<PAGE>
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, 1999
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)
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, 1999 was 29,755,600 shares.
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ASCENT ENTERTAINMENT GROUP, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except par value amounts)
September 30, December 31,
1999 1998
---- ----
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 72,811 $ 44,576
Receivables, net.................................... 35,030 36,413
Deferred income taxes............................... 3,276 417
Prepaid expenses and other current assets (Note 3).. 13,657 2,983
Net assets of discontinued operations (Note 3)...... 87,461 132,144
-------- --------
Total current assets.......................... 212,235 216,533
-------- --------
Property and equipment, net............................ 291,080 296,513
Goodwill, net.......................................... 91,690 96,503
Investments............................................ 1,365 1,493
Deferred income taxes.................................. 5,529 3,866
Other assets, net...................................... 7,194 8,717
-------- --------
Total Assets........................................... $609,093 $623,625
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................... $ 28,733 $ 23,668
Deferred income..................................... 2,457 2,412
Other taxes payable................................ 7,668 9,301
Accrued compensation................................ 10,083 7,588
Other accrued liabilities........................... 14,749 14,348
--------- ---------
Total current liabilities..................... 63,690 57,317
--------- ---------
Long-term debt (Note 4)............................... 332,461 305,537
Other long-term liabilities........................... 384 2,300
--------- ---------
Total liabilities............................. 396,535 365,154
--------- ---------
Minority interest...................................... 74,846 81,945
Commitments and contingencies (Note 5)................. -- --
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.......................... 307,993 306,358
Accumulated deficit................................. (170,578) (130,872)
Accumulated other comprehensive income.............. -- 743
Total stockholders' equity.................... 137,712 176,526
--------- ---------
Total Liabilities and Stockholders' Equity............. $ 609,093 $ 623,625
========= =========
</TABLE>
See accompanying notes to these condensed unaudited consolidated financial
statements.
2
<PAGE>
ASCENT ENTERTAINMENT GROUP, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues............................................... $ 73,147 $68,611 $207,743 $195,267
-------- ------- -------- --------
Operating expenses:
Cost of services.................................... 47,749 44,766 139,779 133,168
Depreciation and amortization....................... 27,220 24,750 79,248 72,969
General and administrative.......................... 3,414 1,242 11,323 5,876
-------- ------- -------- --------
Total operating expenses...................... 78,383 70,758 230,350 212,013
-------- ------- -------- --------
Loss from continuing operations before
interest, taxes and minority interest......... (5,236) (2,147) (22,607) (16,746)
Interest and other income, net......................... 1,023 353 4,502 1,076
Interest expense....................................... (7,413) (6,354) (21,364) (17,688)
-------- ------- -------- --------
Loss from continuing operations before taxes
and minority interest......................... (11,626) (8,148) (39,469) (33,358)
Income tax benefit..................................... 34 1,207 1,024 1,309
-------- ------- -------- --------
Loss from continuing operations before
minority interest............................. (11,592) (6,941) (38,445) (32,049)
Minority interest in
loss of subsidiary, net of taxes.............. 2,156 1,715 8,768 8,136
-------- ------- -------- --------
Loss from continuing operations........................ (9,436) (5,226) (29,677) (23,913)
Loss from discontinued operations, net of
taxes (Note 3)................................ (4,557) (4,346) (13,264) (16,558)
Gain on sale of discontinued operations,
net of taxes (Note 3)......................... -- -- 3,237 --
-------- ------- -------- --------
Net loss.............................................. $(13,993) $(9,572) $(39,704) $(40,471)
======== ======= ======== ========
Basic and diluted net income (loss) per common share:
Loss from continuing operations.................... $ (.31) $ (.17) $(.99) $ (.81)
From Discontinued operations....................... (.16) (.15) (.34) (.55)
-------- ------- -------- --------
Basic and diluted net
loss per share................................ $ (.47) $ (.32) $(1.33) $ (1.36)
======== ======= ======== ========
Weighted average number of
common shares outstanding..................... 29,756 29,756 29,756 29,756
======== ======= ======== ========
See accompanying notes to these condensed unaudited consolidated financial statements.
</TABLE>
3
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ASCENT ENTERTAINMENT GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Nine Months Ended September 30,
1999 1998
---- ----
<TABLE>
<CAPTION>
Operating activities:
<S> <C> <C>
Operating activities:
Net loss..................................... $(39,704) $(40,471)
Adjustments to reconcile net loss to
net cash provided by continuing operations:
Loss from discontinued
operations, net of gain............ 10,027 16,558
Depreciation and amortization........... 79,248 72,969
Minority interest in losses
of subsidiary...................... (8,768) (8,136)
Interest accretion on Senior
Secured Notes...................... 12,924 11,567
Changes in operating assets and
liabilities........................ (7,377) (20,901)
-------- --------
Net cash provided by operating
activities of continuing operations..... 46,350 31,586
Net cash provided by discontinued
operations.............................. 14,326 24,329
-------- --------
Net cash provided by operating activities.... 60,676 55,915
-------- --------
Investing activities:
Proceeds from sale of Beacon
Communications, LLC..................... 15,893 --
Purchase of property and equipment...... (66,097) (67,879)
Payments on note receivable............. 2,005 2,006
Proceeds from sale of investments............ 1,758 264
-------- --------
Net cash used in investing activities........ (46,441) (65,609)
-------- --------
Financing activities - proceeds from
borrowings under credit facilities........... 14,000 27,000
-------- --------
Net increase in cash and cash
equivalents.................................. 28,235 17,306
Cash and cash equivalents, beginning
of period.................................... 44,576 23,598
-------- --------
Cash and cash equivalents, end
of period.................................... $ 72,811 $ 40,904
======== ========
Supplemental cash flow information:
Interest paid, net of interest capitalized... $ 7,580 $ 7,158
======== ========
Income taxes paid............................ $ 2,651 $ 79
======== ========
</TABLE>
See accompanying notes to these condensed unaudited consolidated financial
statements.
