<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 8, 1997
REGISTRATION NO. 333-23629
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LODGENET ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4841 46-0371161
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
808 WEST AVENUE NORTH
SIOUX FALLS, SOUTH DAKOTA 57104
(605) 330-1330
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
ERIC R. JACOBSEN
VICE PRESIDENT, GENERAL COUNSEL
LODGENET ENTERTAINMENT CORPORATION
808 WEST AVENUE NORTH
SIOUX FALLS, SOUTH DAKOTA 57104
(605) 330-1330
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
COPIES TO:
GREGG F. VIGNOS, ESQ.
THERESA GUY MORAN, ESQ.
PILLSBURY MADISON & SUTRO LLP
P.O. BOX 7880
SAN FRANCISCO, CA 94102
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
LODGENET ENTERTAINMENT CORPORATION
Cross-Reference Sheet Pursuant to Item 501(b) of Regulation S-K, and Rule
404(a)
Showing Location in Prospectus of Information Required by Items in S-4
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ITEM NUMBER AND HEADING IN FORM S-4 LOCATION OR HEADING IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
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A. INFORMATION ABOUT THE TRANSACTION
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages
3. Risk Factors, Ratio of Earnings to Fixed Charges and
Other Information.................................. Prospectus Summary; Risk Factors; Selected
Consolidated Financial and Other Data
4. Terms of the Transaction............................. Prospectus Summary; The Exchange Offer; Description
of the Notes
5. Pro Forma Financial Information...................... Selected Consolidated Financial and Other Data
6. Material Contracts with the Company Being Acquired... Not Applicable
7. Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters...... Plan of Distribution
8. Interests of Named Experts and Counsel............... Legal Matters
9. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
B. INFORMATION ABOUT THE REGISTRANT
10. Information With Respect to S-3 Registrants.......... Not Applicable
11. Incorporation of Certain Information by Reference.... Not Applicable
12. Information with Respect to S-2 or S-3
Registrations...................................... Not Applicable
13. Incorporation of Certain Information by Reference.... Not Applicable
14. Information with Respect to Registrants Other than
S-2 or S-3 Registrants............................. Prospectus Summary; Risk Factors; The Exchange Offer;
Capitalization; Selected Consolidated Financial and
Other Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Management; Principal Security Holders;
Certain Transactions; Credit Arrangements of the
Company; Description of the Notes; Consolidated
Financial Statements
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies............ Not Applicable
16. Information with Respect to S-2 or S-3 Companies..... Not Applicable
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ITEM NUMBER AND HEADING IN FORM S-4 LOCATION OR HEADING IN PROSPECTUS
----------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
17. Information with Respect to Companies Other than S-2
or S-3 Companies................................... Not Applicable
D. VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or Authorizations
are to be Solicited................................ Not Applicable
19. Information if Proxies, Consents or Authorizations
are to be Solicited or in an Exchange Offer........ Management, Principal Shareholders, Certain
Transactions
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1997
PROSPECTUS
[LOGO]
OFFER TO EXCHANGE ALL OUTSTANDING
10 1/4% SENIOR NOTES DUE 2006
FOR
10 1/4% SENIOR NOTES DUE 2006
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
---------------------
LodgeNet Entertainment Corporation, a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal," and together with this Prospectus, the "Exchange Offer"), to
exchange its 10 1/4% Senior Notes Due 2006 (the "Exchange Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (as defined herein) of which this
Prospectus is a part, for its outstanding 10 1/4% Senior Notes Due 2006 (the
"Private Notes" and, together with the Exchange Notes, the "Notes") of the
Company.
The Company will accept for exchange any and all Private Notes that are
validly tendered on or prior to 5:00 p.m., New York City time, on the date the
Exchange Offer expires, which will be , 1997, unless the Exchange
Offer is extended (the "Expiration Date"). The exchange of Exchange Notes for
the Private Notes will be made as soon as practicable after the close of the
Exchange Offer. The Company will accept for exchange all Private Notes tendered
and not validly withdrawn pursuant to the Exchange Offer and will deliver to the
Trustee (as defined herein) for cancellation all Private Notes so accepted for
exchange. The Company shall cause the Trustee to authenticate and deliver to
each holder of the Private Notes the Exchange Notes equal in principal amount to
the Private Notes of such holder so accepted for exchange. The Exchange Offer is
not conditioned upon any minimum principal amount of Private Notes being
tendered for exchange. See "The Exchange Offer." The Company has agreed to pay
the expenses of the Exchange Offer.
The Exchange Notes will be obligations of the Company issued pursuant to the
Indenture (as defined herein) under which the Private Notes were issued. The
form and terms of the Exchange Notes are identical in all material respects to
the form and terms of the Private Notes except that the Exchange Notes will not
contain terms with respect to transfer restrictions and the Exchange Notes have
been registered under the Securities Act. See "The Exchange Offer."
(CONTINUED ON NEXT PAGE)
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE EXCHANGE
NOTES.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Exchange Notes will mature on December 15, 2006, unless previously
redeemed. Interest on the Exchange Notes is payable semi-annually on June 15 and
December 15 of each year, commencing June 15, 1997. The Exchange Notes will be
redeemable, in whole or in part, at the option of the Company, at any time on or
after December 15, 2001 at the redemption prices set forth herein plus accrued
and unpaid interest, if any, to the date of redemption. Notwithstanding the
foregoing, at any time on or before December 15, 1999, the Company may redeem up
to 35% of the aggregate principal amount of Exchange Notes with the proceeds of
one or more Public Equity Offerings (as defined herein), at 110.25% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the date
of redemption, provided however that at least 97.5 million of the aggregate
principal amount of Exchange Notes originally issued are outstanding immediately
after giving effect to any such redemption. Upon a Change of Control (as defined
herein), the Company will be required to make an offer to repurchase all
outstanding Exchange Notes at a price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of repurchase.
