<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 SEPTEMBER 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 November 1, 1996, there were 11,045,369 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 September 30, 1996 (unaudited)) 3
Consolidated Statements of Operations (unaudited) for
the Three Months Ended September 30, 1995 and 1996. 4
Consolidated Statements of Operations (unaudited) for
the Nine Months Ended September 30, 1995 and 1996. 5
Consolidated Statements of Cash Flows (unaudited) for
the Nine Months Ended September 30, 1995 and 1996. 6
Notes to Consolidated Financial Statements. 7
Item 2 -- Management's Discussion and Analysis of the Results
of Operations. 9
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings. 20
Item 2 -- Changes in Securities. 20
Item 3 -- Defaults Upon Senior Securities. 20
Item 4 -- Submission of Matters to a Vote of Security Holders. 20
Item 5 -- Other Information. 20
Item 6 -- Exhibits and Reports on Form 8-K. 22
SIGNATURES 23
- -----------
As used herein (unless the context otherwise requires) "LodgeNet",
"the Company" and/or "the Registrant" means LodgeNet Entertainment
Corporation and its majority-owned subsidiaries.
LodgeNet Entertainment Corporation Page 2 September 30, 1996
<PAGE>
PART I - FINANCIAL INFORMATION
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1996
-------------------- --------------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,252 $2,083
Accounts receivable, net of allowance for doubtful accounts 11,355 17,729
Prepaid expenses and other 1,462 2,634
-------------------- --------------------
Total current assets 15,069 22,446
-------------------- --------------------
Property and equipment:
Land, building and equipment 8,976 14,361
Free-to-guest equipment 5,068 6,353
Cable television equipment 0 3,445
Guest Pay systems:
Installed 119,354 160,890
System components 13,468 18,895
Software costs 4,078 5,886
-------------------- --------------------
Total property and equipment 150,944 209,830
Less - accumulated depreciation and amortization (42,838) (61,111)
-------------------- --------------------
Property and equipment, net 108,106 148,719
-------------------- --------------------
Debt issuance costs, net of accumulated amortization 1,537 2,308
-------------------- --------------------
Other assets, net 0 895
-------------------- --------------------
$124,712 $174,368
-------------------- --------------------
-------------------- --------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $15,222 $19,347
Current maturities of long-term debt 4,254 4,479
Accrued expenses 3,434 4,367
-------------------- --------------------
Total current liabilities 22,910 28,193
-------------------- --------------------
Deferred revenue 1,579 3,052
-------------------- --------------------
Long-term debt 57,497 63,847
-------------------- --------------------
Stockholders' equity:
Common stock, $.01 par value, 20 million shares authorized;
7,352,113 and 11,045,369 shares outstanding at December 31,
1995 and September 30, 1996, respectively 74 110
Additional paid-in capital 71,234 115,874
Accumulated deficit (28,582) (36,708)
-------------------- --------------------
Total stockholders' equity 42,726 79,276
-------------------- --------------------
$124,712 $174,368
-------------------- --------------------
-------------------- --------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
LodgeNet Entertainment Corporation Page 3 September 30, 1996
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------------
1995 1996
---------------------------------
<S> <C> <C>
Revenues:
Guest Pay $14,196 $23,349
Free-to-guest 2,038 2,422
Other 1,180 1,345
----------- ---------
Total revenues 17,414 27,116
----------- ---------
Direct costs:
Guest Pay 5,369 9,655
Free-to-guest 1,498 1,862
Other 1,063 1,174
----------- ---------
Total direct costs 7,930 12,691
----------- ---------
Gross profit 9,484 14,425
----------- ---------
Operating expenses:
Guest Pay operations 2,522 3,876
Selling and marketing 459 545
General and administrative 1,740 2,523
Depreciation and amortization 4,827 7,560
----------- ---------
Total operating expenses 9,548 14,504
----------- ---------
Operating loss (64) (79)
Interest expense 1,228 1,769
----------- ---------
Loss before income taxes (1,292) (1,848)
Provision for income taxes -- 9
----------- ---------
Net loss $(1,292) $(1,857)
----------- ----------
----------- ----------
Per common share:
Net loss attributable to common stock $(0.17) $(0.17)
----------- -----------
----------- -----------
Weighted average shares outstanding 7,396,151 11,093,655
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
LodgeNet Entertainment Corporation Page 4 September 30, 1996
<PAGE>
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1995 1996
--------------------------------
<S> <C> <C>
Revenues:
Guest Pay $36,397 $60,912
Free-to-guest 6,033 6,709
Other 2,957 3,068
---------- -----------
Total revenues 45,387 70,689
---------- -----------
Direct costs:
Guest Pay 13,511 24,438
Free-to-guest 4,573 5,200
Other 2,574 2,591
---------- -----------
Total direct costs 20,658 32,229
---------- -----------
Gross profit 24,729 38,460
---------- -----------
Operating expenses:
Guest Pay operations 7,092 10,614
Selling and marketing 1,503 2,105
General and administrative 4,596 7,175
Depreciation and amortization 12,883 20,891
----------- -----------
Total operating expenses 26,074 40,785
---------- -----------
Operating loss (1,345) (2,325)
Interest expense 2,870 5,769
----------- -----------
Loss before income taxes (4,215) (8,094)
Provision for income taxes -- 31
----------- -----------
Net loss $(4,215) $(8,125)
----------- -----------
----------- -----------
Per common share:
Net loss attributable to common stock $(0.57) $(0.89)
----------- -----------
----------- -----------
Weighted average shares outstanding 7,375,866 9,125,970
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
LodgeNet Entertainment Corporation Page 5 September 30, 1996
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1995 1996
--------------------------------
<S> <C> <C>
Operating activities:
Net loss $(4,215) $(8,125)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 12,883 20,891
Change in operating assets and liabilities:
Accounts receivable (3,622) (6,374)
Prepaid expenses and other (547) (2,067)
Accounts payable 4,817 4,125
Accrued expenses and deferred revenue 664 2,406
----------- ----------
Net cash provided by operating activities 9,980 10,856
----------- ----------
Investing activities:
Property and equipment additions (34,383) (61,106)
----------- ----------
Net cash used for investing activities (34,383) (61,106)
Financing activities:
Proceeds from long-term debt 24,294 901
Debt issuance costs (1,072) (1,169)
Repayments of long-term debt (139) (4,327)
Borrowings under revolving credit facility 10,000 35,858
Repayments of revolving credit facility (10,000) (25,858)
Proceeds from issuance of common stock -- 44,635
Proceeds from issuance of common stock warrants 1,095 --
Stock option activity 41 42
----------- ----------
Net cash provided by financing activities 24,219 50,082
----------- ----------
Effect of exchange rates on cash 135 (1)
----------- ----------
Increase (decrease) in cash and cash equivalents (49) (169)
Cash and cash equivalents at beginning of period 4,302 2,252
----------- ----------
Cash and cash equivalents at end of period $4,253 $2,083
----------- ----------
----------- ----------
Supplemental cash flow information:
Cash paid for interest $2,463 $6,246
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
LodgeNet Entertainment Corporation Page 6 September 30, 1996
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The accompanying consolidated financial statements as of September 30,
1996 and for the three and nine month periods ended September 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 majority-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.