4
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ASCENT ENTERTAINMENT GROUP, INC.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss........................................... $(13,993) $ (9,572) $(39,704) $(40,471)
-------- -------- -------- --------
Other comprehensive income (loss):
Unrealized gain (loss) on securities.......... -- (1,698) (1,143) 487
Income tax (expense) benefit related
to other comprehensive income............ -- 594 400 (170)
-------- -------- -------- --------
Other comprehensive income (loss),
net of tax.................................... -- (1,104) (743) 317
-------- -------- -------- --------
Comprehensive Loss................................. $(13,993) $(10,676) $(40,447) $(40,154)
======== ======== ======== ========
</TABLE>
See accompanying notes to these condensed unaudited consolidated financial
statements.
5
<PAGE>
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 1998 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 unaudited 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.
Certain amounts in prior periods have been reclassified to conform with the
current periods presentation, most notably the discontinued operations
presentation of the Company's former entertainment segment (see Notes 2 and 3).
2. Organization and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Ascent and its majority-owned subsidiary, On Command Corporation ("OCC").
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. The
Company's discontinued operations are comprised of the results of the Company's
former entertainment segment, which included the Denver Nuggets, the Colorado
Avalanche and Ascent Arena Company (the "Arena Company"), the owner and manager
of the Pepsi Center, (collectively the "Sports related businesses"), which the
Company has agreed to sell (see Note 3). In addition, discontinued operations
include the results of the Company's former subsidiary, Beacon Communications,
LLC ("Beacon"), in which a 90% interest was sold on January 20, 1999. The
accompanying 1998 financial information has been restated to conform to the
discontinued operations presentation of the former entertainment segment and
Beacon.
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. 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 13 to the Company's 1998 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 was subject to
numerous restrictions under the Distribution Agreement, most of which have
expired. The most significant restriction still in place is that 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.
Note 3 - Discontinued Operations
Beacon - On January 20, 1999, the Company sold 90% of its interest in Beacon to
- ------
an investor group controlled by Beacon's management and venture capital
investors (the "Buyers"). The purchase price for the 90% interest was $19.0
million in cash, net of certain adjustments. The Company received approximately
$15.9 million at closing. The Company believes it is entitled to receive future
cash consideration of approximately $.8 million. The Company intends to
continue its efforts to collect this amount, and the Company will report an
additional gain from the Beacon sale when these proceeds are received. After
the sale of the 90% interest, the Company has no future obligations to fund any
of Beacon's liabilities or film development or production commitments. The 10%
interest in Beacon retained by the Company is subject to limited purchase and
sale options between the Company and the Buyers at a price
6
<PAGE>
proportionate to the purchase price. The Company's remaining investment in
Beacon is accounted for using the cost method. In the first quarter of 1999, the
Company reported a gain of $3.2 million on the sale of 90% of its interest in
Beacon.
Sports related businesses - On July 27, 1999, the Company entered into a
- -------------------------
definitive Purchase and Sale Agreement (the "Sports Sale Agreement") to sell its
Sports-related businesses to a group of entities controlled by Donald L. Sturm
("The Sturm Group") for $321.0 million in cash (of which Liberty Denver Arena
LLC, currently an unrelated third party (see Note 7 to Condensed Consolidated
Financial Statements), will receive up to $20.5 million)), subject to further
adjustment for cash balances and receipts received by the Company prior to
closing, which relate to the Nuggets and Avalanche 1999/2000 playing seasons.
In conjunction with the sale, the approximate $140.0 million in non-recourse
Arena Note obligations will be remain the obligation of an entity to be acquired
by The Sturm Group (see Note 6 of the Company's 1998 Consolidated Financial
Statements). On October 14, 1999, the Company entered into an amendment (the
"First Amendment") to the Sports Sale Agreement. The First Amendment
restructured the transaction to add a new entity to the group of Purchasers and
make certain other tax and estate planning related changes on behalf of
Purchasers. Also in the First Amendment, the Purchasers agreed to seek the
release of Ascent from certain guarantees, and to indemnify Ascent from claims
under such guarantees if Ascent were not released. On October 29, 1999, the
Company entered into an additional amendment (the "Second Amendment") to the
Sports Sale Agreement. The Second Amendment provides, among other things, that
(a) the Drop Dead Date (as defined in the Sports Sale Agreement) has been
extended from October 31, 1999 to November 10, 1999; (b) the Purchasers will not
be obligated to pay to the Company interest on the cash portion of the purchase
price; (c) Ascent and the Purchasers will jointly fund a construction claims
escrow account in favor of Purchasers to cover any construction overruns in
excess of $191 million associated with the completion of the Pepsi Center prior
to the second anniversary of the closing, and Ascent will initially place $1.5
million in such escrow; (d) Ascent will fund an escrow account in favor of
Purchasers in an amount equal to $5 million that Purchasers can use to pay
construction overruns or other costs or revenue shortfalls; (e) certain closing
conditions were amended, in particular that in order to obtain the consent of
the City and County of Denver (the "City) to the transactions contemplated by
the Sports Sale Agreement and to obtain the release of Ascent from certain
guarantees from the City, The Sturm Group agree that a certain form of
replacement guaranty would be acceptable to The Sturm Group if so acceptable to
the City; (f) the deductible baskets related to Ascent's indemnification
obligations have been decreased from an aggregate of $5 million to an aggregate
of $2 million; and (g) the parties have agreed to certain other adjustments and
indemnities. Subsequently, on November 10, 1999, the Company entered into an
additional amendment (the "Third Amendment") to the Sports Sale Agreement. The
Third Amendment provides that the Drop Dead Date has been extended from November
10, 1999 to November 15, 1999 with the further agreement that if The Sturm Group
finalizes terms and documentation of its agreement-in-principle with the City
prior to the November 15 expiration, then the Sports Sale Agreement between
Ascent and The Sturm Group will be further extended to a date two businesses
days following final Denver City Council approval of the agreement between The
Sturm Group and the City. Accordingly, there can be no assurances that The
Sturm Group and the City will successfully finalize the terms and documentation
of any agreement leading to the satisfaction of the City consent condition, or
that the City Council will approve such agreement, or that the sale of Ascent's
sports-related businesses pursuant to the Sports Sale Agreement, as amended,
with The Sturm Group will be completed.
