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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from n/a to n/a
Commission File Number 0-27192
ASCENT ENTERTAINMENT GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1930707
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Tabor Center
1200 Seventeenth Street, Suite 2800
Denver, Colorado 80202
(Address of principal executive office)
(303) 626-7000
(Registrant's telephone number, including area code)
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 twelve (12) months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the Registrant's Common Stock as of
September 30, 1997 was 29,755,600 shares.
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<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASCENT ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
(Unaudited)
ASSETS
-----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....... $ 18,419 $ 3,963
Receivables, net ............... 57,512 54,695
Prepaid expenses ................ 20,336 11,247
Current portion of film inventory 15,922 -
Deferred income taxes ........... 5,409 3,580
Income taxes receivable (Note 7) 8,798 12,623
Other current assets ........... 1,770 2,759
----- -----
Total current assets..... 128,166 88,867
------- ------
Property and equipment, net....... 311,759 301,498
Goodwill, net..................... 124,501 132,805
Franchise rights, net............. 98,577 102,189
Film inventory, net (Note 5)...... 30,797 76,234
Investments....................... 7,226 9,150
Other assets, net................. 33,805 31,899
------ -----
TOTAL ASSETS ..................... $734,831 $742,642
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
CURRENT LIABILITIES:
Short-term borrowings (Note 6) .. $192,000 $143,000
Accounts payable ................ 19,113 19,992
Deferred income ................. 50,782 81,942
Income taxes payable ............ 4,202 6,970
Payable to COMSAT (Note 7) ...... 541 4,662
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Other accrued liabilities ....... 58,949 38,629
------ ------
Total current liabilities ...... 325,587 295,195
Long-term debt (Note 6)........... 50,000 50,000
Other long-term liabilities....... 13,004 14,645
Deferred income taxes............. 7,716 5,742
------ -----
Total liabilities ............. 396,307 365,582
Minority interest (Note 3)........ 97,661 107,475
STOCKHOLDERS' EQUITY (Note 9):
Preferred stock, par value $0.1
per share,5,000,000 shares
authorized, none outstanding _ _
Common stock, par value $.01
per share,60,000,000 shares
authorized; 29,755,600 and
29,754,000 issued and
outstanding..................... 297 297
Additional paid-in capital ..... 307,588 307,569
Accumulated deficit ............. (68,387) (39,633)
Other ........................... 1,365 1,352
------ ------
Total stockholders' equity ..... 240,863 269,585
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................ $734,831 $742,642
======== =======
ee accompanying notes to these condensed consolidated financial statements.
</TABLE>
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<TABLE>
ASCENT ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPT
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES................. $141,034 $40,248 $318,714 $169,501
------- ------ ------- --------
OPERATING EXPENSES:
Cost of services ....... 110,245 27,841 266,463 131,059
Depreciation and
amortization.......... 25,141 16,939 75,689 48,637
General and administrative 2,769 2,599 5,921 7,723
----- ----- ----- -----
Total operating
expenses......... 138,155 47,379 348,073 187,419
------- ------ ------- -------
Operating income (loss).. 2,879 (7,131) (29,359) (17,918)
Other income, net........ 390 728 789 491
Interest expense......... (6,042) (2,282) (16,329) (5,904)
------- ------ ------ ------
Loss before taxes and
minority interest... (2,773) (8,685) (44,899) (23,331)
Income tax (expense) benefit (1,223) 2,702 5,907 7,081
------ ------ ------ -------
Loss before minority
interest............ (3,996) (5,983) (38,992) (16,250)
Minority interest in (income)
loss of subsidiary,
net of taxes........ 2,635 (52) 10,237 (316)
------ ---- ------ ----
NET LOSS................ $ (1,361) $(6,035) $(28,755) $ (16,566)
====== ====== ======== =======
NET LOSS PER COMMON SHARE $ (.04) $ (.20) $ (.97) $ (.56)
======= ======= ======= ========
Weighted average number of
common shares outstanding 29,756 29,752 29,755 29,752
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====== ====== ======= ======
See accompanying notes to these condensed consolidated financial statements.
</TABLE>
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<TABLE>
ASCENT ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
---- -----
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .............. $ (28,755) $ (16,566)
......................
Adjustments for non-cash
expenses:
Depreciation and amortization 75,689 48,637
Amortization of film
inventory........ 68,888 5,380
Provision for loss on
investment....... 129 1,800
Changes in operating assets
and liabilities.. (67,583) (10,972)
------- ------
Net cash provided by operating
activities ....... 48,368 28,279
------- -------
INVESTING ACTIVITIES:
Proceeds from note receivable 2,189 2,900
Purchase of property and
equipment........... (68,293) (73,421)
Net expenditures for film
production costs.... (19,233) (33,432)
Investments in unconsolidated
business............ - (4,125)
Distributions from partner-
ships and joint ventures 505 -
Proceeds from sale of
investment.......... 1,920 1,892
------ ------
Net cash used in investing
activities.......... (82,912) (106,186)
------- --------
FINANCING ACTIVITIES:
Repayment of long-term debt - (208)
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Net short-term borrowings 49,000 68,000
Other ................. - 576
------ ------
Net cash provided by financing
activities........... 49,000 68,368
------- ------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.... 14,456 (9,539)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD..... 3,963 11,012
------ ------
CASH AND CASH EQUIVALENTS, END
OF PERIOD............... $ 18,419 $ 1,473
======= ======
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid....... $ 11,454 $ 5,534
======= ======
Income taxes paid... $ 262 $ 414
======= =======
NON-CASH INVESTING AND FINANCING
ACTIVITY:
Reversal of accrual made
in OCC purchase price
allocation.......... $ 3,000 _
======= =======
See accompanying notes to these condensed consolidated financial statements.
</TABLE>
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ASCENT ENTERTAINMENT GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.GENERAL
The accompanying unaudited condensed consolidated financial statements have
been prepared by Ascent Entertainment Group, Inc. ("Ascent" or the "Company")
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "Commission"). These financial statements should be read in the context of
the financial statements and notes thereto filed with the Commission in the
Company's 1996 Annual Report on Form 10-K. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. The accompanying condensed consolidated financial
statements reflect all adjustments and disclosures which are, in the opinion of
management, necessary for a fair presentation. All such adjustments are of a
normal recurring nature. The results of operations for the interim periods are
not necessarily indicative of the results of the entire year. Certain fiscal
1996 amounts have been reclassified to conform with the fiscal 1997
presentation. Such reclassifications had no effect on net income or
stockholders' equity.
2.Organization and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Ascent and its majority-owned subsidiaries which include On Command Corporation
("OCC"), the Denver Nuggets Limited Partnership (the _Nuggets"), the Colorado
Avalanche LLC (the _Avalanche"), Beacon Communications Corp. ("Beacon") and the
Ascent Arena Company, LLC (the _Arena Company_). Ascent Network Services, Inc.
(_ANS_), formerly a wholly owned subsidiary of Ascent, was merged into Ascent
and became an operating division of Ascent on May 30, 1997. Significant
intercompany transactions have been eliminated.
Ascent executed an initial public offering (the _Offering_) of its common
stock on December 18, 1995. Prior to the Offering, Ascent was a wholly owned
subsidiary of COMSAT Corporation (_COMSAT_). Until June 27, 1997 COMSAT
continued to own a majority (80.67%) of Ascent's common stock and control
Ascent. In addition, Ascent's relationship with COMSAT was governed by three
agreements entered into in connection with the Offering; an Intercompany
Services Agreement, a Corporate Agreement and a Tax Sharing Agreement.
