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 the Quarter Ended September 30, 1998
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.)
1225 Seventeenth Street, Suite 1800
Denver, Colorado 80202
(Address of principal executive office)
(303) 308-7000
(Registrant's telephone number, including area code)
One Tabor Center, Suite 2800
1200 Seventeenth Street
Denver, Colorado 80202
(Former address if changed since last report)
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, 1998 was 29,755,600 shares.
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ASCENT ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 43,492 $ 25,250
Receivables, net 46,711 62,572
Prepaid expenses 18,086 15,876
Income taxes receivable (Note 4) 2,076 8,212
Deferred income taxes 310 2,577
Current portion of film inventory
(Note 3) 703 8,628
Other current assets 862 1,462
-------- --------
Total current assets 112,240 124,577
-------- --------
Property and equipment, net 372,563 336,859
Restricted cash investments (Note 5) 134,057 --
Goodwill, net 115,869 122,341
Franchise rights, net 93,763 97,373
Film inventory, net (Note 3) 20,346 17,442
Investments 4,735 5,979
Other assets, net 27,273 34,413
-------- --------
TOTAL ASSETS $880,846 $738,984
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 33,179 $ 24,202
Deferred income 35,948 48,004
Other taxes payable 8,305 10,657
Accrued compensation 9,304 13,480
Accrued film participations 8,254 1,274
Income taxes payable 1,945 2,213
Other accrued liabilities 25,479 16,965
-------- --------
Total current liabilities 122,414 116,795
-------- --------
Long-term debt (Note 5) 438,358 259,958
Other long-term liabilities 45,806 37,448
Deferred income taxes 1,648 1,917
-------- --------
TOTAL LIABILITIES 608,226 416,118
-------- --------
Minority interest 86,846 95,168
Contingencies (Note 6) -- --
STOCKHOLDERS' EQUITY:
Preferred stock, par value
$.01 per share, 5,000 shares
authorized, none outstanding -- --
Common stock, par value $.01
per share, 60,000 shares
authorized; 29,756 shares issued
and outstanding 297 297
Additional paid-in capital 306,566 307,248
Accumulated deficit (121,619) (81,147)
Other 530 1,300
-------- --------
Total stockholders' equity 185,774 227,698
-------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $880,846 $738,984
-------- --------
-------- --------
See accompanying notes to these condensed unaudited consolidated
financial statements.
</TABLE>
<TABLE>
ASCENT ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES $ 78,678 $141,034 $278,218 $318,714
OPERATING EXPENSES:
Cost of services 56,117 110,245 223,231 266,463
Depreciation and amortization 27,625 25,141 81,825 75,689
General and administrative 1,242 2,769 5,875 5,921
-------- -------- -------- --------
Total operating expenses 84,984 138,155 310,931 348,073
-------- -------- -------- --------
Operating income (loss) (6,306) 2,879 (32,713) (29,359)
Other income, net 1,787 390 2,593 789
Interest expense, net (7,989) (6,042) (19,813) (16,329)
Loss before taxes and minority
Interest (12,508) (2,773) (49,933) (44,899)
Income tax benefit (expense) 1,207 (1,223) 1,309 5,907
-------- -------- -------- --------
Loss before minority interest (11,301) (3,996) (48,624) (38,992)
Minority interest in
loss of subsidiaries, net
of taxes 1,729 2,635 8,154 10,237
-------- -------- -------- --------
NET LOSS $ (9,572) $ (1,361) $(40,470) $(28,755)
-------- -------- -------- --------
-------- -------- -------- --------
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $ (.32) $ (.04) $ (1.36) $ (.97)
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of
common shares outstanding 29,756 29,756 29,756 29,755
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to these condensed unaudited consolidated
financial statements.
</TABLE>
<TABLE>
ASCENT ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(40,470) $(28,755)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 81,825 75,689
Amortization of film inventory 20,552 68,888
Minority interest in losses
of subsidiaries, net (8,154) (10,237)
Interest accretion on Senior
Secured Notes 11,565 --
Changes in operating assets and
liabilities 32,781 (57,346)
Other 984 129
-------- --------
Net cash provided by operating
activities 99,083 48,368
-------- --------
INVESTING ACTIVITIES:
Purchase of restricted cash
investments (150,775) --
Sales of restricted cash investments 16,718 --
Purchase of property and equipment (104,099) (68,293)
Net expenditures for film production
costs (8,559) (19,233)
Proceeds from note receivable 2,003 2,189
Proceeds from sale of investment 264 1,920
Distributions from partnerships and
joint ventures -- 505
-------- --------
Net cash used in investing activities (244,448) (82,912)
-------- --------
FINANCING ACTIVITIES:
Proceeds from borrowings under credit
facilities 27,000 49,000
Net proceeds from issuance of Arena
Notes 136,607 --
-------- --------
Net cash provided by financing
activities 163,607 49,000
-------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 18,242 14,456
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 25,250 3,963
-------- --------
CASH AND CASH EQUIVALENTS, END
OF PERIOD $ 43,492 $ 18,419
-------- --------
-------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of interest
capitalized $ 7,158 $ 11,454
-------- --------
-------- --------
Income taxes paid $ 79 $ 262
-------- --------
-------- --------
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Reversal of accrual made in OCC
purchase price allocation $ -- $ 3,000
-------- --------
-------- --------
See accompanying notes to these condensed unaudited consolidated
financial statements.
</TABLE>
<TABLE>
ASCENT ENTERTAINMENT GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(IN THOUSANDS)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net loss $ (9,572) $ (1,361) $(40,470) $(28,755)
Other comprehensive income
(loss):
Unrealized gain (loss)
on securities (1,698) (92) (1,185) 487
Income tax (expense)
benefit related
to other comprehensive
income 594 32 415 (170)
-------- -------- -------- --------
Other comprehensive income
(loss), net of tax (1,104) (60) (770) 317
-------- -------- -------- --------
Comprehensive Loss $(10,676) $ (1,421) $(41,240) $(28,438)
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to these condensed unaudited consolidated
financial statements.