As a result of the amendments to the Sports Sale Agreement and assuming a
timely closing, as to which there can be no assurances, the Company would report
a pre-tax gain, net of transaction costs in excess of $150.0 million on the sale
of the Sports related businesses in the fourth quarter of 1999. Transaction
costs, including investment banker and attorney fees and expenses, fees payable
to William and Nancy Laurie in conjunction with the termination of the previous
agreement between Ascent and the Lauries, which was entered into on April 25,
1999 (see Note 5 of Notes to Condensed Consolidated Financial Statements), and
other associated costs of the transaction are estimated to be approximately
$23.0 million and will be netted against the proceeds from the transaction for
financial reporting purposes. In conjunction with the sale, as of September 30,
1999, the Company had incurred approximately $13.6 million of such transaction
costs. These costs are included in prepaid expenses and other current assets
in the accompanying condensed consolidated balance sheet at September 30, 1999.
7
<PAGE>
The Company began accounting for Beacon as a discontinued operation as of
December 31, 1998 and for the Sports related businesses as a discontinued
operation as of March 31, 1999, pursuant to guidance contained in Emerging
Issues Task Force Issue No. 95-18, "Accounting and Reporting for Discontinued
Business Segment when the Measurement Date occurs after the Balance Sheet Date
but before the Issuance of the Financial Statements." Accordingly, the
consolidated financial statements have been restated for all prior periods
presented to reflect the results of operations and net assets of Beacon and the
Sports related businesses as discontinued operations. The loss from
discontinued operations of Beacon and the Sports related businesses, net of
taxes, for the three and nine month periods ended September 30, 1999 and 1998 is
composed of the following:
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------
1999 1998
----------- ------------------------------------
Sports Sports
Related Related
Businesses Businesses Beacon Total
---------- -------------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Revenues............................ $ 3,143 $ 3,386 $ 6,781 $ 10,067
======== ======== ======== ========
Loss from discontinued operations
before taxes.................... $ (3,396) $ (1,951) $(23,957) $ (4,346)
Income tax expense.................. 1,161 -- -- --
-------- -------- -------- --------
Loss from discontinued operations... $ (4,557) $ (1,951) $ (2,395) $ (4,346)
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------
1999 1998
----------- ---------------------------------------
Sports Sports
Related Related
Businesses Businesses Beacon Total
---------- ---------- -------------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Revenues............................ $ 67,854 $ 59,237 $ 23,715 $ 82,952
======== ======== ======== ========
Loss from discontinued operations
before taxes....................... $(13,905) $(11,122) $ (5,436) $(16,558)
Income tax expense.................. 641 -- -- --
--------- -------- -------- --------
Loss from discontinued operations... $(13,264) $(11,122) $ (5,436) $(16,558)
======== ======== ======== ========
The net assets of the discontinued operations included in the unaudited condensed consolidated
balance sheets as of September 30, 1999 and December 31, 1998, consist of the following:
9/30/99 1998
----------- ----------------------------------------
Sports Sports
Related Related
Businesses Businesses Beacon Total
---------- ---------- ------------- ---------
(in thousands)
Current assets.................. $ 50,719 $ 38,194 $ 3,062 $ 41,256
Property and equipment, net..... 174,141 92,249 -- 92,249
Restricted cash held in trust... 55,992 112,478 -- 112,478
Film inventory.................. -- -- 48,457 48,457
Franchise rights, net........... 88,948 92,559 -- 92,559
Other assets.................... 25,462 24,453 10,651 35,104
Current liabilities, including
current portion of Arena
Notes...................... (132,860) (70,222) (5,763) (75,985)
Non-recourse Arena Notes and
other obligations.......... (136,170) (136,170) (35,079) (171,249)
Other long term liabilities..... (38,771) (33,725) (9,000) (42,725)
--------- --------- --------- ---------
Net assets of discontinued
operations...................... $ 87,461 $ 119,816 $ 12,328 $ 132,144
========= ========= ========= =========
</TABLE>
8
<PAGE>
4. Long-Term Debt
Long-term debt consists of the following at September 30, 1999 and
December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Senior Secured Discount Notes, 11.875%, due
2004, net of unamortized discount of
$69,539 and $82,463........................ $155,461 $142,537
OCC Credit Facility, variable rate, due 2002.. 177,000 163,000
-------- --------
Total long term debt....................... $332,461 $305,537
======== ========
</TABLE>
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. In connection with the sale of the Sports related
businesses (see Note 3), it is anticipated that the Ascent credit facility will
be terminated or renegotiated. 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 outstanding at
September 30, 1999, the Company had access to $50.0 million of long-term
financing under the Ascent credit facility and OCC had access to $27.0 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 1998 Consolidated
Financial Statements).
5. Contingencies
Litigation - In September 1998, On Command Video (OCV) filed suit against
----------
MagiNet, alleging a breach by MagiNet of a license agreement between OCV and
MagiNet, and terminating the license agreement. OCV has also demanded the
payment of licensee fees from MagiNet which OCV believes were due and payable
under the license agreement and have not been paid by MagiNet. MagiNet has
counter-claimed against OCV, alleging that OCV breached the license agreement,
and alleging various torts by OCV in its relationship with MagiNet.
