10-Q 1 d92330e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2001 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, 2001 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.) 12300 Liberty Blvd. Englewood, Colorado 80112 (Address of principal executive office) (720) 875-5400 (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 [ ] No [X(*)] The number of shares outstanding of the Registrant's Common Stock as of September 30, 2001 was 1,000 shares. REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H OF FORM 10-Q AND IS THEREFORE FILING THIS FORM 10-Q WITH THE REDUCED DISCLOSURE FORMAT (*) The Registrant filed a Form 15 with the Securities and Exchange Commission on June 8, 2000 and is no longer subject to such filing requirements. This filing is being made in accordance with the requirements of the Registrant's Indenture for its 11.875% Senior Secured Notes. PART I FINANCIAL INFORMATION Item 1. Financial Statements ASCENT ENTERTAINMENT GROUP, INC. (A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION) CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See accompanying notes to these unaudited consolidated financial statements. 2 ASCENT ENTERTAINMENT GROUP, INC. (A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION) Consolidated Statements of Operations (Unaudited)

See accompanying notes to these unaudited consolidated financial statements. 3 ASCENT ENTERTAINMENT GROUP, INC. (A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION) Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to these unaudited consolidated financial statements. 4 ASCENT ENTERTAINMENT GROUP, INC. (A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION) Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

See accompanying notes to these unaudited consolidated financial statements. 5 ASCENT ENTERTAINMENT GROUP, INC. (A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION) Notes to Consolidated Financial Statements (Unaudited) 1. GENERAL The accompanying unaudited 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 consolidated financial statements and notes thereto filed with the Commission in the Company's 2000 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 included or omitted pursuant to such regulations. The accompanying 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. 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"). The Company's discontinued operations are comprised of the results of (1) 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 sold in July 2000 (see Note 4); (2) the Company's former subsidiary, Beacon Communications, LLC ("Beacon"), in which a 90% interest was sold in January 1999 and the remainder in July 2000; and (3) the Company's former subsidiary Livewire Network Services, LLC ("LNS"), which was sold to Liberty Livewire Corporation (LiveWire), a majority-owned subsidiary of Liberty, on September 4, 2001. As of September 30, 2001, the Company, through OCC, is the leading provider (as measured by number of hotel rooms served) of in-room, on-demand video entertainment and information services to the lodging industry. On February 22, 2000, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Liberty Media Corporation ("Liberty") and Liberty AEG Acquisition, Inc. ("Merger Sub"), an indirect wholly-owned subsidiary of Liberty. Pursuant to the Merger Agreement, Merger Sub commenced a tender offer (the "Offer"), offering Ascent stockholders $15.25 in cash for each share of Ascent common stock. Liberty commenced the Offer on February 29, 2000 which expired at midnight on March 27, 2000 whereupon approximately 25.2 million shares of Ascent common stock were validly tendered and not withdrawn pursuant to the Offer. On March 28, 2000, Merger Sub accepted for payment all shares of Ascent common stock tendered, which constituted approximately 85% of the total outstanding shares of Ascent common stock. Merger Sub purchased such shares at an aggregate purchase price of approximately $385 million with funds contributed to it by Liberty from its cash on hand. Under the terms of the Merger Agreement, Merger Sub was merged with and into Ascent (the "Merger") on June 8, 2000. At the time of the Merger, Ascent became an indirect, wholly-owned subsidiary of Liberty and all outstanding shares not owned by Liberty with respect to which appraisal rights were not properly exercised were converted into the right to receive $15.25 per share in cash on the terms and conditions set forth in the Merger Agreement. Pursuant to the Merger, the charter of Merger Sub immediately prior to the Merger became the charter of the Company effective upon the Merger, each outstanding share of the Company's common stock held by Liberty or Merger Sub was canceled and each outstanding share of common stock of Merger Sub was converted into a share of Common Stock of the Company. There are 1,000 shares of Common Stock of the Company outstanding, all of which are held indirectly by Liberty. During 2000, the Company expensed approximately $8.4 million of costs associated with the Merger Agreement, primarily investment banker