On June 27, 1997, COMSAT consummated the distribution of its 80.67% ownership
interest in Ascent to the COMSAT shareholders on a pro-rata basis in a
transaction that was tax-free for federal income tax purposes (the
_Distribution_). Ascent and COMSAT entered into a Distribution Agreement and a
Tax Disaffiliation Agreement, both dated as of June 3, 1997 (see Note 7) in
connection with the Distribution. Ascent and COMSAT also terminated the
Intercompany Services Agreement and Corporate Agreement entered into in
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connection with the Offering resulting in, among other things, the
termination of the restriction on Ascent's incurring indebtedness without the
consent of COMSAT. As a result of the Distribution, Ascent became an
independent publicly held corporation. All costs incurred by Ascent which
are directly associated with the Distribution have been charged to expense.
3. BUSINESS COMBINATION
As discussed in Note 2 to the Company's 1996 consolidated financial
statements, effective October 8, 1996, Ascent through its newly formed
subsidiary, OCC, acquired the assets, properties and certain liabilities of
SpectraVision, Inc., a leading provider of in-room video entertainment
services to the lodging industry. Prior to the acquisition of SpectraVision, On
Command Video Corporation (_OCV_), formerly an 84% owned subsidiary of Ascent,
was merged with a subsidiary of OCC and became a wholly owned subsidiary of
OCC pursuant to an Agreement and an of Merger. Ascent owns approximately 57% of
the common stock of OCC as of September 30, 1997. The acquisition of
SpectraVision has been accounted for under the purchase method and,
accordingly, the results of operations of SpectraVision are included in the
consolidated financial statements from the date of the acquisition.
4. DENVER ARENA PROJECT
As discussed in Note 4 to the Company's 1996 consolidated financial
statements, on March 28, 1996, the Company entered into an agreement with The
Anschutz Corporation ("TAC") pursuant to which the Company purchased all of
TAC's interests in the proposed arena development project in Denver and related
goodwill, rights, plans, specifications, drawings, contracts, relationships,
approvals, permits and other work product of every kind that had been generated
by the efforts of TAC and Ascent with respect to the proposed arena (the "Arena
Assets"), and TAC agreed to use reasonable efforts to facilitate the development
and construction of the proposed arena. Ascent and TAC had worked together on
the proposed arena development from early 1994 until September 1995. In
consideration for TAC's interest in the Arena Assets and its agreement to
facilitate development of the proposed arena, Ascent paid TAC $6,600,000 in
cash. On a non-interest bearing basis, Ascent also agreed to pay TAC an
additional $5,000,000 and grant a paid-up suite license, contingent
on completion of construction and occupancy of the proposed arena.
On May 7, 1997, the Company entered into a Land Purchase Agreement (the
_Agreement_) with Southern Pacific Transportation Company ("SPT") pursuant to
which the Company would purchase approximately 49 acres in Denver as the site
for the proposed arena for a purchase price of $20,000,000. The Agreement is
similar to the previously expired agreement between SPT and the Company.
Pursuant to the Agreement, the closing of the land purchase needs to occur on or
before August 31, 1997 and consummation of the transaction is subject to
several conditions, including obtaining satisfactory financing. In
connection with the Agreement, the Company paid SPT an earnest money deposit of
$750,000, which will be credited against the purchase price at closing. The
Agreement also provides for SPT to effect a state-approved environmental clean-
up plan on the site, and to provide continuing partial indemnification with
regard to certain environmental
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liabilities. Subsequently, the Company has amended the Agreement to extend the
final date for closing of the land purchase first to October 31, 1997
and then to November 14, 1997. In connection with these extensions, the
Company paid SPT non-refundable deposits totaling $410,000. On November 14,
1997, the Company purchased the land pursuant to the Agreement as amended.
In connection with the proposed arena, on November 13, 1997, the
Company entered into a definitive agreement (the _Arena Agreement_) with the
City and County of Denver (the _City_), the effectiveness of which is subject
to the satisfaction of certain conditions prior to December 15, 1997. The
Arena Agreement provides for Ascent to construct, own and manage a new arena in
the city through its subsidiary, the Arena Company. The Arena Agreement also
provides for the release of the Nuggets and Avalanche from their existing leases
at the City's current arena, McNichols Arena, upon the completion of the new
arena. In addition, upon completion of the new arena, Ascent is to transfer to
the City the land associated with the arena and the City will lease the land
back to Ascent for a 25 year term. At the end of such term the City will
contribute the land back to Ascent.
On November 14, 1997, Liberty Denver Arena, LLC (_LDA_) a subsidiary of
Liberty Media Corporation, invested $15,000,000 in the Arena Company. In
connection with such investment, upon consent of the NBA and NHL, LDA will
receive an ownership interest in the Arena Company that includes an interest
in capital and a profits interest of approximately 6.5% representing the right
to receive distributions from the Arena Company measured by reference to each of
the Nuggets and Avalanche. LDA will not have any management or operating rights
with respect to the Arena Company, the Nuggets or the Avalanche. Prior to
receipt of the league consents, LDA will have a 50% interest in the Arena
Company, and, if the consents are not received, then after June 30, 1998, LDA
may require Ascent to purchase, and Ascent may require LDA to sell, LDA's
interest in the Arena Company for $15,000,000, plus interest. If Ascent
purchases LDA's interest as set forth in the prior sentence, the purchase price
for LDA's interest may be paid, at the election of Ascent, in either cash or
common stock of Ascent, or some combination thereof.
5. FILM INVENTORY
Film inventory consists of the following at September 30, 1997 and December
31, 1996:
<TABLE>
<CAPTION>
1997 1996
---- -----
(in thousands)
<S> <C> <C>
Films released, less
amortization_____ $28,441 $ 3,382
Films in process and
development_____ 13,422 69,732
Development_____________ 4,856 3,120
------- -------
Total film inventory__ $46,719 $76,234
======= =======
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6.NOTES PAYABLE AND LONG-TERM DEBT
On March 23, 1997, OCC entered into an amendment to its revolving credit
facility with a bank (the _OCC Amendment_). Under the OCC Amendment, the amount
available under the OCC revolving credit facility was increased from $125.0
million to $150.0 million, and certain other terms were amended to clarify such
terms. At September 30, 1997, $50.0 million was outstanding as a long-term
revolving loan payable in 2001 while $77.0 million is considered a short-term
borrowing under the OCC Amendment. At September 30, 1997, there was $23.0
million available for future borrowings under the OCC Amendment, subject to
certain covenant restrictions.
On March 23, 1997, Ascent entered into an amendment and restatement of its
revolving credit facility with a bank (the _Ascent Amended Facility_). The
Ascent Amended Facility provides, among other things, that the Ascent revolving
credit facility will only be renewable for two additional one year options
beyond October 7, 1997 if, prior thereto, Ascent has received not less than
$50.0 million in proceeds from a new debt financing which is subordinated to the
Ascent Amended Facility; for the maximum amount available to be
borrowed under the facility to be reduced from $200.0 million to $140.0 million;
for the elimination of the $125.0 million limit on available borrowings under
the facility prior to the receipt of NBA and NHL consents; that those financial
covenants contained in the Ascent Amended Facility related to the
financial results of OCC will not be applicable until December 31, 1997; for the
$140.0 million of availability to be divided into a term loan of $50.0 million
and a revolving facility of $90.0 million; for the failure of Ascent to commence
construction on the new arena (see Note 4) prior to August 31, 1997 to be an
event of default; and for amendments to certain other financial covenants.
