ADVANSTAR COMMUNICATIONS INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
ý	Quarterly Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934.
For the quarterly period ended: June 30, 2004
OR
o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 333-57201

Advanstar Communications Inc.
(Exact name of registrant as specified in its charter)

New York (State or other jurisdiction of incorporation or organization)		59-2757389 (I.R.S. Employer Identification No.)
One Park Avenue, New York, NY (Address of principal executive offices)		10016 (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 951-6600

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

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

As of August 16, 2004, 1,000,000 shares of the registrant's common stock were outstanding.

PART I FINANCIAL INFORMATION

Item 1. Financial Statements:

		Page in this Quarterly Report
	Condensed Consolidated Balance Sheets at June 30, 2004 (unaudited) and December 31, 2003	2
	Condensed Consolidated Statements of Operations (unaudited) for the three months ended June 30, 2004 and 2003	3
	Condensed Consolidated Statements of Operations (unaudited) for the six months ended June 30, 2004 and 2003	4
	Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2004 and 2003	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	*Management's Discussion and Analysis of Financial Condition and Results of Operations*	25
Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*	40
Item 4.	*Controls and Procedures*	41
PART II OTHER INFORMATION
Item 5.	*Other Information*	42
Item 6.	Exhibits and Reports on Form 8-K	42
Signatures		43

PART I FINANCIAL INFORMATION

Advanstar Communications Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)

			June 30, 2004			December 31, 2003
			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	22,435		$	29,274
	Accounts receivable, net of allowance of $1,223 and $1,006 at June 30, 2004 and December 31, 2003			33,980			33,844
	Prepaid expenses			6,817			7,892
	Other			2,140			1,771
	Current assets of discontinued operations and assets held for sale			892			1,811

		Total current assets		66,264			74,592
Property, plant and equipment, net				23,264			23,778
Intangible and other assets:
	Goodwill			711,384			708,098
	Intangibles and other, net			125,448			142,294

		Total intangible and other assets, net		836,832			850,392
Non current assets of discontinued operations and assets held for sale				2,768			36,323

			$	929,128		$	985,085

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
	Current maturities of long-term debt		$	2,300		$	3,700
	Accounts payable			16,198			29,110
	Accrued compensation			5,273			6,940
	Other accrued expenses			24,151			26,202
	Deferred revenue			46,301			56,470
	Current liabilities of discontinued operations and assets held for sale			1,127			4,947

		Total current liabilities		95,350			127,369
Long-term debt, net of current maturities				613,644			622,369
Deferred income taxes				10,730			6,990
Other long-term liabilities				4,216			5,322
Due to parent				4,287			5,155
Minority interests				3,952			3,516
Long term liabilities of discontinued operations and assets held for sale				696			5,068
Commitments and contingencies
Stockholder's equity:
	Common stock, $.01 par value, 40,000,000 shares authorized; 1,000,000 shares issued and outstanding at June 30, 2004 and December 31, 2003			10			10
	Capital in excess of par value			447,367			447,367
	Accumulated deficit			(253,275	)		(241,594	)
	Accumulated other comprehensive loss			2,151			3,513

		Total stockholder's equity		196,253			209,296

			$	929,128		$	985,085

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

Advanstar Communications Inc.
Condensed Consolidated Statements of Operations
(in thousands)

			Three Months Ended June 30,
			2004			2003
			(unaudited)
Revenue			$	84,694		$	59,544
Operating expenses:
	Cost of production			16,648			12,268
	Selling, editorial and circulation			41,147			28,135
	General and administrative			10,438			7,921
	Funding of affiliated dot.com company operations (see Note 9)			2,225			425
	Amortization of intangibles			10,586			10,867
	Depreciation			2,129			2,205

		Total operating expenses		83,173			61,821

Operating income (loss)				1,521			(2,277	)
Other income (expense):
	Interest expense, net			(17,382	)		(12,549	)
	Other income (expense), net			177			(91	)

Loss from continuing operations before income taxes and minority interests				(15,684	)		(14,917	)
Provision (benefit) for income taxes				3,437			(87	)
Minority interests				113			48

Loss from continuing operations				(19,008	)		(14,782	)
Discontinued operations (see Note 3):
(Loss) income from operations of discontinued businesses (including a goodwill impairment charge of $9,420 net of minority interest of $5,072 for the three months ended June 30, 2004)				(8,773	)		492

Net loss			$	(27,781	)	$	(14,290	)

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

Advanstar Communications Inc.
Condensed Consolidated Statements of Operations
(in thousands)

			Six Months Ended June 30,
			2004			2003
			(unaudited)
Revenue			$	204,583		$	159,371
Operating expenses:
	Cost of production			39,673			31,762
	Selling, editorial and circulation			84,507			60,808
	General and administrative			21,779			17,619
	Funding of affiliated dot.com company operations (see Note 9)			2,763			635
	Amortization of intangibles			20,128			21,597
	Depreciation			4,103			4,318

		Total operating expenses		172,953			136,739

Operating income				31,630			22,632
Other income (expense):
	Interest expense, net			(35,578	)		(24,635	)
	Other income (expense), net			1,388			308

Loss from continuing operations before income taxes and minority interests				(2,560	)		(1,695	)
Provision for income taxes				6,562			296
Minority interests				(437	)		(193	)

Loss from continuing operations				(9,559	)		(2,184	)
Discontinued operations (see Note 3):
(Loss) income from operations of discontinued businesses (including a goodwill impairment charge of $9,420 net of minority interest of $5,072 for the six months ended June 30, 2004)				(2,122	)		3,580

Net (loss) income			$	(11,681	)	$	1,396

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

Advanstar Communications Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)

			Six Months Ended June 30,
			2004			2003
			(unaudited)
Operating activities:
	Net (loss) income		$	(11,681	)	$	1,396
	Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
		Depreciation and amortization		24,308			26,527
		Impairment of goodwill		9,420			—
		Gain on derivative financial instruments		(1,264	)		(709	)
		Undistributed earnings of minority interest holders		689			542
		Non-cash interest		1,631			1,559
		(Gain) loss on sale of business and other assets		(1,070	)		4
		Deferred income taxes		3,740			659
		Provision for bad debts		804			142
		Changes in operating assets and liabilities		(30,294	)		(17,723	)

		Net cash (used in) provided by operating activities		(3,717	)		12,397

Investing activities:
	Additions to property, plant and equipment			(3,648	)		(3,001	)
	Acquisitions of publications and trade shows, net of cash acquired			(8,088	)		(207	)
	Proceeds from sale of business and other assets			19,511			3

		Net cash provided by (used in) investing activities		7,775			(3,205	)

Financing activities:
	Proceeds from revolving credit loan			6,000			8,000
	Payments on revolving credit loan			(14,000	)		(6,000	)
	Payments of long-term debt			(2,050	)		(8,900	)
	Deferred financing costs			(302	)		(3,896	)

		Net cash used in financing activities		(10,352	)		(10,796	)

Effect of exchange rate changes on cash				(545	)		660

Net decrease in cash and cash equivalents				(6,839	)		(944	)
Cash and cash equivalents, beginning of period				29,274			18,930

Cash and cash equivalents, end of period			$	22,435		$	17,986

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

Advanstar Communications Inc.
Notes to Condensed Consolidated Financial Statements

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by Advanstar Communications Inc. ("Communications", or the "Company") in accordance with the instructions to Form 10-Q and, therefore, do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. Management believes that all adjustments, consisting solely of normal recurring items, considered necessary for a fair presentation have been included. These condensed consolidated financial statements, however, should be read in conjunction with the audited financial statements and the related notes included in the Company's annual report on Form 10-K for the year ended December 31, 2003, filed with the Securities and Exchange Commission on March 29, 2004. The results of operations for the three and six month periods ended June 30, 2004 are not necessarily indicative of the operating results that may be expected for the entire year ending December 31, 2004.

2. Summary of Significant Interim Accounting Policies

Stock-Based Compensation

As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company has elected to account for stock options and awards to employees under the provisions of Accounting Principles Board ("APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations.

If the Company had elected to recognize compensation costs based on the fair value of the options granted as prescribed by SFAS No. 123, results would have been adjusted to the pro forma amounts indicated in the table below (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Net (loss) income—as reported	$	(27,781	)	$	(14,290	)	$	(11,681	)	$	1,396
Less: pro forma stock based employee compensation		(705	)		(592	)		(1,382	)		(1,184	)

Net (loss) income—pro forma	$	(28,486	)	$	(14,882	)	$	(13,063	)	$	212

Interim Income Tax Expense

The Company determines its quarterly income tax provision based upon an estimated annual effective income tax rate. In determining the effective income tax rate applicable to interim periods, the Company excludes tax jurisdictions where no tax expense or benefit is expected for the entire year.

Recently Issued Accounting Standards

In December 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46R, Consolidation of Variable Interest Entities, which addresses accounting for special-purpose and variable interest entities and which superseded Interpretation No. 46. The provisions of Interpretation No. 46R are effective for the Company in the first quarter of 2005. Specifically, based upon the Company's preliminary analysis, the Company believes that it will be required to consolidate the operations of Advanstar.com effective January 1, 2005. If the Company consolidates Advanstar.com, management believes the effect will be to reduce the amount of Advanstar.com losses included in the

Company's operating results. The Company does not expect this consolidation to have a material effect on its financial position, results of operations or cash flows.

3. Acquisitions and Divestitures

Acquisitions

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

On March 8, 2004, the Company purchased a portfolio of pharmaceutical industry conferences and magazines from the Institute of Validation Technology, Inc. ("IVT") for $8.0 million in cash plus assumed liabilities. In addition, the Company agreed to pay additional contingent cash consideration based on 2004 and 2005 operating results of the acquired assets. Certain acquired assets and assumed liabilities are recorded based upon preliminary estimates of their respective fair values as of the date of the acquisition. The Company does not believe the final allocation of purchase price will be materially different from preliminary allocations.

The following table provides the unaudited pro forma operating results of the Company for the three and six month periods ended June 30, 2003 as if the Thomson acquisition had taken place at January 1, 2003. The pro forma operating results do not include the effect of the IVT acquisition described above because the acquisition is not material (in thousands):

	Three Months Ended June 30, 2003			Six Months Ended June 30, 2003
Revenue	$	80,043		$	200,192
Loss from continuing operations		(17,875	)		(8,919	)
Net Loss		(17,383	)		(5,339	)

The unaudited pro forma operating results do not purport to represent what the Company's results of operations actually would have been if the acquisition had occurred as of the date indicated or what such results will be for any future periods.

Divestitures

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

The results of the Art Group have been reported in discontinued operations in the condensed consolidated statements of operations for the three and six months ended June 30, 2004 and 2003. In addition, the assets and liabilities of the Art Group are reported in discontinued operations in the condensed consolidated balance sheet at June 30, 2004 and December 31, 2003. Prior year consolidated financial statements have been restated to present the Art Group in discontinued operations.