and legal costs, and has included these costs in general and administrative expenses during the year ended December 31, 2000. In connection with this Merger, Liberty did not push down the purchase consideration since the Company's outstanding Senior Secured Notes are publicly held. 6 3. NEW ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" which requires the use of the purchase method and eliminates the option of using the pooling-of-interests method of accounting for all business combinations. The provisions in this statement apply to all business combinations initiated after June 30, 2001, and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company does not believe the adoption of this statement will have a material impact on the Company's financial position, results of operations or cash flows. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" which requires that all intangible assets acquired, other than those acquired in a business combination, be initially recognized and measured based on the asset's fair value. In addition, the intangible asset should be amortized based upon its useful life. If the intangible asset is determined to have an indefinite useful life, it shall not be amortized until its useful life can be determined. Management has not determined the potential impact that this statement will have on the Company's financial position, results of operations or cash flows. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The statement also requires that the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for periods beginning after June 15, 2002. The Company does not believe the adoption of this statement will have a material impact on the company's financial position, results of operations or cash flows. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes prior statements that address the disposal of a segment of a business, and eliminates the exception to consolidation for subsidiaries for which control is likely to be temporary. This statement retains the prior statements fundamental provisions for the recognition and measurement of impairment of long-lived assets to be held and used, as well as the measurement of long-lived assets to be disposed of by sale. The statement is effective for fiscal years beginning after December 15, 2001. The Company does not believe the adoption of this statement will have a material impact on the Company's financial position, results of operations or cash flows. 4. DISCONTINUED OPERATIONS Beacon - On January 20, 1999, the Company sold ninety percent of the membership interests in Beacon to an investment group which included Beacon's Chairman and Chief Executive Officer. The purchase price for the 90% interest was $19 million in cash, net of certain adjustments, after which Ascent received approximately $15.9 million at closing. In July 2000, the Company exercised its option pursuant to an Option Agreement to require the investment group to purchase Ascent's remaining 10% interest in Beacon. Subsequently, on July 3, 2000, the Company received $2.1 million in cash in accordance with the terms of the Option Agreement and assigned its interest in Beacon to the investment group. The Company recognized a gain of approximately $1.7 million, net of taxes, during the third quarter of 2000 in connection with the sale of its interest in Beacon. Sports-related businesses - On April 24, 2000, the Company entered into a definitive Purchase and Sale Agreement (the "Sports Sale Agreement") to sell the Sports-related businesses to a group of entities controlled by E. Stanley Kroenke (the "Kroenke entities"). On July 6, 2000, the Company consummated the sale of its Sports-related businesses to the Kroenke entities for approximately $267.7 million in net cash proceeds. In addition, the Kroenke entities assumed approximately $136.2 million in outstanding nonrecourse Arena Note obligations. An indirect wholly owned subsidiary of Liberty retained an approximate 6.5% interest in the Sports-related businesses, with an agreed upon valuation of approximately $18.7 million. Livewire Network Services - LNS was formed on November 15, 2000 to acquire the assets of the Company's former Ascent Network Services ("ANS") division. On January 5, 2001, all of the assets used in connection with the ANS business were transferred to LNS, a wholly owned subsidiary of the Company. The Company transferred a 7 1% ownership interest in LNS to Liberty LiveWire Corporation (LiveWire), a majority-owned subsidiary of Liberty, in exchange for $300,000 in cash and the Company and LiveWire became parties to the Operating Agreement of LNS. Under the Purchase Agreement between the Company and LiveWire, the Company and LNS executed a Contribution and Assumption Agreement pursuant to which LNS assumed all liabilities, obligations and commitments of the Company relating to the ANS business, whether before or after January 5, 2001. On September 4, 2001, the Company transferred the remaining 99% ownership interest in LNS to Liberty LiveWire Corporate for $31,738,165. The excess of the cash received over the carrying amount of the LNS assets has been reflected as an increase to equity, net of related taxes, in the accompanying consolidated financial statements. Income from the Company's discontinued operations, net of taxes, is as follows (amounts in thousands): NINE MONTHS ENDED SEPTEMBER 30, 2001