Note 4 -- Subsequent Event - Sale of Equity Interest in Subsidiary
On October 21, 1996, the Company and its subsidiary, ResNet Communications,
Inc. ("ResNet") entered into agreements with TCI Satellite Entertainment, Inc.
("TCI") under which ResNet sold a 4.99% equity interest in ResNet to TCI in
exchange for $5.4 million in cash. In addition, TCI agreed to advance up to
$34.6 million to ResNet during the five years ending October 21, 2001, under a
convertible note agreement (the "Convertible Note").
The Convertible Note matures on October 21, 2001, subject to a one-year
extension at the election of the Company, and on that date is subject to
mandatory conversion into a maximum 32.0% equity interest in ResNet. The
Convertible Note is unsecured, is not subject to prepayment, has no recourse to
the Company, and is subordinated to all present and future borrowings by the
Company, to the extent that the proceeds thereof are advanced to ResNet, and/or
ResNet. Interest accrues (generally at TCI's average borrowing rate) on amounts
outstanding under the Convertible Note, but such interest is not paid in cash
(and does not increase the equity interest into which the Convertible Note will
be converted) and accrues only until maturity or such time as the balance of
outstanding principal and accrued interest is $34.6 million, whichever is
sooner. The proceeds of the Convertible Note are to be used to purchase
satellite receiving equipment in accordance with agreements with TCI. In
addition,
LodgeNet Entertainment Corporation Page 7 September 30, 1996
<PAGE>
pursuant to a signal carriage agreement, TCI has agreed to provide
ResNet with nationwide access to certain satellite programming signals.
In connection with the aforementioned agreements, the Company granted TCI
an option to acquire an additional 13.01% equity interest in ResNet, first
exercisable 60 days following October 21, 1999, in return for an additional cash
investment in ResNet based on ResNet's then fair market value. Such option will
expire, subject to certain limitations, coincident with the maturity of the
Convertible Note.
Note 5 -- Subsequent Event - Long-term Debt
Effective November 1, 1996, the Company's 1996 Revolving Facility with
National Westminster Bank Plc and three other banks was amended to increase the
amount available under the facility from $45 million to $60 million.
Note 6 -- Reclassifications
Certain amounts have been reclassified to conform to the 1996 presentation.
Such reclassifications had no effect on previously reported results of
operations or stockholders' equity.
LodgeNet Entertainment Corporation Page 8 September 30, 1996
<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
LODGING INDUSTRY SERVICES
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.
LodgeNet Entertainment Corporation Page 9 September 30, 1996
<PAGE>
Installed Room Base
During the three months ended September 30, 1996, the Company installed
34,359 new Guest Pay rooms, equipped 44,750 rooms with its Nintendo game
system, and installed 16,487 free-to-guest rooms. From September 30, 1995
through September 30, 1996, the Company has installed 127,641 new Guest Pay
rooms, equipped 152,783 rooms with its Nintendo game system, and installed
44,261 free-to-guest rooms; representing increases of 52.7%, 112.7% and
18.6%, respectively, in its installed room bases. The Company's base of
installed rooms was comprised as follows at September 30:
1995 1996
---------------- ----------------
Rooms % Rooms %
------- ------ ------- ------
Guest Pay rooms:
Scheduled 60,933 25.1% 44,497 12.0%
On-demand 181,408 74.9% 325,485 88.0%
------- ------ ------- ------
242,341 100.0% 369,982 100.0%
------- ------ ------- ------
------- ------ ------- ------
Nintendo game system rooms 135,625 288,408
------- -------
------- -------
Free-to-guest rooms 238,376 282,637
------- -------
------- -------
RESIDENTIAL INDUSTRY 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.
("ResNet"), a majority-owned subsidiary of the Company, is expected to have
financial and technological requirements similar to those of the Company's
lodging industry operations.
