<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 THE PERIOD ENDED JUNE 30, 1996
Commission File Number 0-22334
LODGENET ENTERTAINMENT CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 46-0371161
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
808 WEST AVENUE NORTH, SIOUX FALLS, SOUTH DAKOTA 57104
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (ZIP code)
(605) 330-1330
-------------------------------
(Registrant's telephone number,
including area code)
(not applicable)
-------------------------------------------------
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
At August 2, 1996, there were 11,039,733 shares outstanding of the
Registrant's common stock, $.01 par value.
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
Form 10-Q
Index
Page
No.
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets as of December 31, 1995
and June 30, 1996 (unaudited)) 3
Consolidated Statements of Operations (unaudited) for
the Three Months Ended June 30, 1995 and 1996. 4
Consolidated Statements of Operations (unaudited) for
the Six Months Ended June 30, 1995 and 1996. 5
Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended June 30, 1995 and 1996. 6
Notes to Consolidated Financial Statements. 7
Item 2 - Management's Discussion and Analysis of the Results
of Operations. 8
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings. 19
Item 2 - Changes in Securities. 19
Item 3 - Defaults Upon Senior Securities. 19
Item 4 - Submission of Matters to a Vote of Security Holders. 19
Item 5 - Other Information. 19
Item 6 - Exhibits and Reports on Form 8-K. 19
SIGNATURES 20
- --------------------
As used herein (unless the context otherwise requires) "LodgeNet", "the
Company" and/or "the Registrant" means LodgeNet Entertainment Corporation and
its wholly-owned subsidiaries.
Page 2
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1995 1996
------------ -----------
Assets (unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $2,252 $10,984
Accounts receivable, net of allowance for doubtful accounts 11,355 15,231
Prepaid expenses and other 1,462 2,171
------------ ----------
Total current assets 15,069 28,386
------------ ----------
Property and equipment:
Land, building and equipment 8,976 12,474
Free-to-guest equipment 5,068 5,088
Guest Pay systems:
Installed 119,354 149,135
System components 13,468 20,036
Software costs 4,078 5,478
------------ ----------
Total property and equipment 150,944 192,211
Less - accumulated depreciation and amortization (42,838) (55,443)
------------ ----------
Property and equipment, net 108,106 136,768
------------ ----------
Debt issuance costs, net of accumulated amortization 1,537 2,457
------------ ----------
$124,712 $167,611
------------ ----------
------------ ----------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $15,222 $17,233
Current maturities of long-term debt 4,254 5,182
Accrued expenses 3,434 4,256
------------ ----------
Total current liabilities 22,910 26,671
------------ ----------
Deferred revenue 1,579 1,663
------------ ----------
Long-term debt 57,497 58,147
------------ ----------
Stockholders' equity:
Common stock, $.01 par value, 20 million shares authorized;
7,352,113 and 11,039,733 shares outstanding at December 31,
1995 and June 30, 1996, respectively 74 110
Additional paid-in capital 71,234 115,869
Accumulated deficit (28,582) (34,849)
------------ ----------
Total stockholders' equity 42,726 81,130
------------ ----------
$124,712 $167,611
------------ ----------
------------ ----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
Page 3
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
Three Months Ended
June 30,
-----------------------
1995 1996
-----------------------
Revenues:
Guest Pay $11,701 $19,979
Free-to-guest 2,002 2,142
Other 878 1,081
---------- ----------
Total revenues 14,581 23,202
---------- ----------
Direct costs:
Guest Pay 4,318 7,944
Free-to-guest 1,531 1,654
Other 709 824
---------- ----------
Total direct costs 6,558 10,422
---------- ----------
Gross profit 8,023 12,780
---------- ----------
Operating expenses:
Guest Pay operations 2,357 3,575
Selling and marketing 533 855
General and administrative 1,471 2,508
Depreciation and amortization 4,198 7,157
---------- ----------
Total operating expenses 8,559 14,095
---------- ----------
Operating loss (536) (1,315)
Interest expense 907 2,078
---------- ----------
Loss before income taxes (1,443) (3,393)
Provision for income taxes -- 2
---------- ----------
Net loss $(1,443) $(3,395)
---------- ----------
---------- ----------
Per common share:
Net loss attributable to common stock $(0.19) $(0.38)
---------- ----------
---------- ----------
Weighted average shares outstanding 7,417,860 8,855,842
---------- ----------
---------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
Six Months Ended
June 30,
-------------------------
1995 1996
----------- -----------
Revenues:
Guest Pay $22,201 $37,561
Free-to-guest 3,995 4,287
Other 1,777 1,722
----------- -----------
Total revenues 27,973 43,570
----------- -----------
Direct costs:
Guest Pay 8,142 14,783
Free-to-guest 3,075 3,338
Other 1,511 1,415
----------- -----------
Total direct costs 12,728 19,536
----------- -----------
Gross profit 15,245 24,034
----------- -----------
Operating expenses:
Guest Pay operations 4,570 6,738
Selling and marketing 1,044 1,597
General and administrative 2,856 4,615
Depreciation and amortization 8,056 13,330
----------- -----------
Total operating expenses 16,526 26,280
----------- -----------
Operating loss (1,281) (2,246)
Interest expense 1,642 4,000
----------- -----------
Loss before income taxes (2,923) (6,246)
Provision for income taxes -- 22
----------- -----------
Net loss $(2,923) $(6,268)
----------- -----------
----------- -----------
Per common share:
Net loss attributable to common stock $(0.40) $(0.77)
----------- -----------
----------- -----------
Weighted average shares outstanding 7,365,590 8,131,281
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1995 1996
--------- ---------
Operating activities:
<S> <C> <C>
Net loss $(2,923) $(6,268)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 8,056 13,330
Change in operating assets and liabilities:
Accounts receivable (733) (3,876)
Prepaid expenses and other (448) (709)
Accounts payable 2,076 2,011
Accrued expenses and deferred revenue (253) 1,882
--------- ---------
