<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, 1997
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 5, 1997, there were 11,213,437 shares outstanding of the
Registrant's common stock, $0.01 par value.
THIS REPORT CONTAINS A TOTAL OF 16 PAGES, EXCLUDING EXHIBITS. THE EXHIBIT
INDEX APPEARS ON PAGE 15.
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LodgeNet Entertainment Corporation Form 10-Q
LODGENET ENTERTAINMENT CORPORATION
FORM 10-Q
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
March 31, 1997 (Unaudited). . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations (Unaudited) for
the Three Months Ended March 31, 1996 and 1997. . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 1996 and 1997. . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . 6
Item 2 -- Management's Discussion and Analysis of the Results
of Operations. . . . . . . . . . . . . . . . . . . . 8
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
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS -- CERTAIN STATEMENTS IN
THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WHEN USED IN THIS QUARTERLY
REPORT, THE WORDS "EXPECTS," "ANTICIPATES," "ESTIMATES," "BELIEVES," "NO
ASSURANCE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE THE COMPANY'S
ACTUAL PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. IN ADDITION TO THE RISKS AND UNCERTAINTIES
DISCUSSED IN THIS QUARTERLY REPORT, SUCH FACTORS INCLUDE, AMONG OTHERS, THE
FOLLOWING: THE IMPACT OF COMPETITION AND CHANGES TO THE COMPETITIVE
ENVIRONMENT FOR THE COMPANY'S PRODUCTS AND SERVICES, CHANGES IN TECHNOLOGY,
RELIANCE ON STRATEGIC PARTNERS, UNCERTAINTY OF LITIGATION, CHANGES IN
GOVERNMENT REGULATION AND OTHER FACTORS DETAILED, FROM TIME TO TIME, IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY
REPORT. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO
RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH
REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH
ANY SUCH STATEMENT IS BASED.
- --------
As used herein (unless the context otherwise requires) "LodgeNet", "the
Company" and/or "the Registrant" means LodgeNet Entertainment Corporation and
its majority-owned subsidiaries.
March 31, 1997 Page 2
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LodgeNet Entertainment Corporation Form 10-Q
PART I -- FINANCIAL INFORMATION
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
December 31, March 31,
1996 1997
------------ -----------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 86,177 $ 60,416
Accounts receivable, net of allowance for
doubtful accounts 18,428 21,113
Prepaid expenses and other 1,935 2,488
-------- --------
Total current assets 106,540 84,017
Property and equipment, net 164,157 178,537
Debt issuance costs, net of accumulated depreciation 8,509 8,459
Other assets, net 562 3,908
-------- --------
$279,768 $274,921
-------- --------
-------- --------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 16,775 $ 15,326
Current portion of long-term debt 425 486
Accrued expenses 4,596 7,591
-------- --------
21,796 23,403
Deferred revenue 2,956 3,078
Long-term debt 179,233 179,304
Minority interest in consolidated subsidiary 231 198
-------- --------
Total liabilities 204,216 205,983
-------- --------
Stockholders' equity:
Common stock, $0.01 par value, 20 million shares
authorized; 11,125,369 shares outstanding at
December 31, 1996 and 11,213,437 shares outstanding
at March 31, 1997 111 111
Additional paid-in capital 120,539 120,625
Accumulated deficit (45,098) (51,798)
-------- --------
Total stockholders' equity 75,552 68,938
-------- --------
$279,768 $274,921
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
March 31, 1997 Page 3
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LodgeNet Entertainment Corporation Form 10-Q
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
Three Months Ended
March 31,
---------------------
1996 1997
--------- ----------
Revenue:
Guest Pay $ 17,582 $ 25,567
Free-to-guest 2,145 2,166
Other 641 1,923
--------- ----------
Total revenue 20,368 29,656
--------- ----------
Direct costs:
Guest Pay 6,839 9,726
Free-to-guest 1,684 1,735
Other 591 1,356
--------- ----------
Total direct costs 9,114 12,817
--------- ----------
Gross profit 11,254 16,839
--------- ----------
Operating expenses:
Guest Pay operations 3,163 4,693
Selling, general and administrative 2,849 5,056
Depreciation and amortization 6,173 9,695
--------- ----------
Total operating expenses 12,185 19,444
--------- ----------
Operating loss (931) (2,605)
