<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 MARCH 31, 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 May 8, 1996, there were 7,359,733 shares outstanding of
the Registrant's common stock, $.01 par value.
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
Form 10-Q
Index
<TABLE>
Page
No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
Consolidated Balance Sheets as of December 31, 1995
and March 31, 1996 (unaudited)) 3
Consolidated Statements of Operations (unaudited) for
the Three Months Ended March 31, 1995 and 1996. 4
Consolidated Statements of Cash Flows (unaudited) for
the Three Months Ended March 31, 1995 and 1996. 5
Notes to Consolidated Financial Statements. 6
Item 2 - Management's Discussion and Analysis of the Results
of Operations. 7
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings. 15
Item 2 - Changes in Securities. 15
Item 3 - Defaults Upon Senior Securities. 15
Item 4 - Submission of Matters to a Vote of Security Holders. 15
Item 5 - Other Information. 15
Item 6 - Exhibits and Reports on Form 8-K. 15
SIGNATURES 16
</TABLE>
- - -----------------
As used herein (unless the context otherwise requires)
"LodgeNet", "the Company" and/or "the Registrant" means LodgeNet
Entertainment Corporation and its wholly-owned subsidiaries.
LodgeNet Entertainment Corporation Page 2 March 31, 1996
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
December 31, March 31,
1995 1996
------------ ---------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $2,252 $14
Accounts receivable, net of allowance for doubtful accounts 11,355 14,070
Prepaid expenses and other 1,462 2,681
------------ ---------
Total current assets 15,069 16,765
------------ ---------
Property and equipment:
Land, building and equipment 8,976 10,450
Free-to-guest equipment 5,068 4,491
Guest Pay systems:
Installed 119,354 134,367
System components 13,468 14,626
Software costs 4,078 5,075
------------ ---------
Total property and equipment 150,944 169,009
Less - accumulated depreciation and amortization (42,838) (48,911)
------------ ---------
Property and equipment, net 108,106 120,098
------------ ---------
Debt issuance costs, net of accumulated amortization 1,537 2,606
------------ ---------
$124,712 $139,469
------------ ---------
------------ ---------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $15,222 $17,446
Current maturities of long-term debt 4,254 4,299
Accrued expenses 3,434 3,089
------------ --------
Total current liabilities 22,910 24,834
------------ --------
Deferred revenue 1,579 1,602
------------ --------
Long-term debt 57,497 73,133
------------ --------
Stockholders' equity:
Common stock, $.01 par value, 20 million shares authorized;
7,352,113 and 7,359,613 shares outstanding at December 31,
1995 and March 31, 1996, respectively 74 74
Additional paid-in capital 71,234 71,262
Accumulated deficit (28,582) (31,436)
------------ --------
Total stockholders' equity 42,726 39,900
------------ --------
$124,712 $139,469
------------ --------
------------ --------
</TABLE>
The accompanying notes are an integral part of
these consolidated balance sheets.
LodgeNet Entertainment Corporation Page 3 March 31, 1996
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
Three Months Ended
March 31,
-----------------------
1995 1996
--------- ----------
Revenues:
Guest Pay $10,500 $17,582
Free-to-guest 1,993 2,145
Other 899 641
---------- ----------
Total revenues 13,392 20,368
---------- ----------
Direct costs:
Guest Pay 3,824 6,839
Free-to-guest 1,544 1,684
Other 802 591
---------- ----------
Total direct costs 6,170 9,114
---------- ----------
Gross profit 7,222 11,254
---------- ----------
Operating expenses:
Guest Pay operations 2,213 3,163
Selling and marketing 511 742
General and administrative 1,385 2,107
Depreciation and amortization 3,858 6,173
---------- ----------
Total operating expenses 7,967 12,185
---------- ----------
Operating income (loss) (745) (931)
Interest expense 735 1,922
---------- ----------
Loss before income taxes (1,480) (2,853)
Provision for income taxes -- 20
---------- ----------
Net loss $(1,480) $(2,873)
---------- ----------
---------- ----------
Per common share:
Net loss attributable to common stock $(0.20) $(0.39)
---------- ----------
---------- ----------
Weighted average shares outstanding 7,352,166 7,406,719
---------- ----------
---------- ----------
The accompanying notes are an integral part of
these consolidated financial statements.