Net cash provided by operating activities 5,775 6,370
--------- ---------
Investing activities:
Property and equipment additions (19,961) (41,743)
--------- ---------
Net cash used for investing activities (19,961) (41,743)
--------- ---------
Financing activities:
Proceeds from long-term debt 5,342 650
Debt issuance costs (498) (1,169)
Repayments of long-term debt (36) (48)
Borrowings under revolving credit facility 6,000 25,858
Repayments of revolving credit facility (25,858)
Proceeds from issuance of common stock 44,635
Stock option activity 32 36
--------- ---------
Net cash provided by financing activities 10,840 44,104
--------- ---------
Effect of exchange rates on cash (53) 1
--------- ---------
Increase (decrease) in cash and cash equivalents (3,399) 8,732
Cash and cash equivalents at beginning of period 4,302 2,252
Cash and cash equivalents at end of period $903 $10,984
--------- ---------
--------- ---------
Supplemental cash flow information:
Cash paid for interest $1,492 $3,464
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying consolidated financial statements as of June 30, 1996 and
for the three and six month periods ended June 30, 1995 and 1996, have been
prepared by LodgeNet Entertainment Corporation (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "Commission"). The information furnished in the accompanying consolidated
financial statements reflects all adjustments, consisting only of normal
recurring adjustments, which, in the opinion of management, are necessary for a
fair presentation of such financial statements.
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 the rules and regulations
of the Commission. Although the Company believes that the disclosures are
adequate to make the information presented herein not misleading, it is
recommended that these unaudited consolidated financial statements be read in
conjunction with the more detailed information contained in the Company's Annual
Report on Form 10-K for 1995, as filed with the Commission.
The consolidated financial statements include the accounts of LodgeNet
Entertainment Corporation and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.
Note 2 - Net Loss Per Common Share
The net loss per common share was computed using the weighted average
number of shares outstanding and, where applicable, outstanding warrants and
options.
Note 3 - Issuance of Common Stock
On May 23, 1996, the Company sold 3,200,000 new shares of common stock at
$13.00 per share in a public offering. On June 10, 1996, the Company sold an
additional 480,000 new shares of common stock, representing the underwriters'
exercise of their over-allotment option in accordance with the underwriting
agreement. Net proceeds to the Company from these issuances, after deducting
underwriters' commissions and other offering expenses, were approximately $44.6
million. Such proceeds were used to repay borrowings under the Company's
revolving credit facility, approximately $25.9 million, and to provide working
capital for the Company's expansion of its lodging and residential businesses.
Page 7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-
LOOKING STATEMENTS. THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) INCLUDED ELSEWHERE HEREIN, AND
WITH THE CONSOLIDATED FINANCIAL STATEMENTS, NOTES THERETO AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTAINED THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR 1995, AS FILED WITH THE
COMMISSION.
OVERVIEW
GUEST PAY SERVICES
The growth that the Company has experienced has principally resulted from
its rapid expansion of guest pay-per-view services, which the Company began
installing in 1986. In May 1992, the Company introduced and began installing
its on-demand Guest Pay service. It has been the Company's experience that
rooms featuring the "on-demand" Guest Pay service generate significantly more
revenue and gross profit per room than comparable rooms having only the
scheduled format.
The Company's Guest Pay revenues depend on a number of factors, including
the number of rooms equipped with the Company's systems, Guest Pay buy rates,
hotel occupancy rates, the popularity, selection and pricing of the Company's
program offerings and the length of time programming is available to the Company
prior to its release to the home video and cable television markets. The
primary costs of providing Guest Pay services are (i) license fees paid to
studios for non-exclusive distribution rights to recently-released major motion
pictures, generally ranging from 35% to 50% of gross revenues, (ii) nominal
one-time license fees paid for independent films, which are duplicated by the
Company for distribution to its operating sites, (iii) license fees for video
games and other services and (iv) the commission retained by the hotel,
generally 10% to 15% of gross revenues, depending on the services provided and
other factors. Guest Pay operating expenses include costs of system maintenance
and support, in-room marketing, video tape duplication and distribution, data
retrieval, insurance and personal property taxes.
The Company also provides video games and interactive multimedia
entertainment and information services through its Guest Pay systems. Services
include folio review, video check-out, in-room printers and guest satisfaction
surveys. In 1993 the Company entered into a seven-year non-exclusive license
agreement with Nintendo of America to provide hotels with a network-based Super
Nintendo-Registered Trademark- video game playing system.
FREE-TO-GUEST SERVICES
In addition to Guest Pay services, the Company provides cable television
programming for which the hotel, rather than its guests, pays the charges.
Free-to-guest services include the satellite delivery of various programming
channels through a satellite earth station, which generally is owned or leased
by the hotel. For free-to-guest services the hotel pays the Company a fixed
monthly charge per room for each programming channel provided. Such monthly
charges range generally from $2.75 to $3.50 per room per month for premium
channels and from $0.15 to $0.85 per room per month for non-premium channels.
The Company obtains its free-to-guest programming pursuant to multi-year
agreements and pays a fixed monthly fee per room, which ranges generally from
75% to 80% of revenues, depending on incentive programs in effect from time to
time from the programming networks.