In June 1999, the Company and certain of its present and former directors
were named as defendants in lawsuits filed by shareholders (the "Shareholder
lawsuits") in June 1999 in the Delaware Court of Chancery. These proposed class
actions asserted that the Company's agreement to sell the Company's Sports
related businesses to entities controlled by William and Nancy Laurie
constituted a sale of substantially all assets of the Company, thereby requiring
a shareholder vote, and resulted from breaches of fiduciary duties by the
director defendants (see Note 3 of Notes to Condensed Consolidated Financial
Statements). On June 23, 1999, the Company, the director defendants and the
Laurie-controlled purchasing entities that were also named as defendants,
entered into an agreement with the shareholder plaintiffs to settle the
lawsuits. Under the settlement agreement, the Company, the director defendants,
and the Laurie-controlled entities agreed, among other things, to amend the
terms of the proposed sale to the Laurie entities to permit the Company to
conduct a new process in which the Company would solicit additional offers for
the purchase of the Sports related businesses. The Company and the director
defendants also agreed, among other things, to engage an additional investment
banker to assist in the new auction process, and to add Peter W. May to the
Company's Board of Directors. On July 27, 1999, as a result of the new auction
process, the Company entered into a definitive agreement to sell the Sports
related businesses to The Sturm Group. The settlement of the Shareholder
lawsuits is subject to the approval of the Delaware Court of Chancery after a
hearing. If approved by the Court, the settlement would result in, among other
things, the dismissal with prejudice of the claims asserted in the Shareholder
lawsuits and the payment by the Company of plaintiff attorney fees and expenses
in an amount to be approved by the Court. For the nine month period ended
September 30, 1999, the Company has incurred and expensed approximately $1.1
million in connection with the Shareholder lawsuits and expects to incur
additional expenses during the fourth quarter of 1999.
9
<PAGE>
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.
6. Segment Operating Results
As discussed in Note 12 to the Company's 1998 Consolidated Financial
Statements, the Company implemented Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information," during the fourth quarter of 1998. In accordance with SFAS No.
131, the Company classified its businesses into 3 reporting segments: multimedia
distribution, network services and entertainment. The multimedia distribution
segment includes the video distribution and on-demand video entertainment
services provided by OCC to the lodging industry. The network services segment
includes the results of ANS and the video distribution services it provides to
the NBC television network and other private networks. The Company's former
entertainment segment (see Notes 1 and 3 of Notes to Condensed Consolidated
Financial Statements) included three segments, the Denver Nuggets, the Colorado
Avalanche and the Arena Company. Accordingly, the financial information for the
three and nine month periods ended September 30, 1998, have been restated to
conform with the Company's new segment classifications pursuant to SFAS 131 and
the Company's classification of its former entertainment segment and Beacon as
discontinued operations. Results by segment are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Income Statement Data: (in thousands, except Room Data)
<S> <C> <C> <C> <C>
Revenues:
Multimedia Distribution............... $67,752 $62,970 $191,550 $179,733
Network Services...................... 5,395 5,641 16,193 15,534
------- ------- -------- --------
Total............................ $73,147 $68,611 $207,743 $195,267
======= ======= ======== ========
Operating income (loss):
Multimedia Distribution(2)............ $(2,853) $(1,867) $(14,438) $(13,308)
Network Services...................... 1,065 998 3,271 2,546
Corporate............................. (3,448) (1,278) (11,440) (5,984)
------- ------- -------- --------
Total............................ $(5,236) $(2,147) $(22,607) $(16,746)
======= ======= ======== ========
Other Data:
EBITDA - from Continuing Operations (1):
Multimedia Distribution............... $22,423 $20,968 $ 58,947 $ 53,955
Network Services...................... 2,975 2,877 9,017 8,144
General & Administrative.............. (3,414) (1,242) (11,323) (5,876)
------- ------- -------- --------
Total EBITDA..................... 21,984 22,603 56,641 56,223
------- ------- -------- --------
Less reconciling item - depreciation
and amortization.................. 27,220 24,750 79,248 72,969
------- ------- -------- --------
Total operating loss................. $(5,236) $(2,147) $(22,607) $(16,746)
======= ======= ======== ========
Capital Expenditures:
Multimedia Distribution............... $23,344 $19,560 $ 64,209 $ 64,805
Network Services...................... 250 843 437 1,806
Corporate............................. 6 226 1,451 1,268
------- ------- -------- --------
Total Capital Expenditures....... $23,600 $20,629 $ 66,097 $ 67,879
======= ======= ======== ========
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Room Data:
<S> <C> <C>
Number of Guest pay rooms
(at end of period):
On Demand................... 873,000 815,000
Scheduled Only.............. 73,000 106,000
------- -------
Total Guest Pay Rooms.. 950,000 921,000
======= =======
</TABLE>
(1) EBITDA represents earnings from continuing operations before interest
expense, income taxes, depreciation, amortization and non-cash charges
related to stock based compensation. The most significant differences
between EBITDA and cash provided from operating activities are changes in
working capital and interest expense under the OCC credit facility. 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.
(2) The Multimedia Distribution segment's operating results reflect the
allocation of intangible assets amortization incurred by Ascent relating to
the acquisition of OCV by Ascent.
7. Pending Merger Agreement
On October 20, 1999, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with AT&T Corp., Ranger Acquisition Corp. and
Liberty Media Corporation ("Liberty"). Liberty Denver Arena LLC (see Note 3 of
Notes to Condensed Consolidated Financial Statements) is an affiliate of
Liberty. Pursuant to the Merger Agreement, upon consummation of the merger each
share of Ascent common stock would be converted into .4626 shares of Liberty
Media Group Class A Common Stock ("LMG.A"). LMG.A is issued by AT&T Corp. and is
a tracking stock designed to reflect the economic performance of the businesses
and assets of AT&T Corp. attributed to Liberty, which is a group of companies
previously acquired by AT&T Corp. The Merger is conditioned upon, among other
things, the sale of, and will not include; the Company's sports-related assets,
the Colorado Avalanche, the Denver Nuggets or the Pepsi Center. The sale of
those business assets is subject to the Sports Sale Agreement, as amended, as
described in Note 3 of Notes to the Condensed Consolidated Financial Statements.
Consummation of the Merger is also subject to the affirmative vote of the
holders of a majority of the outstanding shares of Ascent Common Stock, the
approval of all appropriate governmental and regulatory authorities, the
approval of all appropriate governmental and regulatory authorities, the closing
of the sale of the sports-related assets and other customary conditions.
However, as a result of certain provisions of the Amendments to the Sports
Sale Agreement, the Company and Liberty have agreed that certain conditions to
the consummation of the Merger Agreement are incapable of being satisfied.