</TABLE>
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 1997 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 for the entire year.
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." Accordingly, the Company has included in these condensed
consolidated statements, Condensed Consolidated Statements of Comprehensive
Loss for the three and nine-month periods ended September 30, 1998 and 1997,
respectively.
2. ORGANIZATION AND BASIS OF PRESENTATION
The accompanying condensed 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 of 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"). As discussed in Note 14 to the Company's 1997 Consolidated
Financial Statements, Ascent and COMSAT entered into a Distribution Agreement
and a Tax Disaffiliation Agreement in connection with the Distribution. In
order to maintain the tax-free status of the Distribution, Ascent is subject
to the numerous restrictions under the Distribution Agreement, including
restrictions on the following activities: (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 tax ruling
documents related to the Distribution to be untrue in a manner which would
have an adverse effect on the tax-free status of the Distribution; (ii) until
July 1999, 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; (iii) until
July 1999, Ascent will not voluntarily dissolve or liquidate or engage in any
merger, consolidation or other reorganization; (iv) until July 1999, Ascent
will continue the active conduct of its ANS satellite distribution, service
and maintenance business; and (v) until July 1999, Ascent will not unwind the
merger of ANS with and into Ascent in any way.
The restrictions noted in items (ii) through (v) above will be waived
with respect to any particular transaction if (a) 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, (b) 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 (c) 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.
In addition, Ascent and COMSAT terminated the Intercompany Services
Agreement and Corporate Agreement entered into in 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.
<TABLE>
3. FILM INVENTORY
Film inventory consists of the following at September 30, 1998 and
December 31, 1997:
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Films released, less amortization $ 7,988 $ 20,359
Films in process 8,841 --
Development 4,220 5,711
-------- --------
Total Film Inventory $ 21,049 $ 26,070
-------- --------
-------- --------
</TABLE>
4. RELATED PARTY TRANSACTIONS WITH COMSAT
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 $173,333 for the nine-month period ended
September 30, 1997.
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). 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,
1998 and December 31, 1997, Ascent's federal income tax receivable from
COMSAT was $1,197,000 and $7,945,000, respectively. As a result of the
Distribution (see note 2), the Company is no longer a part of COMSAT's
consolidated tax group and, accordingly, may be unable to recognize tax
benefits and will receive no cash payments from COMSAT for losses incurred
subsequent to June 27, 1997.
<TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following at September 30, 1998 and
December 31, 1997:
<CAPTION>
1998 1997
(in thousands)
<S> <C> <C>
Senior Secured Discount Notes, 11.875%,
due 2004, net of unamortized discount
of $86,477,000 and $98,042,000 $138,523 $126,958
OCC Credit Facility, variable rate,
due 2002 160,000 133,000
Arena Notes, 6.94%, due 2019 139,835 --
-------- --------
Total Long Term Debt $438,358 $259,958
-------- --------
-------- --------
</TABLE>
ARENA NOTES - On July 29, 1998, the Arena Company's beneficially owned
trust, The Denver Arena Trust (the "Trust") issued and sold $139.8 million
principal amount of 6.94% Arena Revenue Backed Notes (the "Arena Notes") due
November 2019. The proceeds from the sale of the Arena Notes were used by
the Trust to purchase from the Arena Company revenue contracts related to
the naming rights, suite licensing and certain corporate sponsorships of the
Arena Company, and the underlying rights related to such contracts
(collectively, the "Revenue Rights"). The Arena Company will use the net
proceeds together with equity investments and intercompany loans from the
Company to fund the construction of a new arena in Denver, to be called the
Pepsi Center. The Arena Notes are non-recourse to the Arena Company but the
Arena Company is obligated to the noteholders to construct and operate the
Pepsi Center. Should a payment default occur absent a default in the Arena
Company's obligations to construct and operate the Pepsi Center, the
noteholders will have no recourse to the assets of the Company. Conversely,
the Revenue Rights are not available to the creditors of Ascent and/or the
Arena Company. To secure the Arena Company's obligations to construct and
operate the new arena, the Arena Company has pledged to the Trust
substantially all of the Arena Company's assets, including the Pepsi Center
itself. These assets, if necessary, could be pledged to a subsequent lender
that agreed to an appropriate intercreditor agreement with the Trust.
The Arena Notes provide for semi-annual payments of interest on May 15
and November 15 of each year and annual payments of principal on November 15
of each year commencing November 15, 1999. The amount of principal payable
will be equal to the lesser of the targeted principal distribution amount or
the cash available for such payment after application to all prior payment
priorities. The targeted principal distribution amount has been calculated
so that based on the projected revenues contractually obligated to be paid
under the Revenue Rights, the Arena Notes will be paid in full by November,
2014.
Pursuant to the Arena Notes,the Trust has established restricted cash
investment accounts which, among other things, will receive proceeds from the
Revenue Contracts, disburse funds for the development and construction of the
Pepsi Center, disburse required principal and interest payments and establish
debt service principal and interest reserve balances on behalf of the
noteholders. The Arena Notes also provide that, if the aggregate cash
available in these restricted cash accounts exceed the required principal,
interest and other payments due, including the required construction funds
and reserve balances, the balance of such excess cash available may be
distributed to the Arena Company, subject to certain covenant restrictions.
The proceeds from the offering of $139.8 million, net of issuance costs of
$3.2 million, combined with initial deposits from certain corporate
sponsorships of $5.0 million, deposits from suite licensing agreements of
$5.9 million and additional advances from the Company of $1.6 million were
used to purchase the restricted cash investments. Subsequently, the Trust
has sold $16.7 million of such investments to fund the construction of the
Arena.