On August 12, 1997, Ascent obtained the bank's consent to (i) extend the
time for the commencement of construction on the new arena from August 31, 1997
to October 31, 1997 and (ii) extend the maturity date for the revolving credit
facility from October 7, 1997 to October 31, 1997, still subject to Ascent
obtaining not less than $50.0 million in subordinated indebtedness by October 9,
1997. On October 9, 1997 the Company reached agreement with the bank to extend
the date by which Ascent has to raise additional debt financing to December 31,
1997. After raising the additional debt financing, Ascent would be able to
renew its current facility for up to two more years after December 31, 1997. On
October 9, 1997, Ascent's lender also agreed to the extension of the maturity
date based on progress in Ascent's efforts to raise financing through a private
placement offering which is expected to raise significantly in excess of $50.0
million in proceeds. Pursuant to the Ascent Amended Facility, the amount
available thereunder would be decreased by an amount equal to the excess over
$50.0 million raised. In consideration for the bank to extend the credit
facility beyond two years, Ascent is considering even a larger decrease in the
amount to be available under the credit facility.
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On October 31, 1997, Ascent obtained the bank's consent to extend the
October 31, 1997 deadline for commencing construction on the new arena to
November 30, 1997. Ascent management currently believes that construction will
commence before the November 30, 1997 deadline. Based on current market
conditions, management of Ascent believes that the Company will be successful in
obtaining the required funds through additional debt financing by December
31, 1997 although there can be no assurances that conditions will not change or
that other contingencies will not arise which could impact Ascent's ability
to raise the additional debt financing or that such financing will be
available on terms acceptable to Ascent. Accordingly, Ascent could be
required to refinance the Ascent Amended Facility which could require Ascent
to sell assets. At September 30, 1997, $25.0 million was available
for future borrowings under the Ascent Amended Facility, subject to certain
covenant restrictions.
7. RELATED PARTY TRANSACTIONS AND AGREEMENTS WITH COMSAT
During the nine-month periods ended September 30, 1997 and 1996, Ascent paid
COMSAT $245,000 and $0 respectively, in interest relating to intercompany
obligations between the two entities. In addition, COMSAT provided
administrative services to Ascent pursuant to an Intercompany Services Agreement
(the _Services Agreement_). The Services Agreement, which was amended in
December 1996 to reflect a reduced level of services to be provided effective
January 1, 1997, was terminated on June 27, 1997 in connection with the
Distribution. Total charges incurred under this agreement were approximately
$173,000 and $1,500,000 for the nine months ended September 30, 1997 and 1996,
respectively.
Through June 27, 1997, the date of the Distribution, Ascent was a member of
COMSAT's consolidated tax group for federal income tax purposes. Accordingly,
Ascent prepared its tax provision based on Ascent's inclusion in COMSAT's
consolidated tax return pursuant to the tax sharing agreement entered into in
connection with the Offering (see note 2). In conjunction with the
SpectraVision transaction, Ascent's ownership in OCC decreased to approximately
57% and OCC began filing a separate return commencing on October 9, 1996.
Pursuant to the tax sharing agreement and the Tax Disaffiliation Agreement,
taxes payable or receivable with respect to periods that Ascent was included in
COMSAT's consolidated tax group are settled with COMSAT annually. At September
30, 1997 and December 31, 1996, Ascent's federal income tax receivable from
COMSAT was $8,798,000 and $12,263,000, respectively. In conjunction with the
Distribution (see note 2), the Company will no longer be part of COMSAT's
consolidated tax group and accordingly, it may be unable to recognize tax
benefits and will receive no cash payments from COMSAT for losses incurred
subsequent to June 27, 1997.
In connection with the Distribution, Ascent and COMSAT executed the
Distribution Agreement, dated June 3, 1997. The Distribution Agreement
provides, among other things, that COMSAT will distribute all of its holdings of
Ascent common stock to COMSAT shareholders on a pro-rata basis. In addition,
while COMSAT has received a ruling from the IRS that the Distribution will not
be taxable to COMSAT or its shareholders, such a ruling is based on the
representations made by COMSAT in the IRS ruling documents. Accordingly, in
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order to maintain the tax-free status of the Distribution, Ascent will be
subject to the following restrictions under the Distribution Agreement: (i)
Ascent shall not take any action, nor fail or omit to take any action, that
would cause the Distribution to be taxable or cause any representation made in
the ruling documents to be untrue in a manner which would have an adverse effect
on the tax-free status of the Distribution; (ii) until the second anniversary
of the Distribution, Ascent will continue the active conduct of its ANS
satellite distribution, service and maintenance business; (iii) until the first
anniversary of the Distribution, Ascent will not sell or otherwise issue to any
person, or redeem or otherwise acquire from any person, any Ascent stock or
securities exercisable or convertible into Ascent stock or any instruments that
afford any person the right to acquire stock of Ascent; (iv) for six months
after the Distribution, Ascent will not solicit any person to make a tender
offer for stock of Ascent, participate in or support any unsolicited tender
offer for stock of Ascent, or approve any proposed business combination or any
transaction which would result in any person owning 20% or more of the stock of
Ascent; (v) until the second anniversary of the Distribution, Ascent will not
sell, transfer or otherwise dispose of assets that, in the aggregate, constitute
more than 60% of its gross assets as of the Distribution, other than in the
ordinary course of business; (vi) until the second anniversary of the
Distribution, Ascent will not voluntarily dissolve or liquidate or engage in any
merger, consolidation or other reorganization; and (vii) until the second
anniversary of the Distribution, Ascent will not unwind the merger of ANS with
and into Ascent in any way.
The restrictions noted in items (ii) through (vii) above will be waived with
respect to any particular transaction if either COMSAT or Ascent have obtained a
ruling from the IRS in form and substance reasonably satisfactory to COMSAT that
such transaction will not adversely affect the tax-free status of the
Distribution, or COMSAT has determined in its sole discretion, exercised in good
faith solely to preserve the tax-free status of the Distribution that such
transaction could not reasonably be expected to have a material adverse effect
on the tax-free status of Distribution, or, with respect to a transaction
occurring at least one year after the Distribution, Ascent obtains an
unqualified tax opinion in form and substance reasonably acceptable to COMSAT
that such transaction will not disqualify the Distribution's tax-free status.
Pursuant to the Distribution Agreement, Ascent will indemnify COMSAT against
any tax related losses incurred by COMSAT to the extent such losses are caused
by any breach by Ascent of its representations, warranties or covenants made in
the Distribution Agreement. In turn, COMSAT will indemnify Ascent against any
tax related losses incurred by Ascent to the extent such losses are caused by
any COMSAT action causing the Distribution to be taxable. To the extent that
tax related losses are attributable to subsequent tax legislation or regulation,
such losses will be borne equally by COMSAT and Ascent.
8. LITIGATION
The Company and its subsidiaries are defendants, and may be potential
defendants, in lawsuits and claims arising in the ordinary course of their
businesses. While the outcomes of such claims, lawsuits, or other proceedings
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cannot be predicted with certainty, management expects that such liability, to
the extent not provided for by insurance or otherwise, will not have a material
adverse effect on the financial condition of the Company.
9. STOCKHOLDERS' EQUITY
Stockholders' Rights' Plan - On June 27, 1997, the Company's Board of
Directors adopted a Rights Plan (the _Plan_) and, in accordance with the Plan,
declared a dividend of one preferred share purchase right for each outstanding
share of common stock, payable July 10, 1997 to stockholders of record on that
date. The Plan is intended to enable all Ascent stockholders to realize the
long term value of their investment in the Company. The Plan will not prevent a
takeover, but should encourage anyone seeking to acquire the Company to
negotiate with the Board of Directors prior to attempting a takeover.