RESIDENTIAL SERVICES
In February 1996, the Company entered into an exclusive contract with GE
ResCom, a unit of General Electric Corporation, under which the Company will
design, install and operate interactive cable television systems in large,
multi-family residential complexes throughout the United States. This new
business, which will be conducted by ResNet Communications, Inc., a wholly-owned
subsidiary of the Company, is expected to have financial and technological
requirements similar to those of the Company's lodging industry operations.
The operations of ResNet Communications, Inc. did not have a material effect on
the consolidated results of the Company during the quarter ended June 30, 1996.
Page 8
<PAGE>
INSTALLED ROOM BASE
During the three months ended June 30, 1996, the Company installed 35,407
new Guest Pay rooms, equipped 43,270 rooms with its Nintendo game system, and
installed 4,155 free-to-guest rooms. From June 30, 1995 through June 30, 1996,
the Company has installed 116,409 new Guest Pay rooms, equipped 131,517 rooms
with its Nintendo game system, and installed 31,068 free-to-guest rooms;
representing increases of 53.1%, 117.3% and 13.2%, respectively. The Company's
base of installed rooms was comprised as follows at June 30:
<TABLE>
<CAPTION>
1996 1995
------------------- ---------------------
Rooms % Rooms %
-------- ------- ------- -------
Guest Pay rooms:
<S> <C> <C> <C> <C>
Scheduled 51,521 15.4% 61,625 28.1%
On-demand 284,102 84.6% 157,589 71.9%
-------- ------- ------- -------
335,623 100.0% 219,214 100.0%
-------- ------- ------- -------
-------- ------- ------- -------
Nintendo game system rooms 243,658 112,141
-------- -------
-------- -------
Free-to-guest rooms 266,150 235,082
-------- -------
-------- -------
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
REVENUE ANALYSIS
The Company's total revenue for the second quarter of 1996 increased 59.1%,
or $8.6 million, in comparison to the second quarter of 1995. The following
table sets forth the components of the Company's revenue for the quarter ending
June 30 (dollar amounts in thousands):
1996 1995
------------------------ ------------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
-------- ---------- -------- ---------
Guest Pay $19,979 86.1% $11,701 80.2%
Free-to-guest 2,142 9.2% 2,002 13.7%
Other 1,081 4.7% 878 6.0%
-------- ---------- -------- --------
Total revenue $23,202 100.0% $14,581 100.0%
-------- ---------- -------- --------
-------- ---------- -------- --------
GUEST PAY REVENUE
Guest Pay revenues increased 70.7%, or $8.3 million, in the second quarter
of 1996 in comparison to the same quarter of 1995. This increase was the result
of (i) a 51.3% increase in the average number of installed Guest Pay rooms, all
of which installations were the Company's on-demand room technology, and (ii) a
12.9% increase in average monthly revenue per Guest Pay room.
Page 9
<PAGE>
The following table sets forth information in regard to (i) average monthly
revenue per installed Guest Pay room; and average movie buy rates, average
movie prices, and average hotel occupancy rates for (ii) all Guest Pay rooms and
(iii) for on-demand Guest Pay rooms; each for the quarter ending June 30:
1996 1995
-------- --------
Average monthly revenue per room:
Movie revenue $18.47 $16.70
Video game/information service 2.80 2.14
-------- --------
Total per Guest Pay room $21.27 $18.84
-------- --------
-------- --------
For all Guest Pay rooms:
Average movie buy rates 10.4% 9.5%
Average movie price $8.24 $8.29
Average hotel occupancy rate 72.8% 71.6%
For on-demand Guest Pay rooms:
Average movie buy rates 11.1% 10.6%
Average movie price $8.27 $8.36
Average hotel occupancy rate 73.4% 72.2%
Average movie revenue per room, for all Guest Pay rooms, was favorably
impacted by a combination of higher average buy rates and higher average
occupancy rates, both in comparison to the year earlier quarter; and by the
comparative increase in the proportion of on-demand rooms; all of which combined
to more than offset the effect of lower average movie prices. The comparative
increase in buy rates, for both all and on-demand Guest Pay rooms, is attributed
to a relatively more popular selection of newly-released major motion pictures
in the current quarter as compared to the year earlier period. Movie prices in
certain Guest Pay rooms were increased effective February 1, 1995. The Company's
movie prices are generally $7.95 or $8.95.The decline in average movie prices is
the result of an increase in the proportion of limited service hotel rooms, in
which movie prices are generally $7.95.
Average video game and information service revenue per room, for all Guest
Pay rooms, increased primarily as a result of the increase in the average number
of rooms with video game services installed. On a per-room basis, average
monthly video game revenues were $2.19 and $1.60 during the quarters ended June
30, 1996 and 1995, respectively. The Company had installed its video game
service in 243,658 and 112,141 Guest Pay rooms as of June 30, 1996 and 1995,
respectively.
FREE-TO-GUEST REVENUE
Free-to-guest revenues increased 7.0%, or $140,000, in the second quarter
of 1996 as compared to the same quarter of 1995. The comparative increase in
revenues resulted from the 13.2% increase in the number of installed free-to-
guest rooms since June 30, 1995, which installed room increase mitigated a
decline in per-room revenues resulting from a relatively lower proportion of
rooms receiving premium services in the current period. The Company had 266,150
and 235,082 free-to-guest rooms installed at June 30, 1996 and 1995,
respectively.