Revenues of the Art Group, included in discontinued operations in the condensed consolidated statements of operations, were $8.5 million for the period from January 1, 2004 to March 12, 2004. For the three and six months ended June 30, 2003, Art Group revenues were $0.4 million and $9.7 million. Pretax results of the Art Group reported in discontinued operations in the condensed consolidated statements of operations, which excludes the gain on sale, was a profit of $3.4 million for the period

from January 1, 2004 to March 12, 2004 and a loss of $0.4 million and a profit of $2.9 million for the three and six months ended June 30, 2003.

During June 2004, the Company committed to the sale of its 65% ownership in its French joint venture ("SeCA"), which consisted of one trade show. On August 5, 2004, the Company completed the sale for a total selling price of $3.1 million in cash. In connection with the sale, the Company recorded a goodwill impairment charge of $9.4 million in the second quarter of 2004. We measured the impairment charge as the excess of our carrying value of the Company's interest in SeCA over the selling price, less costs to sell SeCA. This charge is reported separately as a component of discontinued operations for the three and six months ended June 30, 2004.

The results of SeCA have been reported as a component of discontinued operations in the condensed consolidated statements of operations for the three and six months ended June 30, 2004 and 2003. Prior year consolidated financial statements have been restated to present SeCA in discontinued operations. In addition, the assets and liabilities of SeCA are reported as assets and liabilities of discontinued operations and assets held for sale in the condensed consolidated balance sheet at June 30, 2004 and December 31, 2003.

Revenues of SeCA were $2.9 million for both the three and six months ended June 30, 2004, and $3.4 million and $3.7 million for the three and six months ended June 30, 2003. Pretax results of SeCA, including the goodwill impairment charge of $9.4 million and net of minority interest, reported in discontinued operations in the condensed consolidated statements of operations was a loss of $8.4 million and $8.5 million for the three and six months ended June 30, 2004 and income of $1.4 million and $1.1 million for the three and six months ended June 30, 2003.

The discontinued operations and assets held for sale of SeCA and the Art Group included in the condensed consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 are as follows (in thousands):

				June 30, 2004			December 31, 2003
				Assets Held For Sale			Assets Held For Sale			Discontinued Operations		Total
Assets
	Accounts receivable			$	892		$	716		$	—	$	716
	Prepaid expenses				—			48			1,047		1,095

		Total current assets of discontinued operations and assets held for sale			892			764			1,047		1,811
Property, plant and equipment, net					3			8			100		108
Goodwill					2,706			17,788			16,610		34,398
Intangibles and other, net					59			76			1,741		1,817

		Total non current assets of discontinued operations and assets held for sale			2,768			17,872			18,451		36,323
Liabilities
	Accounts payable and other accrued expenses				1,127			519			—		519
	Deferred revenue				—			230			4,198		4,428

		Total current liabilities of discontinued operations and assets held for sale			1,127			749			4,198		4,947
	Due to parent				(844	)		(1,505	)		—		(1,505	)
	Minority interests				1,540			6,573			—		6,573

		Total long term liabilities of discontinued operations and assets held for sale			696			5,068			—		5,068

			Net assets of discontinued operations and assets held for sale	$	1,837		$	12,819		$	15,300	$	28,119

The Art Group and SeCA assets included discontinued operations in the Company's reportable segments are as follows (in thousands):

		Trade Shows and Conferences		Trade Publications		Marketing Services		Corporate and Other		Total
Segment assets at June 30, 2004		3,657		—		—		3		3,660
Segment assets at December 31, 2003		34,635		3,391		—		108		38,134

4. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill for the six months ended June 30, 2004, by operating segment, are as follows (in thousands):

	Trade Shows and Conferences			Trade Publications		Marketing Services			Totals
Balance as of December 31, 2003	$	466,043		$	210,977	$	31,078		$	708,098
Goodwill acquired or finally allocated during the period		3,029			987		—			4,016
Foreign currency translation		(950	)		230		(10	)		(730	)

Balance as of June 30, 2004	$	468,122		$	212,194	$	31,068		$	711,384

Trade exhibitor and advertiser lists are amortized on a double-declining balance method over six years and five years, respectively, subscriber lists and other intangible assets are amortized on a straight-line basis over three to ten years, trademarks and trade names are amortized on a straight-line basis over twenty years. These intangible assets consist of the following as of June 30, 2004 and December 31, 2003 (in thousands):

		June 30, 2004			December 31, 2003
Trade exhibitor lists		$	156,749		$	156,939
Advertiser lists			62,236			62,303
Subscriber lists			28,153			28,577
Trade names and trademarks			18,018			18,016
Other intangible assets			26,604			21,437
Deferred financing costs			22,244			21,942

			314,004			309,214
Accumulated amortization			(188,556	)		(166,920	)

	Total intangible and other assets, net	$	125,448		$	142,294

Estimated amortization expense of identified intangible assets and other for the remaining six months of 2004 and for the next five years is as follows: (in thousands):

2004	$	22,463
2005		38,408
2006		27,803
2007		11,263
2008		7,673
2009		3,618

5. Financial Derivative Instruments

The Company uses derivative instruments to manage exposure to interest rate and foreign currency risks. The Company's objectives for holding derivatives are to minimize these risks using the most effective methods to eliminate or reduce the impact of these exposures.

Interest Rate Risk

Variable rate debt instruments are subject to interest rate risk. In 2001 the Company entered into an interest rate collar agreement expiring February 2004 to manage its exposure to interest rate

movements on a portion of its variable rate debt obligations. The effective portion of the cumulative gain or loss on the interest rate collar agreement was reported as a component of accumulated other comprehensive income in stockholder's equity and recognized in earnings as the underlying interest expense was incurred. The ineffective portion of the interest rate collar agreement was recognized in current earnings. Gains and losses on the undesignated portion of this agreement were recognized in current earnings until expiration.

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

Foreign Currency Risk

The Company uses forward contracts to manage its exposure associated with forecasted international revenue and expense transactions for up to 15 months in the future. Foreign currencies hedged are the Euro, British Pound Sterling and the Brazilian Real. Changes in the fair value of these instruments are reported as a component of accumulated other comprehensive income in stockholder's equity and are recognized in earnings as the underlying revenue is recognized. Forward contracts not designated as hedging instruments under SFAS No. 133 are also used to manage the impact of the variability in exchange rates. Changes in the fair value of these foreign exchange contracts are recognized in current earnings.

At June 30, 2004, the Company had foreign exchange derivative contracts to sell with a notional amount totaling $3.9 million and to buy totaling $1.1 million. The estimated fair value of the foreign exchange contracts based upon market quotes was a net liability of $0.1 million.

Accumulated Other Comprehensive Income (Loss)

The following table summarizes the effects of SFAS 133 on the Company's accumulated other comprehensive income as of June 30, 2004 and 2003 (in thousands):

	Interest Rate Collar Agreements			Foreign Exchange Contracts			Total
Accumulated other comprehensive income (loss) balance at December 31, 2003	$	(42	)	$	—		$	(42	)
Unwound from accumulated other comprehensive income (loss) during the period		244			—			244
Mark to market hedge contracts		(52	)		—			(52	)

Accumulated other comprehensive income (loss) balance at June 30, 2004	$	150			—		$	150

Accumulated other comprehensive income (loss) balance at December 31, 2002	$	(4,350	)	$	—		$	(4,350	)
Unwound from accumulated other comprehensive income (loss) during the period		2,760			—			2,760
Mark to market hedge contracts		(2,215	)		(42	)		(2,257	)

Accumulated other comprehensive income (loss) balance at June 30, 2003	$	(3,805	)	$	(42	)	$	(3,847	)

At June 30, 2004, the Company estimates that it will reclassify out of accumulated other comprehensive income approximately $0.1 million of deferred gains into earnings within the next

12 months. The fair value of the Company's derivatives was a net liability position of $0.1 million and $1.5 million at June 30, 2004 and December 31, 2003, respectively, which is included in other accrued expenses in the accompanying condensed consolidated balance sheets.

Statement of Operations

The following tables summarize the effects of SFAS No. 133 included in other income (expense) in the Company's statement of operations related to the ineffective portion of the Company's interest rate protection agreements and foreign exchange contracts not designated as hedging instruments for the three and six months ended June 30, 2004 and 2003 (in thousands):

	Interest Rate Collar Agreements		Foreign Exchange Contracts			Total
Three months ended June 30, 2004	$	—	$	(16	)	$	(16	)

Three months ended June 30, 2003		43		223			266

Six months ended June 30, 2004		1,273		(9	)		1,264

Six months ended June 30, 2003		575		134			709

6. Debt

Credit Facility

The credit facility (the "Credit Facility") originally consisted of (i) $415.0 million of term loans A and B payable in quarterly installments through October 11, 2008, and (ii) $80.0 million of revolving loans availability through April 11, 2007. The Credit Facility contained restrictive covenants which required the Company to, among other things, maintain a maximum quarterly leverage ratio (as defined) that declined quarterly through the fourth quarter of 2004, and to maintain a minimum fixed charge ratio (as defined).

In connection with its private placement of Senior Secured Notes in August 2003 described below, the Company and the lenders amended the Credit Facility to permit the private placement and the proposed use of the proceeds, to eliminate the leverage ratio covenant, to amend certain other covenants contained in the Credit Facility and to reduce the revolving loan commitments from $80.0 million to $60.0 million. Failure of the Company to comply with the current covenants may cause an event of default under the Credit Facility. Borrowings under the Credit Facility are collateralized by substantially all of the Company's assets.

Senior Secured Notes

On August 18, 2003, the Company issued $360.0 million of second priority senior secured notes (the "August senior secured notes"). On September 25, 2003, the Company issued an additional $70.0 million of second priority senior secured notes (the "September senior secured notes"), which were issued at a premium (together with the August senior secured notes, the "Senior Secured Notes"). The Senior Secured Notes were issued in two tranches: $130.0 million of Second Priority Senior Secured Floating Rate Notes due 2008, which require quarterly amortization equal to 0.25% of the principal amount thereof (the "floating rate notes"), and $300.0 million of 10.75% Second Priority Senior Secured Notes due 2010. Interest on the floating rate notes is payable at a rate equal to three-month LIBOR, which is reset quarterly, plus 7.5%. Each tranche of the notes is collateralized by second priority liens on substantially all of the collateral pledged against borrowings under the Company's Credit Facility (other than the capital stock of certain of its subsidiaries and assets of its parent companies). The notes contain restrictive covenants that, among other things, limit the Company's ability to incur debt, pay dividends and make investments. The Company entered into a

registration rights agreement in connection with the private placement pursuant to which the Company has registered substantially all of the notes.