BANK CREDIT FACILITIES - The Company and OCC have separate bank credit
facilities. The Ascent credit facility provides for borrowings up to $50.0
million through March 2000. The available borrowings will be permanently
reduced thereafter in varying amounts through 2002 when the Ascent credit
facility will terminate. The OCC credit facility provides for borrowings up
to $200.0 million, matures in 2002 and, subject to certain conditions, can be
renewed for an additional two years. Based on borrowings at September 30,
1998, the Company had access to $50.0 million of long-term financing under
the Ascent credit facility and OCC had access to $40.0 million of long-term
financing under the OCC credit facility, in each case, subject to certain
covenant restrictions (see Note 6 of the Company's 1997 Consolidated
Financial Statements).
OTHER - On September 22, 1998, Beacon obtained a commitment letter from
a bank to provide a secured credit facility of up to $145.0 million (the
"Film credit facility"). The purpose of the Film credit facility is to
finance two motion picture production loans for movies under production at
Beacon as of September 30, 1998. The Film credit facility will be non-
recourse to Beacon, bear interest at the bank's prime rate or LIBOR +.875%,
and will be secured by among other things, the movies themselves,
distribution agreements with both foreign and domestic distributors and all
proceeds from such distribution agreements. The closing of the Film credit
facility is scheduled to occur in November, 1998. However, there can be no
assurance that matters may not arise which could impact Beacon's ability to
either close and/or obtain the Film credit facility on a timely basis. If
Beacon is unable to obtain the Film credit facility, or should closing be
delayed, Ascent may utilize existing cash balances or the Ascent credit
facility to continue funding the production costs of the movies.
6. CONTINGENCIES
LITIGATION - On September 11, 1998, OCC reached an agreement with
LodgeNet Entertainment Corporation ("LodgeNet") to settle all pending
litigation between the companies. As a result, the two providers of in-room
entertainment and information services to the lodging industry have dismissed
all pending litigation between the parties in United States Federal District
Courts in California and South Dakota, with no admission of liability by
either party. The terms of the confidential settlement include a cross-license
of each company's patented technologies at issue to the other party and a
covenant not to engage in patent litigation against the other party for a
period of five years. Each company is responsible for its own legal costs
and expenses, and in connection with the multiple cross-licenses, OCC expects
to receive royalty payments, net of legal fees and expenses, in an aggregate
amount of approximately $10.8 million. OCC received the first payment of
approximately $2.9 million (net of expenses) in September 1998 and expects
to receive an additional two payments of approximately $3.95 million (net of
expenses) in each of July 1999 and July 2000. OCC will be recognizing the
additional royalty revenue as the cash payments are received.
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 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.
NBA COLLECTIVE BARGAINING - On September 15, 1995 the NBA Player's
Association ("NBAPA") approved a NBA Collective Bargaining Agreement (the
"CBA of 1995"), which was subsequently ratified by the NBA owners on
September 18, 1995 and signed on July 11, 1996, retroactive to September 18,
1995. The CBA of 1995 provided for, among other things, establishing both
maximum and minimum total team salaries to be paid to players based upon
estimates of league revenues prior to the start of each season. The maximum
team salary (the "Salary Cap") for each team for a particular season, subject
to certain exceptions, was the greater of a predetermined dollar amount or
48.04% of the projected Basketball Related Income (as defined in the CBA of
1995) ("BRI") of all NBA teams, less league-wide benefits, divided by the
number of NBA teams.
Under the terms of the CBA of 1995, the NBA had the right to terminate
the CBA of 1995 after the 1997/98 season if it was determined that the
aggregate salaries and benefits paid by all NBA teams exceeded 51.8% of
projected BRI for the 1997/98 season. On March 23, 1998, the Board of
Governors of the NBA voted to exercise that right and reopen the CBA of 1995
effective as of June 30, 1998, as it had been determined that the aggregate
salaries and benefits paid by the NBA teams for the 1997/98 season would
exceed 51.8% of the projected BRI. Effective July 1, 1998, the NBA
terminated the CBA of 1995 and commenced a lockout of NBA players in support
of its attempt to reach a new collective bargaining agreement. The NBA and
NBAPA have been engaged in negotiations regarding a new collective bargaining
agreement, but as of November 13, 1998, no agreement has been reached. As a
result of the lack of progress toward a new collective bargaining agreement,
the NBA has announced the cancellation of scheduled regular season games
through November 30, 1998. In addition, the NBA has stated that for each week
following the end of October in which no agreement is reached, there will be
an equal delay in the opening of the regular season. NBA teams, including
the Nuggets, will refund amounts paid by season ticket holders (plus
interest) relating to the ticket payments for the 1998/99 playing season for
any games that are canceled as a result of the lockout.
There can be no assurance that the NBA and the NBAPA will reach
agreement on the new collective bargaining agreement. Given the fixed nature
of many of its expenses, and given that the Nugget's operating revenues are
almost entirely dependent on the NBA season, any loss of games as a result of
the absence of a collective bargaining agreement or the continuation of a
lockout will have an adverse effect on the Company's results of operations
as compared to the prior year's results of operations. Further, in the event
that the NBA and the NBAPA agree to a new collective bargaining agreement or
the lockout ends, there can be no assurance that the NBA and the NBAPA will
not experience labor relations difficulties in the future or significantly
increased player salaries, which could have an adverse effect on the
Company's financial condition or results of operations.
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 SFAS No. 131 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 SFAS 131
in the Company's 1998 Annual Report on Form 10-K.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which defines derivatives, requires that
all derivatives be carried at fair value, and provides for hedging accounting
when certain conditions are met. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. On a forward-looking
basis, although the Company has not fully assessed the implications of SFAS
No. 133, the Company does not believe adoption of SFAS No. 133 will have a
material impact on the Company's financial position or results of operations.