ResNet began installation of its first systems during the quarter ended
September 30, 1996, but its operations did not have a material effect on the
consolidated results of the Company for the quarter.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Revenue Analysis
The Company's total revenue for the third quarter of 1996 increased
55.7%, or $9.7 million, in comparison to the third quarter of 1995. The
following table sets forth the components of the Company's revenue for the
quarter ending September 30 (dollar amounts in thousands):
1995 1996
-------------------- --------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
------- --------- ------- ---------
Guest Pay $14,196 81.5% $23,349 86.1%
Free-to-guest 2,038 11.7% 2,422 8.9%
Other 1,180 6.8% 1,345 5.0%
------- ----- ------- ------
Total revenue $17,414 100.0% $27,116 100.0%
------- ----- ------- ------
------- ----- ------- ------
LodgeNet Entertainment Corporation Page 10 September 30, 1996
<PAGE>
Guest Pay Revenue -- Guest Pay revenues increased 64.5%, or $9.2
million, in the third quarter of 1996 in comparison to the same quarter of
1995. This increase was the result of (i) a 53.3% 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 7.5% increase in average
monthly revenue per Guest Pay room.
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 September 30:
1995 1996
------ ------
Average monthly revenue per room:
Movie revenue $18.06 $18.80
Video game/information service 2.70 3.51
------ ------
Total per Guest Pay room $20.76 $22.31
------ ------
------ ------
For all Guest Pay rooms:
Average movie buy rates 9.5% 10.1%
Average movie price $8.30 $8.22
Average hotel occupancy rate 75.6% 75.3%
For on-demand Guest Pay rooms:
Average movie buy rates 10.5% 10.6%
Average movie price $8.37 $8.27
Average hotel occupancy rate 75.6% 75.5%
Average movie revenue per room, for all Guest Pay rooms, was favorably
impacted by higher average buy rates and by the comparative increase in the
proportion of on-demand rooms; which combined to offset the effect of lower
average movie prices and slightly lower occupancy rates. 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 between the comparative periods is the
result of an increase in the proportion of limited service hotel rooms, in
the installed room base, in which rooms 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 for all Guest Pay rooms, average monthly video game revenues were
$2.86 and $2.23 during the quarters ended September 30, 1996 and 1995,
respectively. The Company had installed its video game service in 288,408
and 135,625 Guest Pay rooms as of September 30, 1996 and 1995, respectively.
Free-to-guest Revenue -- Free-to-guest revenues increased 18.8%, or
$384,000, in the third quarter of 1996 as compared to the same quarter of
1995. The comparative increase in revenues resulted from the 18.6% increase
in the number of installed free-to-guest rooms since September 30, 1995.
The Company had 282,637 and 238,376 free-to-guest rooms installed at
September 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 $165,000, or 14.0%, in the
third quarter of 1996 as compared to the same quarter of 1995. The increase
was primarily attributable to increased sales of systems and equipment to
foreign licensees, which offset a decrease in television sales.
LodgeNet Entertainment Corporation Page 11 September 30, 1996
<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
September 30 (dollar amounts in thousands):
1995 1996
------ -------
Direct costs:
Guest Pay $5,369 $ 9,655
Free-to-guest 1,498 1,862
Other revenue 1,063 1,174
------ ------
Total direct costs $7,930 $12,691
------ ------
------ ------
Gross profit margin:
Guest Pay 62.2% 58.6%
Free-to-guest 26.5% 23.1%
Other revenue 9.9% 12.7%
Overall (composite) 54.5% 53.2%
Guest Pay direct costs increased 79.8%, or $4.3 million, in the third
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 37.8% in the third
quarter of 1995 to 41.4% 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 increased
video game revenue (which generally has a higher direct cost on a percentage
of revenue basis than movies) in the Guest Pay revenue mix, both of which
combined to offset slightly lower hotel commissions; all in the current
quarter as compared to the year-earlier quarter.
Free-to-guest direct costs increased 24.3% to $1.9 million in the third
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 76.9% from
73.5% 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 third quarter of 1996, in comparison
to the same quarter in the prior year, and to a lesser extent to a slightly
higher proportion of non-premium programming in the mix of programming services
delivered.
Direct costs associated with other revenue increased $111,000, in the
third quarter of 1996 as compared to the same quarter of the prior year. As
a percentage of related revenues, such direct costs decreased to 87.3% of
other revenue in the current quarter versus 90.1% in the third quarter of
1995, reflecting the effect of the increased equipment and service part
sales, previously discussed, which have slightly higher margins than the
other sources of other revenue.
The Company's overall gross profit increased 52.1%, or $4.9 million, to
$14.4 million in the third quarter of 1996 on a 55.7% increase in revenues in
comparison to the same period in the prior year. The Company's overall gross
profit margin was 53.2% in the current quarter, as compared to the year earlier
54.5%.
LodgeNet Entertainment Corporation Page 12 September 30, 1996
<PAGE>
Operating Expenses -- The following table sets forth information in
regard to the Company's operating expenses for the quarter ending September
30 (dollar amounts in thousands):
1995 1996
------------------ --------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
------ --------- ------- -----------
Guest Pay operations $2,522 14.5% $ 3,876 14.3%
Selling and marketing 459 2.6% 545 2.0%
General and administrative 1,740 10.0% 2,523 9.3%
Depreciation and amortization 4,827 27.7% 7,560 27.9%
------ -------
Total operating expenses $9,548 54.8% $14,504 53.5%
------ -------
------ -------
Guest Pay operations expense increased 53.7%, or $1.4 million, from
$2.5 million in the comparable quarter of the previous year. This increase
is primarily attributable to the 53.3% 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 $3.72 per month in the current quarter as compared to $3.68 per
month in the same quarter of 1995. The slight comparative increase on a
per-room basis was primarily the result of higher marketing, and service and
support expenses.