The rights become exercisable after a person or group acquires 15% or more of
the Company's common stock or announces an offer, the consummation of which
would result in the ownership of 15% or more of the Company's common stock.
Once exercisable, each right will entitle the holder other than the person or
group that has acquired 15% of the Company's shares to purchase one one-
hundredth of a share of Series A Junior Participating Preferred Stock, par value
$.01, at a price of $40.00, subject to adjustment. If a person or group
acquires 15% or more of Ascent's outstanding common stock, each right will
entitle its holder to purchase a number of shares of the Company's common stock
having a market value of two times the exercise price of the right. In the
event a merger or other business combination transaction is effected after a
person or group has acquired 15% or more of the Company's common stock, each
right will allow its holder to purchase a number of the resulting company's
common shares having a market value of two times the exercise price of the
right.
Following the acquisition by a person or group of 15% or more of the
Company's common stock but prior to the acquisition of a 50% ownership interest,
the Company may exchange the rights at an exchange ratio of one Common stock per
right. The Company may also redeem the rights at $.01 per right at any time
prior to a 15% acquisition. The rights, which do not have voting power and are
not entitled to dividends until such time as they become exercisable, expire on
July 10, 2007.
Stock Option Plans - As discussed in Note 10 to the Company's 1996 financial
statements, the Company had two stock incentive plans, the 1995 Key Employee
Stock Plan (the _Key Employee Plan_) and the 1995 Non-employee Directors Stock
Plan. In order for the Distribution to be tax-free, the Distribution Agreement
required Ascent to cancel substantially all of the outstanding options, and not
to have any plans or agreements to issue stock. Therefore, in connection with
the Distribution, the 1995 Non-employee Director's Stock Plan was terminated as
it only provided for the issuance of stock and stock options. In addition, the
stock options previously granted under the Key Employee Plan (1,273,250 options)
were canceled and, in exchange, option holders were issued stock appreciation
rights (_SARs_), payable only in cash, with an exercise price equal to $9.53 per
share, based on the average trading price of the Ascent common stock for five
days
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commencing with the date of the Distribution. In addition, under the Key
Employee Plan, 120,000 SARs were granted to certain officers and key employees
of the Company in June 1997. The SAR's permit the optionee to surrender the
SAR, in whole or in part, on any date that the fair market value of the
Company's common stock exceeds the exercise price for the SAR and receive
payment in cash. Payment would be equal to the excess of the fair market value
of the shares reflected by the surrendered SAR over the exercise price for such
shares. The SARs will vest over either a three year or five year period from the
date of grant of the option for which they were exchanged. In June 1997, the
Company also adopted the 1997 Non-employee Directors Stock Appreciation Rights
Plan (subject to stockholder approval) pursuant to which each non-employee
director was granted a SAR with respect to 100,000 shares of Ascent common
stock with a three year vesting period. The exercise price for the non-
employee directors SARs is $8.27 per share, the market price on the date of
the Distribution. The change in value of SARs will be reflected in the
Company's statement of operations based upon the market value of the common
stock. During the three and nine month periods ended September 30, 1997 the
Company recorded $741,000 in expense relating to the SAR's.
10.NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, _Earnings Per Share_
(EPS). This Statement establishes standards for computing and presenting
earnings per share. This Statement is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods; early
application is not permitted. The Company will adopt this Statement in the
fourth quarter of 1997 and will restate all prior period earnings per share data
presented as required.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income available to nonredeemable common stock by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
If SFAS 128 had been in effect during the three and six-month periods ended
September 30, 1997 and 1996, basic and diluted EPS would not have been
substantially different than primary EPS currently reported for the respective
periods.
In June 1997, the FASB issued SFAS No. 130 _Reporting Comprehensive Income_,
which requires that an enterprise report, by major components and as a single
total, the change in its net assets during the period from non-owner sources;
and SFAS No. 131 _Disclosures about Segments of an Enterprise and Related
Information_, which redefines how operating segments are determined and requires
disclosures of certain financial and descriptive information about a Company's
operating segments. Adoption of these statements will not impact the Company's
consolidated financial position, results of operations or cash flows. While the
Company has not completed its analysis of which operating segments it will
report under SFAS No. 131 in the future, it is required to and will adopt both
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SFAS 130 and 131 in fiscal 1998.
11. SUBSEQUENT EVENTS
On October 31, 1997, OCC sold the building which housed the SpectraVision
spare part depot in Richardson, Texas for $4.5 million in cash.
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL:
Certain of the statements in this report are forward-looking and relate to
anticipated future events and operating results. Statements which look forward
in time are based on management's current expectations and assumptions, which
may be affected by subsequent developments and business conditions, and
necessarily involve risks and uncertainties. Therefore, there can be no
assurance that actual future results will not differ materially from anticipated
results. Although the Company has attempted to identify some of the important
factors that may cause actual results to differ materially from those
anticipated, those factors should not be viewed as the only factors which may
affect future operating results. Accordingly, the following should be read in
conjunction with the Consolidated Financial Statements (unaudited) included in
this filing, and with the Consolidated Financial Statements, notes thereto, and
Management Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for 1996, as
previously filed with the Commission.
SEASONALITY, VARIABILITY AND OTHER:
The Company's businesses are subject to the effects of both seasonality and
variability. Consequently, the operating results for the quarter and nine
months ended September 30, 1997 for each segment and line of business, and for
the Company as a whole, are not necessarily indicative of the results for the
full year.
The MultiMedia Distribution segment revenues and primarily those of OCC are
influenced principally by hotel occupancy rates and the _buy rate_ or percentage
of occupied rooms at hotels that buy movies or other services at the property.
Higher revenues are generally realized during the summer months and lower
revenues realized during the winter months due to business and vacation travel
patterns which impact the lodging industry's occupancy rates. Buy rates
generally reflect the hotel's guest mix profile, the popularity of the motion
picture or services available at the hotel and the guests' other entertainment
alternatives.
The Entertainment segment revenues are influenced by various factors.
Revenues for the Nuggets and Avalanche correspond to the NBA and NHL playing
seasons, which extend from the fall to late spring depending on the extent of
each team's post-season playoff participation. Accordingly, the Company
realizes the vast majority of its revenues from the Nuggets and the Avalanche
during such period. Conversely, Beacon's revenues fluctuate based upon the
delivery and/or availability of the films it produces, the timing of theatrical
and home video releases and seasonal consumer purchasing behavior. Release and
delivery dates for theatrical products are determined by several factors,
including the distributor's schedule, the timing of vacation and holiday periods
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and competition in the market. Specifically, Beacon delivered and released two
motion pictures during the three months ended September 30, 1997; Air Force One,
delivered and released in July 1997, and A Thousand Acres, delivered and
released in September 1997. An additional picture, Playing God, has been
delivered to certain of its distributors and was released domestically in
October 1997. Accordingly, Beacon's revenues have significantly increased
during the third quarter of 1997 and will increase during the fourth quarter of
1997 as compared to the comparable period of 1996 and prior years.
Furthermore, Beacon's operating results are significantly affected by
accounting policies required for the film and entertainment industry and
management's estimates of the ultimate realizable value of its films.
Production advances received prior to delivery or completion of a film are
treated as deferred income. Production advances are generally recognized as
revenue on the date the film is delivered or made available for delivery to its
distributors.