NINE MONTHS ENDED SEPTEMBER 30, 2000

5. OTHER INVESTMENTS On March 30, 2001, OCC completed a $20 million investment in convertible preferred stock of STSN, Inc. ("STSN"), a high-speed broadband Internet access provider for hotels. In connection with this investment, OCC advanced $15 million in cash and converted a $5 million Convertible Promissory Note in consideration for a 9.7% equity interest in STSN. OCC previously recorded the Convertible Promissory Note as a note receivable in the December 31, 2000 consolidated financial statement. OCC uses the cost method to account for this investment. Other strategic investors in STSN include Marriott International, Inc. ("Marriott"), a hotel company and major customer of OCC, and Siemens Corporation, a German corporation which, among many other things, manufactures electronic equipment and supplies. STSN has an exclusive contract with Marriott to provide its in-room services to Marriott hotels. During the third quarter of 2001 and pursuant to a Subscription Agreement, the Company purchased 9,000 shares of common stock of Sky Global Networks, Inc. ("SNG"), a subsidiary of The News Corporation Limited ("News Corp"). As consideration for such shares, the Company delivered to SGN a note payable in the amount of $45 million (the "SNG Note"). In connection with this purchase, the Company entered into a put right agreement with SGN and News Corp. This put right agreement gives the Company the right to put the shares of SNG back to SGN for $45 million in cash in the event certain specified events have not occurred by October 31, 2001 (the "Termination Date"). The specified events did not occur by the Termination Date, and the Company has notified SGN of its intent to exercise its put right. This transaction closed on November 13, 2001. On such date, the Company repaid the SGN Note, and immediately thereafter, SGN purchased the 9,000 SGN shares from the Company for $45 million. 8 6. ACQUISITIONS On February 28, 2001, pursuant to a stock purchase agreement between OCC and Hotel Digital Network, Inc. ("DMN"), for aggregate consideration of approximately $1.7 million (which consisted primarily of the conversion of a $1.4 million promissory note and accrued interest thereon), DMN issued to OCC common stock equal to 80% of the equity interests in DMN, on a fully diluted basis, and approximately 85% of the voting securities of DMN. OCC previously recorded the promissory note as a note receivable in the December 31, 2000 consolidated financial statement. The acquisition has been accounted for using the purchase method of accounting. Accordingly, the excess purchase price over the fair market value of net tangible assets acquired was allocated to goodwill and is being amortized over five years. In addition, OCC has agreed to fund additional contributions up to $2.7 million towards future operations. The operating results of DMN are included in OCC's consolidated financial statements of operations from the date of acquisition. 7. LONG-TERM DEBT

Senior Secured Discount Notes ("Senior Notes") - As discussed in Note 6 to the Company's 2000 Consolidated Financial Statements, under the terms of the Senior Notes, to the extent that within one year of the sale of the Sports-related businesses (see Note 4), Ascent did not use the net cash proceeds for certain permitted uses under the Senior Note Indenture, Ascent was required to use all remaining proceeds to offer to repurchase the Senior Notes at 100% of their accreted value. Pursuant to the foregoing provision of the Senior Notes and effective July 30, 2001, the Company commenced an Offer to Purchase up to $124 million in accreted value of the Senior Notes. Under the Offer to Purchase, registered holders of the Senior Notes had the right to require the Company to repurchase the Senior Notes on a pro rata basis up to $124 million in accreted value for a cash purchase price equal to 100% of the accreted value thereof on August 28, 2001. The purchase price was $861.64 per $1,000 principal amount at maturity of the Senior Notes. The Offer to Purchase was not conditioned on any minimum principal amount of Senior Notes being tendered. The Offer to Purchase expired on August 28, 2001, and no Senior Notes were tendered. OCC Credit Facilities - On March 27, 2001, OCC entered into an amendment to the Revolving Credit Facility. As amended, the Revolving Credit Facility provides for maximum commitments of up to $320 million, subject to OCC's compliance with certain financial covenants and other customary conditions. OCC entered into a second amendment on August 29, 2001, when the total commitments were further reduced from $320 million to $300 million. The Revolving Credit Facility matures in July 2005 and, subject to certain conditions, can be renewed for two additional years. Borrowings