Interest expense, net 1,922 4,064
--------- ----------
Loss before income taxes (2,853) (6,669)
Provision for income taxes 20 10
--------- ----------
Net loss $ (2,873) $ (6,679)
--------- ----------
--------- ----------
Per common share:
Net loss attributable to common stock $ (0.39) $ (0.59)
--------- ----------
--------- ----------
Weighted average shares outstanding 7,406,719 11,264,587
--------- ----------
--------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
March 31, 1997 Page 4
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LodgeNet Entertainment Corporation Form 10-Q
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Three Months Ended
March 31,
----------------------
1996 1997
-------- --------
Operating activities:
Net loss $ (2,873) $ (6,679)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 6,073 9,695
Minority interest - (33)
Change in current assets and liabilities:
Accounts receivable (2,715) (2,633)
Prepaid expenses and other (1,219) (553)
Accounts payable 2,224 (1,574)
Accrued expenses and deferred revenue (322) 3,117
Other - (432)
-------- --------
Net cash provided by operating activities 1,168 908
-------- --------
Investing activities:
Property and equipment additions (18,065) (22,305)
Purchase of Cable TV operation - (4,562)
-------- --------
(18,065) (26,867)
-------- --------
Financing activities:
Proceeds from long-term debt 378 238
Debt issuance costs (1,069) -
Repayments of long-term debt (55) (106)
Borrowings under revolving credit facility 15,358 -
Stock option activity 28 86
-------- --------
Net cash provided by financing activities 14,640 218
-------- --------
Effect of exchange rates on cash 19 (20)
-------- --------
Increase (decrease) in cash and cash equivalents (2,238) (25,761)
Cash and equivalents at beginning of period 4,302 86,177
Cash and equivalents at end of period $ 2,064 $ 60,416
-------- --------
-------- --------
Supplemental cash flow information:
Cash paid for interest $ 753 $ 1,076
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
March 31, 1997 Page 5
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LodgeNet Entertainment Corporation Form 10-Q
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The accompanying consolidated financial statements as of March 31,
1997, and for the three month periods ended March 31, 1996 and 1997, 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 1996, as filed with
the Commission. The results of operations for the three month period ended
March 31, 1997 are not necessarily indicative of the results of operations
for the full year.
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 -- Property and Equipment, Net
Property and equipment was comprised as follows at (in thousands of
dollars):
December 31, March 31,
1996 1997
--------- ---------
Land, building and equipment $ 15,914 $ 17,416
Free-to-guest equipment 7,369 8,171
Cable television equipment 5,291 7,015
Guest Pay systems:
Installed 173,607 185,155
System components 23,290 26,760
Software costs 6,266 6,830
Building construction in progress 2,528 5,189
--------- ---------
234,265 256,536
Less-depreciation and amortization (70,108) (77,999)
--------- ---------
Property and equipment, net $ 164,157 $ 178,537
--------- ---------
--------- ---------
Note 3 -- 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.
March 31, 1997 Page 6
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LodgeNet Entertainment Corporation Form 10-Q
Note 4 -- Effect of Recently Issued Accounting Pronouncements
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share", which requires the disclosure of basic earnings per share and
diluted earnings per share. The Company will adopt SFAS 128 at the end of
1997 and anticipates that it will have no effect on previously reported
earnings per share.
Note 5 -- Reclassifications
Certain amounts have been reclassified to conform to the 1997
presentation. Such reclassifications had no effect on previously reported
results of operations or stockholders' equity.
March 31, 1997 Page 7
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LodgeNet Entertainment Corporation Form 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, (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. 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. The Company obtains its free-to-guest
programming pursuant to multi-year agreements and pays a fixed monthly fee
per room. Such fixed monthly fees vary from time to time, depending on
incentive programs that may be provided by the programming networks.