Selling and marketing expenses increased 18.7%, or $86,000, from
$459,000 in the third quarter of 1995. The increase primarily reflects the
effect of additional sales and marketing personnel. As a percentage of
revenue, such expenses were 2.0% in the current quarter as compared to 2.6%
in the year earlier period.
General and administrative expenses increased 45.0%, or $783,000, from
$1.7 million in the year-earlier quarter. This increase reflects the effect
of an increase in the number of development and administrative personnel,
increased facilities-related expenses, and increased legal expenses. As a
percentage of revenue, such expenses represented 9.3% of total revenue in
the current quarter as compared to 10.0% a year earlier.
Depreciation and amortization expenses increased 56.6% to $7.6 million
in the third quarter of 1996 from $4.8 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, was $(79,000) in the current quarter as
compared to $(64,000) in the same quarter of 1995.
Interest Expense -- Interest expense increased to $1.8 million in the
current quarter from $1.2 million in the comparable quarter of 1995 due to
increases in long-term debt to fund the Company's continuing expansion of
its businesses. Long-term debt increased from $52.1 million at September
30, 1995 to $63.8 million at September 30, 1996. Average principal amount
of long-term debt (excluding amounts under the revolving facility)
outstanding, during the quarter ended September 30, 1996, was approximately
$60 million (at an average interest rate of approximately 10.7%) as compared
to an average principal amount outstanding of approximately $42 million (at
an average interest rate of approximately 10.3%) during the comparable
period of 1995.
Net Loss -- For the reasons previously discussed, the Company's net
loss increased to $(1.9) million in the third quarter of 1996 from a net
loss of $(1.3) million in the same quarter a year earlier.
LodgeNet Entertainment Corporation Page 13 September 30, 1996
<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
57.1% to $7.5 million in the third quarter of 1996 as compared to $4.8
million in the third quarter of 1995. EBITDA as a percentage of total
revenues was 27.6% in the current quarter as compared to 27.4% 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
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
Revenue Analysis
The Company's total revenue for the first nine months of 1996 increased
55.7%, or $25.3 million, in comparison to the first nine months of 1995.
The following table sets forth the components of the Company's revenue for
the nine months ending September 30 (dollar amounts in thousands):
1995 1996
-------------------- -------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
------- -------- ------- ----------
Guest Pay $36,397 80.2% $60,912 86.2%
Free-to-guest 6,033 13.3% 6,709 9.5%
Other 2,957 6.5% 3,068 4.3%
------- ------ ------- ------
Total revenue $45,387 100.0% $70,689 100.0%
------- ------ ------- ------
------- ------ ------- ------
Guest Pay Revenue -- Guest Pay revenues increased 67.4%, or $24.5
million, in the first nine months of 1996 in comparison to the same nine
months of 1995. This increase was the result of (i) a 50.6% 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 9.8% increase in average
monthly revenue per Guest Pay room.
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 nine months
ending September 30:
1995 1996
------ ------
Average monthly revenue per room:
Movie revenue $17.18 $18.37
Video game/information service 2.22 2.93
------ ------
Total per Guest Pay room $19.40 $21.30
------ ------
------ ------
For all Guest Pay rooms:
Average movie buy rates 9.9% 10.6%
Average movie price $ 8.26 $ 8.27
Average hotel occupancy rate 71.1% 71.7%
For on-demand Guest Pay rooms:
Average movie buy rates 11.0% 11.3%
Average movie price $8.33 $8.30
Average hotel occupancy rate 72.1% 72.4%
LodgeNet Entertainment Corporation Page 14 September 30, 1996
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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 nine 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 nine months
as compared to the year earlier period. The slight decrease in average
movie prices for on-demand rooms between the comparative periods is the
result of an increase in the proportion of limited service hotel rooms, in
the installed room base, in which rooms movie prices are generally $7.95.
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 $2.31 and $1.73 during the
nine months ended September 30, 1996 and 1995, respectively.
Free-to-guest Revenue -- Free-to-guest revenues increased 11.2%, or
$676,000, in the first nine months of 1996 as compared to the same nine
months of 1995. The comparative increase in revenues resulted from the
18.6% increase in the number of installed free-to-guest rooms since
September 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, increased by $111,000, or 3.8%, in the
first nine months of 1996 as compared to the same nine months of 1995; all
of which increase was attributable to sales of systems and equipment to
foreign licensees.
Expense Analysis
Direct Costs -- The following table sets forth information in regard to
the Company's direct costs and gross profit margin for the nine months
ending September 30 (dollar amounts in thousands):
1995 1996
------- -------
Direct costs:
Guest Pay $13,511 $24,438
Free-to-guest 4,573 5,200
Other revenue 2,574 2,591
------- -------
Total direct costs $20,658 $32,229
------- -------
------- -------
Gross profit margin:
Guest Pay 62.9% 59.9%
Free-to-guest 24.2% 22.5%
Other revenue 13.0% 15.5%
Overall (composite) 54.5% 54.4%
Guest Pay direct costs increased 80.9%, or $10.9 million, in the first
nine months of 1996 as compared to the year earlier nine 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 37.1% in
the first nine months of 1995 to 40.1% in the current nine 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 nine months as compared to the year-earlier
nine months.