Notwithstanding the foregoing, the Company and Liberty have agreed to negotiate
through November 30, 1999 toward an amendment to the Merger Agreement containing
mutually acceptable terms, during which period Liberty agrees not to terminate
the Merger Agreement unless the parties reach an impasse. After November 30,
1999, if the parties have not amended the Merger Agreement then Liberty may
elect to terminate the Merger Agreement at any time through December 3, 1999. If
Liberty does not so terminate, then it shall have been deemed to waive its right
to terminate the Merger Agreement as a result of those provisions of the
Amendments to the Sports Sale Agreement that caused the conditions of the Merger
Agreement not to be satisfied. Finally, if the Sports Sale Agreement, as
amended, is terminated then the Merger Agreement with Liberty can be terminated
at any time. There can be no assurances that Liberty will not terminate the
Merger Agreement if the Sports Sale Agreement is
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terminated, and Ascent expects that Liberty would do so soon after any such
termination or, that even if the sale of the sports-related businesses is
consummated in accordance with the Sports Sale Agreement, as amended to-date,
that Liberty will not elect to use its right to terminate the Merger Agreement
or will agree to a merger transaction only on revised terms that are less
favorable to the Company.
8. Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board 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,
which has been amended by SFAS 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. 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)
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 1998 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 and nine-
months ended September 30, 1999 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.
In conjunction with the acquisition of SpectraVision's assets and certain
liabilities in October 1996, OCC acquired, among other assets, video systems and
equipment. These specific assets, which were recorded at their estimated fair
market value of approximately $41,800,000 in October 1996, are being depreciated
over 36 months. Accordingly, OCC's 1999 fourth quarter operating results will
be impacted from a reduction in depreciation and amortization expense charges
relating to these specific assets.
The Multimedia Distribution segment revenues 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. 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.
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ANALYSIS OF OPERATIONS
Three months ended September 30, 1999 compared to three months ended September
30, 1998
Continuing Operations
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Revenues for the third quarter of 1999 were $73.1 million, an increase of
$4.5 million or 6.6%, as compared to $68.6 million in revenues for the third
quarter of 1998. This increase is attributable to a $4.7 million increase in
revenues at OCC within the Multimedia Distribution segment and a $.2 million
decrease in revenues at ANS within the Network Services segment. The increase in
revenues at OCC is primarily attributable to new hotel installations, continued
conversions of SpectraVision properties to the superior performing On Command
Video systems, an increase in cable programming revenues, an increase in the net
royalty payment received from LodgeNet Entertainment Corporation ("LodgeNet")
and continued reductions in movie denial rates.
Cost of services for the third quarter of 1999 were $47.7 million, an
increase of $2.9 million or 6.5% compared to $44.8 million in the third quarter
of 1998. Cost of services at OCC increased by $3.3 million and decreased by $.4
million at ANS. This increase in costs at OCC is due to increased direct costs
associated with the increase in movie revenues at OCC (primarily hotel
commissions and movie royalties) and cable programming revenues, due to price
increases from selected cable programmers. The decrease in cost of services at
ANS is attributable to the decline in revenues and cost containment efforts at
ANS.
Depreciation and amortization for the third quarter of 1999 was $27.2
million, an increase of $2.4 million or 9.7% compared to $24.8 million in the
third quarter of 1998. Depreciation and amortization at OCC increased by $2.4
million. This increase is primarily attributable to the larger installed room
base and the increased depreciation on capital expenditures made during 1998 and
the recognition by OCC of a non-cash expense associated with accounting for
cashless stock options in an executive compensation agreement reflecting the
increased share price of OCC's stock.
General and administrative expenses, which include only those costs incurred
by the parent company, were $3.4 million for the third quarter of 1999, an
increase of $2.2 million compared to $1.2 million in the third quarter of 1998.
This increase primarily reflects the $1.9 million in expense recognized during
the current quarter for severance payments made to the Company's former
President and Chief Executive Officer, and an increase in expenses associated
with the Company's stock appreciation rights ("SAR's").
Other income increased by $.7 million in the third quarter of 1999 as
compared to the third quarter of 1998. This increase is attributable to interest
income recognized on the Company's cash and cash equivalent balances.
Interest expense increased $1.1 million in the third quarter of 1999 as
compared to the third quarter of 1998. This increase is attributable to
additional borrowings incurred during 1999 combined with an increase in
borrowing costs at Corporate, primarily those costs related to the interest
accretion on the Company's 11.875% Senior Secured Discount Notes (the "Senior
Notes").
The Company recorded an income tax expense from continuing operations of
$1.1 million during the third quarter of 1999 as compared to an income tax
benefit of $1.2 million during the third quarter of 1998. During the third
quarter of 1999, the Company reduced its effective tax benefit rate for 1999 due
to uncertainties regarding its ability to realize a portion of the benefits
associated with future deductible temporary differences (deferred tax assets).
EBITDA for the third quarter of 1999 was $22.0 million, a decrease of $.6
million or 2.7% compared to $22.6 million in the third quarter of 1998. This
decrease is attributable to a $2.2 million decrease at Corporate offset by a
$1.5 million increase at OCC and a $.1 million increase at ANS. The decrease at
Corporate primarily reflects the severance costs incurred in conjunction with
the payments to the Company's former President and Chief Executive Officer. The
increase at OCC primarily reflects the increase in revenues during the third
quarter of 1999 as compared to the same period of 1998. The increase at ANS,
while minimal, primarily reflects a reduction in operating expenses in the third
quarter of 1999 as compared to the same period of 1998.
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Minority interest reflects the losses attributable to the minority interest
in the Company's 57% owned subsidiary, OCC.
Discontinued Operations
- -----------------------
Ascent's discontinued operations are comprised of the results of the
Company's former entertainment segment, which includes the Denver Nuggets, the
Colorado Avalanche and the Arena Company. In addition, discontinued operations
include the results of Beacon, which was sold on January 20, 1999. The combined
loss from discontinued operations for these entities totaled $4.6 million during
the third quarter of 1999 as compared to a loss of $4.3 million during the
comparable period in 1998. The decreased loss during the third quarter of 1999
is primarily attributable to the lack of operating losses from Beacon of $2.4
million offset by an increase in losses from the operations of the Denver
Nuggets and the Arena Company. Specifically, the Nuggets incurred contract
termination costs during the third quarter of 1999 of $1.7 million while the
Arena Company incurred additional personnel and operating costs, including sales
and marketing expenditures in connection with the opening of the Pepsi Center in
September 1999. Assuming the timely closing of the pending sale of the Sports
related businesses, as to which there can be no assurances, the Company would
report a gain on the sale of its interests in those businesses during the fourth
quarter of 1999.