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 Condensed Consolidated
Financial Statements (unaudited) and notes thereto included in this filing,
and with the Consolidated Financial Statements, notes thereto, and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's 1997 Annual Report on Form 10-K, 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 ended
September 30, 1998 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, the "buy rate" or
percentage of occupied rooms at hotels that buy movies or other services at
the property and the price of the movie or service. Occupancy rates vary by
property based on the property's location, competitive position within its
marketplace, seasonal factors, and general economic conditions. 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. 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.
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. Specifically, the Avalanche were involved in one playoff
round in 1998 as compared to three rounds of playoffs in 1997 and,
accordingly, the Avalanche's revenues decreased during the nine months ended
September 30, 1998 as compared to the same period in 1997. 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 and
competition in the market. Specifically, Beacon released and delivered AIR
FORCE ONE and A THOUSAND ACRES in the third quarter of 1997 and had no movie
releases during the third quarter of 1998. Beacon currently has no movie
releases planned for the remainder of 1998. In addition, the operating
results for the fourth quarter of 1998 as compared to the same period in 1997
will be impacted by the current NBA lockout.
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 the delivery or completion of a film
are treated and recorded as deferred income and are generally recognized as
revenues on the date the film is delivered or made available for delivery.
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 markets. 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 revenues, 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 OPERATONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues for the third quarter of 1998 were $78.7 million, a decrease of
$62.3 million or 44.2%, as compared to $141.0 million in revenues for the
third quarter of 1997. While revenues at OCC increased by $6.0 million
within the Multimedia Distribution segment, the Entertainment segment
experienced a $68.8 million decrease in revenues due to certain non-recurring
events that occurred during the third quarter of 1997. The increase in
revenues at OCC is primarily attributable to the receipt of the first of
three royalty payments due from LodgeNet (see Note 6 of the Company's
unaudited condensed and consolidated financial statements). OCC received the
first royalty payment of approximately $2.9 million (net of expenses) in
September 1998. In addition, OCC realized increased revenues due to
increases in its on-demand movie business from new hotel installations,
continued conversions of hotels served by SpectraVision equipment to On
Command equipment and improved buy rates in its core movie product, partially
offset by a decline in equipment sales. The decrease in revenues in the
Entertainment segment is primarily attributable to a decrease in revenues of
$68.7 million at Beacon. During the third quarter of 1997, Beacon recognized
revenues of $68.1 million from the theatrical release and delivery of the
motion picture AIR FORCE ONE, $6.7 million in revenues from the delivery of
the motion picture A THOUSAND ACRES, and minimal revenues from prior movie
releases. In contrast, during the third quarter of 1998, Beacon had no
pictures released or delivered and generated $6.8 million in revenues from
prior movie releases, primarily AIR FORCE ONE.
Cost of services for the third quarter of 1998 were $56.1 million, a
decrease of $ 54.1 million or 49.1%, as compared to $110.2 million in cost of
services for the third quarter of 1997. This decrease is attributable to a
decrease in film amortization costs of $53.4 million at Beacon primarily
associated with AIR FORCE ONE, decreased reserves taken on certain film
projects at Beacon and decreased costs at the Nuggets which are attributable
to the non-recurrence of certain player contract terminations and cost
savings attributable to the current NBA lockout. The decreases in costs of
services were partially offset by higher costs at OCC which are primarily
attributable to an increase in hotel commission and free-to-guest expenses,
both associated with the increase in room revenues, and an increase in
marketing and program management costs. These expense increases at OCC were
partially offset by a decline in equipment cost of sales.
Depreciation and amortization for the third quarter of 1998 was $27.6
million, an increase of $2.5 million or 10.0%, as compared to $25.1 million
in depreciation and amortization for the third quarter of 1997. This
increase is attributable to the continuing installation of on-demand video
systems at OCC and the resulting increase in depreciation.
General and administrative expenses for the third quarter of 1998 were
$1.2 million, a decrease of $1.6 million as compared to $2.8 million in
general and administrative expenses in the third quarter of 1997. This
decrease in operating costs at Ascent corporate is primarily attributable to
the reduction in expense associated with the Company's stock appreciation
rights from the decline in the value of the Company's common stock at
September 30, 1998.
Other income increased by $1.4 million in the third quarter of 1998 as
compared to the same period last year. This increase is primarily
attributable to an increase in interest income recognized on the Company's
cash and cash equivalent balances.
Interest expense increased $1.9 million in the third quarter of 1998 as
compared to the third quarter of 1997. This increase is attributable to
additional borrowings incurred during the fourth quarter of 1997 and for the
nine months ended September 30, 1998 combined with an increase in borrowing
costs at Ascent, primarily those costs related to the issuance of the
Company's 11.875% Senior Secured Discount Notes in December 1997.