Free-to-guest direct costs increased 13.7% to $5.2 million in the first
nine months of 1996 from $4.6 million in the year-earlier nine months. As a
percentage of free-to-guest revenue, free-to-guest direct costs increased to
77.5% from 75.8% in the year-earlier nine months. The relative increase in
free-to-guest direct costs (as a
LodgeNet Entertainment Corporation Page 15 September 30, 1996
<PAGE>
percentage of revenue) resulted primarily from higher costs for non-premium
programming in the first nine months of 1996, in comparison to the same nine
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 increased $17,000, or .7%,
in the first nine months of 1996 as compared to the same nine months of the
prior year. This decrease is directly attributable to the increased sales
of systems and equipment to licensees as discussed above. As a percentage
of related revenues, such direct costs decreased to 84.5% of other revenue
in the current nine months versus 87.0% in the first nine months of 1995,
reflecting the effect of increased system and equipment sales which have
slightly higher margins than the other sources of other revenue.
The Company's overall gross profit increased 55.5%, or $13.7 million,
to $38.5 million in the first nine months of 1996 on a 55.7% increase in
revenues in comparison to the same period in the prior year. The Company's
overall gross profit margin was 54.4% in the current nine months and 54.5%
in the year earlier period.
Operating Expenses -- The following table sets forth information in
regard to the Company's operating expenses for the nine months ending
September 30 (dollar amounts in thousands):
1995 1996
------------------ --------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
------- ---------- ------- ---------
Guest Pay operations $ 7,092 15.6% $10,614 15.0%
Selling and marketing 1,503 3.3% 2,105 3.0%
General and administrative 4,596 10.1% 7,175 10.2%
Depreciation and amortization 12,883 28.4% 20,891 29.6%
------- -------
Total operating expenses $26,074 57.4% $40,785 57.7%
------- -------
------- -------
Guest Pay operations expense increased 49.7%, or $3.5 million, from
$7.1 million in the comparable nine months of the previous year. This
increase is primarily attributable to the 50.6% increase in the average
number of installed Guest Pay rooms in the current period as compared to the
year earlier nine months. Per average installed Guest Pay room, such
expenses averaged $3.78 and $3.77 per month in the nine months ended
September 30 1996 and 1995, respectively.
Selling and marketing expenses increased 40.0%, or $602,000, from $1.5
million in the third quarter of 1995. This increase primarily reflects the
effect of additional sales and marketing personnel. As a percentage of
revenue, such expenses were 3.3% and 3.0% for the nine months ended
September 30, 1995 and 1996, respectively.
General and administrative expenses increased 56.1%, or $2.6 million,
from $4.6 million in the year-earlier nine months. This increase reflects
the effect of an increase in the number of development and administrative
personnel, increased facilities-related expenses, and increased legal
expenses. As a percentage of revenue, general and administrative expenses
represented 10.2% of total revenue in the current nine months as compared to
10.1% in the year earlier period.
Depreciation and amortization expenses increased 62.2% to $20.9 million
in the first nine months of 1996 from $12.9 million in the year earlier nine
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 nine months.
Operating Loss -- The Company's operating loss, as a result of the
factors previously discussed, increased to $(2.3) million in the current
nine months from $(1.3) million in the same nine months of 1995.
Interest Expense -- Interest expense increased to $5.8 million in the
current nine months from $2.9 million in the comparable nine months of 1995
due to increases in long-term debt to fund the Company's continuing
expansion of its businesses. Long-term debt increased from $52.1 million at
September 30, 1995 to $63.8 million at September 30, 1996, primarily
reflecting the Company's issuance of $30 million, principal amount, of 11.5%
LodgeNet Entertainment Corporation Page 16 September 30, 1996
<PAGE>
Senior Subordinated Notes in two separate private placements during 1995;
and increased borrowings under the Company's bank credit facility. Average
principal amount of long-term debt (excluding amounts outstanding under the
revolving facility) outstanding, during the nine months ended September 30,
1996, was approximately $62 million (at an average interest rate of
approximately 10.7%) as compared to an average principal amount outstanding
of approximately $35 million (at an average interest rate of approximately
10.1%) during the comparable period of 1995.
Net Loss -- For the reasons previously discussed, the Company's net
loss increased to $(8.1) million in the first nine months of 1996 from a net
loss of $(4.2) million in the same nine months a year earlier.
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
60.9% to $18.6 million in the first nine months of 1996 as compared to $11.5
million in the first nine months of 1995. EBITDA as a percentage of total
revenues was 26.3% in the current nine months as compared to 25.4% in the
same nine 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 third calendar quarters 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 nine monthly, and mandatory annual principal payments
of $4.125 million commenced 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 September 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 from 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 September 30, 1996 the Company was in
compliance with all such covenants.
LodgeNet Entertainment Corporation Page 17 September 30, 1996
<PAGE>
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 could 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 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 banks' commitment under the 1996 Revolving
Facility is subject to a scheduled reduction of 15% beginning in September
1997 and annually thereafter as follows: September 1998 - 20%, September
1999 - 20%, September 2000 - 20% and September 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 September 30, 1996, the Company was in compliance with
all such covenants. At September 30, 1996, there was $10.0 million
outstanding under the 1996 Revolving Facility.
Effective November 1, 1996, the banks' commitments under the 1996
Revolving Facility were increased from $45 to $60 million.
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.
On October 21, 1996, the Company and its subsidiary, ResNet
Communications, Inc. ("ResNet") entered into agreements with TCI Satellite
Entertainment, Inc. ("TCI") under which ResNet sold a 4.99% equity interest
in ResNet to TCI in exchange for $5.4 million in cash. In addition, TCI
agreed to advance up to $34.6 million to ResNet during the five years ending
October 21, 2001, under a convertible note agreement (the "Convertible
Note"). The Convertible Note is subject to mandatory conversion into a
maximum 32.0% equity interest in ResNet. The Convertible Note is unsecured,
is payable solely in shares of ResNet's common stock, is non-recourse to the
Company, and is subordinated to all present and future borrowings by ResNet
and/or the Company, to the extent that the proceeds thereof are advanced to
ResNet. Interest accrues (generally at TCI's average borrowing rate) on
amounts outstanding under the Convertible Note, but such interest is not
paid in cash (and does not increase the equity interest into which the
Convertible Note will be converted). See "Part II - Item 5 -Other
Information."