LodgeNet Entertainment Corporation Page 4 March 31, 1996
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Three Months Ended
March 31,
--------- ---------
1995 1996
--------- ---------
Operating activities:
Net loss $(1,480) $(2,873)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 3,858 6,073
Change in operating assets and liabilities:
Accounts receivable (933) (2,715)
Prepaid expenses and other (315) (1,219)
Accounts payable 392 2,224
Accrued expenses and deferred revenue 32 (322)
--------- ---------
Net cash provided by operating activities 1,554 1,168
--------- ---------
Investing activities:
Property and equipment additions (8,505) (18,065)
Certificates of deposit
--------- ---------
Net cash used for investing activities (8,505) (18,065)
--------- ---------
Financing activities:
Proceeds from long-term debt 208 378
Debt issuance costs (398) (1,069)
Repayments of long-term debt (20) (55)
Borrowings under revolving credit facility 4,200 15,358
Stock option activity 11 28
--------- ---------
Net cash provided by financing activities 4,001 14,640
--------- ---------
Effect of exchange rates on cash (10) 19
--------- ---------
Increase (decrease) in cash and cash equivalents (2,960) (2,238)
--------- ---------
Cash and cash equivalents at beginning of period 4,302 2,252
--------- ---------
Cash and cash equivalents at end of period $1,342 $14
--------- ---------
--------- ---------
Supplemental cash flow information:
cash paid for interest $753 $2,256
--------- ---------
--------- ---------
The accompanying notes are an integral part of
these consolidated financial statements.
LodgeNet Entertainment Corporation Page 5 March 31, 1996
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying consolidated financial statements as of March 31,
1996 and for the three month periods ended March 31, 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 - Subsequent Event
On April 16, 1996, the Company's Board of Directors authorized the
filing of a Registration Statement with the Securities and Exchange
Commission for a proposed public offering of 3,000,000 shares (which excludes
450,000 shares which may be offered subject to an over-allotment agreement
with the underwriters) of common stock of the Company. Costs associated with
the public offering will be charged against the proceeds of the offering. If
for any reason the offering is not completed, such costs will be charged to
operations.
LodgeNet Entertainment Corporation Page 6 March 31, 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
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 is expected to have financial and technological requirements
similar to those of the Company's lodging industry operations. The Company
expects to begin installing systems and to realize its first revenue from
residential services in the second quarter of 1996.
LodgeNet Entertainment Corporation Page 7 March 31, 1996
<PAGE>
INSTALLED ROOM BASE
During the three months ended March 31, 1996, the Company installed
32,009 new Guest Pay rooms, equipped 36,509 rooms with its Nintendo game
system, and installed 12,219 free-to-guest rooms. From March 31, 1995 through
March 31, 1996, the Company has installed 99,749 new Guest Pay rooms,
equipped 109,042 rooms with its Nintendo game system, and installed 33,312
free-to-guest rooms; representing increases of 49.8%, 119.4% and 14.6%,
respectively. The Company's base of installed rooms was comprised as follows
at March 31:
1996 1995
--------------- ----------------
Rooms % Rooms %
------- ----- -------- -------
Guest Pay rooms:
Scheduled 56,353 18.8% 62,885 31.4%
On-demand 243,863 81.2% 137,582 68.6%
------- ----- ------- ------
300,216 100.0% 200,467 100.0%
------- ----- ------- ------
------- ----- ------- ------
Nintendo game system rooms 200,388 91,346
------- -------
------- -------
Free-to-guest rooms 261,995 228,683
------- -------
------- -------
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
REVENUE ANALYSIS
The Company's total revenue for the first quarter of 1996 increased
52.1%, or $7.0 million, in comparison to the first quarter of 1995. The
following table sets forth the components of the Company's revenue for the
quarter ending March 31 (dollar amounts in thousands):
1996 1995
----------------------- ---------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
--------- ----------- -------- -----------
Guest Pay $17,582 86.3% $10,500 78.4%
Free-to-guest 2,145 10.5% 1,993 14.9%
Other 641 3.1% 899 6.7%
--------- ----------- -------- -----------
Total revenue $20,368 100.0% $13,392 100.0%
--------- ----------- -------- -----------
GUEST PAY REVENUE
Guest Pay revenues increased 67.4%, or $7.1 million, in the first
quarter of 1996 in comparison to the same quarter of 1995. This increase was
the result of (i) a 46.7% 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 9.3% increase in average monthly revenue per Guest Pay
room.