March 31, 1997 Page 8
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LodgeNet Entertainment Corporation Form 10-Q
Installed Room Base
During the three months ended March 31, 1997, the Company installed
32,451 new Guest Pay rooms, equipped 36,133 rooms with its Nintendo game
system, and installed 5,722 free-to-guest rooms. From March 31, 1996 through
March 31, 1997, the Company has installed 132,480 new Guest Pay rooms,
equipped 158,648 rooms with its Nintendo game system, and installed 38,609
free-to-guest rooms; representing increases of 44.1%, 79.2% and 14.7%,
respectively, in its installed room bases. The Company's base of installed
rooms was comprised as follows at March 31:
1996 1997
---------------- ----------------
Rooms % Rooms %
------- ------ ------- ------
Guest Pay rooms:
Scheduled 56,353 18.8% 38,182 8.8%
On-demand 243,863 81.2% 394,514 91.2%
------- ------ ------- ------
300,216 100.0% 432,696 100.0%
------- ------ ------- ------
------- ------ ------- ------
Nintendo game system rooms 200,388 359,036
------- -------
------- -------
Free-to-guest rooms 261,995 300,604
------- -------
------- -------
RESIDENTIAL INDUSTRY SERVICES
In January 1996, the Company formed ResNet Communications, Inc.
("ResNet") for the purpose of extending the Company's proprietary B-LAN-SM-
system architecture and operational expertise into the multi-family
residential unit ("MDU") market. In October 1996, TCI Satellite, an
affiliate of TCI, agreed to invest up to $40 million in ResNet in exchange
for up to a 36.99% interest in ResNet and agreed to provide ResNet with
long-term access to DBS signals for the MDU market on a nationwide basis.
The Company believes that the MDU business has financial and technological
requirements similar to those of the Company's lodging industry business.
ResNet began installations of its first systems during the quarter ended
September 30, 1996. During the quarter ended March 31, 1997, ResNet
purchased, for approximately $4.6 million, the assets and contracts of a
private cable television operation with approximately 11,000 passings in the
Detroit metropolitan area. The results of ResNet's operations during the
three months ended March 31, 1997 were not material to the Company's
consolidated results of operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996 AND 1997
REVENUE ANALYSIS
The Company's total revenue for the first quarter of 1997 increased
45.6%, or $9.3 million, in comparison to the first quarter of 1996. The
following table sets forth the components of the Company's revenue for the
quarter ending March 31 (dollar amounts in thousands):
1996 1997
--------------------- ---------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
--------- ------ --------- ------
Guest Pay $ 17,582 86.3% $ 25,567 86.2%
Free-to-guest 2,145 10.5% 2,166 7.3%
Other 641 3.2% 1,923 6.5%
--------- ------ --------- ------
Total revenue $ 20,368 100.0% $ 29,656 100.0%
--------- ------ --------- ------
--------- ------ --------- ------
March 31, 1997 Page 9
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LodgeNet Entertainment Corporation Form 10-Q
Guest Pay Revenue -- Guest Pay revenues increased 45.4%, or $8.0
million, in the first quarter of 1997 in comparison to the same quarter of
1996. This increase was primarily the result of a 47.4% increase in the
average number of installed Guest Pay rooms, which offset a slight decline in
average monthly revenue per room. The following table sets forth information
in regard to average monthly revenue per installed Guest Pay room for the
quarter ending March 31:
1996 1997
---- ----
Average monthly revenue per room:
Movie revenue $ 18.50 $ 17.64
Video game/information service 2.45 3.04
-------- --------
Total per Guest Pay room $ 20.95 $ 20.68
-------- --------
-------- --------
Average movie revenue per room, for all Guest Pay rooms, was impacted by
lower average buy rates and lower hotel occupancy rates, and partially offset
by the effect of higher average movie prices. The comparative decrease in buy
rates is attributed to a relatively less popular selection of newly-released
major motion pictures in the current quarter as compared to the year earlier
period. The slight increase in average movie price is due to price increases
in certain Guest Pay rooms; the Company's movie prices are generally $7.95 or
$8.95.
Average video game and information service revenue per room 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 $2.14 and $1.86 during the quarters ended March 31, 1997
and 1996, respectively. The Company had installed its video game service in
359,036 and 200,388 Guest Pay rooms as of March 31, 1997 and 1996,
respectively.