See "Description of the Notes."
The Exchange Notes are being offered hereunder to satisfy certain
obligations of the Company contained in the Registration Rights Agreement (as
defined herein). Based on existing interpretations of the Securities Act by the
staff of the Securities and Exchange Commission (the "Commission") set forth in
several no-action letters to third parties, and subject to the immediately
following sentence, the Company believes that the Exchange Notes issued pursuant
to the Exchange Offer may be offered for resale, resold and otherwise
transferred by the holders thereof without further compliance with the
registration and prospectus delivery provisions of the Securities Act. However,
any holder of the Private Notes who is an "affiliate" of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing the
Exchange Notes (i) will not be able to rely on the interpretation by the staff
of the Commission set forth in the above mentioned no-action letters, (ii) will
not be able to tender its Private Notes in the Exchange Offer and (iii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of the Private Notes
unless such sale or transfer is made pursuant to an exemption from such
requirements. In, addition, any holder of the Private Notes who does not acquire
the Exchange Notes in the ordinary course of business (i) cannot rely on the
interpretation by the staff of the Commission set forth in the above mentioned
no-action letters, (ii) cannot tender its Private Notes in the Exchange Offer
and (iii) must comply with the registration and prospectus delivery requirements
of the Securities Act.
Each holder of the Private Notes (other than certain specified holders) who
wishes to exchange the Private Notes for Exchange Notes in the Exchange Offer is
required to represent to the Company that (i) it is not an affiliate of the
Company, (ii) any Exchange Notes to be received by it were acquired in the
ordinary course of its business and (iii) at the time of the commencement of the
Exchange Offer, it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Private Notes where such Private Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, starting on the
Expiration Date and ending on the close of business on the 180th day following
the Expiration Date, they will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "The Exchange
Offer" and "Plan of Distribution."
Until , 1997 all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus. This is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
The Private Notes and the Exchange Notes constitute new issues of securities
with no established public trading market. The Private Notes, however, have
traded on the National Association of Securities Dealers, Inc.'s Private
Offerings, Resales and Trading through Automated Linkages Market. Any Private
2
<PAGE>
Notes not tendered and accepted in the Exchange Offer will remain outstanding.
To the extent that Private Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered, and tendered but unaccepted,
Private Notes could be adversely affected. Following consummation of the
Exchange Offer, the holders of Private Notes will continue to be subject to the
existing restrictions on transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the Securities
Act of the Private Notes except under certain limited circumstances. See
"Description of the Notes--Registration Rights." No assurance can be given as to
the liquidity of the trading market for either the Private Notes or the Exchange
Notes.
The Company will not receive any proceeds from this offering, and no
underwriter is being utilized in connection with the Exchange Offer. See "Use of
Proceeds."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission. The Company filed with the Commission a Registration Statement on
Form S-4 (the "Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the Securities
Act and the rules and regulations promulgated thereunder, covering the Exchange
Notes being offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement. For further information with respect to
the Company and the Exchange Offer, reference is made to the Registration
Statement. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are not necessarily complete.
With respect to each such contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for a
more complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Registration Statement, including the exhibits thereto, and the reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the
Regional Offices of the Commission at 7 World Trade Center, 14th Floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
Under the terms of the Indenture (as defined herein), under which the
Private Notes were issued, and under which the Exchange Notes are to be issued,
the Company has agreed that, whether or not it is required to do so by the rules
and regulations of the Commission, for so long as any of the Notes remain
outstanding, it will furnish to the holders of the Notes and file with the
Commission all reports and other information as it would be required to file
with the Commission by Sections 13(a) or 15(d) under the Exchange Act if it were
subject thereto.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY THE EXCHANGE NOTES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
3
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TABLE OF CONTENTS
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PAGE
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Summary................................................................... 5
Risk Factors.............................................................. 16
The Exchange Offer........................................................ 23
Use of Proceeds........................................................... 32
Capitalization............................................................ 33
Selected Consolidated Financial and Other Data............................ 34
Management's Discussion and Analysis of Financial Conditions and Results
of Operations........................................................... 36
Business.................................................................. 47
Management................................................................ 67
Principal Stockholders.................................................... 73
Certain Transactions...................................................... 74
Credit Arrangements of the Company........................................ 75
Description of the Notes.................................................. 77
Certain Federal Income Tax Consequences................................... 102
Plan of Distribution...................................................... 102
Legal Matters............................................................. 103
Experts................................................................... 103
Available Information..................................................... 103
Index to Consolidated Financial Statements................................ F-1
</TABLE>
------------------------
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES LAWS. CERTAIN STATEMENTS REGARDING THE COMPANY'S AND ITS
SUBSIDIARIES' EXPECTED FINANCIAL POSITION, BUSINESS AND FINANCING PLANS,
INCLUDING WITH RESPECT TO REGULATION, COMPETITION, LITIGATION AND RESNET (AS
DEFINED BELOW), ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY AND ITS
SUBSIDIARIES BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING
STATEMENTS ARE REASONABLE, NO ASSURANCE CAN BE GIVEN THAT SUCH EXPECTATIONS WILL
PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM SUCH EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED
IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, IN CONJUNCTION WITH THE
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS."
ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO THE
COMPANY, ITS SUBSIDIARIES OR PERSONS ACTING ON THEIR BEHALF ARE EXPRESSLY
QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
4
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SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE CONSOLIDATED FINANCIAL
STATEMENTS OF THE COMPANY INCLUDING THE NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. REFERENCES IN THIS PROSPECTUS TO THE COMPANY INCLUDE ITS
PREDECESSOR AND ITS SUBSIDIARIES, UNLESS THE CONTEXT INDICATES OTHERWISE. THE
NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. INVESTORS SHOULD CAREFULLY
CONSIDER THE INFORMATION SET FORTH UNDER "RISK FACTORS."
THE COMPANY
LodgeNet provides video on-demand, network-based video games, cable
television programming and other interactive entertainment and information
services to the lodging and multi-family dwelling unit ("MDU") markets utilizing
its proprietary broadband local area network ("B-LAN"-SM-) system architecture.
Through its rapid growth, the Company has become the second largest provider of
such services to the lodging market (based on total rooms served), currently
serving over 516,000 rooms in over 3,400 hotel properties throughout the United
States and Canada. In January 1996, the Company formed ResNet Communications,
Inc. ("ResNet") to extend its B-LAN-SM- system architecture and operational
expertise into the MDU market. In October 1996, TCI Satellite MDU, Inc. ("TCI
Satellite"), an affiliate of Tele-Communications, Inc. ("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 the digital DBS signals
provided by TCI Satellite for the MDU market on a nationwide basis.
LodgeNet and ResNet generally operate under exclusive long-term contracts in
the lodging and MDU markets. The Company's lodging guest pay contracts typically
have terms of 5 to 7 years and ResNet's MDU contracts are expected to have terms
of 8 to 12 years. The exclusive nature of these contracts allows the Company to
estimate, based on certain operating assumptions, future revenues, cash flows
and rates of return related to the contracts prior to making a capital
investment decision.
The Company has experienced substantial growth in the number of guest pay
rooms served, total revenue and earnings before interest, taxes, depreciation
and amortization ("EBITDA"). From 1991 through 1996, guest pay rooms served
increased from 73,415 to 400,245, revenues increased from $19.6 million to $97.7
million, and EBITDA increased from $2.9 million to $24.7 million.
LODGING SERVICES. The Company provides its services in the lodging market
to corporate-managed hotel chains such as ITT Sheraton, The Ritz-Carlton
Company, Harrah's Casino Hotels, Delta Hotels and Resorts, Outrigger, La Quinta
Inns, Red Roof Inns and Budgetel Inns, as well as many individual properties
flying the Marriott, Holiday Inn, Hilton, Inter-Continental, Prince, Radisson,
Westin, Doubletree, Embassy Suites, and other flags. The lodging market in the
United States comprises approximately 3.4 million rooms. The Company believes
that approximately 1.9 million of these rooms are located in the Company's
target market of hotels having more than 100 rooms. The Company provides its
services under exclusive, long-term contracts throughout the United States and
Canada, and in other select countries through licensing arrangements with
strategic partners. The average remaining life of the Company's existing guest
pay contracts is over four years, with less than 7% of these contracts due to
expire before 1998.
In the lodging market, the Company's services include Guest Scheduled-SM-
on-demand movies, network-based Super Nintendo-Registered Trademark- video
games, PRIMESTAR digital-Registered Trademark- satellite-delivered basic and
premium cable television programming, and other interactive entertainment and
information services. On-demand services enable a guest to purchase and start a
movie on-demand, rather than restricting the guest to a predetermined start
time. Video games can be started on-demand by a hotel guest who is charged an
hourly rate for play time. Free-to-guest services typically involve a customized
package of basic and premium cable television programming which the hotel
purchases from the Company and provides at no charge to guests. Other services,
which are typically provided at no charge to the guest, include guest surveys,
folio review and video checkout. The Company is able to offer its interactive
services by virtue of
5
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the high-speed, two-way digital communications design of its proprietary
B-LAN-SM- system architecture. The Company's open-architecture, UNIX-based
platform enables the Company to upgrade system software to support the
introduction of new services or integrate new technologies as they become
commercially available and economically viable.
The Company believes it is a leader in providing innovative products and
services to the lodging industry. The Company believes that it was the first in
the lodging market to install network-based interactive video games, the first
to install in-room printers for video checkout and other applications, and the
first to utilize a Video Room Card-SM- (an image-based menu and purchasing
protocol, utilizing pictures and graphics to replace the simple text menus
traditionally utilized by its competitors). In 1995, LodgeNet redesigned its
interactive system, enabling the Company to deliver what it believes is the
first cost-effective system for on-demand movies and network-based video games
to mid-size hotels of 100 to 150 rooms, a market segment the Company believes
has been historically underserved by guest pay providers. The Company believes
that the scalability and advanced features of its redesigned system for mid-size
hotels were principal factors in the recent awarding by La Quinta Inns of its
over 30,000-room account, Red Roof Inns of its over 27,000-room account and
Budgetel Inns of its over 8,000-room account to the Company over other
competitors. The Company believes that the mid-size hotel segment represents a
large and attractive market for the Company's services that will generate
financial returns similar to those achieved by the Company in larger
full-service hotels. In April 1996, the Company entered into an agreement with
PRIMESTAR Partners L.P. ("PRIMESTAR") pursuant to which the Company was
appointed as the exclusive third-party provider (other than the partners in
PRIMESTAR and their affiliated distributors) of the
PRIMESTAR-Registered Trademark- DBS signal to the lodging industry. This
arrangement enables the Company to provide free-to-guest, digital
satellite-delivered cable television programming to a broader segment of the
lodging industry than can be cost-effectively served with traditional C-band
satellite systems. Since February 1997, the Company has been testing an Internet
browser at a hotel property that enables the hotel guest to access and navigate
the World Wide Web from any guest room television in the hotel, and the Company
intends to install and test the Internet browser at additional hotels over the
next several months.