under the Revolving Credit Facility bear interest at the London Interbank Offering Rate plus a spread ranging from 1.10% to 2.25% depending on certain financial ratios of the Company. In addition, OCC must pay a facility fee ranging from 0.15% to 0.50% per annum on the daily amount of the outstanding commitments under the Revolving Credit Facility, payable in arrears and at maturity. The Revolving Credit Facility contains customary covenants, most notably the inclusion of restrictions on OCC's ability to pay dividends or make other distributions, as well as maintaining minimum leverage and interest coverage ratios. In addition to the limitations on borrowing contained in the Revolving Credit Facility, certain covenants in the public indebtedness of Ascent effectively prevent OCC's indebtedness under its Revolving Credit Facility from exceeding an aggregate of $275 million so long as such public indebtedness of Ascent is outstanding. OCC was in compliance with its bank covenants as of September 30, 2001. 9 8. CONTINGENCIES In September 1998, On Command Video Corporation ("OCV"), a subsidiary of OCC, filed suit against Maginet Corporation ("Maginet"), in the Superior State Court of California, County of Santa Clara Case No. CV776723, for past due royalties and for judicial declaration that the license agreement between OCV and Maginet was terminated by Maginet's material breach. Maginet counter-claimed against OCV, alleging that OCV breached the license agreement, and alleging various torts by OCV in its relationship with Maginet. On January 4, 2001, OCC signed a settlement agreement with Maginet. In exchange for the (i) contribution of 100% of OCC's equity interest in various Asia-Pacific subsidiaries, (ii) payment of $1.0 million in cash, and (iii) issuance of 275,000 shares of OCC's common stock, OCC received a 7.5% minority interest in Maginet. OCC also agreed that Maginet will have the option during the period of 15 days beginning on the second anniversary of the execution of the settlement agreement to cause OCC to repurchase all, but not less than all, of the shares of OCC's common stock issued to Maginet at a price per share of $15.00. This obligation will terminate if OCC's common stock closes at or above $15.00 per share on any ten consecutive trading days prior to the second anniversary of the execution of the settlement agreement and the shares of OCC's common stock held by Maginet are freely tradable by Maginet during such time, either because a registration statement covering those shares is effective or the shares are saleable pursuant to an exemption under the Securities Act. Due to the existence of the foregoing purchase price contingency, OCC has recorded the shares issued to Maginet at the specified amount of $15.00 per share. OCC estimated the fair value of its 7.5% minority interest at approximately $5.3 million, which resulted in a charge of approximately $4.8 million recorded in the fourth quarter of 2000, and an additional charge of $3.7 million recorded in the first quarter of 2001. This additional charge was the result of a change in the estimate of the amount of inter-company debt to be forgiven in connection with the settlement. The settlement agreement was finalized on March 1, 2001. As a result the results of operations of the Asia-Pacific subsidiaries have been excluded from OCC's consolidated operating results since February 28, 2001. The Company is a defendant, and may be a potential defendant, 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. 9. STOCKHOLDERS' EQUITY Series B and C Preferred Stock Pursuant to Preferred Stock Agreements dated March 5, 2001 and April 23, 2001 between the Company and OCC, OCC sold 15,000 newly issued shares of its Series B Cumulative Redeemable Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), and 10,000 shares of its Series C Cumulative Redeemable Preferred Stock, par value $.01 per share (The "Series C Preferred Stock"), (collectively, the "Redeemable Preferred Stock"), for cash consideration of $15 million and $10 million, respectively. The liquidation preference (the "Liquidation Preference") of each share of the Redeemable Preferred Stock as of any date of determination is equal to the sum of (a) the stated value per share of $1,000, plus (b) an amount equal to all dividends accrued on such shares that have been added to and remain a part of the Liquidation Preference as of such date, plus (c) for purposes of the liquidation and redemption provisions of the Redeemable Preferred Stock, an amount equal to all unpaid dividends accrued on the sum of the amounts specified in clauses (a) and (b) above during the period from and including the immediately preceding dividend payment date to but excluding the date in question. The holders of Redeemable Preferred Stock are entitled to receive cumulative dividends, when and as declared by OCC, in preference to dividends on junior securities, including the common stock and the Series A Preferred Stock, and ratably on dividends to parity securities. Dividends accrue on the Series B Preferred Stock on a daily basis at the