LodgeNet Entertainment Corporation Page 8 March 31, 1996
<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 March 31:
1996 1995
------- ------
Average monthly revenue per room:
Movie revenue $17.73 $16.64
Video game/information service 2.35 1.73
------- ------
Total per Guest Pay Room $20.08 $18.37
------- ------
------- ------
For all Guest Pay rooms:
Average movie buy rates 11.3% 10.7%
Average movie price $8.37 $8.19
Average hotel occupancy rate 65.9% 65.3%
For on-demand Guest Pay rooms:
Average movie buy rates 12.4% 12.0%
Average movie price $8.41 $8.25
Average hotel occupancy rate 67.9% 67.3%
Average movie revenue per room, for all Guest Pay rooms, was favorably
impacted by a combination of higher average buy rates and higher average
movie prices, both in comparison to the year earlier quarter; 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 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.
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 $1.75 and $1.27 during the
quarters ended March 31, 1996 and 1995, respectively. The Company had
installed its video game service in 200,388 and 91,346 Guest Pay rooms as of
March 31, 1996 and 1995, respectively.
FREE-TO-GUEST REVENUE
Free-to-guest revenues increased 7.6%, or $152,000, in the first
quarter of 1996 as compared to the same quarter of 1995. The comparative
increase in revenues resulted from the 14.6% increase in the number of
installed free-to-guest rooms since March 31, 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 261,995 and 228,683 free-to-guest rooms installed at March
31, 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, decreased by $.3 million, in the first quarter of 1996
as compared to the same quarter of 1995; all of which decrease was due to
lower television sales.
LodgeNet Entertainment Corporation Page 9 March 31, 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 March
31 (dollar amounts in thousands):
1966 1995
------ -------
Direct costs:
Guest Pay $6,839 $3,824
Free-to-guest 1,684 1,544
Other revenue 591 802
------ ------
Total direct cost $9,114 $6,170
------ ------
------ ------
Gross profit margin:
Guest Pay 61.1% 63.6%
Free-to-guest 21.5% 22.5%
Other revenue 7.8% 10.8%
Overall (composite) 55.3% 53.9%
Guest Pay direct costs increased 78.8%, or $3.0 million, in the first
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 36.4% in the first quarter
of 1995 to 38.9% 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,
substantially increased video game revenue in the Guest Pay revenue mix and
increased hotel commissions; all in the current quarter as compared to the
year-earlier quarter.
Free-to-guest direct costs increased 9.1% to $1.7 million in the first
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
78.5% from 77.5% in the year-earlier quarter. The relative increase in
free-to-guest direct costs (as a percentage of revenue) resulted from higher
costs for non-premium programming in the first 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 decreased $211,000, in the
first quarter of 1996 as compared to the same quarter 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
increased to 92.2% of other revenue in the current quarter versus 89.2% in
the first quarter of 1995, reflecting the effect of increased equipment
sales, which have relatively low margins, in the revenue mix for current
period as compared to a year earlier.