MULTI-FAMILY RESIDENTIAL SERVICES. The Company views the MDU market as
attractive due to: (i) the large market size; (ii) the portability to this
market of the Company's B-LAN-SM- system architecture and operating expertise
developed for the lodging market; (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
traditional franchised cable operators); and (iv) the exclusive long-term
contracts that have customarily been available in the MDU market.
The Company believes it is well positioned to pursue the large MDU private
cable market with its proprietary B-LAN-SM- system architecture and the ability
to offer the DBS signals provided by TCI Satellite on a nationwide basis. The
Company believes there are approximately 6 million multi-family residential
units in the United States that are located in apartment complexes having more
than 200 units, the Company's primary market, which represents a market more
than three times as large as the Company's traditional lodging market. The
Company believes that its proprietary B-LAN-SM- system architecture enables
ResNet to offer a differentiated and cost effective solution for the video
service needs of property owners and their tenants. In addition, the Company
believes that its existing nationwide installation and field service
organization enables ResNet to operate effectively throughout the United States
wherever MDU contracts may be obtained, which the Company believes is a
significant strategic advantage for ResNet over local satellite master antenna
television ("SMATV") and franchised cable operators in addressing the needs of
large multi-state property portfolios.
ResNet's video service agreement with each property owner grants ResNet the
exclusive right and access on a long-term basis to provide video services to
tenants of the MDU complex, in return for which the owner receives a monthly
commission based on revenues. These agreements generally prohibit the
6
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property owner from installing or marketing an alternative video system and
prohibit the owner from allowing tenants to install an antenna, satellite or
microwave dish on the exterior of the building.
ResNet's private cable television system has the capacity to deliver over
100 channels, although the Company expects that the typical system will deliver
35 to 50 channels of basic and premium programming, depending principally upon
the size of the property, the length of the contract and local competitive
considerations. ResNet may elect to provide approximately 10 to 35 additional
channels for scheduled pay-per-view, video on-demand, and other interactive
services, such as Internet access. ResNet intends to tailor the programming
lineup at each multi-family residential complex, based on the particular
demographic profile of that complex. ResNet's private cable television system is
based on the proprietary B-LAN-SM- system architecture deployed by the Company
in the lodging market and will utilize the DBS signal provided by TCI Satellite
nationwide. ResNet's access to TCI Satellite's digital Ku-band technology
provides it with a more capable and cost-effective system than the C-band
systems generally used by most SMATV cable operators. ResNet's private cable
television system also utilizes addressable interdiction technology, enabling
ResNet to remotely initiate, modify or terminate service, prevent signal theft
and respond to many other service needs.
In February 1996, ResNet entered into an agreement with GE Capital-ResCom,
L.P. ("GE ResCom"), an affiliate of General Electric Co. and a provider of
private telephony services to MDUs, pursuant to which GE ResCom was appointed
the exclusive sales and marketing agent for ResNet in the MDU market. Pursuant
to the terms of the agreement, ResNet was prohibited from selling, marketing or
providing video services in the MDU market other than to customers obtained by
GE ResCom. Subject to the terms of the agreement, GE ResCom was required to
provide ResNet contracts for a minimum of 200,000 passings by January 31, 1998,
including 70,000 passings by January 31, 1997, such contracts to have an average
term of not less than ten years. At January 31, 1997, ResNet had contracts
covering approximately 3,225 passings, less than the required benchmark under
its agreement. Pursuant to the terms of ResNet's agreement with GE ResCom,
ResNet will now be able to independently market and provide its services
directly to large property portfolios, property management companies, and owners
of MDU properties and pursue other available opportunities in the MDU market
(whereas previously it had been restricted contractually from doing so).
On March 6, 1997, in connection with a reevaluation of its business plan, GE
ResCom entered into an agreement with Shared Technologies Fairchild, Inc.
("STF"), one of the nation's larger providers of private telephony services to
commercial office buildings. GE ResCom has advised the Company that its revised
business plan calls for the formation of a new venture ("ResCom"), to be managed
by STF, that will continue the business of GE ResCom and in which GE Capital and
STF will hold significant equity interests. The restructuring of ResCom is
subject to certain consents, including the successful transition of GE ResCom's
portfolio of telephony contracts. There can be no assurance that ResCom will be
successfully restructured or that, if restructured, that the Company and ResNet
will be able to continue their contractual relationship with ResCom on terms
similar to the existing video services agreement or otherwise on mutually
acceptable terms.
ResNet intends to grow its business by (i) taking over the management and
control of the sales and marketing of its unique B-LAN-SM- solution and customer
service capabilities to large multi-state MDU property portfolios, property
owners and property managers, and (ii) considering selected acquisitions of
private cable operations where the expected return on capital meets ResNet's
investment criteria.