rate of 8.5% per annum of the Liquidation Preference from and including March 5, 2001 to but excluding April 15, 2001 and at the rate of 12% per annum of the Liquidation Preference thereafter. Dividends accrue on the Series C Preferred Stock on a daily-basis at the rate of 12% per annum of the Liquidation Preference. Accrued dividends on the Series B Preferred Stock are payable monthly, in cash. Accrued dividends on the Series C 10 Preferred Stock are payable quarterly, in cash. Dividends not paid on any dividend payment date are added to the Liquidation Preference on such date and remain a part of the Liquidation Preference until such dividends are paid. Upon any liquidation, dissolution or winding up of OCC, the holders of Redeemable Preferred Stock are entitled to receive, from the assets of OCC available for distribution to stockholders, an amount in cash per share equal to the Liquidation Preference of a share of Redeemable Preferred Stock, after payment is made on any senior securities and before any distribution or payment is made on any junior securities, which payment will be made ratably among the holders of Redeemable Preferred Stock and the holders of any parity securities. Shares of Redeemable Preferred Stock are redeemable at the option of OCC at any time after the issuance date at a redemption price per share payable in cash equal to the Liquidation Preference of such share on the redemption date. Any redemptions by OCC are required to be made pro rata if less than all shares of Redeemable Preferred Stock are to be redeemed. Series D Preferred Stock On June 29, 2001, pursuant to a Preferred Stock Agreement between the Company and OCC (the "Series D Purchase Agreement"), OCC authorized for issuance 60,000 shares of its Cumulative Convertible Redeemable Preferred Stock, Series D, par value $.01 per share (the "Series D Preferred Stock") to Ascent in consideration of $60 million in cash. The Series D Purchase Agreement states that the shares are issuable in three sub-series, Series D-1, Series D-2, and Series D-3, each with an aggregate authorized amount of $20 million in stated value. The Series D-1 shares were issued on June 29, 2001, the Series D-2 shares were issued after August 2, 2001, and the Series D-3 shares were issued on October 18, 2001. Shares of Series D Preferred Stock are convertible on or after December 31, 2002 at the option of the holder, into OCC's common stock at a conversion price of $7.55 per share of common stock. The liquidation preference (the "Series D Liquidation Preference") of each share of Series D Preferred Stock as of any date of determination is equal to the sum of (a) the stated value per share of $1,000, plus (b) an amount equal to all dividends accrued on such shares that have been added to and remain a part of the Series C Liquidation Preference as of such date, plus (c) for purposes of the liquidation and redemption provisions of the Series D Preferred Stock, an amount equal to all unpaid dividends accrued on the sum of the amounts specified in clauses (a) and (b) above during the period from and including the immediately preceding dividend payment date to but excluding the date in question. The holders of the Series D Preferred Stock are entitled to receive cumulative dividends, when and as declared by the Company, in preference to dividends on junior securities, including the common stock and the Series A Preferred Stock and ratably to dividends to parity securities. Dividends accrue on each sub-series of the Series D Preferred Stock on a daily basis at the rate of 8% per annum of the Series D Liquidation Preference from and including the applicable issue date of such shares (the "Issue Date"). Accrued dividends are payable in cash quarterly on the last day of March, June, September and December, commencing, with respect to each outstanding share of a sub-series of Series D Preferred Stock, on the first date following the Issue Date of such share. Dividends not paid on any dividend payment date are added to the Series D Liquidation Preference until such dividends are paid. Upon any liquidation, dissolution or winding up of OCC, the holders of shares of Series D Preferred Stock are entitled to receive, from the assets of OCC available for distribution to stockholders, an amount in cash per share equal to the Series D Liquidation Preference of a share of Series D Preferred Stock, after payment is made on any senior securities and before any distribution or payment is made on any junior securities, which payment will be made ratably among the holders of Series D Preferred Stock and the holders of any parity securities. 11 Shares of the Series D Preferred Stock are redeemable, at the option of OCC, between June 29, 2001 and December 31, 2002 at a redemption price per share payable in cash equal to the Series D Liquidation Preference. The Series D Preferred Stock is not redeemable during the period from December 31, 2002 to June 30, 2005. Thereafter, the shares are redeemable at the Series D Liquidation Preference plus the percentage set forth opposite the applicable redemption date.