The Company recorded a $1.2 million income tax benefit in the third
quarter of 1998 as compared to an income tax expense of $1.2 million in the
third quarter of 1997. The 1998 benefit reflects an additional tax payment
to be received from COMSAT pursuant to the tax disaffiliation agreement with
COMSAT. During the third quarter of 1997, income tax expense was recorded to
appropriately reflect the Company's consolidated net deferred tax liabilities
following the Distribution. Prior to the Distribution on June 27, 1997, the
Company was able to recognize tax benefits from its taxable losses as a
result of a tax sharing agreement with COMSAT so long as Ascent was a member
of the consolidated tax group of COMSAT. During the third quarter of 1998,
the Company and the members of its consolidated tax group 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, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1997
Revenues for the nine months ended September 30, 1998 were $278.2
million, a decrease of $40.5 million or 12.7%, as compared to $318.7 million
in revenues for the nine months ended September 30, 1997. This decrease is
attributable to a $55.4 million decrease in revenues within the Entertainment
segment offset by a $14.9 million increase in revenues at OCC within the
Multimedia Distribution segment. The increase in revenues at OCC is primarily
attributable to increases in its on-demand movie business from new hotel
installations, continued conversions of SpectraVision equipment to OCC
equipment and strong buy rates in its core movie product, the non-recurrence
of the interruption in satellite service to a number of SpectraVision hotels
which occurred during the first quarter of 1997, and the receipt of the
LodgeNet royalty payment. The decrease in revenues in the Entertainment
segment is primarily attributable to a decrease in revenues of $59.8 million
at Beacon, partially offset by increased revenues from the Nuggets and
Avalanche. During the nine months ended September 30, 1997, Beacon
recognized revenues of $68.1 million from the release and delivery of the
motion picture AIR FORCE ONE, $6.7 million in revenues from the delivery of
the motion picture A THOUSAND ACRES and $7.1 million in revenues from the
delivery of PLAYING GOD to its domestic distributor. In contrast, during the
nine months ended September 30, 1998, Beacon has recognized $18.4 million in
revenues from AIR FORCE ONE and $5.3 million from prior movie releases.
During the nine months ended September 30, 1998, the Nuggets realized increased
distributions from the NBA's national television contract and an increase in
distributions under their regional broadcasting agreement with Fox Sports
Rocky Mountain ("Fox Sports"). While the Avalanche realized increased
revenues from regular season ticket and sponsorship sales, the receipt of NHL
expansion proceeds and increased revenues from their regional broadcasting
agreement with Fox Sports, these increases were substantially offset by a
decline in playoff revenues of $4.4 million. During the second quarter of
1998,the Avalanche had 5 fewer home playoff games as a result of playing only
one playoff round as compared to three rounds of playoffs in 1997.
Cost of services for the nine months ended September 30, 1998 were
$223.2 million, a decrease of $43.3 million or 16.2%, as compared to $266.5
million in cost of services for the nine months ended September 30, 1997.
This decrease is attributable to a decrease in film amortization costs of
$47.4 million at Beacon, primarily associated with AIR FORCE ONE, a reduction
in reserves taken on certain film projects at Beacon, and lower operating
costs at the Nuggets (primarily the non-recurrence of certain player contract
termination costs and NBA lockout cost savings). Partially offsetting these
decreases in cost of services are increased operating costs at both the
Avalanche (principally player salaries) and OCC. OCC has experienced an
increase in hotel commissions and free-to-guest expenses, both associated
with the increase in room revenue, and increased expenditures in research and
development and costs related to new products and initiatives. Partially
offsetting these increased costs at OCC is a decline in certain non-recurring
costs. Specifically, these non-recurring costs include costs associated with
the termination of satellite movie service related to SpectraVision rooms and
the non-recurrence of costs associated with the interruption of satellite
service which occurred during the first quarter of 1997.
Depreciation and amortization for the nine months ended September 30,
1998 was $81.8 million, an increase of $6.1 million or 8.1%, as compared to
$75.7 million in depreciation and amortization for the nine months ended
September 30, 1997. This increase is attributable to the continuing
installation of on-demand video systems at OCC and the resulting increase in
depreciation.
General and administrative expenses for the nine months ended September
30, 1998 were $5.9 million, as compared to $5.9 million in general and
administrative expenses for the nine months ended September 30, 1997. While
compensation costs have increased in 1998 and the year-to-date results for
1997 reflect a favorable expense settlement, these increases have been offset
by the reduction in expense associated with the Company's stock appreciation
rights and the non-recurrence of charges from COMSAT and costs associated
with the Distribution.
Other income increased by $1.8 million in the nine months ended
September 30, 1998 as compared to the same period last year. This increase
is primarily attributable to an increase in interest income recognized on the
Company's cash and cash equivalent balances.
Interest expense increased by $3.5 million during the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997.
This increase is attributable to additional borrowings incurred during the
fourth quarter of 1997 and the nine months ended September 30, 1998 combined
with an increase in borrowing costs at Ascent, primarily those costs related
to the issuance of the Company's 11.875% Senior Secured Discount Notes in
December 1997.
The Company recorded a $1.3 million income tax benefit during the nine
months ended September 30, 1998 as compared to an income tax benefit of $5.9
million during the nine months ended September 30, 1997. Prior to the
Distribution on June 27, 1997, the Company was able to recognize tax
benefits from its taxable losses as a result of a tax sharing agreement with
COMSAT so long as Ascent was a member of the consolidated tax group of COMSAT.
The benefit recorded in 1998 is primarily attributable to an additional tax
payment to be received from COMSAT pursuant to the tax disaffiliation
agreement with COMSAT. During the nine months ended September 30, 1998, the
Company and the members of its consolidated tax group recognized no tax
benefits 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.