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 $61.1 million during the nine months ended
September 30, 1996, net cash provided by operating activities was
approximately $10.9 million, and financing activities provided approximately
$50.1 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 $17.5 to $25.0 million during
the remainder of 1996. The Company expects to incur in 1997 capital
expenditures of between approximately $125 to $145 million; and, depending
the amount of such capital expenditures and the financing sources utilized,
principal payments of approximately $4.3 and interest payments of between
approximately $16.5 to $18.0 million. 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, and other factors.
The Company believes that its operating cash flows, working capital,
the proceeds of the sale of the 4.99% equity interest in ResNet, 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
LodgeNet Entertainment Corporation Page 18 September 30, 1996
<PAGE>
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.
LodgeNet Entertainment Corporation Page 19 September 30, 1996
<PAGE>
PART II - OTHER INFORMATION
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
Not applicable.
ITEM 5 -- OTHER INFORMATION
RESNET COMMUNICATIONS, INC.
OVERVIEW. On October 21, 1996, the Company entered into a transaction
(the "TCI Transaction") with TCI Satellite Entertainment, Inc. ("TCI
Satellite"), a subsidiary of Tele-Communications, Inc. ("TCI"), pursuant to
which, among other things, TCI Satellite acquired an ownership interest in
ResNet Communications, Inc., a Delaware corporation ("ResNet"). Prior to
the investment by TCI Satellite, ResNet was a wholly-owned subsidiary of the
Company.
ResNet was formed in January 1996 to engage in the business of offering
basic and premium cable television programming and other interactive
entertainment and information services ("ResNet's Services") to subscribers
in multiple dwelling units ("MDUs") throughout the United States. The
Company believes there are substantial opportunities to provide its services
in the multi-family residential market. The Company believes there are
approximately 26,000 apartment complexes having more than 200 units, with an
aggregate of over 6 million multi-family residential units, in the 70
largest metropolitan areas in the United States. This represents a market
that is more than three times the size of the Company's target lodging
market.
The Company views the multi-family cable television market as
attractive due to : (i) the large market size; (ii) the portability to this
market of the proprietary technology and operating expertise developed by
the Company for the lodging industry; (iii) the favorable regulatory
environment available to operators such as ResNet who qualify as "private
cable" operators under applicable federal regulations (including the absence
of franchise requirements, "must-carry" obligations and rate regulations
applicable to franchised cable operators); (iv) the exclusive long-term
contracts that have customarily been available in the multi-family
residential market; and (v) the low-cost operating structure made possible
by the services to be provided by GE Capital-ResCom (as described below).
ResNet's MDU private cable systems will have the capacity to deliver
over 100 channels, although the ResNet expects that the typical system will
deliver approximately 35 to 50 channels of programming. The
LodgeNet Entertainment Corporation Page 20 September 30, 1996
<PAGE>
Company may elect to provide from approximately 10 to 35 additional channels
for pay-per-view, video on-demand, video games and other interactive
services, such as Internet access. ResNet will design a specific programming
line-up for each MDU property, based on the particular demographic profile
of that property. These systems are expected to include basic programming
services, such as CNN, ESPN, WTBS, TNT, The Discovery Channel and The
Weather Channel, premium programming, such as HBO and Showtime, plus
additional channels which carry local off-air stations, an electronic
programming guide, a preview channel, and a bulletin board channel. ResNet's
Services are delivered utilizing proprietary technology which, among other
things, combines addressable interdiction technology with the Company's
proprietary broadband, local area network technology (B-LAN-TM-) developed
for the lodging industry.
GE CAPITAL-RESCOM TRANSACTION. On February 9, 1996, ResNet entered
into an agreement with GE Capital-ResCom, L.P. ("GE ResCom"), a leading
provider of private telephony services to MDUs and an affiliate of General
Electric Co., under which GE ResCom's national sales force will exclusively
market ResNet's Services to MDUs on a nationwide basis. The joint marketing
plan is to offer the MDU owner or property manager a one-stop portfolio of
products, including ResNet's Services and the private telephony, paging and
other services offered by GE ResCom. GE ResCom will also provide, for a fee
equal to 5% of collected revenues, the following services; (i) common sales
training to on-site property leasing agents, who will promote and sign-up
subscribers for ResNet's video services; (ii) a common customer service
"hotline" through which residents may order or modify service and make
inquiries; and (iii) subscriber billing. ResNet will own the franchise
agreements with the property owners and the video services agreements with
the tenants and will be responsible for all other operational aspects,
including system design, installation, programming, and technical field
service. The Company's existing nationwide installation and field service
organizations position ResNet to operate effectively throughout the United
States wherever the GE ResCom sales force may obtain contracts, a capability
which is of particular strategic importance when addressing the needs of the
largest multi-state MDU property portfolios.