Free-to-guest Revenue -- Free-to-guest revenues increased 1.0%, or
$21,000, in the first quarter of 1997 as compared to the same quarter of
1996. The comparative increase in revenues resulted from the 14.7% increase
in the number of installed free-to-guest rooms since March 31, 1996, which
offset lower average revenue per room. The Company had 300,604 and 261,995
free-to-guest rooms installed at March 31, 1997 and 1996, 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 $1.3 million or 200%, in
the first quarter of 1997 as compared to the same quarter of 1996. The
increase was primarily attributable to increased sales of system equipment,
increased service-related revenues and increased television sales.
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):
1996 1997
-------- --------
Direct costs:
Guest Pay $ 6,839 $ 9,726
Free-to-guest 1,684 1,735
Other revenue 591 1,356
-------- --------
Total direct costs $ 9,114 $ 12,817
-------- --------
-------- --------
Gross profit margin:
Guest Pay 61.1% 62.0%
Free-to-guest 21.5% 19.9%
Other revenue 7.8% 29.5%
Overall (composite) 55.3% 56.8%
Guest Pay direct costs increased 42.2%, or $2.9 million, in the first
quarter of 1997 as compared to the year earlier quarter. Since Guest Pay
direct costs (primarily studio license fees, video game license fees and the
March 31, 1997 Page 10
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LodgeNet Entertainment Corporation Form 10-Q
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 decreased from 38.9% in the first quarter
of 1996 to 38.0% in the current quarter. The relative decrease in Guest Pay
direct costs (as a percentage of revenue) reflects lower movie-related costs
due to proportionately less revenue from newly-released motion pictures
partially offset by 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.
Free-to-guest direct costs increased 3.0% or $51,000 in the first
quarter of 1997 as compared to the year earlier quarter. As a percentage of
free-to-guest revenue, free-to-guest direct costs increased to 80.1% from
78.5% 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 first quarter of 1997, 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 129% to $1.4
million in the first quarter of 1997 from $591,000 in the year earlier
quarter. As a percentage of related revenues, such direct costs decreased to
70.5% of other revenue in the current quarter versus 92.2% in the first
quarter of 1996, primarily reflecting the effect of the increased equipment
sales discussed above.
The Company's overall gross profit increased 49.6%, or $5.6 million, to
$16.8 million in the first quarter of 1997 on a 45.6% increase in revenues in
comparison to the same period in the prior year. The Company's overall gross
profit margin was 56.8% in the current quarter, as compared to the year
earlier 55.3%.
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 1997
------------------ -------------------
Percent of Percent of
Total Total
Amount Revenues Amount Revenues
-------- -------- -------- --------
Guest Pay operations $ 3,163 15.5% $ 4,693 15.8%
Selling, general and administrative 2,849 14.0% 5,056 17.0%
Depreciation and amortization 6,173 30.3% 9,695 32.7%
-------- --------
Total operating expenses $ 12,185 59.8% $ 19,444 65.6%
-------- --------
-------- --------
Guest Pay operations expense increased 48.4%, or $1.5 million, from $3.2
million in the comparable quarter of the previous year. This increase is
primarily attributable to the 47.4% 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
$3.80 per month in the current quarter as compared to $3.77 per month in the
same quarter of 1996. The slight comparative increase on a per-room basis was
primarily the result of higher marketing, and service and support expenses.
Selling, general and administrative expenses increased 77%, or $2.2
million, from $2.8 million in the first quarter of 1996. The increase
reflects the effects of substantially increased litigation-related expenses
($1.0 million during the first quarter of 1997 as compared to $.1 million
during the first quarter of 1996), an increase in the number of development
and administrative personnel and increased facilities-related expenses. As a
percentage of revenue, such expenses were 17.0% in the current quarter as
compared to 14.0% in the year earlier period.
Depreciation and amortization expenses increased 57.1% to $9.7 million
in the first quarter of 1997 from $6.2 million in the year earlier quarter.