The Company's overall gross profit increased 55.8%, or $4.0 million, to
$11.3 million in the first quarter of 1996 on a 52.1% increase in revenues in
comparison to the same period in the prior year. The Company's overall gross
profit margin improved to 55.3% in the current quarter, as compared to the
year earlier 53.9%, primarily due to the relative increase in the proportion
of Guest Pay revenues in the total revenue mix between the quarters.
LodgeNet Entertainment Corporation Page 10 March 31, 1996
<PAGE>
OPERATING EXPENSES The following table sets forth information in regard to
the Company's operating expenses for the quarter ending March 31 (dollar
amounts in thousands):
1996 1995
------------------- -------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
-------- ---------- -------- ----------
Guest Pay operations $3,163 15.5% $2,213 16.5%
Selling and marketing 742 3.7% 511 3.8%
General and administrative 2,107 10.3% 1,385 10.3%
Depreciation and amortization 6,173 30.3% 3,858 28.8%
------- ------
Total operating expenses $12,185 59.8% $7,967 59.5%
------- ------
------- ------
Guest Pay operations expense increased 42.9%, or $950,000, from $2.2
million in the comparable quarter of the previous year. This increase is
primarily attributable to the 46.7% 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 $3.87 per month in the
same quarter of 1995. The comparative decrease on a per-room basis was
primarily the result of lower service, maintenance and support costs.
Selling and marketing expenses increased 45.2%, or $231,000, from
$511,000 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 the current quarter as compared to 3.8% in the
year earlier period.
General and administrative expenses increased 52.1%, or $722,000, from
$1.4 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 10.3% of total revenue in both quarters.
Depreciation and amortization expenses increased 60.0% to $6.2 million
in the first quarter of 1996 from $3.9 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 $(.9) million in the current quarter from
$(.7) million in the same quarter of 1995.
INTEREST Interest expense increased to $1.9 million in the current quarter
from $735,000 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 $32.3 million at March 31, 1995 to
approximately $73.1 million at March 31, 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, and
borrowings under the Company's revolving credit facility. Average principal
amount of long-term debt outstanding, during the quarter ended March 31,
1996, was approximately $68 million (at an average interest rate of
approximately 10.7%) as compared to an average principal amount outstanding
of approximately $29 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 $(2.9) million in the first quarter of 1996 from a net loss of
$(1.5) million in the same quarter a year earlier.
LodgeNet Entertainment Corporation Page 11 March 31, 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 68.4% to
$5.2 million in the first quarter of 1996 as compared to $3.1 million in the
first quarter of 1995. EBITDA as a percentage of total revenues was 25.7% in
the current quarter as compared to 23.2% 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.
SEASONALITY
The Company's quarterly 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 first 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
quarterly, 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 March 31, 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 March 31, 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
LodgeNet Entertainment Corporation Page 12 March 31, 1996
<PAGE>
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, replacing the
Company's former revolving facility. 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 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 March 31, 1996, the Company was in compliance with all
such covenants. There was approximately $15.4 million outstanding under the
1996 Revolving Facility as of March 31, 1996.
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
$18.1 million during the three months ended March 31, 1996, and net cash
provided by operating activities was approximately $1.6 million. Financing
activities provided approximately $14.5 million, all of which was provided by
borrowings under the 1996 Revolving Facility, during the three months ended
March 31, 1996. 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 $80 to $90 million during 1996,
and principal and interest payments of approximately $4.3 and $7.5 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.
On April 16, 1996, the Company filed a registration statement with the
Commission for a proposed offering of 3,000,000 shares (which excludes
450,000 shares which may be offered subject to an over-allotment agreement
with the underwriters) of common stock. The Company believes that the net
proceeds from this offering, 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.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"), issued in October 1995 and
effective for fiscal years beginning after December 15, 1995, encourages, but
does not require, a fair value based method of accounting for employee stock
options or similar equity instruments. It also allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), but
requires pro forma disclosures of net income and earnings per share as if the
fair value method of accounting had been applied.