Nine months ended September 30, 1999 compared to nine months ended September 30,
1998
Continuing Operations
- ---------------------
Revenues for the nine-months ended September 30, 1999 were $207.7 million,
an increase of $12.4 million or 6.3%, as compared to $195.3 million in revenues
for the nine-months ended September 30, 1998. This increase is attributable to a
$11.8 million increase in revenues at OCC and a $.6 million increase in revenues
at ANS. The increase in revenues at OCC is primarily attributable to continued
conversions of SpectraVision properties to the superior performing On Command
Video systems, an increase in cable programming revenues, an increase in the net
royalty payment from LodgeNet, reductions in movie denial rates and higher
equipment sales. The increase in revenues in the Network Services segment is
attributable to an increase in service revenues from NBC and its affiliates and
other private networks.
Cost of services for the nine-months ended September 30, 1999 were $139.8
million, an increase of $6.6 million or 5.0% compared to $133.2 million for the
nine-months ended September 30, 1998. Cost of services at OCC increased by $6.8
million. This increase in costs at OCC is primarily due to increased direct
costs associated with the increase in movie revenues at OCC (primarily hotel
commissions and movie royalties) and equipment sales and cable programming
revenues.
Depreciation and amortization for the nine-months ended September 30, 1999
was $79.2 million, an increase of $6.2 million or 8.5% compared to $73.0 million
for the nine-months ended September 30, 1998. Depreciation and amortization at
OCC increased by $6.1 million. This increase is primarily attributable to the
continuing installation of on-demand video systems at OCC and the resulting
increase in depreciation and the recognition by OCC of a non-cash expense
associated with accounting for cashless stock options in an executive
compensation agreement reflecting the increased share price of OCC's stock.
General and administrative expenses, which include only those costs incurred
by the parent company, were $11.3 million for the nine-months ended September
30, 1999, an increase of $5.4 million or 91.5% compared to $5.9 million for the
nine-months ended September 30, 1998. This increase reflects the expense
recognized during the nine-months ended September 30, 1999 for the Company's
stock appreciation rights of $3.8 million due to increases in the Company's
stock price, $1.9 million in expenses recognized for severance payments made to
the Company's former President and Chief Operating Officer and costs incurred in
conjunction with the settlement of a shareholder lawsuit of approximately $.8
million (see Note 5 of Notes to Condensed Consolidated Financial Statements),
partially offset by the reduction of other operating expenses.
Other income increased by $ 3.4 million in the nine-months ended September
30, 1999 as compared to the same period last year. This increase is primarily
attributable to the recognition of a $1.8 million gain at Corporate from the
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sale of investment securities and to an increase in interest income recognized
on Corporate's cash and cash equivalent balances.
Interest expense increased $3.7 million in the nine-months ended September
30, 1999 as compared to the nine-months ended September 30, 1998. This increase
is attributable to additional borrowings incurred during 1999 combined with an
increase in borrowing costs at Corporate, primarily those costs related to the
interest accretion on the Senior Notes.
The Company recorded an income tax benefit from continuing operations of
$1.0 million during the nine-months ended September 30, 1999 as compared to an
income tax benefit of $1.3 million from continuing operations during the nine-
months ended September 30, 1998. The decrease in the Company's 1999 benefit rate
as compared to the nine-months ended September 30, 1999 is due to uncertainties
regarding its ability to realize a portion of the benefits associated with
future deductible temporary differences (deferred tax assets).
EBITDA for the nine-months ended September 30, 1999 was $56.6 million, an
increase of $.4 million or .7% compared to $56.2 million in the nine-months
ended September 30, 1998. The increase is attributable to a $5.0 million
increase at OCC and a $.9 million increase at ANS offset by a $5.5 million
decrease at Corporate. The increase at OCC reflects the decrease in operating
expenses in 1999 compared to 1998. The increase at ANS reflects increased
revenues in 1999 compared to 1998. The decrease at Corporate reflects the
expense recognized for stock appreciation rights, expenses related to severance
payments made to the Company's former President and Chief Executive Officer and
costs incurred in conjunction with the settlement of the Shareholder lawsuit
(see Note 5 of Notes to Condensed Consolidated Financial Statements).
Minority interest reflects the losses attributable to the minority interest
in the Company's 57% owned subsidiary, OCC.
Discontinued Operations
- -----------------------
The combined loss from discontinued operations totaled $13.3 million during
the nine-months ended September 30, 1999 as compared to a loss of $16.6 million
during the comparable period in 1998. The increased loss is primarily due to the
operations of the Denver Nuggets and the Arena Company offset by the improvement
in the operations of the Colorado Avalanche and the lack of operating losses
from Beacon. Specifically, during the second quarter of 1999, the Avalanche
participated in three rounds of the NHL playoffs as compared to one round in
1998. Offsetting the improvements were the operations of the Denver Nuggets,
which were impacted by the NBA work stoppage during the first quarter of 1999
and the contract termination cost of the former coach during the third quarter
of 1999. Specifically, while revenues for the Nuggets decreased, operating
expenses increased due to a reserve taken on receivables due from NBA
Properties, the merchandising affiliate of the NBA, an overall increase in
player salaries over the comparable period in 1998 and the incurrence of
contract termination costs. In addition, the Arena Company reflects an increase
in operating costs, primarily personnel and sales and marketing costs as the
Pepsi Center opened in September, 1999.