The Company used the net proceeds from the August senior secured notes offering to repay and terminate all outstanding term A loans under the Credit Facility and all but $25.0 million of the outstanding term B loans and a portion of its revolving credit borrowings under the Credit Facility. The Company used the net proceeds of the September senior secured notes offering to reduce revolver borrowings and acquire a portfolio of healthcare industry magazines and related custom projects business from the Thomson Corporation (Note 3).

The Senior Secured Notes are fully and unconditionally guaranteed on a senior basis, jointly and severally, by the Company's wholly owned domestic subsidiaries. The financial covenants under the Senior Secured Notes include limitations on certain asset dispositions, payments, debt incurrence, dividends and other restricted payments.

Senior Subordinated Notes

The Company's $160.0 million unsecured, 12% senior subordinated notes due 2011 (the "Senior Subordinated Notes") require semiannual interest-only payments on February 15 and August 15 of each year. The Senior Subordinated Notes are fully and unconditionally guaranteed on a senior subordinated basis, jointly and severally, by the Company's wholly owned domestic subsidiaries. The financial covenants under the Senior Subordinated Notes include limitations on certain asset dispositions, payments, debt incurrence, dividends and other restricted payments.

Long-term debt consists of the following (in thousands):

	June 30, 2004			December 31, 2003
Term loan B, interest at LIBOR plus 4.50%; 5.78% at June 30, 2004, due quarterly through October 11, 2008	$	25,000		$	25,000
Revolving credit loan, interest at LIBOR plus 3.75%; 4.85% at June 30, 2004, due April 11, 2007		—			8,000
Second priority senior secured floating rate notes, interest at LIBOR plus 7.5%, 8.62% at June 30, 2004, due 2008		129,025			129,675
10.75% Second priority senior secured notes, due 2010, plus unamortized premium of $919 and $994 at June 30, 2004 and December 31, 2003, respectively		300,919			300,994
Senior subordinated notes, interest at 12.00%, due 2011		160,000			160,000
Acquisition note payable, interest at 5.50%, due monthly through 2004		1,000			2,000
Acquisition note payable, interest at 6.00%, due April 1, 2004		—			400

		615,944			626,069
Less current maturities		(2,300	)		(3,700	)

	$	613,644		$	622,369

7. Comprehensive Income

The table below presents comprehensive income (loss), defined as changes in the equity of the Company excluding changes resulting from investments by and distributions to shareholders (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2004			2003			2004			2003
Net (Loss) income	$	(27,781	)	$	(14,290	)	$	(11,681	)	$	1,396
Change in cumulative translation adjustment		(1,402	)		4,488			(1,554	)		5,499
Change in unrealized losses on derivative financial instruments		—			(340	)		192			503

Comprehensive (loss) income	$	(29,183	)	$	(10,142	)	$	(13,043	)	$	7,398

8. Segments

The Company follows the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and has three reportable segments: trade shows and conferences, trade publications and marketing services.

The Company evaluates the performance of, and allocates resources to, its segments based on contribution margin—defined as net revenue less cost of production and selling, editorial and circulation costs. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. There are no inter-segment sales or transfers. Segment assets are primarily intangible assets, prepaid expenses and accounts receivable. Revenues, contribution margins and segment assets of the Company's reportable segments are as follows (in thousands):

		Trade Shows and Conferences		Trade Publications		Marketing Services		Corporate and Other			Total
Three months ended June 30, 2004
	Revenues	$	21,573	$	57,985	$	5,136	$	—		$	84,694
	Contribution margin (loss)		8,098		18,436		2,748		(2,383	)		26,899
	Segment assets		524,786		305,752		33,283		65,307			929,128
Three months ended June 30, 2003
	Revenues	$	20,526	$	35,039	$	3,979	$	—			59,544
	Contribution margin (loss)		6,634		12,184		1,546		(1,223	)		19,141
	Segment assets		574,910		177,448		32,622		63,238			848,218
Six months ended June 30, 2004
	Revenues	$	89,798	$	105,154	$	9,631	$	—		$	204,583
	Contribution margin (loss)		46,935		31,622		5,221		(3,375	)		80,403
	Segment assets		524,786		305,752		33,283		65,307			929,128
Six months ended June 30, 2003
	Revenues	$	86,098	$	65,606	$	7,667	$	—			159,371
	Contribution margin (loss)		44,911		20,858		2,913		(1,881	)		66,801
	Segment assets		574,910		177,448		32,622		63,238			848,218

The reconciliation of total segment contribution margin to consolidated loss from continuing operations before income taxes, and minority interests is as follows (in thousands):

		Three Months Ended June 30,						Six Months Ended June 30,
		2004			2003			2004			2003
Total segment contribution margin		$	26,899		$	19,141		$	80,403		$	66,801
General and administrative expense			(10,438	)		(7,921	)		(21,779	)		(17,619	)
Funding of affiliated dot.com company operations			(2,225	)		(425	)		(2,763	)		(635	)
Depreciation and amortization			(12,715	)		(13,072	)		(24,231	)		(25,915	)
Other expense (primarily interest)			(17,205	)		(12,640	)		(34,190	)		(24,327	)

	Loss from continuing operations before income taxes and minority interests	$	(15,684	)	$	(14,917	)	$	(2,560	)	$	(1,695	)

9. Relationship with Advanstar.com, Inc.

Advanstar.com, Inc. (Advanstar.com), an affiliate of the Company, operates the Company's event and publication-related web sites and develops certain enhanced web opportunities to serve the Company's customers in selected industries. The Company provides Advanstar.com with certain administrative support services and charges for these services based on a general overhead charge. In addition, selected sales, editorial, marketing and production staff of the Company are shared with Advanstar.com. The Company also provides Advanstar.com with marketing and promotional support through advertising pages in its trade publications and exhibit space in its trade shows. In return, Advanstar.com provides support on its web sites for the Company's trade publications and trade shows.

The Company records advances and notes issued in support of Advanstar.com operations as an operating expense on the Company's consolidated statement of operations, as a reflection of the ongoing nature of the operations of Advanstar.com in support of the Company's operations. Net advances and notes charged to the Company's operations during the three months ended June 30, 2004 and 2003 were $2.2 million and $0.4 million, respectively. Net advances and notes charged to the Company's operations during the six months ended June 30, 2004 and 2003 were $2.8 million and $0.6 million, respectively. In May 2004, the Company made a $1.9 million advance to Advanstar.com to fund the settlement of Advanstar.com's outstanding New York lease obligation. As described in Note 2, the Company expects to begin consolidating the operations of Advanstar.com with those of the Company, beginning on January 1, 2005.

10. Parent Company Notes

As part of the financing for the acquisition of the Company by the DLJ Merchant Banking Funds in October 2000 (the "Acquisition") and concurrently with the closing of the offering of the Senior Subordinated Notes in February 2001, the Company's parent, Advanstar, Inc., issued discount notes (the "Discount Notes") with an aggregate principal amount at maturity in aggregate of $171.8 million. These notes do not require cash interest payments until 2006. Neither the Company nor any of its subsidiaries guaranteed the Discount Notes. Advanstar, Inc., however, is a holding company and its ability to pay interest on these Discount Notes will be dependent upon the receipt of dividends from its subsidiaries, principally the Company. The Credit Facility, the Senior Secured Notes and the Senior Subordinated Notes impose substantial restrictions on the Company's and its subsidiaries' ability to pay dividends.

11. Supplemental Guarantor Condensed Consolidating Financial Statements

Basis of Presentation

The Company's Senior Subordinated Notes and Senior Secured Notes are fully and unconditionally guaranteed on a senior subordinated basis and senior basis, respectively, jointly and severally, by the Company and it's wholly owned domestic subsidiaries. The subsidiary guarantors are MAGIC and Applied Business TeleCommunications. The condensed consolidating financial statements of the guarantors are presented below and should be read in conjunction with the consolidated financial statements of the Company. Separate financial statements of the guarantors are not presented because the guarantors are jointly, severally, fully and unconditionally liable under the guarantees and the Company believes the condensed consolidating financial statements presented are sufficiently meaningful in understanding the financial position and results of the guarantors. There are no significant restrictions on the ability of the subsidiary guarantors to make distributions to the Company.

Advanstar Communications Inc.
Condensed Consolidated Balance Sheets
At June 30, 2004
(in thousands)

			Communications			Guarantor Subsidiaries		Nonguarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
	Cash and cash equivalents		$	12,984		$	—	$	9,451		$	—		$	22,435
	Accounts receivable, net			33,171			—		809			—			33,980
	Prepaid expenses			4,246			847		1,724			—			6,817
	Other			2,108			—		32			—			2,140
	Current assets of discontinued operations and assets held for sale			—			—		892			—			892

		Total current assets		52,509			847		12,908			—			66,264
Noncurrent assets:
	Property, plant and equipment, net			22,070			742		452			—			23,264
	Deferred tax asset			13,524			35		—			(13,559	)		—
	Intangible and other assets, net			510,197			274,651		51,984			—			836,832
	Investments in subsidiaries			514,630			—		26,003			(540,633	)		—
	Intercompany receivable			(4,451	)		221,417		(4,027	)		(212,939	)		—
	Non-current assets of discontinued operations and assets held for sale			—			—		2,768						2,768

			$	1,108,479		$	497,692	$	90,088		$	(767,131	)	$	929,128

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
	Current maturities of long-term debt		$	2,300		$	—	$	—		$	—		$	2,300
	Accounts payable			13,069			1,401		1,728			—			16,198
	Accrued liabilities			21,555			6,888		981			—			29,424
	Deferred revenue			25,846			15,828		4,627			—			46,301
	Current liabilities of discontinued operations and assets held for sale			—			—		1,127			—			1,127

		Total current liabilities		62,770			24,117		8,463			—			95,350
Long-term debt, net of current maturities				613,644			—		—			—			613,644
Deferred income taxes and other long-term liabilities				14,634			13,559		312			(13,559	)		14,946
Intercompany payable				212,939			—		—			(212,939	)		—
Due to parent				4,287			—		—			—			4,287
Minority interests				3,952			—		—			—			3,952
Long-term liabilities of discontinued operations and assets held for sale				—					696			—			696
Stockholder's equity:
	Common stock			10			3		947			(950	)		10
	Capital in excess of par value			447,367			438,117		108,772			(546,889	)		447,367
	(Accumulated deficit) retained earnings			(253,275	)		21,896		(31,104	)		9,208			(253,275	)
	Accumulated other comprehensive loss			2,151			—		2,002			(2,002	)		2,151

		Total stockholder's equity		196,253			460,016		80,617			(540,633	)		196,253

			$	1,108,479		$	497,692	$	90,088		$	(767,131	)	$	929,128

Advanstar Communications, Inc.
Condensed Consolidating Statements of Operations
For the three months ended June 30, 2004
(in thousands)