The Company generally capitalizes all costs incurred to produce a film. Such
costs include the acquisition of story rights, the development of stories, the
direct costs of production, print and advertising costs, production overhead and
interest expense relating to financing the project. Capitalized exploitation or
distribution costs include those costs that clearly benefit future periods such
as film prints and prerelease and early release advertising that is expected to
benefit the film in future periods. These costs, as well as participation and
talent residuals, are amortized each period under the individual film forecast
method which uses the ratio that the current period's gross revenues from all
sources for the film bear to management's estimate of anticipated total gross
revenues for such film from all sources. In the event management reduces its
estimates of the future gross revenues associated with a particular film, which
had been expected to yield greater future proceeds, a write-down and a
corresponding decrease in the Company's earnings for the quarter and fiscal year
end in which such write-down is taken could result and could be material.
ANALYSIS OF OPERATIONS
CONSOLIDATED OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
Revenues for the third quarter of 1997 were $141.0 million, an increase of
$100.8 million or 251%, as compared to $40.2 million in revenues for the third
quarter of 1996. This increase is primarily attributable to a $24.3 million
increase in revenues at OCC within the Multimedia Distribution segment and a
$75.4 million increase in revenues at Beacon within the Entertainment segment.
The increase in revenues at OCC was due to a larger number of hotel rooms
served, resulting primarily from the acquisition of SpectraVision assets in
October 1996. The increase in revenues at Beacon is primarily attributable
to revenues of $68.1 million from the release and delivery of the motion
picture Air Force One and $6.7 million in revenues from the delivery of the
motion picture A Thousand
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Acres. Specifically, revenues from the release of Air Force One include
Beacon's share of the net box office results through September 30 and $50.0
million primarily attributable to the recognition of an advance from the film's
foreign distributor, previously classified as deferred revenues, upon the
delivery of the film to its foreign distributor during the quarter. During the
third quarter of 1996, Beacon had no movie releases and generated minimal
revenues from prior movie releases.
Costs of services for the third quarter of 1997 were $110.2 million, an
increase of $82.4 million or 296% compared to the third quarter of 1996. This
increase is attributable to increased film amortization costs of $60.9 million
at Beacon, primarily from Air Force One; an increase in cost of services of
$20.0 million at OCC due to the overall increase in the number of hotel rooms
served by OCC, including increased costs to support the SpectraVision rooms,
costs associated with the integration of SpectraVision and OCV, and the
increased expenses to operate OCC as a public company, and to a lesser degree,
higher costs at the Nuggets resulting from player contract terminations.
Depreciation and amortization for the third quarter of 1997 was $25.1
million, an increase of $8.2 million or 48% compared to the third quarter of
1996. This increase is attributable to a larger installed room base and the
resulting increase in depreciation at OCC combined with the incremental
depreciation and amortization resulting from the assets acquired in connection
with the SpectraVision acquisition in October 1996.
General and administrative expenses for the third quarter of 1997 were $2.8
million, an increase of $200,000 or 7% compared to the third quarter of 1996.
This increase primarily reflects the expense recognized for the Company's stock
appreciation rights offset by the reduction in 1997 of certain general and
administrative service charges from COMSAT. From January through June 1997,
COMSAT provided only limited administrative and support services to the Company
and, since July 1997, has provided no services.
Other income (expenses) decreased by $300,000 in the third quarter of 1997 as
compared to the same period last year. The decrease is attributable to the non-
recurrence of certain significant transactions which occurred during the third
quarter of 1996. Specifically, the Company recognized a $1.8 million loss on
its limited partnership investment in Elitch Gardens, which was offset by a gain
of $1.9 million from the sale of investment securities during the comparable
quarter in 1996. Elitch Gardens, a Denver amusement park, was sold in October
1996.
Interest expense increased $3.8 million in the third quarter of 1997 as
compared to the third quarter of 1996. This increase is attributable to the
additional borrowings incurred during the fourth quarter of 1996 and the first
nine months of 1997 for capital expenditures, investment requirements (primarily
the assumption of debt in the SpectraVision transaction) and the funding of
operating requirements of Ascent and its subsidiaries.
The Company recorded an income tax expense of $1.2 million in the third
quarter of 1997 as compared to an income tax benefit of $2.7 million in the
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third quarter of 1996. Up to and until the previously announced spin-off from
COMSAT on June 27, 1997, the Company was able to recognize tax benefits from its
operating losses as part of its inclusion as a member of the consolidated tax
group of COMSAT. During the third quarter of 1997, the Company recognized tax
expense to reflect OCC's taxes from income in foreign jurisdictions and to
appropriately reflect the Company's consolidated net deferred tax liabilities
after the Distribution from COMSAT. Furthermore, OCC, which files a separate
return, recognized no tax benefit from its operating losses due to uncertainties
regarding its ability to realize a portion of the benefits associated with
future deductible temporary differences (deferred tax assets) and net operating
loss carry forwards, prior to their expiration.
Minority interest reflects the losses attributable to the minority interest
in the Company's 57% owned subsidiary, OCC.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues for the nine months ended September 30, 1997 were $318.7 million, an
increase of $149.2 million or 88%, as compared to $169.5 million in revenues for
the nine months ended September 30, 1996. This increase is primarily
attributable to a $70.3 million increase in revenues at OCC in the Multimedia
Distribution segment and a $78.0 million increase in revenues at Beacon within
the Entertainment Segment. The increase in revenues at OCC was due to a larger
number of hotel rooms served, resulting primarily from the acquisition of
SpectraVision assets in October 1996. The increase in revenues at Beacon is
due to the recognition of $81.9 million in revenues from the release and
delivery of three motion pictures to their distributors during 1997.
Specifically, Beacon recognized revenues of $68.1 million from the release of
Air Force One (which includes Beacon's share of the net box office results
to-date and $50.0 million which is attributable to the recognition of
previously deferred revenues upon delivery of the film to its foreign
distributors), $6.7 million from the delivery and release of A Thousand
Acres and revenues of $7.1 from the delivery of the motion picture Playing God
to its domestic distributor. In contrast, during the nine months ended
September 30, 1996, Beacon recognized revenues of $4.6 million from the home
video release of the motion picture, The Babysitter's Club. During the nine
months ended September 30, 1997, the Avalanche realized increased revenues from
regular season tickets, sponsorship sales, and increased playoff
and pre-season revenues in spite of playing fewer home games as compared to
1996. However, the increases at the Avalanche were substantially offset by
declining revenues from the Nuggets as compared to 1996.
Cost of services for the nine months ended September 30, 1997 was $266.5
million, an increase of $135.4 million or 103% compared to the nine months ended
September 30, 1996. This increase is attributable to an increase in film
amortization of costs at Beacon of $63.4 million, primarily from Air Force One;
an increase in cost of services at OCC of $66.3 million due to the overall
increase in the number of hotel rooms served by OCC, including increased costs
to support the Spectravision rooms, costs associated with the integration of
SpectraVision and OCV and the increased expenses to operate OCC as a public
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company; and, to a lesser degree, higher costs at the Avalanche and the
Nuggets resulting primarily from increased player and other team related
costs.
Depreciation and amortization for the nine months ended September 30, 1997
was $75.7 million, an increase of $27.1 million or 56% compared to the nine
months ended September 30, 1996. This increase is attributable to a larger
installed room base and the resulting increase in depreciation at OCC combined
with the incremental depreciation and amortization of the intangible assets
acquired in connection with the SpectraVision acquisition in October 1996.
General and administrative expenses for the nine months ended September 30,
1997 were $5.9 million, a decrease of $1.8 million or 23% compared to the nine
months ended September 30, 1996. This decrease primarily reflects the reduction
of approximately $1.3 million in certain general and administrative service
charges from COMSAT and the non-recurrence of moving, relocation and other
travel costs incurred during the second quarter of 1996 offset by an increase in
professional services costs associated with the Distribution and the recognition
of expense during the third quarter of 1997 for the Company's stock appreciation
rights. From January through June 1997, COMSAT provided only limited
administrative and support services to the Company and, since July 1997 has
provided none.