OTHER REVENUE
Revenue from other sources, such as the sale of televisions, system
equipment, service parts and labor, and miscellaneous free-to-guest programming
materials, increased by $203,000, or 23.1%, in the second quarter of 1996 as
compared to the same quarter of 1995. The comparative revenue increase was
primarily attributable to increased sales of equipment and service parts, which
offset lower television sales.
Page 10
<PAGE>
EXPENSE ANALYSIS
DIRECT COSTS The following table sets forth information in regard to the
Company's direct costs and gross profit margin for the quarter ending June 30
(dollar amounts in thousands):
1966 1995
--------- --------
Direct costs:
Guest Pay $7,944 $4,318
Free-to-guest 1,654 1,531
Other revenue 824 709
--------- --------
Total direct costs $10,422 $6,558
--------- --------
--------- --------
Gross profit margin:
Guest Pay 60.2% 63.1%
Free-to-guest 22.8% 23.5%
Other revenue 23.8% 19.2%
Overall (composite) 55.1% 55.0%
Guest Pay direct costs increased 84.0%, or $3.6 million, in the second
quarter of 1996 as compared to the year earlier quarter. Since Guest Pay direct
costs (primarily: studio license fees, video game license fees and the
commission retained by the hotel) are primarily based on related revenue, such
direct costs tend to vary more or less directly with revenue. As a percentage
of revenue, such costs increased from 36.9% in the second quarter of 1995 to
39.8% in the current quarter. The relative increase in Guest Pay direct costs
(as a percentage of revenue) reflects higher movie-related costs due to
proportionately higher revenue from newly-released motion pictures and the
cost-related effect of substantially increased video game revenue in the Guest
Pay revenue mix; all in the current quarter as compared to the year-earlier
quarter.
Free-to-guest direct costs increased 8.0% to $1.7 million in the second
quarter of 1996 from $1.5 million in the year-earlier quarter. As a percentage
of free-to-guest revenue, free-to-guest direct costs increased to 77.2% from
76.5% in the year-earlier quarter. The relative increase in free-to-guest
direct costs (as a percentage of revenue) resulted from higher costs for both
premium and non-premium programming in the second quarter of 1996, in comparison
to the same quarter in the prior year, and to a lesser extent to slightly higher
proportion of non-premium programming in the mix of programming services
delivered.
Direct costs associated with other revenue increased $115,000, in the
second quarter of 1996 as compared to the same quarter of the prior year. As a
percentage of related revenues, such direct costs decreased to 76.2% of other
revenue in the current quarter versus 80.8% in the second quarter of 1995,
reflecting the effect of the increased equipment and service part sales,
previously discussed, which have relatively higher margins than the other
sources of other revenue.
The Company's overall gross profit increased 59.3%, or $4.8 million, to
$12.8 million in the second quarter of 1996 on a 59.1% increase in revenues in
comparison to the same period in the prior year. The Company's overall gross
profit margin was 55.1% in the current quarter, as compared to the year earlier
55.0%.
Page 11
<PAGE>
OPERATING EXPENSES The following table sets forth information in regard to
the Company's operating expenses for the quarter ending June 30 (dollar amounts
in thousands):
1996 1995
-------------------- -------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
-------- ---------- ------- ----------
Guest Pay operations $3,575 15.4% $2,357 16.2%
Selling and marketing 855 3.7% 533 3.7%
General and administrative 2,508 10.8% 1,471 10.1%
Depreciation and amortization 7,157 30.8% 4,198 28.8%
-------- -------
Total operating expenses $14,095 60.7% $8,559 58.7%
-------- -------
-------- -------
Guest Pay operations expense increased 51.7%, or $1.2 million, from $2.4
million in the comparable quarter of the previous year. This increase is
primarily attributable to the 51.3% increase in the average number of installed
Guest Pay rooms in the current period as compared to the year earlier quarter.
Per average installed Guest Pay room, such expenses averaged $3.83 per month in
the current quarter as compared to $3.80 per month in the same quarter of 1995.
The slight comparative increase on a per-room basis was primarily the result of
higher maintenance, service and support expenses.
Selling and marketing expenses increased 60.4%, or $322,000, from $533,000
in the year-earlier quarter. This increase reflects the effect of expanded
marketing and promotional activities and an increase in the number of sales and
marketing personnel. As a percentage of revenue, such expenses represented 3.7%
of revenue in both the current and the year earlier quarter.
General and administrative expenses increased 70.5%, or $1.0 million, from
$1.5 million in the same quarter a year earlier primarily reflecting higher
legal and personnel-related costs. As a percentage of revenue, general and
administrative expenses represented 10.8% of total revenue in the current
quarter as compared to 10.1% a year earlier.
Depreciation and amortization expenses increased 70.5% to $7.2 million in
the second quarter of 1996 from $4.2 million in the year earlier quarter. This
increase is directly attributable to the increases in the number of installed
Guest Pay and game service equipped rooms previously discussed, associated
software; and other capitalized costs such as service vans, equipment and
computers that are related to the increased number of rooms in service since the
year-earlier quarter.
OPERATING LOSS The Company's operating loss, as a result of the factors
previously discussed, increased to $(1.3) million in the current quarter from
$(.5) million in the same quarter of 1995.
INTEREST Interest expense increased to $2.1 million in the current
quarter from $907,000 in the comparable quarter of 1995 due to increases in
long-term debt to fund the Company's continuing expansion of its Guest Pay
services business. Long-term debt increased from $39.2 million at June 30, 1995
to $58.1 million at June 30, 1996, primarily reflecting the Company's issuance
of $30 million, principal amount, of 11.5% Senior Subordinated Notes in two
separate private placements during 1995. Average principal amount of long-term
debt outstanding, during the quarter ended June 30, 1996, was approximately $73
million (at an average interest rate of approximately 10.6%) as compared to an
average principal amount outstanding of approximately $37 million (at an average
interest rate of approximately 10.0%) during the comparable period of 1995.