			Communications			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations		Consolidated Total
Revenue			$	82,423		$	11		$	2,260		$	—	$	84,694
Operating expenses:
	Cost of production and selling, editorial and circulation			54,068			1,218			2,509			—		57,795
	General and administrative			9,141			436			861			—		10,438
	Funding of affiliated company operations			2,225			—			—			—		2,225
	Depreciation and amortization			8,837			3,468			410			—		12,715

		Total operating expenses		74,271			5,122			3,780			—		83,173

Operating income (loss)				8,152			(5,111	)		(1,520	)		—		1,521
Other income (expense):
	Interest expense, net			(17,346	)		—			(36	)		—		(17,382	)
	Other income, net			(461	)		—			638			—		177

Loss from continuing operations before income taxes and minority interests				(9,655	)		(5,111	)		(918	)		—		(15,684	)
Provision (benefit) for income taxes				5,011			(1,908	)		334			—		3,437
Minority interests				113			—			—			—		113
Equity in earnings of subsidiaries				(4,455	)		—			—			4,455		—

(Loss) Income from continuing operations				(19,008	)		(3,203	)		(1,252	)		4,455		(19,008	)
Discontinued operations:
(Loss) income from operations of discontinued business				(8,773	)		—			(8,780	)		8,780		(8,773	)

Net (loss) income			$	(27,781	)	$	(3,203	)	$	(10,032	)	$	13,235	$	(27,781	)

Advanstar Communications Inc.
Condensed Consolidating Statements of Operations
For the six months ended June 30, 2004
(in thousands)

			Communications			Guarantor Subsidiaries		Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Revenue			$	161,350		$	32,773	$	10,460		$	—		$	204,583
Operating expenses:
	Cost of production and selling, editorial and circulation			104,267			12,417		7,496			—			124,180
	General and administrative			19,007			790		1,982			—			21,779
	Funding of affiliated company operations			2,763			—		—			—			2,763
	Depreciation and amortization			16,463			6,938		830			—			24,231

		Total operating expenses		142,500			20,145		10,308			—			172,953

Operating income				18,850			12,628		152			—			31,630
Other income (expense):
	Interest expense, net			(35,565	)		—		(13	)		—			(35,578	)
	Other income, net			481			—		907			—			1,388

(Loss) income from continuing operations before income taxes and minority interests				(16,234	)		12,628		1,046			—			(2,560	)
Provision for income taxes				1,404			4,748		410			—			6,562
Minority interests				(437	)		—		—			—			(437	)
Equity in earnings of subsidiaries				8,516			—		—			(8,516	)		—

Net (loss) income from continuing operations				(9,559	)		7,880		636			(8,516	)		(9,559	)
Discontinued operations:
(Loss) income from operations of discontinued business				(2,122	)		—		(8,900	)		8,900			(2,122	)

Net (loss) income			$	(11,681	)	$	7,880	$	(8,264	)	$	384		$	(11,681	)

Advanstar Communications Inc.
Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2004
(in thousands)

			Communications			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Operating activities:
	Net (loss) income		$	(11,681	)	$	7,880		$	(8,264	)	$	384		$	(11,681	)
	Adjustments to reconcile net (loss) income to net cash provided by operating activities:
		Equity in earnings of subsidiaries		384			—			—			(384	)		—
		Gain on derivative financial instruments		(1,264	)		—			—			—			(1,264	)
		Impairment of goodwill		—			—			9,420			—			9,420
		Depreciation and amortization		16,525			6,938			845			—			24,308
		Other noncash items		5,482			14			298			—			5,794
		Change in working capital items		(15,635	)		(14,730	)		71			—			(30,294	)

		Net cash (used in) provided by operating activities		(6,189	)		102			2,370			—			(3,717	)

Investing activities:
	Additions to property, plant and equipment			(3,467	)		(102	)		(79	)		—			(3,648	)
	Acquisitions of publications and trade shows, net of proceeds			(8,088	)		—			—			—			(8,088	)
	Proceeds from sale of business and other assets			19,511			—			—			—			19,511

		Net cash provided by (used in) investing activities		7,956			(102	)		(79	)		—			7,775

Financing activities:
	Borrowings of long term debt, net			(10,050	)		—			—			—			(10,050	)
	Deferred financing costs			(302	)											(302	)
	Dividends paid to minority interest holders			—			—			—			—			—

		Net cash used in financing activities		(10,352	)		—			—			—			(10,352	)

Effect of exchange rate changes on cash				1			—			(546	)		—			(545	)

Net (decrease) increase in cash and cash equivalents				(8,584	)		—			1,745			—			(6,839	)
Cash and cash equivalents, beginning of year				21,568			—			7,706			—			29,274

Cash and cash equivalents, end of year			$	12,984		$	—		$	9,451		$	—		$	22,435

Advanstar Communications Inc.
Condensed Consolidating Balance Sheets
At December 31, 2003
(in thousands)

			Communications			Guarantor Subsidiaries		Nonguarantor Subsidiaries			Eliminations			Consolidated Total
ASSETS
Current assets:
	Cash and cash equivalents		$	21,568		$	—	$	7,706		$	—		$	29,274
	Accounts receivable, net			30,256			—		3,588			—			33,844
	Prepaid expenses			4,626			1,547		1,719			—			7,892
	Other			1,718			—		53			—			1,771
	Current assets of discontinued operations and assets held for sale			1,047			—		764			—			1,811

		Total current assets		59,215			1,547		13,830			—			74,592
Noncurrent assets:
	Property, plant and equipment, net			22,406			850		522			—			23,778
	Deferred tax asset			13,524			35		—			(13,559	)		—
	Intangible and other assets, net			515,599			281,321		53,472			—			850,392
	Non current assets of discontinued operations and assets held for sale			18,451			—		17,872			—			36,323
	Investments in subsidiaries			518,214			—		27,792			(546,006	)		—
	Intercompany receivable			3			208,188		(8,952	)		(199,239	)		—

			$	1,147,412		$	491,941	$	104,536		$	(758,804	)	$	985,085

LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
	Current maturities of long-term debt		$	3,700		$	—	$	—		$	—		$	3,700
	Accounts payable			23,289			2,738		3,083			—			29,110
	Accrued liabilities			23,513			6,554		3,075			—			33,142
	Deferred revenue			37,124			16,954		2,392			—			56,470
	Current liabilities of discontinued operations and assets held for sale			4,198			—		749			—			4,947

		Total current liabilities		91,824			26,246		9,299			—			127,369
Long-term debt, net of current maturities				622,369			—		—			—			622,369
Deferred income taxes and other long-term liabilities				12,017			13,559		295			(13,559	)		12,312
Intercompany payable				199,239			—		—			(199,239	)		—
Due to parent				3,650			—		1,505			—			5,155
Minority interests				9,017			—		(5,501	)		—			3,516
Long term liabilities of discontinued operations and assets held for sale				—			—		5,068			—			5,068
Stockholder's equity:
	Common stock			10			3		950			(953	)		10
	Capital in excess of par value			447,367			438,117		112,204			(550,321	)		447,367
	(Accumulated deficit) retained earnings			(241,594	)		14,016		(22,839	)		8,823			(241,594	)
	Accumulated other comprehensive loss			3,513			—		3,555			(3,555	)		3,513

		Total stockholder's equity		209,296			452,136		93,870			(546,006	)		209,296

			$	1,147,412		$	491,941	$	104,536		$	(758,804	)	$	985,085

Advanstar Communications Inc.
Condensed Consolidating Statements of Operations
For the three months ended June 30, 2003
(in thousands)

			Communications			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Revenue			$	55,629		$	1,061		$	2,854		$	—		$	59,544
Operating expenses:
	Cost of production and selling, editorial and circulation			34,176			2,444			3,783			—			40,403
	General and administrative			6,833			313			775			—			7,921
	Funding of affiliated company operations			425			—			—			—			425
	Depreciation and amortization			7,454			4,895			723			—			13,072

		Total operating expenses		48,888			7,652			5,281			—			61,821

Operating (loss) income				6,741			(6,591	)		(2,427	)		—			(2,277	)
Other income (expense):
	Interest expense, net			(12,689	)		—			140			—			(12,549	)
	Other income, net			219			—			(310	)		—			(91	)

Loss from continuing operations before income taxes and minority interests				(5,729	)		(6,591	)		(2,597	)		—			(14,917	)
Provision (benefit) for income taxes				2,401			(2,398	)		(90	)		—			(87	)
Minority interests				49			—			(1	)		—			48
Equity in earnings of subsidiaries				(6,701	)		—			—			6,701			—

Net (loss) income from continuing operations				(14,782	)		(4,193	)		(2,508	)		6,701			(14,782	)
Discontinued operations:
(Loss) income from operations of discontinued business				492			—			900			(900	)		492

Net (loss) income			$	(14,290	)	$	(4,193	)	$	(1,608	)	$	5,801		$	(14,290	)

Advanstar Communications Inc.
Condensed Consolidating Statements of Operations
For the six months ended June 30, 2003
(in thousands)

			Communications			Guarantor Subsidiaries		Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Revenue			$	114,632		$	32,650	$	12,089		$	—		$	159,371
Operating expenses:
	Cost of production and selling, editorial and circulation			70,618			11,731		10,221			—			92,570
	General and administrative			15,115			640		1,864			—			17,619
	Funding of affiliated company operations			635			—		—			—			635
	Depreciation and amortization			14,937			9,736		1,242			—			25,915

		Total operating expenses		101,305			22,107		13,327			—			136,739

Operating income (loss)				13,327			10,543		(1,238	)		—			22,632
Other income (expense):
	Interest expense, net			(24,880	)		—		245			—			(24,635	)
	Other income, net			842			—		(534	)		—			308

(Loss) Income from continuing operations before income taxes and minority interests				(10,711	)		10,543		(1,527	)		—			(1,695	)
(Benefit) provision for income taxes				(3,887	)		3,890		293			—			296
Minority interests				(193	)		—		—			—			(193	)
Equity in earnings of subsidiaries				4,833			—		—			(4,833	)		—

Net (loss) income from continuing operations				(2,184	)		6,653		(1,820	)		(4,833	)		(2,184	)
Discontinued operations:
Income from operations of discontinued business				3,580			—		720			(720	)		3,580

Net income (loss)			$	1,396		$	6,653	$	(1,100	)	$	(5,553	)	$	1,396

Advanstar Communications Inc.
Condensed Consolidating Statements of Cash Flows
For the six months ended June 30, 2003
(in thousands)

			Communications			Guarantor Subsidiaries			Nonguarantor Subsidiaries			Eliminations			Consolidated Total
Operating activities:
	Net income (loss)		$	1,396		$	6,653		$	(1,100	)	$	(5,553	)	$	1,396
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Equity in earnings of subsidiaries		(5,553	)		—			—			5,553			—
		Gain on derivative financial instruments		(709	)		—			—			—			(709	)
		Depreciation and amortization		15,486			9,736			1,305			—			26,527
		Other noncash items		(44,380	)		46,102			1,184			—			2,906
		Change in working capital items		44,220			(62,173	)		230			—			(17,723	)