10. SIGNIFICANT CUSTOMER On March 21, 2001, OCC and Marriott entered into a definitive agreement pursuant to which OCC will distribute its interactive television platform in approximately 165,000 U.S. and Canadian hotel rooms managed by Marriott and an additional approximately 135,000 U.S. and Canadian hotel rooms franchised by Marriott. 11. RELOCATION AND RESTRUCTURING COSTS OCC is in the process of relocating its headquarter operations from San Jose, California, to Denver, Colorado. It is estimated that most sales, marketing, field support, accounting, finance, and executive management will be transitioned to Denver by December 2001. During the three months and nine months ended September 30, 2001, $1.8 million and $13.3 million of relocation expenses have been recognized and recorded. The relocation expenses include severance, stay bonuses, search fees, contractors, travel and redundant operations expenses. On May 21, 2001, the compensation committee of OCC's board of directors approved a restructuring plan (the "Plan"), which effected approximately 50 employees. Severance costs associated with the Plan aggregated $1.7 million and were recognized during the nine months ended September 30, 2001. Annual savings of salary and employee related costs from the restructuring are estimated to be approximately $5.4 million. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations GENERAL: Certain of the statements in this report are forward-looking and relate to anticipated future events and operating results. Statements which look forward in time are based on management's current expectations and assumptions, which may be affected by subsequent developments and business conditions, and necessarily involve risks and uncertainties. Therefore, there can be no assurance that actual future results will not differ materially from anticipated results. Although the Company has attempted to identify some of the important factors that may cause actual results to differ materially from those anticipated, those factors should not be viewed as the only factors which may affect future operating results. Accordingly, the following should be read in conjunction with the Consolidated Financial Statements (unaudited) included in this filing, and with the Consolidated Financial Statements, notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2000 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. The Multimedia Distribution segment revenues are influenced principally by hotel occupancy rates and the "buy rate" or percentage of occupied rooms at hotels that buy movies or other services at the property. Higher revenues are generally realized during the summer months and lower revenues realized during the winter months due to business and vacation travel patterns which impact the lodging industry's occupancy rates. Buy rates generally 12 reflect the hotel's guest mix profile, the popularity of the motion pictures or services available at the hotel and the guests' other entertainment alternatives. ANALYSIS OF OPERATIONS The Company's continuing operations are comprised of the results of On Command Corporation and the parent company, Ascent Entertainment Group, Inc. The Company's discontinued operations are comprised of the results of (1) 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 sold in July 2000 (see Note 4); (2) the Company's former subsidiary, Beacon Communications, LLC ("Beacon"), in which a 90% interest was sold in January 1999 and the remainder in July 2000; and (3) the Company's former subsidiary Livewire Network Services, LLC ("LNS"), which was sold to Liberty Livewire Corporation (LiveWire), a majority-owned subsidiary of Liberty, on September 4, 2001. Continuing Operations OCC revenues decreased $10.5 million and $15.7 million during the three and nine months ended September 30, 2001 compared to the corresponding periods in 2000. These decreases are a result of a reduction in total rooms served by OCC and an overall decrease in occupancy rates in the hotel industry, offset by an increase in room revenue generated primarily from OCC's @Hotel TV internet and short video products. Total rooms served decreased from approximately 975,000 rooms as of September 30, 2000 to approximately 930,000 rooms as of September 30, 2001. The decrease is the result of the loss of approximately 35,000 rooms, related to OCC's Asia-Pacific operations, as part of the settlement agreement with Maginet (see Note 8). Cost of services decreased $6.0 million during the three months ended September 30, 2001 and increased $8.5 million during the nine months ended September 30, 2001 compared to the corresponding periods in 2000. The increase during the nine months ended September 30, 2001 is due primarily to costs of $11.6 million incurred for restructuring costs and the relocation of OCC from San Jose, California to Denver, Colorado. The decrease during the three and nine month periods ended September 30, 2001 is due to a decrease in direct costs associated with the revenues at OCC. General and administrative expenses, which include only those costs incurred by the parent company decreased $0.8 million and $10.3 million during the three and nine months ended September 30, 2001 as compared to the corresponding periods in 2000. The decrease is due primarily to the costs relating to the Merger Agreement