This increase is directly attributable to the increases in the number of
installed Guest Pay and game service equipped rooms previously discussed,
associated software and other capitalized costs such as service vans,
equipment and computers that are related to the increased number of rooms in
service since the year-earlier quarter.
March 31, 1997 Page 11
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LodgeNet Entertainment Corporation Form 10-Q
Operating Loss -- The Company's operating loss, as a result of the
factors previously discussed, was $(2.6) million in the current quarter as
compared to $(.9) million in the same quarter of 1996.
Interest Expense -- Interest expense, net of interest income, increased
to $4.1 million in the current quarter from $1.9 million in the comparable
quarter of 1996 due to increases in long-term debt to fund the Company's
continuing expansion of its business. Long-term debt increased from $73.1
million at March 31, 1996 to $179.3 million at March 31, 1997. Average
principal amount of long-term debt (excluding amounts under the revolving
facility) outstanding, during the quarter ended March 31, 1997, was
approximately $179 million (at an average interest rate of approximately
10.5%) as compared to an average principal amount outstanding of
approximately $68 million (at an average interest rate of approximately
10.7%) during the comparable period of 1996.
Net Loss -- For the reasons previously discussed, the Company's net loss
increased to $(6.7) million in the first quarter of 1997 from a net loss of
$(2.9) million in the same quarter 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
35.3% to $7.1 million in the first quarter of 1997 as compared to $5.2
million in the first quarter of 1996. EBITDA as a percentage of total
revenues was 23.9% in the current quarter as compared to 25.7% in the same
quarter of 1996. Absent the litigation-related expenses discussed above,
EBITDA would have been approximately $8.1 million during the first quarter of
1997 as compared to $5.3 million during the same quarter last year. As a
percentage of revenue, EBITDA would have equaled 27.3% during the first
quarter of 1997 versus 26.2% in the same period of 1996. 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 operating results from its lodging activities 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 than in the first and fourth quarters due to seasonal
travel patterns.
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, concurrently with certain amendments to the Note Purchase
Agreement, the Company issued $5 million principal amount of 10.35% Senior
Notes under such agreement in a private placement to certain holders of the
9.95% Senior Notes. As part of the transaction in which the Company issued
its 10.25% Senior Notes (discussed further below) the Company redeemed the
9.95% and 10.35% Senior Notes in their entirety, which represented a use of
proceeds of approximately $28.9 million in principal amount, plus accrued
interest, and a make-whole premium of approximately $2.8 million.
On August 9, 1995, the Company issued $20 million principal amount of
its 11.5% Senior Subordinated Notes due July 15, 2005 (the 11.5% Senior
Notes) to three insurance companies in a private placement. On October 4,
1995, the Company issued an additional $10 million principal amount of such
11.5% Senior Notes to the same purchasers and under identical terms and
conditions. In connection with the issuance of its 10.25% Senior Notes, the
Company and the holders of the 11.5% Senior Notes amended the terms of the
11.5% Senior Notes to provide that such notes rank PARI PASSU with, and have
substantially the same covenants as, the 10.25% Senior Notes. The 11.5%
Senior 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 11.5% Senior 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
March 31, 1997 Page 12
<PAGE>
LodgeNet Entertainment Corporation Form 10-Q
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 the 11.5% Senior 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.
In connection with the December 19, 1996 issuance of its 10.25% Senior
Notes, the Company repaid all of the outstanding borrowing under its then
bank credit facility, approximately $20.4 million, and amended and restated
such facility. The amended and restated bank credit facility (the 1997
Facility) provides for total lending commitments of $100.0 million (which can
be increased to $175.0 million with the consent of NatWest Bank) and contains
certain covenants, including the maintenance of certain financial ratios,
limitations on the incurrence of additional indebtedness, limitations on the
incurrence of certain liens, limitations on certain payments or distributions
in respect of the common stock and provisions for acceleration of principal
repayment in certain circumstances. At May 5, 1997 no amounts had been
drawn by the Company under the 1997 Facility. The Company was in compliance
with all such covenants as of March 31, 1997. The 1997 Facility is secured
by (i) a first priority security interest in all of the Company's and certain
of its subsidiaries' tangible and intangible assets and (ii) a guarantee by
ResNet of all amounts advanced to it by the Company. Amounts borrowed under
the 1997 Facility bear interest at either (i) LIBOR plus from 1.25% to 2.00%
or (ii) the greater of (a) the NatWest Bank prime rate plus from .25% to
1.00% or (b) the federal funds rate plus from .75% to 1.50%, depending on the
Company's total leverage, as defined in the agreement. The banks' commitment
under the 1997 Facility is subject to a scheduled reduction of 15% beginning
in December 1998 and annually thereafter as follows: December 1999 -- 20%;
December 2000 -- 20%; December 2001 -- 20%; and December 2002 -- 25%.