		Net cash provided by operating activities		10,460			318			1,619			—			12,397

Investing activities:
	Additions to property, plant and equipment			(2,598	)		(318	)		(85	)		—			(3,001	)
	Acquisitions of publications and trade shows, net of proceeds			(206	)		—			(1	)		—			(207	)
	Proceeds from sale of business and other assets			3			—						—			3

		Net cash used in investing activities		(2,801	)		(318	)		(86	)		—			(3,205	)

Financing activities:
	Borrowings of long term debt, net			(6,900	)		—			—			—			(6,900	)
	Deferred financing costs			(3,896	)											(3,896	)
	Dividends paid to minority interest holders			—			—			—			—			—

		Net cash used in financing activities		(10,796	)		—			—			—			(10,796	)

Effect of exchange rate changes on cash				(3	)		—			663			—			660

Net (decrease) increase in cash and cash equivalents equivalents				(3,140	)		—			2,196			—			(944	)
Cash and cash equivalents, beginning of year				12,282			—			6,648			—			18,930

Cash and cash equivalents, end of year			$	9,142		$	—		$	8,844		$	—		$	17,986

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations:

This quarterly report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned not to place undue reliance on these forward-looking statements, including statements about plans and objectives of management, potential acquisitions, market growth and opportunity. These forward-looking statements are neither promises nor guarantees and involve risks and uncertainties that could cause actual results to differ materially from those indicated by such forward-looking statements. You should not expect that these forward-looking statements will be updated or supplemented as a result of changing circumstances or otherwise, and we disavow and disclaim any obligation to do so. Important cautionary statements and risk factors that would affect actual results are discussed in the our periodic reports and registration statements filed with the Securities and Exchange Commission, including those under the caption entitled "Certain Factors Which May Affect Future Results" in the our annual report on Form 10-K filed with the Securities and Exchange Commission on March 29, 2004.

Overview

We are a worldwide provider of integrated, B-to-B marketing communications products and services for targeted industry sectors, principally through trade shows and conferences and through controlled circulation trade, business and professional magazines. We also provide a broad range of other marketing services products, including classified advertising, direct mail services, reprints, database marketing, guides, and reference books.

We report our business in three segments:

•: trade shows and conferences, which consists primarily of the management of trade shows and seminars held in convention and conference centers;
•: trade publications, which consists primarily of the creation and distribution of controlled circulation trade, business and professional magazines; and
•: marketing services, which consists primarily of sales of a variety of direct mail and database products, magazine editorial reprints and classified advertising.

Trade shows and conferences accounted for approximately 44% and 54% of total revenue in the six months ended June 30, 2004 and 2003, respectively. Trade publications accounted for approximately 51% and 41% of total revenue in the six months ended June 30, 2004 and 2003, respectively, while marketing services accounted for approximately 5% and 5% of total revenue in the six months ended June 30, 2004 and 2003, respectively. We expect that publications will constitute slightly more than 50% of our full year 2004 revenue as a result of the acquisition in October 2003 of the Thomson healthcare properties. Our revenue reaches its highest levels during the first and third quarters of the year due to the timing of the MAGIC trade shows and our other large trade shows and conferences. Because trade shows and conferences revenue is recognized when a particular event is held, we may experience fluctuations in quarterly revenue based on the movement of trade show dates from one quarter to another.

Trends and Developments

The rebound in marketing and advertising spending remains variable across the twenty industry sectors served by our trade shows and publications.

Our trade shows and conferences continued to perform well in the first half. Our MAGIC and License events posted gains in square footage, revenue and attendance over the first half of 2003. Our Powersports motorcycle events also increased revenue significantly over the first half last year. Our trade shows serving technology markets had mixed results but our AIIM and On Demand events

servicing the document management and digital printing markets and our Sensors event in the system design and engineering markets began to stabilize after three years of technology market declines. Our recently acquired IVT conferences, which address FDA validation and compliance issues for the pharmaceutical industry, have performed ahead of our expectations.

The primary driver in the growth of our publishing segment to date 2004 came from the acquisition of the Thomson healthcare properties. Our legacy healthcare and pharmaceutical publications are continuing their strong growth trend from 2003 in the first half of 2004 and many of the flagship healthcare publications we recently acquired from Thomson are performing to our acquisition expectations. Trade advertising in aggregate across our other market sectors in the first half of 2004 continues to show reasonable growth over the first half of 2003 with the exception of our travel sector, which continues to mirror the decline in total travel industry advertising pages. Our technology publications stabilized in the first half with revenue declining less than 3.0% and pages increasing 5.0% from the first half of 2003 after two years of double digit percentage declines. We do not anticipate significant near term recovery in either our technology or travel based publications.

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

Presentation of Financial Information

Acquisitions and Divestitures

On October 1, 2003, we purchased a portfolio of healthcare industry magazines and related custom projects business from The Thomson Corporation and its subsidiaries for $136.5 million in cash (including $1.0 million of related fees and expenses) ("the Thomson acquisition").

On March 8, 2004, we purchased a portfolio of pharmaceutical industry specific magazines and conferences from the Institute of Validation Technology, Inc. ("IVT") for $8.0 million in cash and assumed liabilities. In addition, we agreed to pay additional contingent cash consideration based upon 2004 and 2005 operating results of the acquired assets.

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

On December 31, 2003, we sold a portfolio of automotive and technology industry trade shows and magazines operated by our U.K. subsidiary for a total sales price of $2.2 million in cash, subject to a working capital adjustment. Total revenue for these properties in the second quarter and first half of 2003 was $0.9 million and $2.9 million, respectively, and contribution margin loss of $0.6 million and $0.7 million for second quarter and first half 2003, respectively.

On March 12, 2004, we completed the sale of our art industry trade shows and magazines (the "Art Group") for a total selling price of $19.6 million in cash. The portfolio included three trade shows, with 186,216 aggregate square feet in 2003, and two publications, with 935 aggregate advertising pages in 2003. We recorded a gain on the sale of $1.0 million plus a tax benefit of $2.4 million. The results of the Art Group, along with the after tax gain, are reported in discontinued operations in the condensed consolidated statements of operations for the three and six months ended June 30, 2004 and 2003.

During June 2004, we committed to the sale of our 65% ownership in our French joint venture ("SeCA"), which consisted of one trade show. On August 5, 2004, we completed the sale for $3.1 million in cash. In the second quarter, we recorded a goodwill impairment charge of $9.4 million based the sale of SeCA for less than its carrying value. This charge is reported separately as a

component of discontinued operations for the three and six months ended June 30, 2004. The results of SeCA have been reported in discontinued operations in the condensed consolidated statements of operations for the three and six months ended June 30, 2004 and 2003.

See Note 3 to our condensed consolidated financial statements

Private Placement of Second Priority Senior Secured Notes and Refinancing of Credit Facility

In August 2003, we amended our Credit Facility to permit the issuance of $360.0 million of second priority senior secured notes and the use of the proceeds thereof, eliminate the leverage ratio covenant and amend certain other covenants contained in the Credit Facility and reduce the revolving loan commitments thereunder from $80 million to $60 million. We recorded an expense of $11.3 million in the third quarter of 2003 to reflect the write-off of deferred financing costs related to the term loans, which were repaid with the proceeds of the offering. Our interest expense and cash interest is higher as a result of this refinancing. In addition, we reclassified $1.8 million of deferred losses related to our interest rate collar and swap agreements previously reported as a component of accumulated other comprehensive income into other expenses in the third quarter of 2003. Gains and losses on the portion of these agreements not designated as hedges of the second priority senior secured floating rate notes at the end of each fiscal quarter (which are calculated as the net amount payable upon termination at the date of determination) are recognized in current earnings.

In September 2003 we issued $70 million of second priority senior secured notes and used the net proceeds to repay approximately $12 million of outstanding borrowings under our revolving Credit Facility and to purchase short-term investments pending completion of the Thomson acquisition. On October 1, 2003, we used $136.5 million in cash, including $56 million of the net proceeds of the September offering to finance the Thomson acquisition.

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 our events. In 2003, approximately 82% of our trade show and conference revenue was from the sale of exhibit space. Events are generally held on an annual basis in major metropolitan or convention areas such as New York City and Las Vegas. At many of our trade shows, a portion of exhibit space is reserved as much as a year in advance. The sale of exhibit space is generally impacted by the ongoing quality and quantity of attendance, venue selection and availability, industry 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 consolidated balance sheet as deferred revenue.

Trade Publications

The trade publications segment derives revenue principally from the sale of advertising in our B-to-B magazines. Additionally, certain publications derive revenue from paid subscriptions and custom publishing and projects. Paid subscriptions comprise less than 5% of total publishing revenue. Most publications are produced monthly with advertising sold both on a scheduled and a single insertion basis. The sale of advertising is generally impacted by circulation and editorial quality, readership, new product releases 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 print and internet based classified advertising, direct mail services, reprints, database marketing, directories, guides and reference books. These products complement and utilize the content or databases generated by our trade shows, conferences and publications. The sale of these products is generally impacted 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 or otherwise delivered.

Components of Expenses

Trade Shows and Conferences

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

Trade Publications

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

Marketing Services

Costs of the marketing services segment include printing and distribution costs, database administration fees and selling and product development salaries and related payroll taxes and benefits. All direct costs are expensed in the month incurred.

Significant Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We evaluate these estimates on an ongoing basis, including those related to bad debts, intangible assets and income taxes. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We apply the following critical accounting policies in the preparation of our consolidated financial statements:

Revenue Recognition

We recognize revenue as discussed in the "Sources of Revenue" section above. The balance of deferred revenue was $46.3 million at June 30, 2004; $13.1 million for trade publications and

$33.2 million for trade shows. On a relative basis, deferred revenue reaches its highest levels during the second and fourth quarters of the year largely due to the timing of the MAGIC trade shows and our other large trade shows and conferences.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The balance of the allowance for doubtful accounts at June 30, 2004 and December 31, 2003 was $1.2 million and $1.0 million, respectively. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

The allowance for doubtful accounts is an estimate based on specifically identified accounts as well as general reserves. We evaluate specific accounts where we have information that the customer may have an inability to meet its financial obligations. In these cases, management uses its judgment, based on the best available facts and circumstances, to determine if a specific reserve for that customer's receivable is warranted. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. We also establish a general reserve for all customers based on percentages applied to customer balances depending on the age of the amount due. This percentage is based on historical collection and write-off experience and varies by geographic region. If circumstances change, our estimates of the recoverability of amounts due us could be reduced or increased by a material amount. Such a change in estimated recoverability would be accounted for in the period in which the facts that give rise to the change become known.