TCI TRANSACTION. As part of the TCI Transaction, ResNet and TCI
Satellite entered into the following agreements:
(i) a Subscription Agreement, providing for the sale of 4.99% of
ResNet's outstanding common stock to TCI Satellite for a purchase price
equal to $5,396,000 (the "Initial Investment Amount");
(ii) a Signal Availability Agreement, pursuant to which ResNet
will receive long-term access on a nationwide basis to TCI Satellite's
direct broadcast satellite signals;
(iii) an Equipment Sale Agreement, pursuant to which ResNet has agreed
to purchase exclusively from TCI Satellite up to $40 million of satellite
reception equipment, including a purchase order placed at the closing in an
amount equal to the Initial Investment Amount;
(iv) a Subordinated Convertible Term Loan Agreement, pursuant to which
TCI Satellite will provide ResNet with up to $34,604,000 in a subordinated
convertible term loan (the "Loan"), the proceeds of which can be used only to
finance purchases of equipment under the Equipment Sale Agreement, the term of
the Loan to be five years with an option by ResNet to extend the term for an
additional year, such loan to be convertible (as described below) into an
additional 32% of ResNet's outstanding common stock;
(v) an Option Agreement granting TCI Satellite an option, exercisable
after three years and expiring on the maturity date of the Loan, to acquire an
additional 13.01% of ResNet's outstanding common stock at a purchase price equal
to the appraised fair market value of such shares at the time of exercise;
(vi) a Stockholders' Agreement, providing for certain restrictions on
transfer of interests in ResNet, rights of first refusal on any such transfer,
and pre-emptive rights to purchase newly issued shares of ResNet's capital
stock; and
(vii) a Standstill Agreement prohibiting TCI Satellite and its
controlled affiliates from acquiring more than 10% of the Company's outstanding
common stock, participating in any solicitation of proxies or otherwise seeking
to control or influence the Board of Directors or management of the Company.
The Loan is convertible, to the extent permitted by applicable
regulations of the Federal Communications Commission ("FCC") (as described
below), over a four-year period into shares representing 32% of ResNet's
LodgeNet Entertainment Corporation Page 21 September 30, 1996
<PAGE>
outstanding common stock. The Loan is subordinated to all present and
future borrowings of ResNet and/or the Company, to the extent that the
proceeds thereof are advanced to ResNet. TCI Satellite's only recourse with
respect to repayment of the Loan is conversion into ResNet common stock (or
warrants as described below). Under current interpretations of FCC rules
and regulations relating to restrictions on cross-ownership of franchised
cable and satellite master antenna television operations, TCI Satellite
would be prevented from holding 5% or more of ResNet's capital stock and
consequently could not exercise the conversion rights under the convertible
loan agreement. TCI Satellite is required to convert the Loan into ResNet
common stock at such time as conversion would not violate the aforementioned
FCC restriction. The acquisition of such conversion shares, when combined
with TCI Satellite's initial purchase of 4.99% of ResNet's common stock and
the exercise of the option to acquire an additional 13.01% of such stock,
would result in ownership by TCI Satellite of 50% of ResNet's outstanding
common stock (assuming no other issuances of common stock or common stock
equivalents). Upon the maturity date of the Loan, if TCI Satellite has been
prevented from converting the Loan or exercising the option in full due to
the previously described FCC restriction, ResNet will issue warrants to TCI
Satellite to acquire such shares into which the Loan is convertible and/or
for which the option is exercisable and that it has been unable to acquire.
The exercise price of the warrants for the shares issuable upon conversion
of the Loan will be DE MINIMUS, and the exercise price of the warrants for
the option shares will be equivalent to the exercise price under such option
agreement.
The Company, on behalf of itself and ResNet, retained PaineWebber
Incorporated ("PaineWebber") to act as financial advisor in connection with
the TCI Transaction, and to render its opinion to the stockholders of each
of ResNet and the Company as to the fairness of certain aspects of the
transaction, from a financial point of view. PaineWebber was engaged by the
Company because of its experience and expertise in strategic investment
transactions in the entertainment and multimedia industries and its
knowledge of the respective businesses of the Company and ResNet arising out
of its prior role as an investment banker to the Company.
PaineWebber delivered its written opinion, dated October 18, 1996 (the
"Opinion"), to the respective Board of Directors of the Company and ResNet
to the effect that, as of such date, the initial sale of 4.99% of ResNet's
outstanding common stock for consideration equal to $5,396,000 and the right
of TCI Satellite to convert the full amount of the Loan into 32% of ResNet's
outstanding common stock was fair, from a financial point of view, to the
stockholders of the Company and ResNet. In rendering the Opinion,
PaineWebber, among other things, reviewed historical business and financial
information of the Company, analyzed discounted cash flows of ResNet based
on financial forecasts furnished by the Company, conducted discussions with
members of senior management of the Company and ResNet concerning ResNet's
business and prospects, reviewed the historical market prices and trading
activity of certain publicly traded companies similar to ResNet which it
deemed relevant and conducted such other financial analyses and
investigations as it deemed necessary for purposes of the Opinion. Although
PaineWebber evaluated certain financial terms of the TCI Transaction,
PaineWebber did not recommend the specific consideration to be received by
the Company or ResNet, such terms being determined by negotiations between
TCI Satellite, the Company and their respective representatives.
Pursuant to an engagement letter, PaineWebber will be paid $200,000 for
its services as financial advisor to the Company and ResNet and $200,000 in
connection with the rendering of the Opinion. The Company has also agreed
to reimburse PaineWebber for its reasonable out-of-pocket expenses incurred
in connection with its engagement and to certain customary indemnification
provisions for the benefit of PaineWebber and its officers, agents,
employees and control persons, including indemnification for liabilities
under federal securities laws.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
Exhibit 11.1 Statement Regarding Computation of Net Loss Per Common
Share.
Exhibit 99.1 Press Release of the Company, dated October 21, 1996
B. REPORTS ON FORM 8-K:
The Company filed no Reports on Form 8 - K during the nine months
ended September 30, 1996.