NET LOSS For the reasons previously discussed, the Company's net loss
increased to $(3.4) million in the second quarter of 1996 from a net loss of
$(1.4) million in the same quarter a year earlier.
Page 12
<PAGE>
EBITDA As a result of increasing revenues from Guest Pay services,
and the other factors previously discussed, EBITDA (defined as "earnings before
interest, income taxes, depreciation and amortization") increased 59.5% to $5.8
million in the second quarter of 1996 as compared to $3.7 million in the second
quarter of 1995. EBITDA as a percentage of total revenues was 25.2% in the
current quarter as compared to 25.1% in the same quarter of 1995. EBITDA is
included herein because it is a widely accepted financial indicator used by
certain investors and financial analysts to assess and compare companies on the
basis of operating performance. EBITDA is not intended to represent an
alternative to net income (as determined in accordance with generally accepted
accounting principles) as a measure of performance, but management believes that
it does provide an important additional perspective on the Company's operating
results and the Company's ability to service its long-term debt and to fund the
Company's continuing growth.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
REVENUE ANALYSIS
The Company's total revenue for the second six months of 1996 increased
55.8%, or $15.6 million, in comparison to the second six months of 1995. The
following table sets forth the components of the Company's revenue for the six
months ending June 30 (dollar amounts in thousands):
1996 1995
--------------------- ---------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
------- --------- ------- ---------
Guest Pay $37,561 86.2% $22,201 79.4%
Free-to-guest 4,287 9.8% 3,995 14.3%
Other 1,722 4.0% 1,777 6.4%
------- --------- ------- ---------
Total revenue $43,570 100.0% $27,973 100.0%
------- --------- ------- ---------
------- --------- ------- ---------
GUEST PAY REVENUE
Guest Pay revenues increased 69.2%, or $15.4 million, in the second six
months of 1996 in comparison to the same six months of 1995. This increase was
the result of (i) a 49.1% increase in the average number of installed Guest Pay
rooms, all of which installations were the Company's on-demand room technology,
and (ii) an 11.3% increase in average monthly revenue per Guest Pay room.
Page 13
<PAGE>
The following table sets forth information in regard to (i) average monthly
revenue per installed Guest Pay room; and average movie buy rates, average
movie prices, and average hotel occupancy rates for (ii) all Guest Pay rooms and
(iii) for on-demand Guest Pay rooms; each for the six months ending June 30:
1996 1995
-------- --------
Average monthly revenue per room:
Movie revenue $18.12 $16.67
Video game/information service 2.59 1.94
-------- --------
Total per Guest Pay room $20.71 $18.61
-------- --------
-------- --------
For all Guest Pay rooms:
Average movie buy rates 10.9% 10.1%
Average movie price $8.30 $8.24
Average hotel occupancy rate 69.5% 68.6%
For on-demand Guest Pay rooms:
Average movie buy rates 11.7% 11.3%
Average movie price $8.33 $8.31
Average hotel occupancy rate 70.4% 69.9%
Average movie revenue per room, for all Guest Pay rooms, was favorably
impacted by a combination of higher average buy rates, higher average movie
prices, and higher average occupancies, all in comparison to the year earlier
six months; and by the comparative increase in the proportion of on-demand
rooms. It has been the Company's experience that buy rates are higher in rooms
featuring the on-demand service than in those with the scheduled service. The
comparative increase in buy rates, for both all and on-demand Guest Pay rooms,
is attributed to a relatively more popular selection of newly-released major
motion pictures in the current six months as compared to the year earlier
period. Movie prices in certain Guest Pay rooms were increased effective
February 1, 1995. The Company's movie prices are generally $7.95 or $8.95.
Average video game and information service revenue per room, for all Guest
Pay rooms, increased primarily as a result of the increase in the average number
of rooms with video game services installed. On a per-room basis, average
monthly video game revenues were $1.99 and $1.44 during the six months ended
June 30, 1996 and 1995, respectively.
FREE-TO-GUEST REVENUE
Free-to-guest revenues increased 7.3%, or $292,000, in the second six
months of 1996 as compared to the same six months of 1995. The comparative
increase in revenues resulted from the 13.2% increase in the number of installed
free-to-guest rooms since June 30, 1995, which installed room increase mitigated
a decline in per-room revenues resulting from a relatively lower proportion of
rooms receiving premium services in the current period.
OTHER REVENUE
Revenue from other sources, such as the sale of televisions, system
equipment, service parts and labor, and miscellaneous free-to-guest programming
materials, decreased by $55,000, in the second six months of 1996 as compared to
the same six months of 1995; all of which decrease was due to lower television
sales.