Deferred Taxes

Pursuant to the requirements of SFAS No. 109, we record a valuation allowance to reduce our deferred tax assets to the amount that we determine is more likely than not to be realized. At June 30, 2004 we have recorded a valuation allowance to offset the deferred tax benefit associated with all of our U.S. and foreign net operating loss carryforwards because the realization of these benefits is not considered likely. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event we were to subsequently determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, a reduction in the valuation allowance would result in an income tax benefit and would increase net income or reduce net loss in the period such determination was made. In addition to the deferred tax assets, which are fully reserved, we have established a deferred tax liability equal to the excess of the carrying value of our goodwill for financial reporting purposes over the tax basis of this goodwill. We establish this liability because we do not amortize goodwill for financial reporting purposes but we do amortize goodwill for tax reporting purposes.

Amortization of Intangible Assets

Intangible assets related to trade exhibitor and advertiser lists are amortized using a double-declining balance method over 6 years and 5 years, respectively. Intangible assets related to tradenames and trade marks are amortized using a straight-line method over 20 years. Intangible assets related to subscriber lists and other intangible assets are amortized using a straight-line method over 3 to 10 years. We amortize intangible assets on a basis, which corresponds to our projections of future cash flows directly related to these intangible assets. A change in circumstances could result in a determination that asset lives should be changed or that the related assets are impaired and impairment charges to reduce the carrying value of intangible assets may be necessary. The effect of any changes in useful lives or a determination that the carrying value of an intangible asset is impaired would be accounted for in the period that such determination was made.

Impairment of Long-Lived Assets

We evaluate the carrying value of long-lived assets, including identifiable intangibles, 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 undiscounted cash flows are less than the carrying value of the assets, the carrying value is reduced to the estimated fair value as measured by the associated discounted cash flows.

In accordance with the provisions of SFAS No. 142, we evaluate goodwill for impairment using a two-step test based upon a fair value approach. The first step is used to identify a potential impairment by comparing the carrying value of the net assets of each reporting unit to an estimate of the fair value of each of our reporting units (as defined by SFAS No. 142), while the second step calculates the amount of impairment, if any. Additionally, goodwill will be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of an entity below its carrying value. We determine the fair value of our reporting units by application of a discounted cash flow analysis. If circumstances change, our estimates of fair value will also change and could result in a determination that additional impairment charges to reduce the carrying value of goodwill are necessary. We engaged an appraiser to assist us in completing the first step of our annual goodwill impairment test for each of our three reporting units as of July 1, 2003. Based on this first step test, which utilized a discounted cash flow method, there was no impairment of goodwill indicated.

As a result of our sale of SeCA, we recorded a goodwill impairment charge of $9.4 million in the second quarter of 2004.We measured the fair value of SeCA using the selling price, less our costs to sell SeCA. This charge is reported separately as a component of discontinued operations for the three and six months ended June 30, 2004.

Selected Financial Data

The following table sets forth selected statements of operations and other financial data.

			Three Months Ended June 30,						Six Months Ended June 30,
			2004			2003			2004			2003
			(in thousands)
Income Statement Data:
Revenue
	Trade Shows and conferences		$	21,573		$	20,526		$	89,798		$	86,098
	Publications			57,985			35,039			105,154			65,606
	Marketing services and other			5,136			3,979			9,631			7,667

		Total revenue		84,694			59,544			204,583			159,371
Cost of production and selling
	Trade Shows and conferences			13,475			13,892			42,863			41,187
	Publications			39,549			22,855			73,532			44,748
	Marketing services and other			2,388			2,433			4,410			4,754
	Department and support costs			2,383			1,223			3,375			1,881

		Total cost of production and selling		57,795			40,403			124,180			92,570
General and administrative expenses				10,438			7,921			21,779			17,619
Funding of affiliated dot.comcompany operations				2,225			425			2,763			635
Depreciation and amortization				12,715			13,072			24,231			25,915

Operating income (loss)				1,521			(2,277	)		31,630			22,632
Other income (expense):
	Interest expense			(17,382	)		(12,549	)		(35,578	)		(24,635	)
	Other income (expense), net			177			(91	)		1,388			308

Loss from continuing operations before income taxes and minority interests				(15,684	)		(14,917	)		(2,560	)		(1,695	)
Provision (benefit) for income taxes				3,437			(87	)		6,562			296
Minority interests				113			48			(437	)		(193	)

Loss from continuing operations				(19,008	)		(14,782	)		(9,559	)		(2,184	)
(Loss) income fromoperations of discontinued businesses (including a goodwill impairment charge of $9,420 net of minority interest of $5,072 for the three and sixmonths ended June 30, 2004)				(8,773	)		492			(2,122	)		3,580

Net (loss) income			$	(27,781	)	$	(14,290	)	$	(11,681	)	$	1,396

Results of Operations

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2003

Revenue

Revenue in the second quarter of 2004 increased 42.2% to $84.7 million from $59.5 million in the second quarter of 2003.

Revenue from trade shows and conferences increased $1.1 million, or 5.1%, to $21.6 million in the second quarter of 2004 from $20.5 million in the second quarter of 2003. Revenue for events held in the second quarter of both 2004 and 2003 increased $2.0 million in the second quarter of 2004. This increase was primarily due to the strong performances of our License and Sensors events. Two trade shows held in the second quarter of 2003 shifted into the first quarter of 2004 and two trade shows held in the first quarter of 2003 shifted into the second quarter of 2004 reducing revenue by $1.9 million, net, in the second quarter of 2004. Our acquisition in March 2004 of conferences from the Institute of Validation Technology, Inc. ("IVT"), combined with a new pharmaceutical conference launch, contributed $2.5 million of revenue in the second quarter of 2004. These revenue gains were partially offset by holding two fewer events serving our technology and beauty markets.

Revenue from publications increased $23.0 million, or 65.5%, to $58.0 million in the second quarter of 2004 from $35.0 million in the second quarter of 2003. The increase in revenue was driven by the acquisition of the Thomson healthcare properties acquired in October 2003, which contributed $21.5 million in the second quarter of 2004. Revenue was also impacted by strong performances from American Salon, American Spa, our pre-Thomson healthcare publications, Video Store, our science publications, DVM and the launch of a License directory. These increases were partially offset by revenue reductions of $0.8 million attributable to the sale of certain U.K. publications in December 2003. Overall advertising pages increased 27.8%, principally due to our acquired healthcare properties. For publishing properties, other than properties acquired or sold during the second quarters of 2004 and 2003, advertising pages increased 2.5% and revenue increased $2.0 million, or 5.9%.

Revenue from marketing services and other in the second quarter of 2004 increased 29.1% to $5.1 million from $4.0 million in the second quarter of 2003, due to positive results in classified and recruitment advertising, list sales and permissions, principally from the Thomson healthcare acquisition.

Cost of production and selling

Cost of production and selling expenses in the second quarter of 2004 increased 43.1% to $57.8 million from $40.4 million in the second quarter of 2003 primarily due to the acquisition of the healthcare properties in October 2003.

Expenses of trade shows and conferences in the second quarter of 2004 declined 3.0% to $13.5 million from $13.9 million in the second quarter of 2003. This decline was due primarily to cost savings associated with holding two fewer events serving our technology and beauty markets and the effect of trade show shifts between quarters as discussed above. These declines were partially offset by increased costs associated with the IVT acquisition and the launch of a new pharmaceutical conference.

Expenses of trade publications in the second quarter of 2004 increased 73.0% to $39.5 million from $22.9 million in the second quarter of 2003. Operating costs were impacted by $17.5 million of additional costs associated with our healthcare publications, principally our acquisition of the Thomson healthcare publications in October 2003, due to new investments in sales resources and product enhancements. These cost increases were partially offset by cost savings of $1.3 million attributable to the sale of certain of our U.K. based properties at the end of 2003. Prices for printing, paper and

postage remained stable in the second quarter compared to second quarter of 2003, however we have indications that paper prices may increase 5% to 8% in the second half of 2004.

Expenses of marketing services and other were unchanged at $2.4 million in the second quarter of 2004 and 2003.

Department and support costs of $2.4 million in the second quarter of 2004 increased $1.2 million from the second quarter of 2003 due primarily to increased group management and departmental production staff related to the Thomson acquisition.

General and administrative expenses

General and administrative expenses increased $2.5 million to $10.4 million in the second quarter of 2004 from $7.9 million in the second quarter of 2003 due in part to increased office and administrative costs attributable to the acquisition of the Thomson healthcare properties with the addition of three offices and approximately 300 employees. During the second quarter of 2004 we also appointed a new executive vice president to manage and develop our healthcare, pharmaceutical and science properties.

Funding of affiliated dot.com company operations

Advanstar.com, Inc. ("Advanstar.com"), an affiliate of ours, operates our event and publication-related web sites and develops certain enhanced web opportunities to serve our customers in selected industries. We provide Advanstar.com with certain administrative support services and charge for these services based on a general overhead charge. In addition, we share selected sales, editorial, marketing and production staff with Advanstar.com. We also provide Advanstar.com with marketing and promotional support through advertising pages in our trade publications and exhibit space in our trade shows. In return, Advanstar.com provides us with support on its web sites for trade publications and trade shows.

Expense associated with our funding of Advanstar.com in the second quarter of 2004 increased $1.8 million to $2.2 million from $0.4 million in the second quarter of 2003. In the second quarter of 2004 we funded Advanstar.com $1.9 million for the buyout of their long-term facility lease in New York. As described in "—Recent Accounting Developments", we expect to begin consolidating the operations of Advanstar.com with those of the Company, beginning on January 1, 2005.

Depreciation and amortization

Depreciation and amortization expense in the second quarter of 2004 declined $0.4 million to $12.7 million from $13.1 million in the second quarter of 2003 primarily due to the effect of the declining balance method of accelerated amortization on our exhibitor and advertiser lists, partially offset by additional amortization related to Thomson acquisition.

Interest expense

Interest expense in the second quarter of 2004 increased $4.8 million, or 38.5%, to $17.4 million from $12.5 million in the second quarter of 2003 due to an increase in our weighted-average interest rate of approximately 220 basis points and an increase in our weighted-average debt outstanding of approximately $61.8 million as a result of our 2003 financings discussed below.

In August 2003, we issued $360 million of Senior Secured Notes and used the net proceeds to repay and terminate all outstanding term A loans under our Credit Facility and all but $25 million of the outstanding term B loans and a portion of our revolving credit borrowings under our Credit Facility. In September 2003, we issued $70 million of the Senior Secured Notes to finance, in part, the Thomson acquisition. Our interest expense will be higher in future periods as a result of these financings. See "Presentation of Financial Information—Private Placement of Second Priority Senior Secured Notes and Refinancing of Credit Facility".

At June 30, 2004, $461.9 million, or 75%, of our total debt is at a fixed rate with the balance subject to interest rate fluctuations. A 100 basis point increase in interest rates on our current variable rate debt would result in an increase in annual interest expense of $1.5 million. We previously entered into an interest rate collar agreement to hedge our interest rate risk on these variable rate borrowings. The agreement expired in February 2004 and we currently have no plans to renew this interest rate collar agreement or otherwise hedge our remaining floating rate debt.