with Liberty. Specifically, in the first nine months of 2000, $8.5 million of expenses were recognized in connection with the Company's Merger Agreement with Liberty, primarily investment banker and legal costs, and an additional $3.0 million of costs were accrued in conjunction with the contemplated settlement of the Shareholder lawsuits. Also, in the first nine months of 2000, $3.6 million was incurred for the Company's stock appreciation rights due to increases in the Company's stock price. These decreases are offset by expense incurred during the first nine months of 2001 when the Company purchased the outstanding shares of OCC owned by a former executive of OCC for $7 million more than the market value at the date of purchase. In addition, expenses have also decreased in 2001 due to reductions in salaries and employee benefit costs at the parent company from a reduction in employees, reduced legal and professional service costs and various other cost containment efforts. Interest and other income decreased $2.6 million and $1.5 million during the three and nine months ended September 30, 2001 as compared to the corresponding period in 2000. The decrease during the three months ended September 30, 2001 is due to a decrease in interest income of $2.3 million from interest earned on the cash proceeds received from the sale of the Sports-related businesses. The decrease during the nine months ended September 30, 2001 is due to the impairment and settlement loss recognized on OCC's investment in MagiNet of $3.8 million in 2001 and the non-recurrence of a $1.8 million gain that the Company recognized from the sale of investment securities during the nine month period ended September 30, 2000 offset by an increase in interest income of $3.6 million during the nine month period ended September 30, 2001 from interest earned on the cash proceeds received from the sale of the Sports-related businesses. 13 Interest expense increased $0.2 million and $5.2 million during the three and nine months ended September 30, 2001 as compared to the corresponding periods during 2001. This increase is attributable to a decrease in the weighted average interest rate charged on such borrowings offset by an increase attributable to additional borrowing costs at Ascent, primarily those costs related to the interest accretion on the Company's Senior Notes, and additional borrowings incurred at OCC during 2001. The Company recorded a decrease in income tax benefit from continuing operations of $603,000 and an increase in income tax benefit of $544,000 during the three and nine months ended September 30, 2001 as compared to the corresponding periods in 2000, The Company's effective tax rate decreased due to the Company's ability to use tax benefits from its operating loss carryforwards when the Company became a member of Liberty's consolidated tax group. Prior to the Merger, the Company was unable to recognize 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 carryforwards, prior to their expiration. Minority interest in loss of subsidiary reflects the losses attributable to the minority interest in the Company's 62.9% owned subsidiary, OCC. Discontinued Operations The $0.3 million and $0.4 million loss form discontinued operations, net of taxes, during the three and nine months ended September 30, 2001 reflects the loss from LNS. The $1.7 million and $10.6 million income from discontinued operations, net of taxes, during the three and nine months ended September 30, 2000 reflects the combined income from the Sports-related businesses and LNS. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents decreased by $57.5 million since December 31, 2000 to $252.4 million at September 30, 2001. The primary sources of cash during the first nine months of 2001 were net bank borrowings at OCC of $27.5 million and proceeds of $31.7 from the sale of LNS. Cash was expended for continuing operating activities of $27.5 million, OCC's $15.0 million investment in the convertible preferred stock of STSN, and the purchase of property and equipment at OCC. Specifically $78.1 million of capital expenditures were incurred at OCC to support continued hotel installations with the OCX and OCV systems, conversions of SpectraVision systems, increased inventory and other fixed asset purchases. Long-term debt totaled $470.2 million at September 30, 2001 as compared to $426.4 million at December 31, 2000. The increase in long-term debt is attributable to additional net bank borrowings of $27.5 million at OCC and the accretion of interest on the Company's Senior Notes. The Company's cash requirements during the remainder of 2001 are expected to include (i) the continuing conversion and installation by OCC of on-demand in-room video entertainment systems and internal fixed asset purchases, (ii) funding the operating requirements of Ascent and OCC, including additional OCC relocation costs, (iii) the payment of interest under the OCC Credit Facility, as amended, and (iv) funding of additional strategic investments, if any, made by OCC. At September 30, 2001, OCC had $274.6 million outstanding under the OCC Credit Facility. OCC's ability to draw additional funds under this facility is limited by the total amount of borrowing permitted by the OCC Credit Facility and certain financial covenants contained in that facility. Subject