Page 14
<PAGE>
EXPENSE ANALYSIS
DIRECT COSTS The following table sets forth information in regard to
the Company's direct costs and gross profit margin for the six months ending
June 30 (dollar amounts in thousands):
1966 1995
--------- ---------
Direct costs:
Guest Pay $14,783 $8,142
Free-to-guest 3,338 3,075
Other revenue 1,415 1,511
--------- ---------
Total direct costs $19,536 $12,728
--------- ---------
--------- ---------
Gross profit margin:
Guest Pay 60.6% 63.3%
Free-to-guest 22.1% 23.0%
Other revenue 17.8% 15.0%
Overall (composite) 55.2% 54.5%
Guest Pay direct costs increased 81.6%, or $6.6 million, in the first six
months of 1996 as compared to the year earlier six months. Since Guest Pay
direct costs (primarily: studio license fees, video game license fees and the
commission retained by the hotel) are primarily based on related revenue, such
direct costs tend to vary more or less directly with revenue. As a percentage
of revenue, such costs increased from 36.7% in the first six months of 1995 to
39.4% in the current six months. The relative increase in Guest Pay direct
costs (as a percentage of revenue) reflects higher movie-related costs due to
proportionately higher revenue from newly-released motion pictures,
substantially increased video game revenue in the Guest Pay revenue mix and to
a lesser extent, increased hotel commissions; all in the current six months as
compared to the year-earlier six months.
Free-to-guest direct costs increased 8.6% to $3.3 million in the second six
months of 1996 from $13.1 million in the year-earlier six months. As a
percentage of free-to-guest revenue, free-to-guest direct costs increased to
77.9% from 77.0% in the year-earlier six months. The relative increase in free-
to-guest direct costs (as a percentage of revenue) resulted primarily from
higher costs for non-premium programming in the second six months of 1996, in
comparison to the same six months in the prior year, and to a lesser extent to
slightly higher proportion of non-premium programming in the mix of programming
services delivered.
Direct costs associated with other revenue decreased $55,000, in the second
six months of 1996 as compared to the same six months of the prior year. This
decrease is directly attributable to the decreased level of television sales
discussed above. As a percentage of related revenues, such direct costs
decreased to 82.2% of other revenue in the current six months versus 85.0% in
the second six months of 1995, reflecting the effect of decreased television
sales.
The Company's overall gross profit increased 57.7%, or $8.8 million, to
$24.0 million in the first six months of 1996 on a 55.8% increase in revenues in
comparison to the same period in the prior year. The Company's overall gross
profit margin improved to 55.2% in the current six months, as compared to the
year earlier 54.5%, primarily due to the relative increase in the proportion of
Guest Pay revenues in the total revenue mix between the six months.
Page 15
<PAGE>
OPERATING EXPENSES The following table sets forth information in
regard to the Company's operating expenses for the six months ending June 30
(dollar amounts in thousands):
1996 1995
--------------------- ---------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
--------- ---------- --------- ----------
Guest Pay operations $6,738 15.5% $4,570 16.3%
Selling and marketing 1,597 3.7% 1,044 3.7%
General and administrative 4,615 10.6% 2,856 10.2%
Depreciation and amortization 13,330 30.6% 8,056 28.8%
--------- ---------
Total operating expenses $26,280 60.3% $16,526 59.1%
--------- ---------
--------- ---------
Guest Pay operations expense increased 47.4%, or $2.2 million, from $4.6
million in the comparable six months of the previous year. This increase is
primarily attributable to the 49.1% increase in the average number of installed
Guest Pay rooms in the current period as compared to the year earlier six
months. Per average installed Guest Pay room, such expenses averaged $3.83 per
month in both the current six months and the comparable period of 1995.
Selling and marketing expenses increased 53.0%, or $.6 million, from $1.0
million in the year-earlier six months. This increase reflects the effect of
expanded marketing and promotional activities and an increase in the number of
sales and marketing personnel. As a percentage of revenue, such expenses
represented 3.7% of revenue in both six-month periods.
General and administrative expenses increased 61.6%, or $1.8 million, from
$2.9 million in the same six months a year earlier, primarily reflecting higher
legal and personnel-related costs. As a percentage of revenue, general and
administrative expenses represented 10.6% of total revenue in the current six
months as compared to 10.2% in the year earlier period.
Depreciation and amortization expenses increased 65.5% to $13.3 million in
the first six months of 1996 from $8.1 million in the year earlier six months.
This increase is directly attributable to the increases in the number of
installed Guest Pay and game service equipped rooms previously discussed,
associated software; and other capitalized costs such as service vans, equipment
and computers that are related to the increased number of rooms in service since
the year-earlier six months.
OPERATING LOSS The Company's operating loss, as a result of the factors
previously discussed, increased to $(2.2) million in the current six months from
$(1.3) million in the same six months of 1995.
INTEREST Interest expense increased to $4.0 million in the current
six months from $1.6 million in the comparable six months of 1995 due to
increases in long-term debt to fund the Company's continuing expansion of its
Guest Pay services business. Long-term debt increased from $39.2 million at
June 30, 1995 to $58.1 million at June 30, 1996, primarily reflecting the
Company's issuance of $30 million, principal amount, of 11.5% Senior
Subordinated Notes in two separate private placements during 1995. Average
principal amount of long-term debt outstanding, during the six months ended June
30, 1996, was approximately $71 million (at an average interest rate of
approximately 10.6%) as compared to an average principal amount outstanding of
approximately $36 million (at an average interest rate of approximately 10.0%)
during the comparable period of 1995.
NET LOSS For the reasons previously discussed, the Company's net loss
increased to $(6.3) million in the second six months of 1996 from a net loss of
$(2.9) million in the same six months a year earlier.
Page 16
<PAGE>
EBITDA As a result of increasing revenues from Guest Pay services,
and the other factors previously discussed, EBITDA (defined as "earnings before
interest, income taxes, depreciation and amortization") increased 63.6% to $11.1
million in the first six months of 1996 as compared to $6.8 million in the first
six months of 1995. EBITDA as a percentage of total revenues was 25.4% in the
current six months as compared to 24.2% in the same six months of 1995.