The Company's predecessor commenced business in 1980 as Satellite Movie
Company, incorporated as a South Dakota corporation in February 1983 and changed
its name to LodgeNet Entertainment Corporation in September 1991. On October 13,
1993, LodgeNet Entertainment Corporation changed its state of incorporation from
South Dakota to Delaware by merging with and into the Company, its newly-formed
Delaware subsidiary, which then adopted the LodgeNet name. Interested persons
may access additional information concerning the Company and ResNet through the
Company's Web Site at: HTTP:// WWW.LODGENET.COM.
7
<PAGE>
BUSINESS STRATEGY
The Company's business strategy is to: (i) continue to expand its lodging
industry base of guest pay and free-to-guest rooms; (ii) expand into the MDU
private cable television market; (iii) maximize the revenue generated per
lodging room or residential unit served by exploiting new revenue opportunities;
(iv) extend the application of the Company's proprietary B-LAN-SM- system
architecture and operating expertise to new markets; and (v) enhance financial
performance by increasing operating margins and reducing the average capital
invested per new unit installed.
THE REFINANCING
The Offering of the Private Notes was part of a refinancing (the
"Refinancing") that was designed to enhance the Company's financial flexibility.
As part of the Refinancing, the Company (i) issued the Private Notes, (ii)
prepaid in their entirety its then existing Senior Notes due 2005 (the "Old
Senior Notes"), (iii) repaid all outstanding borrowings under and amended and
restated its then existing revolving credit facility with National Westminster
Bank Plc ("NatWest Bank"), as agent (the "Old Credit Facility," and as amended
and restated, with NatWest Bank as agent, the "Credit Facility") and (iv)
amended the terms of its Senior Subordinated Notes due 2005 (as amended, the
"11.5% Senior Notes") such that the 11.5% Senior Notes rank PARI PASSU with the
Private Notes and the Exchange Notes and have substantially the same covenants
as such Notes. See "Use of Proceeds" and "Credit Arrangements of the Company."
Each of the components of the Refinancing occurred concurrently with the closing
of the offering of the Private Notes.
The Company's executive offices are located at 808 West Avenue North, Sioux
Falls, South Dakota, 57104, and its telephone number is (605) 330-1330.
THE EXCHANGE OFFER
<TABLE>
<S> <C>
SECURITIES OFFERED.................. $150,000,000 aggregate principal amount of 10 1/4%
Senior Notes Due 2006, which have been registered
under the Securities Act.
THE EXCHANGE OFFER.................. Upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter
of Transmittal, the Company hereby offers to
exchange, $1,000 principal amount of Exchange Notes
in exchange for each $1,000 principal amount of
Private Notes that are validly tendered and not
withdrawn on or prior to the Expiration Date (as
defined herein). Holders of Private Notes whose
Private Notes are not tendered and accepted in the
Exchange Offer will continue to hold such Private
Notes and will be entitled to all the rights and
preferences and will be subject to the limitations
applicable thereto under the Indenture governing the
Private Notes and the Exchange Notes.
RESALE.............................. Based on interpretations by the staff of the
Commission set forth in no-action letters issued to
third parties unrelated to the Company, the Company
believes the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be
offered for resale, resold and otherwise transferred
by any holder thereof (other than broker-dealers, as
set forth below, and any such holder that is an
"affiliate" of
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery requirements of
the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's
business and that such holder has no arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes. Any holder who
tenders in the Exchange Offer with the intention to
participate, or for the purpose of participating, in
a distribution of the Exchange Notes or who is an
affiliate of the Company may not rely upon such
interpretations by the staff of the Commission and,
in the absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection with
any secondary resale transaction. Failure to comply
with such requirements in such instance may result in
such holder incurring liabilities under the
Securities Act for which the holder is not
indemnified by the Company. Each broker-dealer (other
than an affiliate of the Company) that receives
Exchange Notes for its own account in exchange for
Private Notes, where such Private Notes were acquired
by such broker-dealer as a result of market-making
activities or other trading activities, must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities
Act. The Company has agreed that, for a period of 180
days after the Expiration Date (as defined herein),
it will make this Prospectus available to any
broker-dealer for use in connection with any such
resale. See "Plan of Distribution." Any broker-dealer
who is an affiliate of the Company may not rely on
such no-action letters and must comply with the
registration and prospectus delivery requirements of
the Securities Act in connection with a secondary
resale transaction. The Exchange Offer is not being
made to, nor will the Company accept surrenders for
exchange from, holders of Private Notes in any
jurisdiction in which this Exchange Offer or the
acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
EXPIRATION DATE..................... The Exchange Offer will expire at 5:00 p.m., New York
City time, on , 1997, unless extended, in which
case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is
extended.
CONDITIONS TO THE EXCHANGE OFFER.... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions of the Exchange
Offer." The Exchange Offer is not conditioned upon
any minimum principal amount of Private Notes being
tendered. The
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Company reserves the right to terminate or amend the
Exchange Offer at any time prior to the Expiration
Date upon the occurrence of any such conditions.