<TABLE>
SEGMENT OPERATING RESULTS
As discussed in Note 13 to the Company's 1997 Consolidated Financial
Statements, Ascent reports operating results in two segments: Multimedia
Distribution and Entertainment. Results by segment and certain information
regarding the number of guest-pay rooms at OCC are as follows:
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
INCOME STATEMENT DATA: (dollars in millions)
<S> <C> <C> <C> <C>
Revenues:
Multimedia Distribution $ 68.6 $ 62.1 $195.3 $180.4
Entertainment 10.1 78.9 82.9 138.3
------ ------ ------ ------
Total Revenues $ 78.7 $141.0 $278.2 $318.7
------ ------ ------ ------
------ ------ ------ ------
Operating Income (Loss):
Multimedia Distribution $ (0.9) $ (3.2) $(10.8) $(16.4)
Entertainment (4.1) 8.9 (16.0) (7.1)
General & Administrative (1.3) (2.8) (5.9) (5.9)
------ ------ ------ ------
Total Operating
Income (Loss) $ (6.3) $ 2.9 $(32.7) $(29.4)
------ ------ ------ ------
------ ------ ------ ------
OTHER DATA:
EBITDA (1):
Multimedia Distribution $ 23.8 $ 19.0 $ 62.1 $ 49.3
Entertainment (1.3) 11.8 (7.1) 2.9
General & Administrative (1.2) (2.8) (5.9) (5.9)
------ ------ ------ ------
Total EBITDA $ 21.3 $ 28.0 $ 49.1 $ 46.3
------ ------ ------ ------
------ ------ ------ ------
Capital Expenditures:
Multimedia Distribution $ 20.4 $ 22.4 $ 66.6 $ 66.9
Entertainment 21.0 .8 37.5 1.4
------ ------ ------ ------
Total Capital
Expenditures $ 41.4 $ 23.2 $104.1 $ 68.3
------ ------ ------ ------
------ ------ ------ ------
ROOM DATA:
Number of Guest-Pay rooms
(at end of period):
On-Demand 815,000 749,000
Schedule only 106,000 123,000
------- -------
Total Guest-Pay rooms 921,000 872,000
------- -------
------- -------
</TABLE>
(1) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. The most significant difference between
EBITDA and cash provided from operations is 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 in the Condensed Consolidated Statements of Cash
Flows (unaudited) 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 1998 increased $6.5 million, or
10.5% over last year's third quarter. Year-to-date revenues for the
Multimedia Distribution segment increased $14.9 million over the first nine
months of 1997. OCC's revenues grew $6.0 million and $14.3 million during
the third quarter of 1998 and first nine months of 1998 respectively. These
increases are primarily attributable to increases in its on-demand movie
business from new hotel installations, continued conversions of hotels served
by SpectraVision equipment to OCC equipment and strong buy rates in its core
movie product, the non-recurrence of the satellite outage experienced at
SpectraVision properties during the first quarter 1997 and the receipt of the
LodgeNet royalty payment. ANS' revenues for the third quarter of 1998 and
nine months ended September 30, 1998 were similar to the comparable periods in
1997.
Operating losses for this segment decreased by $2.3 million over last
year's third quarter. Year-to-date operating losses decreased by $5.6
million over the nine months ended September 30, 1997. The decrease in the
operating loss during the third quarter of 1998 is attributable to the
LodgeNet royalty payment and increased revenues discussed above, partially
offset by an increase in both depreciation and interest expense from the
continuing capital investment in hotel installation and conversions that have
been partially financed through increased borrowings under OCC's credit
facility. The operating losses at OCC for the first nine months of 1997 were
impacted on January 11, 1997 by the loss of communication with a satellite,
which delivered pay-per-view programming to certain SpectraVision properties.
While service was restored to all affected 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 million during the first quarter of
1997.
EBITDA for the Multimedia Distribution segment increased by $4.8 million
and $12.8 for the third quarter and first nine months of 1998 respectively,
as compared to the same periods last year. The increase in EBITDA in the
third quarter of 1998 is attributable to the increase in revenues at OCC in
the third quarter of 1998 as compared to 1997, and principally, the LodgeNet
royalty payment. As discussed above, the increase in EBITDA in the first
nine months of 1998 is primarily attributable to the increase in OCC revenues
for the first nine months of 1998 as compared to 1997, including the receipt
of the LodgeNet royalty payment, and the non-recurrence of the satellite
failure that occurred during the first quarter of 1997.
Capital expenditures for the segment decreased by $2.0 million and $.3
million during the third quarter and first nine months of 1998 as compared to
the same periods last year. The decrease in capital expenditures in the
third quarter of 1998 as compared to 1997 is primarily attributable to a
decrease in the number of conversions of hotels served by SpectraVision
equipment to OCC equipment.
ENTERTAINMENT
The Entertainment segment includes the results of the Nuggets, the
Avalanche, the Arena Company and Beacon. Revenues of the Entertainment
segment for the third quarter of 1998 decreased by $68.8 million over the
same quarter last year. The decrease in revenues in the Entertainment segment
in the third quarter is primarily attributable to a decrease in revenues of
$68.7 million at Beacon. During the third quarter of 1997, Beacon recognized
revenues of $68.1 million from the theatrical release and delivery of the
motion picture AIR FORCE ONE, $6.7 million in revenues from the delivery of
the motion picture A THOUSAND ACRES, and minimal revenues from prior movie
releases. During the third quarter of 1998, Beacon had no pictures released
or delivered and generated $6.8 million in revenues from prior movie
releases, primarily Air Force One. Year to date revenues for the
Entertainment segment decreased $55.4 million over the first nine months of
1997. This decrease in revenues is primarily attributable to a decrease in
revenues at Beacon of $59.8 million offset by increased revenues at the
Nuggets of $2.7 million. During the nine months ended September 30, 1997,
Beacon generated revenues of $74.8 million from the release and delivery of
the motion pictures AIR FORCE ONE and A THOUSAND ACRES and revenues of $7.1
million from the delivery of the motion picture PLAYING GOD to its domestic
distributors. During the nine months ended September 30, 1998, Beacon has
recognized $18.4 million in revenues from AIR FORCE ONE and $5.3 million from
prior movie releases. Year to date revenues for the Nuggets have increased
from improvements in distributions from the NBA national television contract
and increased revenues from their regional broadcasting agreement with Fox
Sports. While the Avalanche realized increased revenues from regular season
ticket and sponsorship sales, the receipt of NHL expansion proceeds, and
increased revenues from their regional broadcasting agreement with Fox
Sports, these increases were substantially off set by a decline in playoff
revenues of $4.4 million. During the second quarter of 1998, the Avalanche
had 5 fewer home playoff games as a result of playing in only one playoff
round as compared to three rounds of playoffs in 1997.