Other income (expense), net

Other income for the second quarter of 2004 increased $0.3 million to $0.2 million from other expense of $0.1 million in the second quarter of 2003, principally due to foreign exchange gains in the quarter ended June 30, 2004.

Provision (benefit) for income taxes

The provision for income taxes was $3.4 million in the second quarter of 2004 compared to a benefit of $0.1 million in the second quarter of 2003. The second quarter 2004 provision relates to income taxes in certain foreign jurisdictions and a deferred tax liability related to the basis of goodwill for tax purposes being less than the carrying value of goodwill for financial reporting purposes. We recorded no income tax benefit related to the net operating losses we generated during 2003 or 2004 because we have established a valuation allowance to offset any related tax benefits due to uncertainty about realization of these benefits. Our second quarter 2003 provision relates to income tax benefits in certain foreign jurisdictions.

Discontinued operations

In conjunction with the sale of the Art Group in the first quarter of 2004, we recorded a gain on the sale of $1.0 million plus a tax benefit of $2.4 million. Pretax profit of the Art Group was $3.4 million for the period from January 1, 2004 to March 12, 2004 and pretax loss of $0.4 million for the three months ended June 30, 2003.

In the second quarter 2004, as a result of the sale of SeCA, we recorded a goodwill impairment charge as a component of discontinued operations of $9.4 million. Pretax results of SeCA, net of minority interest, were a loss of $8.4 million and income of $1.4 million for the three months ended June 30, 2004 and 2003.

See further information regarding discontinued operations of the Art Group and SeCA in "Presentation of Financial Information".

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003

Revenue

Revenue in the first half of 2004 increased 28.4% to $204.6 million from $159.4 million in the first half of 2003.

Revenue from trade shows and conferences increased $3.7 million, or 4.3%, to $89.8 million in the first half of 2004 from $86.1 million in the first half of 2003. Revenue for events held in the first six months of both 2004 and 2003 increased $3.4 million in the first half of 2004. The increase reflects strong performances from MAGIC, our Powersports motorcycle events, License event and our Sensors event. MAGIC revenue and square footage in the first six months of 2004 increased approximately 4.7% and 4.5%, respectively, over the first half of 2003. Attendance at MAGIC increased compared to Spring 2003 and the August 2003 events. Revenue for the first six months of 2004 from the Powersports events, including the Dealer Expo trade show and the International Motorcycle Show tour, increased 14.6% over the first half of last year, and revenue from our License event increased 24.1% over the first half of last year. Our acquisition in March 2004 of conferences from IVT, combined with new product launches, contributed revenue of $3.0 million in first half of 2004. These revenue gains were partially offset by holding two fewer events serving our technology and beauty markets.

Revenue from publications increased $39.6 million, or 60.3%, to $105.2 million in the first half of 2004 from $65.6 million in the first half of 2003, principally due to the expansion of our healthcare business with the acquisition of the Thomson healthcare properties in October 2003. The acquired healthcare properties contributed $39.1 million of revenue in the first half of 2004. We also had strong performances from our pre-Thomson healthcare publications, DVM, American Spa, Pharm Tech Europe, Video Store and our telecom publications. For publishing properties, other than properties acquired or sold during the comparative periods, advertising pages increased 2.0% and revenue increased $1.9 million, or 3.0% in the first half of 2004 over the first half of 2003. These increases were partially offset by revenue reductions of $1.6 million attributable to the sale of certain U.K. publications in December 2003.

Revenue from marketing services and other in the first half of 2004 increased 25.6% to $9.6 million from $7.7 million in the first half of 2003, due to positive results in classified and recruitment advertising, list sales and reprints, principally from the Thomson healthcare acquisition.

Cost of production and selling

Cost of production and selling expenses in the first half of 2004 increased 34.2% to $124.2 million from $92.6 million in the first half of 2003 primarily due to the acquisition of the healthcare properties in October 2003.

Expenses of trade shows and conferences in the first half of 2004 increased 4.1% to $42.9 million from $41.2 million in the first half of 2003. This increase was due in part to the impact of investments made in our MAGIC and Powersports events to pursue future revenue growth opportunities, several launches of new events in the U.S. and Europe and the IVT acquisition, partially offset by cost savings associated with holding two fewer events serving our technology and beauty markets in 2004 and with the sale of certain of our U.K. based properties at the end of 2003.

Expenses of trade publications in the first half of 2004 increased 64.3% to $73.5 million from $44.7 million in the first half of 2003. Operating costs were impacted by $30.9 million of additional costs associated with our healthcare publications, principally our acquisition of the Thomson healthcare publications in October 2003. These cost increases were partially offset by cost savings of $2.2 million attributable to the sale of certain of our U.K. based properties at the end of 2003. Prices for printing, paper and postage remained stable in the first half of 2004 compared to the first half of 2003, however we have indications that paper prices may increase 5% to 8% in the second half of 2004.

Expenses of marketing services and other in the first half declined 7.2% to $4.4 million from $4.8 million in the first half of 2003, due to cost savings associated with the reorganization of our marketing services department.

Department and support costs in the first half of 2004 increased $1.5 million to $3.4 million, due to increased group management and departmental production staff related to the Thomson acquisition.

General and administrative expenses

General and administrative expenses increased $4.2 million to $21.8 million in the first half of 2004 from $17.6 million in the first half 2003, due in part to increased office and administrative costs attributable to the acquisition of the Thomson healthcare properties with the addition of three offices and approximately 300 employees. During the second quarter of 2004 we also appointed a new executive vice president to manage and develop our healthcare, pharmaceutical and science properties.

Funding of affiliated dot.com company operations

Expense associated with our funding of Advanstar.com in the first half of 2004 increased $2.2 million to $2.8 million from $0.6 million in the first half of 2003. In the second quarter of 2004 we funded Advanstar.com $1.9 million for the buyout of their long-term facility lease in New York. As described in "—Recent Accounting Developments", we expect to begin consolidating the operations of Advanstar.com with those of the Company, beginning on January 1, 2005.

Depreciation and amortization

Depreciation and amortization expense in the first half of 2004 declined $1.7 million to $24.2 million from $25.9 million in the first half of 2003 primarily due to the effect of the declining balance method of accelerated amortization on our exhibitor and advertiser lists, partially offset by additional amortization related to the Thomson acquisition.

Interest expense

Interest expense in the first half of 2004 increased $11.0 million, or 44.4%, to $35.6 million from $24.6 million in the first half of 2003 due to an increase in our weighted-average interest rate of approximately 260 basis points and an increase in our weighted-average debt outstanding of approximately $65.5 million as a result of our financings discussed above.

Other income (expense), net

Other income in the first half of 2004 increased $1.1 million to $1.4 million from $0.3 million in the first half of 2003. This increase is attributable to gains associated with our interest rate protection agreement, which expired in February 2004, and foreign exchange gains.

Provision (benefit) for income taxes

The provision for income taxes was $6.6 million in the first half of 2004 compared to $0.3 million in the first half of 2003. Our income tax provision for the first half 2004 relates to income taxes in certain foreign jurisdictions and a deferred tax liability related to the basis of goodwill for tax purposes being less than the carrying value of goodwill for financial reporting purposes. We recorded no income

tax benefit related to the net operating losses we generated during 2003 because we have established a valuation allowance to offset any related tax benefits due to uncertainty about realization of these benefits. Our first half 2003 provision relates to income taxes in certain foreign jurisdictions.

Discontinued operations

In conjunction with the sale of the Art Group in the first quarter of 2004, we recorded a gain on the sale of $1.0 million plus a tax benefit of $2.4 million. Pretax profit of the Art Group reported was $3.4 million for the period from January 1, 2004 to March 12, 2004 and $2.9 million for the six months ended June 30, 2003.

In the second quarter 2004, in conjunction with our sale of SeCA we recorded a goodwill impairment charge of $9.4 million. Pretax results of SeCA, net of minority interest, were a loss of $8.5 million and income of $1.1 million for the six months ended June 30, 2004 and 2003.

See further information regarding discontinued operations of the Art Group and SeCA in "Presentation of Financial Information".

Liquidity and Capital Resources

Our principal sources of liquidity have been, and are expected to be, cash flows from operations and borrowings under our Credit Facility. Our principal uses of cash have been, and are expected to be, the debt service requirements of our indebtedness described below, capital expenditures, investments in our publications and trade shows and strategic acquisitions.

Sources and Uses of Funds

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

On a relative basis, our revenue reaches its highest levels during the first and third quarters of the year largely due to the timing of the MAGIC trade shows and our other large trade shows and conferences. This seasonality, when combined with the shift in the timing of when events take place from year to year, may have a significant effect on our quarterly deferred revenue and working capital balances.

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

Historically, our financing requirements have been funded primarily through cash generated by operating activities and borrowings under our revolving credit facility. From time to time, we have also raised additional funds through sales of common stock, high yield offerings and term borrowings under our credit facility for purposes of completing strategic acquisitions.

Operating cash flows may be significantly affected by the working capital characteristics of our business, in particular the trade shows and conferences business. Deferred revenue increases on the

balance sheet in the quarters immediately preceding our busy first quarter trade show season as we collect deposits for booth space several months in advance of the trade shows. Revenue and contribution margin are recognized in the quarter as the events are held, releasing the deferred revenue from the balance sheet resulting in a use of cash from the increase in net operating assets.

Cash flows from operating activities

Net cash provided by operations in the first half of 2004 declined $16.1 million to a use of cash of $3.7 million compared to a source of cash of $12.4 million in the first half of 2003. This decline was principally due to an increase in interest expense of $10.9 million and a reduction in our negative working capital due to the release of deferred revenue in the first half of 2004 attributable to advertising programs for our healthcare publications which were prepaid in the fourth quarter of 2003 and to changes in our payment processing of accounts payable in the first half of 2004. These declines were partially offset by an increase in operating income of $9.0 million in the first half of 2004 compared to the first half of 2003.

Cash flows provided by (used in) investing activities

Net cash provided by investing activities in the first half of 2004 was $7.8 million compared to net cash used in investing activities of $3.2 million in the first half of 2003. This change was principally due to the sale in March 2004 of our art shows and magazines for a total sales price of $19.5 million in cash, partially offset by $8.0 million in cash used for the acquisition of the pharmaceutical publications and conferences as further discussed below.

We incurred capital expenditures of $3.6 million and $3.0 million in the first half of 2004 and 2003, respectively. We anticipate that we will spend approximately $7.0 million on capital expenditures in 2004. The majority of these expenditures are related to expansions and enhancements to our IT and communications infrastructure and management and operating group information systems. We believe that this amount of capital expenditure will be adequate to meet the needs of our business according to our business strategy and to maintain the key trade shows, publications and business of our continuing operations.