PROCEDURES FOR TENDERING PRIVATE
NOTES............................. Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or facsimile thereof, together with such
Private Notes and any other required documentation to
Marine Midland Bank, the Exchange Agent, at the
address set forth herein and therein. By executing
the Letter of Transmittal, each holder will represent
to the Company that, among other things, the Exchange
Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of
the person receiving such Exchange Notes, whether or
not such person is the holder, that neither the
holder nor any such other person has an arrangement
or understanding with any person to participate in
the distribution of such Exchange Notes and that
neither the holder nor any such other person is an
"affiliate" of the Company within the meaning of Rule
405 under the Securities Act or, that if such holder
or other person is an affiliate of the Company, such
holder or other person will comply with the
registration and prospectus delivery requirements of
the Securities Act to the extent applicable. See "The
Exchange Offer--Terms of the Exchange Offer--
Procedures for Tendering Private Notes" and "The
Exchange Offer--Terms of the Exchange
Offer--Guaranteed Delivery Procedures."
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS............................ Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender such Private Notes in the
Exchange Offer should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on his own behalf,
such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering
his Private Notes, either make appropriate
arrangements to register ownership of the Private
Notes in such beneficial owner's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may take
considerable time and may not be able to be completed
prior to the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer--Procedures for
Tendering Private Notes."
GUARANTEED DELIVERY PROCEDURES...... Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to
the Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis,
must tender their Private Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Terms of the Exchange Offer--
Guaranteed Delivery Procedures."
ACCEPTANCE OF PRIVATE NOTES AND
DELIVERY OF EXCHANGE NOTES........ Subject to certain conditions (as described more
fully in "The Exchange Offer--Conditions of the
Exchange Offer"), the Company will accept for
exchange any and all Private Notes which are properly
tendered in the Exchange Offer and not withdrawn,
prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant
to the Exchange Offer will be delivered as promptly
as practicable following the Expiration Date.
WITHDRAWAL RIGHTS................... Except as otherwise provided herein, tenders of
Private Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration
Date. See "The Exchange Offer--Terms of the Exchange
Offer--Withdrawal of Tenders of Notes."
CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS.................... For a discussion of certain federal income tax
considerations relating to the exchange of the
Exchange Notes for the Private Notes, see "Certain
Federal Income Tax Consequences."
EXCHANGE AGENT...................... Marine Midland Bank is the Exchange Agent. The
address, telephone number and facsimile number of the
Exchange Agent are set forth in "The Exchange
Offer--Exchange Agent."
CONSEQUENCES OF FAILURE TO EXCHANGE
PRIVATE NOTES..................... Holders of Private Notes who do not exchange their
Private Notes for Exchange Notes pursuant to the
Exchange Offer will continue to be subject to the
restrictions on transfer of such Private Notes as set
forth in the legend thereon as a consequence of the
issuance of the Private Notes pursuant to exemptions
from, or in transactions not subject to, the
registration requirements of the Securities Act and
applicable state securities laws. In general, the
Private Notes may not be offered or sold, unless
registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject
to, the Securities Act and applicable state
securities laws. The Company does not currently
anticipate that it will register the Private Notes
under the Securities Act.
</TABLE>
11
<PAGE>
THE NOTES
<TABLE>
<S> <C>
The Notes........................... $150 million aggregate principal amount of 10 1/4%
Senior Notes due 2006. The form and terms of the
Exchange Notes are identical in all material respects
to the form and terms of the Private Notes (except
that the Exchange Notes will be registered under the
Securities Act) and, therefore, will be treated as a
single class under the Indenture with any Private
Notes that remain outstanding.
Maturity Date....................... December 15, 2006.
Interest Payment Dates.............. Payable semiannually in cash, on June 15 and December
15, commencing June 15, 1997.
Optional Redemption................. The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after
December 15, 2001, initially at 105.125% of their
principal amount, plus accrued interest, declining
ratably to 100% of their principal amount, plus
accrued interest, on or after December 15, 2003. In
addition, at any time prior to December 15, 1999, the
Company may redeem up to 35% of the aggregate
principal amount of the Notes with the proceeds of
one or more Public Equity Offerings, at 110.250% of
their principal amount, plus accrued and unpaid
interest, if any; provided that after any such
redemption at least $97.5 million aggregate principal
amount of the Notes remains outstanding. See
"Description of the Notes--Optional Redemption."
Change of Control................... Upon a Change of Control (as defined under
"Description of the Notes--Certain Definitions"), the
Company will be required to make an offer to purchase
the Notes at a purchase price equal to 101% of their
principal amount, plus accrued interest. See
"Description of the Notes--Repurchase of Notes upon a
Change of Control."
Ranking............................. The Notes will be senior unsecured indebtedness of
the Company, ranking PARI PASSU in right of payment
with the Company's existing and future unsubordinated
unsecured indebtedness, including, as a result of
amendments thereto effected as part of the
Refinancing, the Company's 11.5% Senior Notes, and
senior in right of payment to all subordinated
indebtedness of the Company. The Notes will be
effectively subordinated to all secured indebtedness,
including indebtedness under the Credit Facility, and
effectively subordinated to all liabilities of the
Company's subsidiaries, including trade payables. At
December 31, 1996, the Company (excluding its
subsidiaries) had approximately $179.7 million of
indebtedness outstanding and the Company's
subsidiaries had approximately $.7 million of
liabilities. ResNet will guarantee indebtedness under
the Credit Facility to the extent borrowings
thereunder are contributed to ResNet and the Notes
will be effectively subordinated to such guarantee.
The indenture pursuant to which the Notes will be
issued (the "Indenture")
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
permits the Company to incur secured indebtedness,
including indebtedness under the Credit Facility. The
Company is expected to incur substantial amounts of
additional indebtedness in the future, subject to
compliance with the limitations contained in the
Indenture, the 11.5% Senior Notes and the Credit
Facility. See "Risk Factors--High Level of Indebted-
ness; Ability to Service Debt," "--Historical and
Future Operating Losses; Need for Additional Capital;
Refinancing Risk" and "--Ranking of the Notes."