Operating losses for this segment increased by $13.0 million during the
third quarter of 1998, as compared to the same period last year. This
decline for the quarter is primarily attributable to the decline in revenues
from AIR FORCE ONE. The year-to-date operating loss for this segment has
increased by $8.9 million as compared to the first nine months of 1997. This
year-to-date decline in 1998 is attributable to the revenue decrease at
Beacon and the reduced playoff margin from the Avalanche, partially offset by
increased revenues at the Nuggets and a reduction in player amortization
costs at the Avalanche.
EBITDA for the Entertainment segment decreased by $13.1 million for the
third quarter of 1998 as compared to the same period last year. This decrease
primarily reflects the reduction in AIR FORCE ONE revenues. On year-to-date
basis, EBITDA for the Entertainment segment decreased by $10.0 million as
compared with the nine months ended September 30, 1997. This decrease is
primarily attributable to the revenue decrease on AIR FORCE ONE, the
Avalanche's reduction in playoff games, offset by the increase in Nuggets
revenues as previously discussed.
Capital expenditures for the Entertainment segment increased by $20.2
million and $36.1 million for the third quarter and first nine months of 1998
as compared to the same periods last year. This increase is due to the
capital expenditures incurred relating to the construction of the Pepsi
Center, the new arena in downtown Denver to be owned and managed by the Arena
Company, on which construction commenced in November, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash and cash equivalents during the nine months
ended September 30, 1998 were cash from operating activities of $99.1
million, borrowings under OCC's credit facility of $27.0 million and the
collection of $2.0 million on notes and other long-term receivables. In
addition, while the Company generated net cash proceeds from the Arena Note
offering of $136.6 million, this cash was invested in restricted cash
investment accounts pursuant to the Trust agreement. (See Note 5 of the
Company's unaudited condensed consolidated financial statements.) Cash
was expended primarily for property and equipment as the Company continued to
make investments to support business growth. Specifically, capital
expenditures of $64.8 million were made by OCC primarily for the continuing
installation and conversion of on-demand systems and $35.9 million was
expended by the Arena Company for construction costs at the Pepsi Center. In
addition, $8.6 million of cash was invested by Beacon on films under
production and development and to acquire rights for film development
properties. Cash and cash equivalents have increased by $18.2 million since
year-end 1997 to $43.5 million at September 30, 1998. Included in cash and
cash equivalents at September 30, 1998 is $31.4 million of cash received by
the Avalanche and the Nuggets primarily relating to ticket sales for their
1998/1999 playing seasons.
Long-term debt of the Company at September 30, 1998 consists primarily
of the Company's Senior Secured Discount Notes (the "Senior Notes") totaling
$138.5 million, $160.0 million outstanding under OCC's credit facility and
$139.8 million outstanding on the non-recourse Arena Notes (see Note 5 of the
Company's unaudited condensed consolidated financial statements).
The Company's cash requirements through the remainder of 1998 and during
1999 are expected to include (i) the continuing conversion and installation
by OCC of on-demand in-room video entertainment systems, (ii) funding the
construction costs of the Pepsi Center, (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, (v) the
payment of interest under the Ascent credit facility, if such facility is
utilized, and the OCC credit facility, and (vi) the payment of interest and
principal due under the Arena Notes. The Company anticipates capital
expenditures in connection with the continued installation and conversion by
OCC of on-demand service will be approximately $20.0 to $30.0 million during
the remainder of 1998 and may be approximately $70.0 to $90.0 million in 1999.
The Company anticipates that OCC's funding for its operating requirements and
capital expenditures for the continued conversion and installation by OCC of
on-demand services will be funded primarily through cash flows from OCC's
operations and financed under the OCC credit facility. The future expenditures
for construction of the Pepsi Center will be funded from the restricted cash
investments purchased with the proceeds of the Arena Notes. To fund Beacon's
current movie productions, the Company expects to finance the production
costs through a Film credit facility with a bank, (see Note 5 of the Company's
unaudited condensed consolidated financial statements). Currently, cash
requirements with respect to the two movies in production are anticipated to
be approximately $8.0 to $10.0 million through the remainder of 1998.
Assuming the timely closing of the Film credit facility during the fourth
quarter of 1998, Beacon will obtain cash proceeds of approximately $6.0
million representing the repayment of certain costs advanced by Beacon on
these movies prior to closing. The closing of the Film credit facility is
scheduled to occur in November, 1998. However, there can be no assurance
that matters may not arise which could impact Beacon's ability to either
close and/or obtain the Film credit facility on a timely basis. If Beacon is
unable to obtain the Film credit facility, or should closing be delayed,
Ascent may utilize existing cash balances or the Ascent credit facility to
continue funding the production costs of the movies. Beacon's cash
requirements with respect to the funding of additional productions will be
dependent upon the number, nature and timing of the projects that the Company
determines to pursue during the remainder of 1998 and 1999. To fund future
Beacon productions, the Company expects to enter into additional non-recourse
film credit facilities, utilize Beacon's domestic distribution agreement with
Universal Pictures when 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's
participation in a full digital upgrade of the NBC television affiliate
network. Specifically, the Company is currently in discussions with NBC
regarding a renewal or extension of the current NBC agreement, which is
scheduled to expire in December 1999. In addition, ANS recently provided NBC
a proposal for the full digital upgrade. No assurance can be provided that
the NBC contract will be renewed or extended, or that such renewal or
extension will be on terms favorable to ANS, or that ANS will be awarded the
full digital upgrade engagement. However, the Company does not anticipate
that the full digital upgrade engagement, should it be awarded to ANS, would
commence until the year 2000 or later.