to the discussion below, OCC could obtain an additional $25.4 million in long term financing under the OCC Credit Facility. In addition to the limitations on borrowing contained in the OCC Credit Facility, certain covenants in the Company's Senior Notes effectively prevent OCC's total indebtedness from exceeding an aggregate of $275.0 million so long as such notes are outstanding. Based upon OCC's current projections of its sources and uses of cash, OCC anticipates it will use all of the remaining availability under the revolving credit facility and the proceeds from the issuance of its Series D Preferred Stock (see Note 9) by February 2002. Accordingly, it will be necessary for OCC to raise incremental capital through additional debt or equity financing in order to satisfy its operations and capital expenditures. However, 14 there can be no assurance that OCC will be able to secure such additional financing on terms acceptable to OCC, or if available, that the proceeds from such financing would be sufficient to enable OCC to fund all of its requirements. In addition, while the Company's public indebtedness is outstanding, OCC will not be able to raise additional debt financing. Pursuant to the terms of the Senior Notes (see Note 6 of the Company's 2000 Consolidated Financial Statements), to the extent that within one year of the sale of the Sports-related businesses, Ascent did not use the net cash proceeds for certain permitted uses under the Senior Note Indenture including further equity investments in OCC, Ascent was required to use all remaining proceeds to offer to repurchase the Senior Notes at 100% of their accreted value. Pursuant to the foregoing provision of the Senior Notes and effective July 30, 2001, the Company commenced an Offer to Purchase up to $124 million in accreted value of the Senior Notes. Under the Offer to Purchase, registered holders of the Senior Notes had the right to require the Company to repurchase the Senior Notes on a pro rata basis up to $124 million in accreted value for a cash purchase price equal to 100% of the accreted value thereof on August 28, 2001. The Offer to Purchase expired on August 28, 2001, and no Senior Notes were tendered. Management of the Company is exploring additional alternatives with respect to the repayment of the Senior Notes. However, the Company's cash and cash equivalents should be adequate to satisfy all of the Company's obligations under the Senior Notes. Management of the Company continues to focus its efforts on the operations of OCC and OCC's strategies to successfully upgrade and expand OCC's technology and service offerings and to convert hotel rooms to OCC's OCX system. INFLATION Inflation has not significantly impacted the Company's financial position or operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INTEREST RATE RISK. The Company's exposure to market risk for changes in interest rates relate 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, limits the amount of credit exposure to any one issuer. As stated in its policy, the Company is averse to principal loss and attempts to ensure the safety and preservation of its invested funds by limiting default risk and market risk. The Company mitigates default risk by investing in only the safest and highest credit quality securities. The portfolio includes only short-term investment securities with active secondary or resale markets to ensure portfolio liquidity. At September 30, 2001, the weighted average interest rate on the Company's cash and cash equivalent balance of $252.4 million was 3.0% consisting of fixed rate short-term investments. The Company does have exposure to interest rate changes for portions of its debt obligations. No cash flow exposure exists on the Company's Senior Notes as they represent fixed-rate obligations. (See Note 5). However, revolving loans extended under the OCC Credit Facility generally bear an interest rate that is variable and based on the London Interbank Offering Rate ("LIBOR") and on certain operating ratios at OCC. At September 30, 2001, OCC had $274.6 million outstanding under the OCC Revolving Credit Facility, with a weighted average interest rate of approximately 5.35%. Assuming no increase or decrease in the amount outstanding, a hypothetical immediate 100 basis point increase (or decrease) in interest rates would have increased (or decreased) the Company's annual interest expense and cash outflow by $2.7 million. FOREIGN CURRENCY RISK. The Company, through OCC, transacts business in various foreign currencies, primarily in Canada, Asia and in certain European countries. 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. 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Change in Securities Omitted pursuant to General Instruction H of Form 10-Q. Item 3. Defaults Upon Senior Securities Omitted pursuant to General Instruction H of Form 10-Q. Item 4. Submission of Matters to a Vote of Security Holders Omitted pursuant to General Instruction H of Form 10-Q. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (A) Exhibit None (B) Reports on Form 8-K: None 16 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. Date: November 19, 2001 By: /s/ Robert R. Bennett ------------------------------------- Robert R. Bennett President and Chief Executive Officer 17

ASCENT ENTERTAINMENT GROUP INC 10-Q