SEASONALITY
The Company's operating results are subject to fluctuation depending upon
hotel occupancy rates and buy rates, among other factors. Typically, occupancy
rates are higher during the second and second calendar six months due to
seasonal travel patterns. Buy rates are influenced by the relative popularity
and selection of the movie titles available to the Company, the length of time
programming is available and other factors.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On September 15, 1994, the Company issued $28 million, principal amount, of
9.95% Senior Notes to three insurance companies in a private placement. On
April 13, 1995, the Company and the holders of the 9.95% Senior Notes amended
the Note Purchase Agreement and concurrently the Company issued $5 million,
principal amount, of 10.35% Senior Notes (the 9.95% Senior Notes and the 10.35%
Senior Notes are collectively referred to as the "Senior Notes"), under the Note
Purchase Agreement, in a private placement to certain holders of the 9.95%
Senior Notes. The Senior Notes are unsecured and mature on August 1, 2003.
Interest on the Senior Notes is fixed and is payable six monthly, and mandatory
annual principal payments of $4.125 million commence August 1, 1996. The Senior
Notes contain covenants which require the maintenance of certain financial
ratios, limit the incurrence of additional indebtedness, limit the incurrence of
certain liens, limit certain payments or distributions in respect of the common
stock of the Company, provide for acceleration of principal repayment in certain
circumstances, and permit early retirement of principal subject to minimum rate
of return provisions. At June 30, 1996 the Company was in compliance with all
such covenants.
On August 9, 1995, the Company issued $20 million, principal amount, of
11.5% Senior Subordinated Notes due July 15, 2005 (the "Subordinated Notes") to
three insurance companies in a private placement. On October 4, 1995, the
Company issued an additional $10 million, principal amount, of such Subordinated
Notes to the same purchasers and under identical terms and conditions. The
Subordinated Notes are unsecured and bear interest at the fixed rate of 11.5%,
payable semi-annually. Mandatory annual principal payments of $6 million
commence July 15, 2001.
Net proceeds of the August 9, 1995 issue of the Subordinated Notes, net of
original issue discount and issuance-related expenses, were approximately $18.1
million, and were used to (i) repay $10.0 million outstanding under the
Company's then existing revolving facility and (ii) provide funding for capital
expenditures to expand the Company's Guest Pay services business. The net
proceeds form the October 4, 1995 issue of Subordinated Notes, net of original
issue discount and issuance-related expenses, were approximately $9.2 million
and provided additional capital to fund the expansion of the Company's Guest Pay
services business. The Subordinated Notes include covenants which require the
maintenance of certain financial ratios, limit the incurrence of additional
indebtedness, limit the incurrence of certain liens, limit certain payments or
distributions in respect of the common stock of the Company, provide for
acceleration of principal repayment in certain circumstances, and permit early
retirement of principal subject to minimum rate of return provisions. At June
30, 1996 the Company was in compliance with all such covenants.
The Company issued a total of 480,000 warrants to purchase common stock of
the Company in connection with the issuance of the Subordinated Notes. Net
proceeds attributable to the warrants were approximately $1.6 million and
provided additional capital to fund the expansion of the Company's Guest Pay
services business. Each warrant permits the holder to purchase one share of
common stock at an exercise price of $7.00. The warrants include demand
registration rights and anti-dilution provisions and expire on July 15, 2005.
On March 11, 1996, the Company entered into the 1996 Revolving Facility
with National Westminster Bank Plc and three other banks, under which the
Company may borrow up to $45 million. The 1996 Revolving Facility is unsecured
and amounts thereunder bear interest at either (i) LIBOR (London Interbank
Offered Rate) plus
Page 17
<PAGE>
from 2.00% to 2.625% or (ii) prime rate plus from 1.00% to 1.625%, both
depending on the Company's total leverage, as defined in the agreement. The
commitment under the 1996 Revolving Facility may be increased from $45 million
to $60 million, subject to conditions precedent. The banks' commitment under
the 1996 Revolving Facility is subject to a scheduled reduction of 15% beginning
in June 1997 and annually thereafter as follows: June 1998 - 20%, June 1999 -
20%, June 2000 - 20% and June 2001 - 25%. The 1996 Revolving Facility provides
for the issuance of letters of credit, subject to customary terms and
conditions, and includes terms and conditions which require the maintenance of
certain financial ratios, limit the incurrence of additional indebtedness, limit
the incurrence of certain liens, limit certain payments or distributions in
respect of the common stock of the Company, provide for acceleration of
principal repayment in certain circumstances. As of June 30, 1996, the Company
was in compliance with all such covenants. There were no amounts outstanding
under the 1996 Revolving Facility as of June 30, 1996.
On May 23, 1996 the Company sold 3,680,000 new shares of common stock
(including 480,000 shares representing the exercise of the underwriters' over-
allotment option) at a price of $13.00 per share in a public offering. Net
proceeds to the Company from the sales of such shares, after underwriters'
commissions and other expenses related to the sale, were approximately $44.6
million. Such proceeds were used to repay amounts then outstanding under the
1996 Revolving Facility, approximately $25.9 million, and to provide working
capital for the continuing expansion of the Company's lodging and residential
businesses
The growth of the Company's business requires substantial capital
investment on a continuing basis to finance expansion of its lodging and multi-
family residential businesses. Historically, cash flow from operations has not
been sufficient to fund the cost of expanding the Company's business and to
service existing indebtedness. Capital expenditures were approximately $41.7
million during the six months ended June 30, 1996, and net cash provided by
operating activities was approximately $6.3 million. Financing activities
provided approximately $44.2 million. Depending on the rate of growth of its
lodging and residential businesses and other factors, the Company expects to
incur capital expenditures of between approximately $42.5 to 52.5 during the
remainder of 1996, and principal and interest payments of approximately $4.3 and
$4.3 million, respectively. The Company expects to incur capital expenditures
of approximately $100 to $140 million in 1997. The actual amount and timing of
the Company's capital expenditures will vary (and such variations could be
material) depending on the number of new contracts for services entered into by
the Company, the costs of installations, the Company's actual experience as it
enters the residential market and other factors.