Other income (expense) improved by $300,000 in the nine months ended
September 30, 1997 as compared to the same period last year. The improvement in
other income is attributable to the non-recurrence of certain significant
transactions. Specifically, during the nine months ended September 30, 1996,
the Company's recognized $2.3 million in losses on its limited partnership
investment in Elitch Gardens, which was offset by a gain of $1.9 million from
the sale of investment securities. Elitch Gardens, a Denver amusement park, was
sold in October 1996.
Interest expense increased $10.4 million during the nine months ended
September 30, 1997 as compared to the nine months ended September 30, 1996.
This increase is attributable to the additional borrowings incurred during the
fourth quarter of 1996 (primarily the assumption of debt in the SpectraVision
transaction) and in the first nine months of 1997 for capital expenditures,
investment requirements and the funding of operating requirements of Ascent and
its subsidiaries and an increase in financing costs as a result of the
Ascent Amended Facility in March 1997 (see Note 6 of Notes to the Unaudited
Condensed Consolidated Financial Statements.)
The Company recorded an income tax benefit of $5.9 million during the nine
months ended September 30, 1997 as compared to an income tax benefit of $7.1
million in the nine months ended September 30, 1996. Up to and until the
previously announced spin-off from COMSAT on June 27, 1997, the Company was able
to recognize tax benefits from its operating losses as part of its inclusion
as a member of the consolidated tax group of COMSAT. In addition, during the
third quarter of 1997, the Company recognized tax expense of $1.2 million to
appropriately reflect OCC's tax on its income from foreign jurisdictions and the
Company's consolidated net deferred tax liabilities after the Distribution from
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COMSAT. Furthermore, OCC, which files a separate return, recognized no tax
benefit from its operating losses due to uncertainties regarding its ability to
realize a portion of the benefits associated with future deductible temporary
differences (deferred tax assets) and net operating loss carry forwards, prior
to their expiration.
Minority interest reflects the losses attributable to the minority interest
in the Company's 57 % owned subsidiary, OCC.
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SEGMENT OPERATING RESULTS
As discussed in Note 13 to the Company's 1996 Consolidated Financial
Statements, Ascent reports operating results in two segments: Multimedia
Distribution and Entertainment. Results by segment and certain information
regarding the pay-per-view customer base are as follows:
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,NINE MONTHS ENDED SEPTEMBER 30,
1997 1996 1997 1996
----- ----- ----- -----
(dollars in millions)
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Multimedia Distribution(1) $ 62.1 $37.7 $ 180.4 $110.0
Entertainment ......... 78.9 2.5 138.3 59.5
----- ----- ----- -----
Total Revenues ....... $141.0 $40.2 $ 318.7 $169.5
===== ===== ====== =====
Operating Income (Loss):
Multimedia Distribution $ (3.2) $ .4 $ (16.3) $ 4.6
Entertainment ......... 8.9 (4.9) (7.1) (14.8)
General & Administrative. (2.8) (2.6) (6.0) (7.7)
----- ----- ------ ------
Total.................... $ 2.9 $(7.1) $ (29.4) $(17.9)
==== ====== ====== ======
OTHER DATA:
EBITDA (2):
Multimedia Distribution $ 19.0 $14.6 $ 49.3 $ 44.5
Entertainment ........ 11.8 (2.2) 2.9 (6.1)
General & Administrative (2.8) (2.6) (5.9) (7.7)
---- ----- ----- -----
Total EBITDA............. $ 28.0 $ 9.8 $ 46.3 $ 30.7
====== ===== ===== =====
Capital Expenditures:
Multimedia Distribution $ 22.4 $24.3 $ 66.9 $ 64.2
Entertainment ......... .8 .5 1.4 9.2
----- ----- ----- -----
Total Capital Expenditures $ 23.2 $ 24.8 $ 68.3 $73.4
====== ====== ====== ======
Room Data:
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Number of guest-pay rooms
at end of period):..
On-Demand ............. 749,000 441,000
......................
Schedule Only ......... 123,000 -
-------- -------
Total ............ 872,000 441,000
======== ========
(1) The results of operations for the three and nine month periods ended
September 30, 1997 include the results from SpectraVision assets which were
acquired on October 8, 1996. See Note 3 of Notes to the Condensed
Consolidated Financial Statements.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. The most significant difference between
EBITDA and cash provided from operations are interest costs and changes in
working capital. EBITDA is presented because it is a widely accepted
financial indicator used by certain investors and analysts to analyze and
compare companies on the basis of operating performance. In addition,
management believes EBITDA provides an important additional perspective on
the Company's operating results and the Company's ability to service its
long-term debt and fund the Company's continuing growth. EBITDA is not
intended to represent cash flows for the period, or to depict funds available
for dividends, reinvestment or other discretionary uses. EBITDA has not been
presented as an alternative to operating cash flow or as an indicator of
operating performance and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles, which are presented and discussed in
Liquidity and Capital Resources.
MULTIMEDIA DISTRIBUTION
The Multimedia Distribution segment includes the results of OCC and ANS. The
segment's third quarter revenues for 1997 increased $24.4 million, or 65% over
last year's third quarter. Year-to-date revenues for the Multimedia
Distribution segment increased $70.4 million over the nine months ended
September 30, 1996. OCC's revenues grew $24.3 million and $70.3 million during
the third quarter and first nine months of 1997, respectively, due to the growth
in total rooms served by OCC from approximately 441,000 rooms on September 30,
1996 to 872,000 rooms on September 30, 1997. The growth in rooms served is
primarily attributable to the acquisition of the SpectraVision assets. ANS's
revenues for the third quarter of 1997 and nine months ended September 30, 1997
were similar to the comparable periods in 1996.
Operating losses for this segment increased by $3.6 million and $20.9 million
for the third quarter and the nine months ended September 30, 1997,
respectively, as compared to the same periods last year. The increase in the
operating loss during the third quarter of 1997 is attributable to increased
depreciation expense due to the significant capital expenditures made by OCV
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during the past twelve months as it increased its installed room base, the
increased depreciation of SpectraVision in-room assets due to the planned
conversion to OCV equipment and amortization of goodwill arising from the
SpectraVision transaction. The increase in operating losses for the first nine
months of 1997 is also impacted by the unexpected failure on January 11, 1997 of
the Telstar 401 Satellite, which delivered pay-per-view programming to
approximately 970 SpectraVision hotel customers. While service was restored to
all hotels within a month, the loss of revenue and costs associated with this
loss of service resulted in a decrease in operating income of approximately $3.0
to $4.0 million during the first quarter of 1997.
EBITDA of the Multimedia Distribution segment increased by $4.4 million and
$4.8 million for the third quarter and the nine months ended September 30, 1997,
respectively, as compared to the same periods last year. This increase in
EBITDA in the third quarter of 1997 is primarily attributable to the larger
installed room base at OCV combined with the conversion of SpectraVision rooms
to OCV equipment, which has lower operating costs. The increase in EBITDA for
the nine months ended September 30, 1997 is primarily attributable to the growth
in rooms served by OCC offset by the losses arising from the satellite failure
during the first quarter of 1997 as discussed above.
Capital expenditures for the segment decreased by $1.9 million for the third
quarter of 1997 as compared to the same period last year. This decrease in
capital expenditures for the quarter is attributable to ANS' procurement of $5.9
million in equipment during the third quarter of 1996 in conjunction with its
project to support the partial digital upgrade of the NBC satellite distribution
network to support the MSNBC network. Capital expenditures increased $2.7
million for the nine months ended September 30, 1997 as compared to the same
period last year. This increase in capital expenditures is primarily
attributable to conversions of SpectraVision customer rooms to OCV systems and
to a lesser extent, the installation of OCV equipment for new hotel customers.