LodgeNet Entertainment Corporation Page 22 September 30, 1996
<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: November 7, 1996 / S / TIM C. FLYNN
-------------------------------------------
Tim C. Flynn
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 1996 / S / JEFFREY T. WEISNER
-------------------------------------------
Jeffrey T. Weisner
Vice President - Finance
(Principal Financial and Accounting
Officer)
LodgeNet Entertainment Corporation Page 23 September 30, 1996
<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 SEPTEMBER 30,
--------------------------------
1995 1996
--------------------------------
<S> <C> <C>
Net loss $ (1,292) $ (1,857)
-------------------------------
-------------------------------
Weighted average shares outstanding:
Shares outstanding 7,348,243 11,042,406
Additional equivalent shares issuable from assumed exercise of common
stock options (1) 47,908 51,249
-------------------------------
Weighted average shares outstanding 7,396,151 11,093,655
-------------------------------
-------------------------------
Net loss attributable to common stock ($0.17) ($0.17)
-------------------------------
-------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1995 1996
-------------------------------
Net loss $ (4,215) $ (8,125)
-------------------------------
-------------------------------
Weighted average shares outstanding:
Shares outstanding 7,332,103 9,073,326
Additional equivalent shares issuable from assumed exercise of common
stock options (1) 43,763 52,644
------------------------------
Weighted average shares outstanding 7,375,866 9,125,970
------------------------------
------------------------------
Net loss attributable to common stock ($0.57) ($0.89)
------------------------------
------------------------------
</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-31-1995
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 2,083
<SECURITIES> 0
<RECEIVABLES> 18,493
<ALLOWANCES> (764)
<INVENTORY> 0
<CURRENT-ASSETS> 22,446
<PP&E> 209,830
<DEPRECIATION> (61,111)
<TOTAL-ASSETS> 174,368
<CURRENT-LIABILITIES> 28,193
<BONDS> 63,847
0
0
<COMMON> 110
<OTHER-SE> 115,874
<TOTAL-LIABILITY-AND-EQUITY> 174,368
<SALES> 60,912
<TOTAL-REVENUES> 60,912
<CGS> 32,229
<TOTAL-COSTS> 40,785
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,769
<INCOME-PRETAX> (8,094)
<INCOME-TAX> 31
<INCOME-CONTINUING> (8,125)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,125)
<EPS-PRIMARY> (.89)
<EPS-DILUTED> 0.00
</TABLE>
<PAGE>
EXHIBIT 99.1
FOR IMMEDIATE RELEASE LODGENET ENTERTAINMENT
October 21, 1996 Ann Parker
(605) 330-1330
TCI SATELLITE ENTERTAINMENT ACQUIRES EQUITY
IN LODGENET'S RESIDENTIAL SUBSIDIARY
_____________________________________________
TCI SATELLITE INVESTS $40 MILLION IN RESNET COMMUNICATIONS
SIOUX FALLS, SD - LodgeNet Entertainment Corp. (NASD: LNET) and TCI
Satellite Entertainment Inc. announced today that TCI Satellite has
purchased an equity interest in LodgeNet's residential subsidiary, ResNet
Communications, Inc. TCI Satellite has agreed to immediately acquire 4.99%
of ResNet's common stock for $5.4 million. In addition, TCI Satellite will
advance ResNet Communications, Inc. $34.6 million over the next five years,
the proceeds of which to be used to purchase Ku-band satellite receiver
equipment, in exchange for a note that will convert into a 36.99% equity
interest in ResNet. ResNet installs and operates private cable television
systems in apartment complexes throughout the United States.
Under the agreement, ResNet will have long-term access to TCI
Satellite's direct broadcast satellite (DBS) signals on a nationwide basis.
TCI Satellite will also have the option to increase its ownership in ResNet
by an additional 13.01%, exercisable after three years in return for an
additional cash investment based upon the then fair market value of ResNet.
"This agreement gives us each an optimal long-term competitive
strategy for expansion in the large multifamily residential market," said
Gary Howard, President and CEO of TCI Satellite. "By combining LodgeNet's
proprietary B-LANsm (broadband local area network) technology with TCI
Satellite's direct broadcast satellite network, we have a compelling
integrated solution to offer apartment owners, operators and residents
nationwide."
-more-
<PAGE>
LodgeNet/TCI Satellite -2
"Not only does this agreement validate our ResNet business plan and
give us capital to expand into this market, ResNet's access to TCI
Satellite's Ku-band technology also offers additional operating benefits,"
said LodgeNet President and CEO Tim C. Flynn. "This agreement will
significantly reduce ResNet's capital costs and increase programming options
for our subscribers. We can now use a smaller satellite dish and less
expensive receiving and decoding equipment and have access to a larger
variety of programming on a single transponder as compared to traditional
C-band technology."
TCI Satellite Entertainment, Inc. is the direct broadcast satellite
subsidiary of Tele-Communications, Inc. (TCI). TCI recently announced that
it will spin-off TCI Satellite Entertainment, Inc. to the holders of the
company's TCI Group common stock. When the spin-off is complete, TCI
Satellite Entertainment's assets and operations will include TCI's interest
in PRIMESTAR Partners, L.P and TCI's business known as PRIMESTAR By TCI,
which markets and distributes PRIMESTAR equipment and programming for TCI.
The spin-off is anticipated to be completed in the fourth quarter of this
year.
LodgeNet Entertainment Corporation is a specialized communications
company that, through its proprietary B-LAN (broadband local area network)
technology, provides video on-demand, network-based video games, PRIMESTAR
digital basic and premium television systems and programming, as well as
other interactive, multimedia entertainment and information services. The
Company is the second largest provider of such services to the lodging
market and also operates ResNet Communications, a subsidiary, which provides
similar services in multi-family residential complexes throughout the United
States.
# # #