Certain Covenants................... The Indenture contains certain covenants for the
benefit of the holders of the Notes (the "Holders")
which, among other things, restrict the ability of
the Company and its Restricted Subsidiaries (as
defined in "Description of the Notes") to: incur
additional indebtedness, create liens, engage in
sale-leaseback transactions, pay dividends or make
distributions in respect of their capital stock, make
investments or certain other restricted payments,
sell assets, redeem capital stock, issue or sell
stock of Restricted Subsidiaries, enter into trans-
actions with stockholders or affiliates or effect a
consolidation or merger. However, these limitations
are subject to a number of important qualifications
and exceptions. See "Description of the
Notes--Covenants."
Use of Proceeds..................... The Company will not receive any proceeds from this
exchange offer, and no underwriter is being utilized
in connection with the Exchange Offer. See "Use of
Proceeds."
</TABLE>
RISK FACTORS
See "Risk Factors," immediately following this Summary, for a discussion of
certain factors to be considered in evaluating the Company, its business and an
investment in the Notes.
13
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT ROOM AND PER ROOM AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues...................................................... $ 31,312 $ 40,394 $ 63,213 $ 97,721
Operating expenses (excluding depreciation and amortization)........ 9,249 12,912 18,405 28,613
Depreciation and amortization....................................... 7,176 11,661 18,336 29,815
Operating income (loss)............................................. 39 (2,360) (2,438) (5,086)
Interest expense.................................................... 2,096 966 4,522 8,243
Net loss (1)........................................................ (2,057) (4,650) (7,026) (16,610)
OTHER DATA:
EBITDA (2).......................................................... $ 7,215 $ 9,301 $ 15,898 $ 24,729
EBITDA margin (2)................................................... 23.0% 23.0% 25.1% 25.3%
Capital expenditures................................................ $ 14,311 $ 43,521 $ 51,497 $ 85,258
Annualized EBITDA (3)............................................... 7,990 11,250 18,246 27,290
Ratio of earnings to fixed charges (4).............................. -- -- -- --
Ratio of long-term debt to annualized EBITDA (3).................... .75x 2.49x 3.15x 6.57x
Ratio of EBITDA to interest expense (2)............................. 3.44x 9.63x 3.52x 3.00x
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................................................... $ 86,177
Total assets....................................................................................... 279,768
Long-term debt (5)................................................................................. 179,233
Total stockholders' equity......................................................................... 75,552
CERTAIN PRO FORMA DATA: (6)
Pro forma interest expense......................................................................... $ 19,266
Ratio of EBITDA to pro forma interest expense (2).................................................. 1.28x
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
OPERATING DATA:
Guest pay rooms served (7)
On-demand......................................................... 59,169 119,680 209,487 358,842
Scheduled......................................................... 77,650 65,351 58,720 41,403
--------- --------- --------- ---------
Total Guest pay rooms............................................. 136,819 185,031 268,207 400,245
--------- --------- --------- ---------
--------- --------- --------- ---------
Rooms with Super Nintendo-Registered Trademark- game systems (7).... 225 69,806 163,879 322,903
Free-to-guest rooms served (7)...................................... 191,893 220,534 249,779 294,882
Total rooms served (7)(8)........................................... 267,171 314,184 388,088 516,348
Average monthly revenue per Guest pay room:
Movie revenue..................................................... $ 14.68 $ 15.03 $ 17.08 $ 18.38
Video game/information services................................... .39 1.01 2.21 2.93
--------- --------- --------- ---------
Total............................................................. $ 15.07 $ 16.04 $ 19.29 $ 21.31
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
(FOOTNOTES APPEAR ON FOLLOWING PAGE)
14
<PAGE>
(1) Includes extraordinary loss on early termination of the Company's bank
credit facility of $1.3 million in 1994 and extraordinary loss of $3.3
million in 1996 relating to the redemption of the Old Senior Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations --Results of Operations."
(2) EBITDA means earnings before interest expense, income taxes, depreciation
and amortization. EBITDA is not intended to represent an alternative to net
income or cash flows from operating, investing or financing activities (as
determined in accordance with generally accepted accounting principles) as a
measure of performance. Rather, it is included herein because EBITDA is a
widely accepted financial indicator used by certain investors and financial
analysts to assess and compare companies on the basis of operating
performance. Management believes that EBITDA provides 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.
(3) "Annualized EBITDA" represents the sum of the quarterly EBITDA for the two
most recently completed fiscal quarters multiplied by two.
(4) Earnings are defined as net loss before income taxes, extraordinary items
and fixed charges, except where capitalized. Fixed charges are defined as
the portion of rental expense under operating leases representing interest,
and interest, including amortization of debt expense, whether expensed or
capitalized. Earnings were insufficient to cover fixed charges for the
following periods by the amounts indicated.
<TABLE>
<CAPTION>
COVERAGE
PERIOD DEFICIENCY
- ----------------------------------------------------------------------------------- -----------
<S> <C>
Year ended December 31, 1993....................................................... $ (2,057)
Year ended December 31, 1994....................................................... (3,326)
Year ended December 31, 1995....................................................... (6,960)
Year ended December 31, 1996....................................................... (13,329)
</TABLE>
(5) Excludes current maturities. See "Capitalization."