The $3.2 million gain from sale of discontinued operations, net of taxes,
during the nine-months ended September 30, 1999 reflects the gain from the sale
of 90% of the Company's interest in Beacon.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased by $28.2 million since December 31,
1998 to $72.8 million at September 30, 1999. The primary sources of cash during
the first nine-months of 1999 were cash from continuing operating activities of
$46.4 million, proceeds of $15.9 million from the sale of 90% of the Company's
interest in Beacon and borrowings under the OCC credit facility of $14.0
million. Cash was expended primarily for property and equipment at OCC,
specifically $64.2 million of capital expenditures, to support continued hotel
installations. Included in cash and cash equivalents at September 30, 1999 is
$24.0 million of cash received by the Avalanche and the Nuggets during 1999
relating to ticket sales and club seat deposits and sponsorship contracts for
both the Avalanche and the Nuggets for the upcoming 1999/2000 playing seasons.
Pursuant to the terms of the Sports Sale
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Agreement (see Note 3 of Notes to Condensed Consolidated Statements), these cash
balances and other cash receipts received prior to closing relating to the
1999/2000 playing seasons will be acquired by The Sturm Group.
Long-term debt totaled $332.5 million at September 30, 1999 as compared to
$305.5 million at December 31, 1998. The increase in long-term debt is
attributable to additional borrowings of $14.0 million under On Command's credit
facility and the accretion of interest on the Company's 11.875% Senior Secured
Discount Notes. The Arena Revenue Backed Notes of $139.8 million (the "Arena
Notes") which were issued by the Arena Company's beneficially owned trust are
classified in the Company's condensed consolidated balance sheet in the net
assets of discontinued operations. 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. In connection with the Sports Sale agreement (see
Note 3 of Notes to Condensed Consolidated Financial Statements), the Purchasers
will acquire the Arena Note obligation. Based on borrowings at September 30,
1999, the Company had access to $50.0 million of long-term financing under the
Ascent credit facility and OCC had access to $23.0 million of long-term
financing under its credit facility, subject to certain covenant restrictions
(see Note 6 of the Company's 1998 Consolidated Financial Statements.)
The Company's cash requirements through the remainder of 1999 are expected
to include (i) the continuing conversion and installation by OCC of on-demand
in-room video entertainment systems, (ii) funding the operating requirements of
Ascent and its subsidiaries (including the cash to be acquired by the Purchasers
as discussed above), and (iii) the payment of interest under the OCC credit
facility. 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 $25.0 million during the fourth quarter of 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.
Management of the Company believes that the available cash, cash flows from
operating activities and funds available under the OCC credit facility (see Note
6 of the Company's 1998 Notes to Consolidated Financial Statements) will be
sufficient for the Company and its subsidiary to satisfy their growth and
finance working capital requirements during 1999. Assuming the consummation of
the sale of the Sports related businesses as to which there can be no
assurances, after payments to Liberty Denver Arena LLC for its interest in the
Arena Company, appropriate reserves for cash received to-date relating to
Nuggets and Avalanche upcoming 1999/2000 playing seasons and after the
establishment of escrow accounts totaling $6.5 million as required by the Second
Amendment to the Sports Sale Agreement (see note 3 of Notes to Condensed
Consolidated Financial Statements), the Company anticipates receiving net cash
proceeds of approximately $255.0 million, subject to any closing adjustments.
Under the terms of Ascent's outstanding Senior Notes, to the extent that within
one year of the sale of the Sports related businesses, Ascent does not use the
net cash proceeds for certain permitted uses under the Senior Note indenture,
Ascent will be required to use all remaining proceeds to offer to repurchase the
Senior Notes at 100% of their accreted value. In addition, in connection with
the sale, it is anticipated that the Ascent credit facility will be terminated
or renegotiated. Assuming that the sale of its Sports related businesses is
consummated and, as a result of the terms of the Company's Senior Notes, the
Company will explore various alternatives as to the use of the cash proceeds
from the sale and, in turn, the Company's overall business strategy. Management
of the Company continues to focus its efforts on the operations of OCC and OCC's
strategies to convert hotel rooms acquired in the acquisition of SpectraVision
to OCC's on-demand technology and the successful upgrade and expansion of OCC's
technology and service offerings. On August 1, 1999, the Company completed
previously disclosed negotiations and entered into a three-year extension
through the end of 2002 of the NBC- ANS Service Agreement, under which Ascent
provides satellite service, maintenance and support of NBC's national television
network. Management of the Company does not anticipate any significant capital
expenditures will be incurred in connection with the extension agreement.
Management continues to believe that at the end of such extension period, it is
likely that NBC will engage ANS to complete a full upgrade of the NBC
distribution network to digital technology. No assurance can provided that a
full digital upgrade will occur or that ANS will be engaged to complete the
digital upgrade on terms as favorable to the Company as the current agreement.
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However, should the sale of the Company's Sports related business not occur
and, in turn, the Merger Agreement with Liberty (see Note 7 to Notes to
Condensed Consolidated Financial Statements) be terminated, the Company will
reevaluate its overall business strategy. It is the Company's expectation that
cash flows from operations will be insufficient to cover planned capital
expenditures during 2000 and, accordingly, the Company previously 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 OCC's
strategy, including conversion of the hotel rooms acquired in the acquisition of
SpectaVision to OCC's on-demand technology and the upgrade and expansion of
OCC's technology and service offerings. In addition, the Company's future
performance would also be dependent on the operating results of the Company's
Sports-related assets, and the ability to attain significant and sustained
growth in the Company's cash flow. There can be no assurance that OCC 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. In addition,
pursuant to the Distribution Agreement, certain restrictions have been put in
place to protect the tax-free status of the Distribution.
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 the
customers who rely on its products.
The Company and its subsidiary are actively engaged, but have not yet
completed, evaluating, 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 systems 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 OCC's hotel systems. In addition, both OCC and ANS 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 operation problems for
the Company's subsidiary or its customers.