The Company believes that the net proceeds from the May 23, 1996 sale of
common stock, together with its operating cash flows, working capital and the
1996 Revolving Facility will be sufficient to fund the Company's growth for the
remainder of 1996. Depending on the Company's rate of growth, the Company
intends to seek additional financing to fund its capital expenditures for 1997.
The Company believes that such financing is available from a number of sources.
However, if such financing should not be available at reasonable cost to the
Company, the Company could modify its expansion plans and reduce its capital
expenditures necessary for the installation of the Company's systems in the
lodging and multi-family residential markets.
Page 18
<PAGE>
PART II
ITEM 1 -- LEGAL PROCEEDINGS
As previously reported, on February 16, 1995 On Command Video Corporation
filed a lawsuit in Federal District Court in Northern California asserting
patent infringement by the Company. The complaint requests an unspecified
amount of damages and injunctive relief. The Company has carefully reviewed the
allegations of infringement and is of the opinion that the Company does not
infringe on the patent and the allegations are without merit. The Company filed
an answer and counterclaim to the lawsuit on April 17, 1995, denying the claims,
asserting affirmative defenses and asserting a counterclaim for declaratory
relief. The Company is currently engaged in litigation with respect to this
matter and intends to vigorously defend itself. Although the outcome of any
litigation cannot be predicted with certainty, the Company believes that the
ultimate disposition of this matter will not have a material adverse effect on
the Company's business or financial condition.
From time to time, the Company is subject to other litigation arising in
the ordinary course of business. As of the date hereof, in the opinion of
management, the resolution of such other litigation will not have a material
adverse effect upon the Company's business or financial condition.
ITEM 2 -- CHANGES IN SECURITIES
Not applicable.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company (the "Meeting") was held
on May 8, 1996, at which Meeting management's nominees for directors were
elected, without opposition, pursuant to a solicitation in accordance with
Regulation 14 of the Securities Exchange Act of 1934, as amended.
Also at such Meeting, the Stockholders of the Company ratified and approved
an amendment of the Company's 1993 Stock Option Plan (the "Plan") to (i)
increase from 500,000 to 1,000,000 the number of shares available for issuance
upon exercise of stock options granted under the Plan and (ii) provide that each
non-employee director shall automatically receive a grant of an option to
purchase 6,000 shares upon initial election and an additional grant of 6,000
shares on each anniversary of such election during the term of service. The
proposed amendment was ratified and approved by the affirmative votes of
4,700,779 shares. Negative votes were 246,912, and 1,879,628 votes were
withheld.
ITEM 5 -- OTHER INFORMATION
None.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
Exhibit 11.1 - Statement Regarding Computation of Net Loss Per
Common Share.
b. REPORTS ON FORM 8-K:
The Company filed no Reports on Form 8 - K during the six months
ended June 30, 1996.
Page 19
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
FORM 10-Q
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.
LODGENET ENTERTAINMENT CORPORATION
--------------------------------------------------
(Registrant)
Date: May 9, 1996 / S / TIM C. FLYNN
--------------------------------------------------
Tim C. Flynn
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 9, 1996 / S / JEFFREY T. WEISNER
--------------------------------------------------
Jeffrey T. Weisner
Vice President - Finance
(Principal Financial and Accounting Officer)
Page 20
<PAGE>
Exhibit 11.1
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Statement Regarding Computation of Net Loss Per Share of Common Stock
(Unaudited)
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
1995 1996 1995 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net loss $(1,443) $(3,395) $(2,923) $(6,268)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding:
Shares outstanding 7,376,698 8,801,485 7,323,900 8,077,939
Additional equivalent shares issuable
from assumed exercise of common
stock options (1) 41,162 54,357 41,690 53,342
---------- ---------- ---------- ----------
Weighted average shares outstanding 7,417,860 8,855,842 7,365,590 8,131,281
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss attributable to common stock ($0.19) ($0.38) ($0.40) ($0.77)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
- -----------------
(1) Includes the effect of options issued during the twelve months preceding
the Company's initial public offering. Other options and warrants have not
been included because their effect would be anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,984
<SECURITIES> 0
<RECEIVABLES> 15,772
<ALLOWANCES> (541)
<INVENTORY> 0
<CURRENT-ASSETS> 28,386
<PP&E> 192,211
<DEPRECIATION> (55,443)
<TOTAL-ASSETS> 167,611
<CURRENT-LIABILITIES> 26,671
<BONDS> 58,147
0
0
<COMMON> 110
<OTHER-SE> 81,020
<TOTAL-LIABILITY-AND-EQUITY> 167,611
<SALES> 43,570
<TOTAL-REVENUES> 43,570
<CGS> 19,536
<TOTAL-COSTS> 26,280
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,000
<INCOME-PRETAX> (6,246)
<INCOME-TAX> 22
<INCOME-CONTINUING> (6,268)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,268)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> 0
</TABLE>