Cash used for acquisitions in the first half of 2004 increased $7.9 million compared to the first half of 2003 due to the acquisition in March 2004 of IVT conferences and magazines for $8.0 million in cash. Our business strategy includes the consummation of strategic acquisitions. In connection with any future acquisitions, we may require additional funding, which may be provided in the form of additional debt or equity financing or a combination thereof. There can be no assurance that any additional financing will be available to us on acceptable terms or in a manner that complies with the restrictive covenants in our debt instruments.

Cash flows used in financing activities

Net cash flows used in financing activities in the first half of 2004 declined $0.4 million to $10.4 million from $10.8 million in the first half of 2003. We paid down $10.1 million in debt during the first half of 2004, including $8.0 million on our revolver, compared to paying down $6.9 million in debt during the first half of 2003. Fees paid to our senior lenders for an amendment to our Credit Facility in the second quarter of 2003 were $3.9 million.

Debt Service.

As of June 30, 2004, we had total indebtedness of $615.9 million and $59.1 million of borrowings available under our revolving Credit Facility. Our principal debt obligations are described below.

Credit Facility

Our Credit Facility consists of a $60.0 million revolving credit facility and $25.0 million outstanding under the Term Loan B facility. The revolving credit facility will terminate in April 2007 and the Term Loan B matures in October 2008. Borrowings under the Credit Facility generally bear interest based on a margin over, at our option, the base rate or LIBOR. The applicable margin for revolving credit loans varies based upon our ratio of consolidated debt to EBITDA, as defined in the Credit Facility, and is currently 3.75% over LIBOR and 2.50% over the base rate. The applicable margin for the Term Loan B varies based upon the rating assigned by S&P and Moody's to our Credit Facility and is currently 4.50% over LIBOR and 3.25% over the base rate. Our obligations under the Credit Facility are guaranteed by Advanstar Holdings Corp. ("Advanstar Holdings"), our ultimate parent company, Advanstar, Inc., our direct parent company, and all our existing and future domestic subsidiaries and are collateralized by substantially all of the assets of our company and the subsidiary guarantors, including a pledge of the capital stock of all our existing and future domestic subsidiaries, a pledge of no more than 65% of the voting stock of any foreign subsidiary directly owned by our company or any domestic subsidiary, a pledge of all intercompany indebtedness in favor of our company and our domestic subsidiaries, a pledge of our company's and Advanstar IH, Inc.'s capital stock by our parent company, and a pledge of our parent company's capital stock by Advanstar Holdings. Our Credit Facility contains restrictive covenants, which require us to, among other things, maintain a minimum fixed charge coverage ratio (as defined in the credit facility documents) as of the end of each fiscal quarter. Although there can be no assurance, we believe, based on our anticipated performance and expected economic conditions, that we will be able to comply with the amended financial covenant contained in the Credit Facility in 2004.

Second Priority Senior Secured Notes

Our $130 million of floating rate notes mature in 2008 and our $300 million of fixed rate notes mature in 2010. The notes of each series are guaranteed by each of our existing and future domestic restricted subsidiaries and collateralized by second-priority liens on the assets collateralizing our credit facility (other than certain subsidiary stock and assets of our parent companies). The fixed rate notes bear interest at an annual rate of 10.75% and the floating rate notes bear interest at an annual rate equal to the three-month LIBOR, which is reset quarterly, plus 7.50%. Interest on the fixed rate notes is payable semi-annually in cash and interest on the floating rate notes, along with amortization of 0.25% of the principal of such floating rate notes, is payable quarterly in cash. The notes contain restrictive covenants that, among other things, limit our ability to incur debt, pay dividends and make investments.

Senior Subordinated Notes

Our $160 million 12% senior subordinated notes mature in 2011 and are guaranteed by each of our existing and future domestic restricted subsidiaries. Interest on the notes is payable semi-annually in cash. The notes contain restrictive covenants that, among other things, limit our ability to incur debt, pay dividends and make investments.

Parent Company Notes

Our parent, Advanstar, Inc., issued 15% senior discount notes due October 2011 with a principal amount at maturity of $171.8 million. These discount notes do not require cash interest payments until April 2006 and contain restrictive covenants that, among other things, limit the ability of Advanstar, Inc. and its subsidiaries (including us) to incur debt, pay dividends and make investments. Neither we nor any of our subsidiaries have guaranteed the discount notes. Advanstar, Inc., however, is a holding company and its ability to pay interest on these discount notes will be dependent upon the receipt of dividends from its subsidiaries, principally Advanstar. However, the terms of our borrowing

arrangements significantly restrict our ability to pay dividends to Advanstar, Inc. and Advanstar, Inc.'s failure to pay these notes would be a default under our Credit Facility.

Contractual and contingent obligations

Our contractual obligations (excluding accounts payable and accrued expenses), as of June 30, 2004 are as set forth below (in millions):

						Payments Due By Period
						Payments Due By Period								After 2009
		2004(1)		2005		2006		2007		2008		2009		After 2009		Total
Indebtedness		$	1.7	$	1.3	$	1.3	$	1.3	$	149.5	$	—	$	460.0	$	615.1
Interest on indebtedness(2)			30.9		64.3		64.2		64.1		60.7		51.5		53.0		388.7
Operating lease obligations			3.2		6.2		6.2		4.1		3.8		2.4		1.2		27.1

	Total Contractual Cash Obligations	$	35.8	$	71.8	$	71.7	$	69.5	$	214.0	$	53.9	$	514.2	$	1,030.9

(1): For the period from July 1, 2004 through December 31, 2004.
(2): Interest on the second priority floating rate notes, revolving credit facility and Term Loan B is calculated using LIBOR of 1.37%, the rate in effect on June 30, 2004. Because the floating rate notes, revolving credit facility and Term Loan B bear interest at a variable rate, actual payments could differ.

We have no material capital lease obligations or purchase obligations. Our contingent obligations are primarily composed of $0.9 million of letters of credit and our interest rate and foreign currency derivatives discussed more fully below in Item 3. "Quantitative and Qualitative Disclosure About Market Risk."

Off-Balance Sheet Arrangements.

We have no material off-balance sheet arrangements.

Recently Issued Accounting Standards

In December 2003, the FASB issued Interpretation No. 46R, Consolidation of Variable Interest Entities, which addresses accounting for special-purpose and variable interest entities and which superseded Interpretation No. 46. The provisions of Interpretation No. 46R are effective for us in the first quarter of 2005. Based upon our preliminary analysis, we believe that it will be required to consolidate the operations of Advanstar.com effective January 1, 2005. If we consolidate Advanstar.com, management believes the effect of adoption will be to reduce the amount of Advanstar.com losses included in our operating results. We do not expect this consolidation to have a material effect on our financial position, results of operations or cash flows.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rates

At June 30, 2004, we had fixed rate debt of $461.9 million and variable rate debt of $154.0 million. The annual pre-tax earnings and cash flows impact resulting from a 100 basis point increase in interest

rates on variable rate debt, holding other variables constant and excluding the impact of the hedging agreements described below, would be approximately $1.5 million per year.

The term loan B under our Credit Facility bears interest at a variable rate. We previously entered into an interest rate collar agreement to hedge our interest rate risk on these borrowings. This interest rate collar agreement expired in February 2004. Changes in fair value of the undesignated portion of this instrument were recognized in current earnings. We currently have no plans to renew this interest rate protection agreement or otherwise hedge our remaining floating rate debt.

Currencies

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

A portion of our assets are based in our foreign locations and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period, with the effect of such translation reflected in other comprehensive income (loss). Accordingly, our consolidated stockholder's equity will fluctuate depending upon the weakening or strengthening of the U.S. dollar against the respective foreign currency.

Our strategy for management of currency risk relies primarily on conducting our operations in a country's respective currency and may, from time to time, involve currency derivatives, primarily forward exchange contracts, to reduce our exposure to currency fluctuations. As of June 30, 2004, we had open foreign exchange derivative contracts to sell with a notional amount totaling $3.9 million, and to buy with a notional amount totaling $1.1 million. The estimated fair value of the foreign exchange contracts based upon market quotes was a net liability of approximately $0.1 million. The potential loss in fair value resulting from a hypothetical 10% adverse change in quoted foreign currency exchange rates amounts to an additional loss of approximately $0.3 million. Actual results may differ.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Advanstar's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report (the "Evaluation Date"), have concluded that as of the Evaluation Date, our disclosure controls and procedures were adequate and designed to ensure that material information relating to the Company would be made known to them by others within the Company.

Changes in Internal Controls. There were no changes during the second fiscal quarter in our internal controls over financial reporting that have materially affected or are reasonably likely to materially affect the Company's internal controls over financial reporting.

PART II OTHER INFORMATION

ITEM 5. Other Information

The Company has the following changes to its directors.

On March 23, 2004, James Quella, who has served as a director since October 2000, resigned as a director.

On July 31, 2004, David M. Wittels, who has served as a director since October 2000, resigned as a director.

Messrs. Quella and Wittels were both appointed to our Board by the DLJ Merchant Banking funds pursuant to their right to appoint directors under our stockholders agreement. Both men resigned from the Board in connection with their departure from DLJ Merchant Banking. They have been replaced by Thompson Dean and Charles Pieper effective August 15, 2004. Messrs. Dean and Pieper are both employed by the DLJ Merchant Banking funds and were appointed by such funds.

On July 31, 2004, Robert L. Krakoff, who has served as Chairman since he joined Advanstar in July 1996, resigned as a director due to his retirement.

James M. Alic, who has served on the Board of Directors since he joined Advanstar in July 1996, was appointed to the position of Chairman effective August 5, 2004.

Item 6.	Exhibits and Reports on Form 8-K
Item 6(a).	Exhibits
	31.1	Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
	31.2	Certification of principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
	32.1	Certification of principal executive officer required by Rule 13a-14(b) or 15d-14(b) of the Exchange Act
	32.2	Certification of principal financial officer required by Rule 13a-14(b) or 15d-14(b) of the Exchange Act
Item 6(b).	Reports on Form 8-K
	The Company furnished a report on Form 8-K under Items 7 and 12 on April 29, 2004 setting forth its first quarter 2004 results.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ADVANSTAR COMMUNICATIONS INC.

August 16, 2004	/s/ DAVID W. MONTGOMERY
		David W. Montgomery Vice President—Finance, Secretary and Chief Financial Officer (Principal Financial Officer and Authorized Representative of the Registrant)

Exhibit Index

Exhibit No.		Document
31.1		Certification of principal executive officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
31.2		Certification of principal financial officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act
32.1		Certification of principal executive officer required by Rule 13a-14(b) or 15d-14(b) of the Exchange Act
32.2		Certification of principal financial officer required by Rule 13a-14(b) or 15d-14(b) of the Exchange Act

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