The Company and its subsidiary are currently working to resolve all
significant Year 2000 issues by December 1999. If these modifications are not
completed by year-end, the Company believes that manual processes, as discussed
under Contingency Plans below, can be utilized to mitigate any operating losses
until such modifications are fully implemented. On an overall basis, if
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all 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 modification to become Year
-----
2000 compliant is not expected to be material to the Company's consolidated
financial position. The total cost to address the Year 2000 issues from
continuing operations is estimated to be less than $1.2 million. The total
amount expended on Year 2000 compliance through September 30, 1999 from
continuing operations was approximately $700,000. 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 systems 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 respective 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 subsidiary rely will be corrected in a timely manner, that
manual processing of OCC's 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 subsidiary.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk. The Company's exposure to market risk for changes in
- ------------------
interest rates relates primarily to the Company's investment portfolio,
including restricted investments and long-term debt obligations. The Company
does not use derivative financial instruments in its investment portfolio. The
Company places its investments with high credit quality issuers and, by policy,
and debt restrictions limit the amount of credit exposure to any one issuer. As
stated in its policy, the Company is averse to principal loss and ensures the
safety and preservation of its invested funds by limiting default risk, market
risk, and reinvestment risk.
The Company mitigates default risk by investing in only the safest and
highest credit quality securities. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity. At September 30, 1999, the weighted average interest rate on the
Company's cash and cash equivalent balance of $72.8 million was approximately
5.4% consisting of fixed rate short-term investments. In addition, the
Company's weighted average interest rate on its restricted cash investments held
in trust (part of discontinued operations, see Note 3 of Notes to the Condensed
Consolidated Financial Statements) at September 30, 1999 of $56.0 million was
approximately 5.34%. These restricted investments are primarily variable rate
money market instruments.
The Company has cash flow exposure due to rate changes for portions of its
debt obligations. Specifically, no cash flow exposure exists on the Company's
Arena Notes and Senior Secured Discount Notes as they represent fixed-rate
obligations. (See Note 6 of the 1998 Consolidated Financial Statements).
However, revolving loans extended under the OCC credit facility (see Note 6 of
the 1998 Consolidated Financial Statements) generally bear an interest rate that
is variable and based on the London Interbank Offering Rate ("LIBOR") and on
certain
18
<PAGE>
operating ratios of the Company. At September 30, 1999, OCC had $177.0 million
outstanding under the OCC credit facility and the weighted average interest rate
on the OCC credit facility was 6.2%. Assuming no increase or decrease in the
amount outstanding, a hypothetical immediate 100 basis point increase (or
decrease) in interest rates would increase (or decrease) the Company's annual
interest expense and cash outflow for the remaining of three months of 1999 by
$.4 million.
Foreign Currency Risk. The Company, through OCC, transacts business in various
- ---------------------
foreign currencies, primarily in Canada, Asia and in certain European countries.
However, the Company believes the risks of foreign exchange rate fluctuations on
its present operations are not material to the Company's overall financial
condition. However, should the Company's international operations continue to
grow, the Company will consider using foreign currency contracts, swap
arrangements, or other financial instruments designed to limit exposure to
foreign exchange rate fluctuations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
For a discussion of additional litigation in which the Company is
involved, see Note 5 of Notes to the Condensed Unaudited Consolidated
Financial Statements. The Company and its subsidiary 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 First Amendment to the Sports Sale Agreement dated
October 14, 1999 (Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed on November 1, 1999).
No. 10.2 Second Amendment to the Sports Sale Agreement dated
October 29, 1999. (Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed on November 1, 1999).
No. 10.3 Third Amendment to the Sports Sale Agreement dated
November 10, 1999. (Incorporated by reference to Exhibit 10.1 to
Current Report on Form 8-K filed on November 12, 1999).
No. 27.0 Financial Data Schedule
19
<PAGE>
(B) Reports on Form 8-K:
--------------------
1.) The Registrant filed with the Commission on November 1,
1999 a Form 8-K describing that the Company had amended
the Purchase and Sale Agreement dated as of July 27, 1999
(the "Sports Sale Agreement") (the "Third Amendment") to
extended the Drop Dead Date, as defined in the Sports Sale
Agreement, from November 10, 1999 to November 15, 1999.
2.) The Registrant filed with the Commission on November 1, 1999
a Form 8-K describing the following: (i) the Company had
entered into two amendments to the Sports Sale Agreement
and, (ii) that, as a result of the second amendment to the
Sports Sale Agreement, that certain conditions to the
consummation of Company's previously announced Agreement and
Plan of Merger (the "Merger Agreement") with AT&T Corp.,
Ranger Acquisition Corp. and Liberty Media Corp. ("Liberty")
are incapable of being satisfied and that Liberty and the
Company have agreed to negotiate through November 30, 1999
toward an amendment to the Merger Agreement.
3.) The Registrant filed with the Commission on October 21,
1999, a Form 8-K describing the following (i) The Company
had entered into an Agreement and Plan of Merger with
Liberty, AT&T Corp. and Ranger Acquisition Corp. ("Merger
Sub") whereby Merger Sub would merge with and into the
Company with the Company surviving as a wholly owned
subsidiary of AT&T and, (ii) that consummation of the Merger
Agreement is subject to the approval of the Company's
shareholder's and appropriate governmental and regulatory
authorities.
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 thereunto duly authorized.
Ascent Entertainment Group, Inc.
- --------------------------------
By: /s/ David A. Holden
-------------------
David A. Holden
Vice President of Finance, Controller
(Principal Accounting Officer)
Date: November 15, 1999
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 72,811
<SECURITIES> 0
<RECEIVABLES> 35,030
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 212,235
<PP&E> 291,080
<DEPRECIATION> 0
<TOTAL-ASSETS> 609,093
<CURRENT-LIABILITIES> 63,690
<BONDS> 332,461
0
0
<COMMON> 297
<OTHER-SE> 137,415
<TOTAL-LIABILITY-AND-EQUITY> 609,093
<SALES> 0
<TOTAL-REVENUES> 207,743
<CGS> 0
<TOTAL-COSTS> 139,779
<OTHER-EXPENSES> 90,571
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,364
<INCOME-PRETAX> (39,469)
<INCOME-TAX> (1,024)
<INCOME-CONTINUING> (38,445)
<DISCONTINUED> (10,027)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,704)
<EPS-BASIC> (1.33)
<EPS-DILUTED> (1.33)
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