On May 23, 1996, the Company sold 3,680,000 shares of the Company's
Common Stock for net proceeds of approximately $44.6 million. Such proceeds
were used to repay approximately $25.9 million of borrowings outstanding
under the then existing credit facility, and to provide working capital for
the continuing expansion of the Company's lodging and residential business.
On October 21, 1996, the Company and ResNet entered into agreements with
TCI Satellite pursuant to which TCI Satellite acquired a 4.99% equity
interest in ResNet for a purchase price of $5.4 million in cash (the "Stock
Payment") and agreed to provide ResNet with long-term access to a DBS signal
on a nationwide basis. In addition, TCI Satellite agreed to advance up to
$34.6 million to ResNet during the five years ending October 21, 2001, under
a convertible note agreement (the "TCI Convertible Note") to purchase DBS
equipment. The TCI Convertible Note is subject to mandatory conversion into a
maximum 32.0% equity interest in ResNet at such time as conversion is not
restricted by FCC regulations. The TCI Convertible Note is unsecured, payable
solely in shares of ResNet's common stock, non-recourse to the Company, and
subordinated to all present and future borrowings by ResNet including any
borrowings from the Company by ResNet. Interest accrues (generally at TCI's
average borrowing rate) on amounts outstanding under the TCI Convertible
Note, but such interest is not payable in cash (and does not increase the
equity interest into which the TCI Convertible Note will be converted).
On December 19, 1996, the Company issued $150 million, principal amount,
of unsecured 10.25% Senior Notes (the Notes) in a private offering in
accordance with Rule 144A of The Securities Act of 1933, as amended (the
Securities Act). The proceeds of the Notes, which were issued at par, after
placement fees and offering expenses, were approximately $143.2 million.
Approximately $31.7 million of such proceeds was used to redeem the
outstanding principal amounts of the 9.95% and 10.35% Senior Notes and to
prepay all outstanding amounts under the Company's then revolving credit
facility, both as previously discussed. The remaining proceeds,
approximately $91.1 million, were invested in highly liquid, interest-bearing
securities pending their use for funding capital expenditures to expand the
Company's lodging and residential businesses. On April 11, 1997, the Company
filed a registration statement with the Securities and Exchange Commission to
effect an offer to exchange the Notes for identical Notes registered under
the Securities Act of 1933, as amended.
The Company has incurred operating and net losses due in large part to
the depreciation, amortization and interest expenses related to the capital
required to expand its lodging and residential businesses. The growth of the
Company's business requires substantial capital to finance expansion of its
lodging and multi-family residential businesses. The Company expects that
losses will increase as the Company implements its expansion strategy.
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 $26.9 million during
the first quarter of 1997, and net cash provided by operating activities was
approximately $.9 million.
March 31, 1997 Page 13
<PAGE>
LodgeNet Entertainment Corporation Form 10-Q
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 $55 to $85 million during the remainder
of 1997 and substantial amounts thereafter. The actual amount and timing of
the Company's capital expenditures will vary (and such variations could be
material) depending upon the number of new contracts for services entered
into by the Company, the costs of installations and other factors; however,
this is a forward-looking statement and there can be no assurance in this
regard. In addition, the 1997 Facility limits the amount of the Company's
annual capital expenditures to a certain base amount plus the amounts of
certain additional financing.