Management of the Company believes that the available cash, cash flows
from operating activities, and funds available under the Ascent credit
facility and the OCC credit facility (see Note 6 of the Company's 1997 Notes
to Consolidated Financial Statements), together with the restricted cash
investments purchased with the proceeds from the Arena Notes will be
sufficient for the Company and its subsidiaries to satisfy their growth and
finance working capital requirements during 1998 and 1999. However, it is
the Company's expectation that cash flows from operations will be
insufficient to cover planned capital expenditures during 1998 and 1999 and,
accordingly, the Company determined that no cash interest would be payable on
the Senior Notes until June 2003. Thereafter, the Company's ability to pay
interest on the Senior Notes and to satisfy its other debt obligations will
depend upon the future performance of the Company and, in particular, on the
successful implementation of the Company's strategy, including conversion of
the hotel rooms acquired in the acquisition of SpectraVision, Inc. to OCC's
on-demand technology, the upgrade and expansion of OCC's technology and
service offerings, the construction of the Pepsi Center in Denver, and the
ability to attain significant and sustained growth in the Company's cash
flow. There can be no assurance that the Company will successfully implement
its strategy or that the Company will be able to generate sufficient cash
flow from operating activities to meet its long-term debt service obligations
and working capital requirements. Based on the Company's current
expectation with respect to its existing businesses, the Company does not
expect to have cash flows after capital expenditures sufficient to repay all
of the Senior Notes at maturity and, accordingly, may have to refinance the
Senior Notes at or before their maturity. There can be no assurance that any
such financing could be obtained on terms that are acceptable to the Company,
or at all. In the absence of such financing, the Company could be forced to
sell assets.
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 2 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 has increased and will
increase in the future for numerous reasons. 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 is
not allowed to 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 until July 1999
(see Note 2 of Notes to Condensed Consolidated Financial Statements).
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 1998 and thereafter.
INFORMATION SYSTEMS AND THE YEAR 2000
GENERAL - The Year 2000 issue is the result of certain computer programs
and firmware having been developed using two digits rather than four digits
to define the application year, such that computer programs that are date
sensitive may recognize a date using "00" as the Year 1900 rather than the
Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in normal business activities for
the Company and its subsidiaries and their customers who rely on their
products.
The Company and its subsidiaries are actively engaged, but have not yet
completed, reviewing, correcting and testing all of their Year 2000
compliance issues. Based on the current review and remediation, the primary
Year 2000 compliance issue facing the Company is that OCC will be required to
modify or replace some of its internally developed information technology
software products. OCC utilizes embedded technology in all of its hotel
system design. OCC's engineering department has completed the majority of
its evaluation process and is currently developing solutions to this and
other Year 2000 issues affecting its hotel systems. In addition, both OCC
and the Company's other subsidiaries have determined that they will be
required to modify and/or replace certain third-party software so that it
will function properly with respect to dates in the Year 2000 and thereafter.
The Company presently believes that with the proper modifications to its
products and third-party software and the replacement of non-compatible
hardware, the Year 2000 issue will not pose significant operational problems
for the Company's subsidiaries or its customers.
The Company and its subsidiaries are currently on schedule to complete
all Year 2000 issues by June 1999. However, if such modifications and
replacements are not made, or completed timely, the Year 2000 issue could
have a material impact on the Company, its subsidiaries and their customers.
COSTS - The total cost associated with required modifications to become
Year 2000 compliant is not expected to be material to the Company's
consolidated financial position. The total cost to address the various Year
2000 issues is estimated to be less than $1.5 million. The total amount
expended on Year 2000 through September 30, 1998 was approximately $250,000.
The costs of Year 2000 compliance and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions, including third
parties' Year 2000 readiness and other factors.
RISKS - The Company has and will continue to have communications with
its significant suppliers and customers to determine the extent to which the
Company may be vulnerable in the event that those parties fail to address
their own Year 2000 issues. The Company has taken steps to monitor the
progress made by those parties, and intends to test critical system
interfaces, as the year 2000 approaches. Specifically, there is some unknown
level of risk at OCC with respect to its hotel customers and conditions that
would make a hotel unable to register guests which, in turn, could affect
OCC's revenue. A large number of OCC's systems are interfaced with the
hotel's property management system. If this interface fails, all movie
charges would require manual processing. Processes to perform manual
processing are in place in all of OCC's customers' hotels and are occasionally
utilized at times when the property management system interface is not
functioning. This typically causes a slightly higher number of lost charges,
which could be material if applied to a large number of hotel customers.
CONTINGENCY PLANS - While the Company has not completed a formal
contingency plan for the Year 2000 problem, it has evaluated several
anticipated scenarios for failures affecting its critical business systems,
including third-party hotel systems which could impact OCC as discussed
above. Currently, it is OCC's opinion that any of the potential scenarios
can be managed by manual means, although less efficient, while the necessary
corrective actions are taken. However, there can be no guarantee that the
systems of third parties on which the Company and its subsidiaries rely will
be corrected in a timely manner, that manual processing of OCC movie charges
would be accomplished, or that the failure to properly convert by another
company would not have a material adverse effect on the Company or its
subsidiaries.
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. 27.0 Financial Data Schedule
(B) Reports on Form 8-K:
None
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 hereunto duly authorized.
ASCENT ENTERTAINMENT GROUP, INC.
By:/s/ David A. Holden
- ----------------------
David A. Holden
Vice President, Finance and Controller
(Principal Accounting Officer)
Date: November 16, 1998
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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<SECURITIES> 0
<RECEIVABLES> 46,711
<ALLOWANCES> 0
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0
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<COMMON> 297
<OTHER-SE> 185,477
<TOTAL-LIABILITY-AND-EQUITY> 880,846
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<TOTAL-REVENUES> 278,218
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