ENTERTAINMENT
The Entertainment segment includes the results of the Nuggets, the Avalanche,
and Beacon. Revenues of the Entertainment segment for the third quarter of 1997
increased by $76.4 million over the same quarter last year. This increase in
revenues is primarily attributable to higher revenues from Beacon. During the
third quarter of 1997, Beacon generated revenues of $75.4 million from both the
release and delivery of the motion pictures Air Force One and A Thousand Acres.
During the third quarter of 1996, Beacon had no movie releases and generated
minimal revenues from prior movie releases. Year-to-date revenues for the
Entertainment segment increased $78.8 million over the first nine months of
1996. Once again, this increase is primarily attributable to an increase in
Beacon year-to-date 1997 revenues of $78.0 million. During the nine months
ended September 30, 1997, Beacon generated combined revenues of $81.9 from the
release and/or delivery of the motion pictures Air Force One, A Thousand Acres
and Playing God in contrast to the nine months ended September 30, 1996, where
Beacon generated the majority of its revenues ($5.2 million in total) from
the home video release of the Babysitter's Club. While the Avalanche realized
increased revenues from regular season ticket and sponsorship sales as well as
increased playoff and pre-season
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revenues in spite of playing fewer home games, these increases were offset by
declining revenues from the Denver Nuggets.
Operating losses for this segment decreased by $13.8 million and $7.7 million
for the third quarter and nine months ended September 30, 1997, respectively,
as compared to the same periods last year. The improved operating profit for
the quarter is attributable to Beacon and an increase in its operating profit of
$14.1 million due primarily to the success of Air Force One. The year-to-date
operating profit improvement for the segment is also due to the success of Air
Force One and improved operating margins from the Avalanche's 1997 playoff
participation. However, lower revenues and higher operating costs (principally
player and coaches' contract terminations) at the Nuggets have combined, on a
year-to-date basis, to partially offset the improvements at Beacon and the
Avalanche.
EBITDA for the Entertainment segment increased by $14.0 million and $9.0
million respectively for the third quarter of 1997 and nine months ended
September 30, 1997 as compared to the same periods last year. Once again, these
increases primarily reflect Beacon's increased EBITDA resulting from Air Force
One and, to a lesser degree, increased EBITDA from the Avalanche as a result of
their playoff participation offset by decreased EBITDA from lower revenues and
higher costs at the Nuggets.
Capital expenditures for the Entertainment segment increased by $300,000 and
decreased $7.8 million for the third quarter and nine months ended September 30,
1997 as compared to the same periods last year. The substantial decrease in
capital expenditures for the nine months ended September 30, 1997 is
attributable to lower spending on the Arena project.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash during the nine months ended September 30, 1997
were cash from operating activities of $48.4 million, borrowings under the
Company's credit facilities of $49.0 million and the collection of $2.2 million
on notes and other long-term receivables. Cash was expended primarily for
property and equipment as the Company continued to make investments to support
business growth. Specifically, capital expenditures of $65.8 million were made
by OCC for the continuing installation of on-demand systems. In addition, $19.2
million of cash was invested by Beacon on films under production and development
and to acquire rights for film properties and $17.5 million in cash was used by
the sports teams to make payments associated with long-term player contracts.
The Company's negative working capital position improved by $8.9 million
from December 31, 1996 to September 30, 1997. This improvement is attributable
to the increase in cash of $14.5 million, which is primarily attributable to the
receipt of significant cash deposits at quarter end relating to the Nuggets and
Avalanche local television rights agreement with Fox Sports Rocky Mountain; the
classification of $15.9 million of film inventory as a current asset and a
reduction in deferred revenue, primarily at Beacon, due to the recognition of
certain previously deferred revenues upon delivery of films to their respective
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distributors. These working capital increases were offset by the $49.0 million
increase in short-term debt, most of which was used by OCC for the acquisition
of long-term assets and the remainder of which was used by Ascent primarily for
film expenditures.
The Company and OCC have access to short-term financing under their
respective amended credit facilities. (See Note 6 of Notes to the Condensed
Consolidated Financial Statements). Based on the borrowings outstanding at
September 30, 1997, Ascent has $25.0 million available under the Ascent Amended
Facility and OCC has $23.0 million in available borrowings under the OCC
Amendment, subject to certain covenant restrictions.
The Ascent Amended Facility, as modified by the bank consent dated August
12, 1997 and the extensions dated October 9, 1997 and October 31, 1997 (see Note
6 of Notes to the Condensed Consolidated Financial Statements) provides, among
other things, that (i) the facility will only be renewable for two additional
one year options beyond December 31, 1997 provided that Ascent has received not
less than $50.0 million in proceeds from a new debt financing which is
subordinated to the Ascent Amended Facility prior to December 31, 1997, and (ii)
that Ascent has commenced construction on the new arena by November 30, 1997.
Based on current market conditions, management of Ascent currently believes that
Ascent will be successful in obtaining the required funds through additional
debt financing by December 31, 1997. In addition, management currently
believes that the Company will commence construction on the new arena prior
to November 30, 1997. However, there can be no assurances that other
contingencies will not arise which could impact Ascent's ability to obtain
the additional financing, that such financing will be available on terms
acceptable to Ascent or that Ascent will commence construction on the new
arena by November 30, 1997. If Ascent were not able to obtain the additional
financing or commence construction on the new arena, Ascent may be required
to refinance the Ascent Amended Facility which could require Ascent to sell
assets.
As a result of the requirement under the Ascent Amended Facility to obtain
not less than $50.0 million in proceeds from a new debt financing and of the
need to obtain construction financing for the new arena (see Note 4 of Notes
to the Condensed Financial Statements), the Company is exploring various
financing alternatives. With respect to the new debt financing, the Company
is pursuing a private placement of senior notes (the_Ascent Debt Offering_)
during the fourth quarter of 1997, which may raise up to $125.0 million in
proceeds. Pursuant to Ascent's Amended Facility, the amount available
thereunder will be decreased by the amount equal to the excess over $50.0
million raised by the Ascent Debt Offering. In consideration for the
bank to extend the Ascent Amended Facility two years beyond December 31, 1996
, Ascent is considering even a larger decrease in the amount to be available
under the credit facility. The Company intends to use a portion of the
proceeds from the Ascent Debt Offering to repay outstanding indebtedness of
the Company, together with accrued interest thereon, under the Ascent Amended
Facility and it is also anticipated that the Company will enter into a new
credit facility, providing for $50.0 million of revolving credit borrowings
(the _ New Ascent Credit
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Facility_). Amounts repaid under the Ascent Amended Facility may be reborrowed
under the New Ascent Credit Facility up to the limits set forth thereunder. The
Company is also proposing to offer approximately $115.0 - $130.0 million of
indebtedness (the _Arena Notes Offering_) during the first quarter of 1998 for
purposes of financing the construction of the new arena in downtown Denver. The
Arena Notes will have a term of 20 - 25 years, and be secured by the arena
assets.
In addition, OCC is in the process of finalizing negotiations with its
lender to refinance its existing $150.0 million revolving credit facility and
enter into an amended and restated credit agreement (the _OCC Refinancing_).
Under the OCC refinancing, the amount available under the credit facility will
be increased from $150.0 million to $200.0 million, and certain other terms will
also be amended; including, the inclusion of restrictions on OCC's ability to
pay dividends or make other distributions until the later of January 1, 1999 or
until certain operating ratios are attained. In connection with OCC's proposed
refinancing, Ascent and its lender would alo amend certain provisions of the
Ascent Amended Facility (see Note 6 of Notes to the Condensed Consolidated
Financial Statements).