The Company adopted Statement 123 in 1996 and elected to continue to
measure compensation cost in accordance with APB 25, as permitted under
Statement 123, and to comply with the pro forma disclosure requirements
thereof. Compliance with Statement 123 will have no impact on the Company's
results of operations or financial position because the Company's stock
option plans are fixed stock option plans, and therefore grants thereunder
have no intrinsic value at the grant date under APB 25.
LodgeNet Entertainment Corporation Page 13 March 31, 1996
<PAGE>
Financial Accounting Standards Board Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("Statement 121") was issued in March 1995 and is effective for fiscal
years beginning after December 15, 1995. This statement will be applied
prospectively, and requires that impairment losses on long-lived assets be
recognized when the book value of the asset exceeds its expected undiscounted
cash flows. The Company adopted Statement 121 as of January 1, 1996 and
adoption at that time did not have a material impact on the Company's
financial position or results of operations.
LodgeNet Entertainment Corporation Page 14 March 31, 1996
<PAGE>
PART II
ITEM 1 -- LEGAL PROCEEDINGS
As previously reported, on February 16, 1996 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, 1996, 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
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 quarter ended
March 31, 1996.
LodgeNet Entertainment Corporation Page 15 March 31, 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: May 8, 1996 / s / TIM C. FLYNN
-----------------------------------------------
Tim C. Flynn
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 8, 1996 / s / JEFFREY T. WEISNER
-----------------------------------------------
Jeffrey T. Weisner
Vice President - Finance
(Principal Financial and Accounting Officer)
LodgeNet Entertainment Corporation Page 16 March 31, 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>
Year Ended December 31, Three Months Ended March 31,
------------------------------------ ----------------------------
1993 1994 1995 1995 1996
------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Loss before extraordinary loss $(2,057) $(3,326) $(7,026) $(1,480) $(2,873)
Cumulative preferred dividends 1,557
------------ ----------- ----------- ------------ -------------
Loss before extraordinary loss
attributable to common stock (3,614) (3,326) (7,026) (1,480) (2,873)
Extraordinary loss (1,324)
------------ ----------- ----------- ------------ -------------
Net loss attributable to common stock $(3,614) $(4,650) $(7,026) $(1,480) $(2,873)
------------ ----------- ----------- ------------ -------------
------------ ----------- ----------- ------------ -------------
Weighted average shares outstanding:
Shares outstanding 7,274,248 7,275,481 7,337,147 7,309,948 7,354,393
Additional equivalent shares issuable
from assumed exercise of common
stock options (1) 59,978 51,267 45,324 42,218 52,326
------------ ----------- ----------- ------------ -------------
Weighted average shares outstanding 7,334,226 7,326,748 7,382,471 7,352,166 7,406,719
------------ ----------- ----------- ------------ -------------
------------ ----------- ----------- ------------ -------------
Loss before extraordinary loss
attributable to common stock ($0.49) ($0.45) ($0.95) ($0.20) ($0.39)
Extraordinary loss (0.18)
------------ ----------- ----------- ------------ -------------
Net loss attributable to common stock ($0.49) ($0.63) ($0.95) ($0.20) ($0.39)
------------ ----------- ----------- ------------ -------------
------------ ----------- ----------- ------------ -------------
</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> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 14
<SECURITIES> 0
<RECEIVABLES> 14,583
<ALLOWANCES> (513)
<INVENTORY> 0
<CURRENT-ASSETS> 16,765
<PP&E> 169,009
<DEPRECIATION> (48,911)
<TOTAL-ASSETS> 139,469
<CURRENT-LIABILITIES> 24,834
<BONDS> 73,133
0
0
<COMMON> 74
<OTHER-SE> 39,826
<TOTAL-LIABILITY-AND-EQUITY> 139,469
<SALES> 20,368
<TOTAL-REVENUES> 20,368
<CGS> 9,114
<TOTAL-COSTS> 12,185
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,922
<INCOME-PRETAX> (2,853)
<INCOME-TAX> 20
<INCOME-CONTINUING> (2,873)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,873)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> 0
</TABLE>