The Company believes that the net proceeds from the 10.25% Senior Notes,
the funds to be provided by TCI Satellite, its operating cash flows and
borrowings permitted under the 1997 Facility will be sufficient to fund the
Company's cash requirements for 12 to 18 months; however, this is a
forward-looking statement and there can be no assurance in this regard.
After such time, the Company may incur additional amounts of indebtedness.
If the Company's plans or assumptions change, if its assumptions prove to be
inaccurate or if the Company experiences unanticipated costs or competitive
pressures, the Company may be required to seek additional capital sooner than
currently anticipated. There can be no assurance that the Company will be
able to obtain financing, or, if such financing is available, that the
Company will be able to obtain it on acceptable terms. Failure to obtain
additional financing, if needed, could result in the delay or abandonment of
some or all of the Company's expansion plans.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share", which requires the disclosure of basic earnings per share and
diluted earnings per share. The Company will adopt SFAS 128 at the end of
1997 and anticipates that it will have no effect on previously reported
earnings per share.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS -- CERTAIN STATEMENTS IN
THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WHEN USED IN THIS QUARTERLY
REPORT, THE WORDS "EXPECTS," "ANTICIPATES," "ESTIMATES," "BELIEVES," "NO
ASSURANCE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE THE COMPANY'S
ACTUAL PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. IN ADDITION TO THE RISKS AND UNCERTAINTIES
DISCUSSED IN THIS QUARTERLY REPORT, SUCH FACTORS INCLUDE, AMONG OTHERS, THE
FOLLOWING: THE IMPACT OF COMPETITION AND CHANGES TO THE COMPETITIVE
ENVIRONMENT FOR THE COMPANY'S PRODUCTS AND SERVICES, CHANGES IN TECHNOLOGY,
RELIANCE ON STRATEGIC PARTNERS, UNCERTAINTY OF LITIGATION, CHANGES IN
GOVERNMENT REGULATION AND OTHER FACTORS DETAILED, FROM TIME TO TIME, IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY
REPORT. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO
RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH
REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH
ANY SUCH STATEMENT IS BASED.
March 31, 1997 Page 14
<PAGE>
LodgeNet Entertainment Corporation Form 10-Q
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
On February 16, 1995, On Command Video Corporation filed a lawsuit in
Federal District Court for the Northern District of California asserting
patent infringement by the Company relating to its on-demand video system.
The complaint requests an unspecified amount of damages and injunctive
relief. 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 trial is expected to begin on
September 29, 1997. Based on the advice of special patent counsel and
technical experts retained by the Company, as well as the Company's
independent analysis, the Company believes that the claims of infringement
are unfounded. The Company has and will continue to vigorously defend itself
in this matter. Patent litigation is especially complex, both as to factual
allegations and the legal interpretation of patent claims, which makes such
lawsuits difficult to assess with certainty. While the Company and its patent
counsel believe the Company has a number of defenses available, which, if
properly considered, would eliminate or minimize any liability for the
Company, an unexpected unfavorable resolution, depending on the amount and
timing, could adversely affect the Company. 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
Not applicable.
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 three months
ended March 31, 1997.
March 31, 1997 Page 15
<PAGE>
LodgeNet Entertainment Corporation Form 10-Q
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, 1997 / s / TIM C. FLYNN
-------------------------------
Tim C. Flynn
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 8, 1997 / s / JEFFREY T. WEISNER
-------------------------------
Jeffrey T. Weisner
Vice President - Finance
(Principal Financial and Accounting Officer)
March 31, 1997 Page 16
<PAGE>
EXHIBIT 11.1
MARCH 31, 1997
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)
Three Months Ended
March 31,
-----------------------
1996 1997
--------- ----------
Net loss $(2,873) $(6,679)
--------- ----------
--------- ----------
Weighted average shares outstanding:
Shares outstanding 7,354,393 11,209,124
Additional equivalent shares issuable
from assumed exercise of common
stock options (1) 52,326 55,463
--------- ----------
Weighted average shares outstanding 7,406,719 11,264,587
--------- ----------
--------- ----------
Net loss attributable to common stock ($0.39) ($0.59)
--------- ----------
--------- ----------
- ---------
(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.
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