The Company's cash requirements through the remainder of 1997 and during
1998 are expected to include (i) the continuing installation by OCC of on-demand
in-room video entertainment systems, (ii) an investment in the new arena and
entertainment complex in Denver for use by the Nuggets and Avalanche, (iii)
funding the development, production and/or acquisition of rights for motion
pictures at Beacon, (iv) funding the operating requirements of Ascent and its
subsidiaries, and (v) the payment of interest under the Ascent Amended Facility
and OCC Amendment. The Company anticipates capital expenditures in connection
with the continued installation by OCC of on-demand service will be
approximately $20 - $25 million during the remainder of 1997 and may be
approximately $85.0 - $100.0 million in 1998. The Company anticipates that
OCC's funding for its operating requirements and capital expenditures for the
continued installation by OCC of on-demand in-room video entertainment services
will be funded primarily through cash flows from OCC's operations and financed
under its bank credit facility. In connection with the construction of the new
arena, the Company plans to limit its equity participation in the project to
expenditures totaling approximately $15.0 - $20.0 million. However, depending
upon the timing of the closing of the Arena Notes Offering and the ground
breaking for construction, the Company may fund additional expenditures during
the fourth quarter of 1997 and the first quarter of 1998 in excess of its
anticipated participation. Such expenditures will be funded through cash from
operations, the proceeds from the $15.0 million investment by LDA (see Note 4 of
Notes to the Condensed Consolidated Financial Statements) in the Arena Company
and the anticipated proceeds of the Arena Notes Offering. Beacon's cash
requirements with respect to the funding of its current movie productions are
expected to consist of expenditures totaling approximately $2.0 million during
the fourth quarter of 1997. Cash requirements with respect to the funding of
additional productions at Beacon will be dependent upon the number, nature and
timing of the projects that the Company determines to pursue during the
remainder of 1997 and 1998. To fund Beacon's productions, the Company expects
to utilize Beacon's domestic distribution agreement with Universal Pictures when
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appropriate, and/or pre-sell a portion of the international distribution rights
to help fund motion picture costs. The Company's other long-term capital
requirements may include ANS' participation in an upgrade of the NBC television
affiliate network. ANS' cash requirements, should it be awarded the NBC
contract, may consist of expenditures of $30.0 - $35.0 million,
commencing in late 1998 or 1999. Such expenditures for ANS may be financed
off-balance sheet utilizing operating leases.
Management of the Company believes that available cash, cash flows from
operations and funds available under the Ascent Amended Facility and OCC
Amendment (see Note 6 of Notes to the Condensed Consolidated Financial
Statements), together with the anticipated proceeds from the proposed Ascent
Debt Offering, and the Arena Notes Offering, and the additional borrowing
availability under the proposed OCC Refinancing, will be sufficient for the
Company and its subsidiaries to satisfy their growth and finance working capital
requirements through the remainder of 1997 and 1998.
A number of factors could cause Ascent's funding requirements to differ
materially from those projected, including, but not limited to, the ability of
Ascent to obtain the $50.0 million in additional debt financing by December 31,
1997, the operating performance of Ascent's subsidiaries, the level of ticket
sales and other revenues by Ascent's professional sports franchises, the timing
of film productions and releases, the timing of distributions from SONY Pictures
Entertainment, Walt Disney Company and other distributors from the movies Air
Force One, A Thousand Acres and Playing God and other market conditions.
As previously discussed, on June 27, 1997, COMSAT completed the
Distribution of the Ascent common stock held by COMSAT as a tax-free dividend to
COMSAT's shareholders. The Distribution was intended, among other things, to
afford Ascent more flexibility in obtaining debt financing to meet its growing
needs. The Distribution Agreement between Ascent and COMSAT, (see Note 7 of
Notes to Condensed Consolidated Financial Statements) terminated the Corporate
Agreement between Ascent and COMSAT which imposed restrictions on Ascent to
ensure compliance with certain capital structure and debt financing restrictions
imposed on COMSAT by the Federal Communications Commission. As a result,
Ascent's financial leverage may increase in the future for numerous reasons,
including the proposed Ascent Debt Offering and the Arena Note Offering.
Such an increase in debt is subject to the resolution of the financing
alternatives discussed above. In addition, pursuant to the Distribution
Agreement, certain restrictions have been put in place to protect the
tax-free status of the Distribution. Among the restrictions, Ascent will not be
allowed to sell, purchase or otherwise acquire stock or instruments which
afford a person the right to acquire the stock of Ascent until one year after
the date of the Distribution. Finally, as a result of the Distribution,
Ascent is no longer part of COMSAT's consolidated tax group and accordingly,
Ascent may be unable to recognize tax benefits and will not receive cash
payments from COMSAT resulting from Ascent's anticipated operating
losses during the second half of 1997 and thereafter.
Also, in connection with the SpectraVision transaction, Ascent and OCC
entered into a Corporate Agreement (the _OCC Corporate Agreement_), pursuant to
which OCC agreed, among other things, not to incur any indebtedness, other than
under OCC's Credit Facility (and refinancings thereof) and indebtedness incurred
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in the ordinary course of business which together shall not exceed $100 million
in the aggregate, without Ascent's prior written consent. In connection with
OCC's 1997 budget process, Ascent consented to OCC incurring up to $130.0
million in indebtedness under the OCC Credit Facility, subject to the financial
covenants contained therein. On October 29, 1997, Ascent consented to an
Amendment of the OCC Corporate Agreement to allow OCC to borrow up to $140.0
million provided that such indebtedness be incurred in compliance with the
financial covenants of OCC's new credit facility (see Note 11 of Notes to the
Unaudited Consolidated Financial Statements).
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PART II. OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
The Company and its subsidiaries are defendants and may be potential
defendants in lawsuits and claims arising in the ordinary course of its
business. While the outcomes of such claims, lawsuits, or other
proceedings cannot be predicted with certainty, management expects that
such liability, to the extent not provided for by insurance or
otherwise, will not have a material adverse effect on the financial
condition of the Company.
ITEM 2.CHANGE IN SECURITIES
--------------------
None.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
ITEM 5.OTHER INFORMATION
-----------------
None.
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(A) EXHIBIT
-------
No. 10.1 Buena Vista International, Inc. - Beacon Communications
Corp. Letter Agreement dated as of April 1, 1996
(Confidential Treatment Requested).
No. 10.2 Term Sheet for Local Television License Agreement for the
Denver Nuggets and Colorado Avalanche between Ascent
Entertainment Group, Inc. and Fox Sports Rocky Mountain
(Confidential Treatment Requested).
No. 27.0 Financial Data Schedule
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(B) REPORTS ON FORM 8-K:
--------------------
1. The Registrant filed with the Commission on November 3, 1997 a
Form 8-K describing its issuance of a press release reporting the
Company's announcement that (i) it has finalized with the City
and County of Denver the definitive agreements allowing Ascent to
build a new arena in downtown Denver and, (ii) that the Company
had received a waiver from its lender to extend the October 31,
1997 deadline for commencing construction on the new arena
to November 11, 1997, with an additional extension to November
30, 1997,conditioned on obtaining final City Council approval for
the agreement.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by
the undersigned and thereunto duly authorized.
Ascent Entertainment Group, Inc.
- --------------------------------
By:/s/ David A. Holden
David A. Holden
Vice President of Finance, Controller
Date: October 14, 1997
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</TABLE>