(6) Adjusted to give effect to the Refinancing as if the Refinancing had
occurred on January 1, 1996. The effect of such adjustment would have
precluded the necessity for other borrowings during year ended December 31,
1996 and therefore it reflects that no amounts would have been outstanding
under the Old Credit Facility. The adjustment reflects outstanding
indebtedness of $150 million of the Notes, and $30 million of the 11.5%
Senior Notes for a total interest expense of $19.3 million.
(7) At end of period.
(8) Total rooms served include those rooms receiving one or more of the
Company's services.
15
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE
TENDERING THEIR PRIVATE NOTES FOR THE EXCHANGE NOTES OFFERED HEREBY, HOLDERS OF
PRIVATE NOTES AND PROSPECTIVE PURCHASERS SHOULD CONSIDER CAREFULLY THE FOLLOWING
FACTORS, WHICH ARE GENERALLY APPLICABLE TO THE PRIVATE NOTES AS WELL AS THE
EXCHANGE NOTES:
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Holders of Private Notes who do not exchange their Private Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Private Notes as set forth in the legend
thereon as a consequence of the issuance of the Private Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Private Notes may not be offered or sold, unless registered under
the Securities Act and applicable state securities laws, or pursuant to an
exemption therefrom. The Company does not intend to register the Private Notes
under the Securities Act. In addition, any holder of Private Notes who tenders
in the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes may be deemed to have received restricted securities and, if so,
will be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction. To
the extent Private Notes are tendered and accepted in the Exchange Offer, the
trading market, if any, for the Private Notes could be adversely affected. See
"The Exchange Offer."
HIGH LEVEL OF INDEBTEDNESS; ABILITY TO SERVICE DEBT
At December 31, 1996, the Company had approximately $179.7 million of total
indebtedness, cash and cash equivalents of approximately $86.2 million and
stockholders' equity of $75.6 million, and the percentage of total debt to total
capitalization on a consolidated basis was approximately 70.5%. On a pro forma
basis (calculated as if the Refinancing had occurred on January 1, 1996), the
Company's earnings before fixed charges would have been insufficient to cover
fixed charges for the year ended December 31, 1996 by 24.3 million. See
"Selected Consolidated Financial and Other Data." Although the Refinancing
facilitates the Company's expansion of its lodging business and entry into the
residential business and is expected to improve the Company's financial
flexibility, the Company's total indebtedness and debt service requirements were
substantially increased as a result thereof, and the Company will continue to be
subject to significant financial restrictions and limitations. See
"--Restrictions Imposed by the Credit Facility, the Indenture and the 11.5%
Senior Notes."
The level of the Company's indebtedness could have important consequences to
Holders of the Notes, including the following: (i) the debt service requirements
of any additional indebtedness could make it more difficult for the Company to
make payments on the Notes; (ii) the ability of the Company to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes may be limited; (iii) a substantial
portion of the Company's cash flow from operations, if any, must be dedicated to
the payment of principal and interest on its indebtedness and other obligations
and will not be available for the Company's business; (iv) the Company's level
of indebtedness could limit its flexibility in planning for, or reacting to
changes in, its business; and (v) the Company's high degree of indebtedness
could make it more vulnerable in the event of a downturn in its business.
Beginning in 1998, the Company will be obligated to make substantial
principal payments of amounts, if any, borrowed under the Credit Facility. In
the event the Company's cash flow is inadequate to meet its debt obligations,
the Company could face substantial liquidity problems. If the Company is unable
to generate sufficient cash flow or otherwise obtain funds necessary to make
required payments on its indebtedness (including the Credit Facility), it would
be in default under the terms thereof, which could cause defaults under other
indebtedness of the Company or result in bankruptcy of the Company. Such
defaults or bankruptcy of the Company would result in a default on the Notes and
could delay or preclude payment of principal of, or interest on, the Notes. The
ability of the Company to meet its obligations will be dependent upon the future
performance of the Company, which will be subject to prevailing economic
16
<PAGE>
conditions and to financial, business and other factors, including factors
beyond the control of the Company. See "Selected Consolidated Financial and
Other Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
HISTORICAL AND FUTURE OPERATING LOSSES; NEED FOR ADDITIONAL CAPITAL; REFINANCING
RISK
Historically, cash flow generated from the Company's business has not been
sufficient to fund the cost of expanding the Company's business and to service
related indebtedness. The Company's EBITDA minus capital expenditures and pro
forma interest expense (calculated as if the Refinancing had occurred on January
1, 1996) for the year ended December 31, 1996 would have been negative $79.8
million. The continued expansion of the Company's business will require
substantial investment on a continuing basis to finance increasing capital
expenditures and related expenses for the installation of the Company's systems
in the lodging and the MDU markets. The Company plans to incur substantial
amounts of indebtedness in the future and will be able to incur up to $175
million of secured indebtedness under the Credit Facility.
Although the Company generates positive EBITDA, the Company expects that the
capital expenditures required to expand its lodging and MDU businesses will
continue to exceed EBITDA. The Company expects to continue to incur significant
operating losses as a result of depreciation and amortization charges related to
such capital expenditures, and to generate negative free cash flow. ResNet must
make significant capital investments at each MDU location prior to receiving any
significant revenues. In addition, because of the floating interest rate on
borrowings under the Credit Facility, any significant increase in market
interest rates would increase the Company's debt service requirements. There can
be no assurance that the Company will sustain or achieve profitability or
positive cash flow in the future. If the Company cannot achieve operating
profitability or positive cash flow, it may not be able to meet its debt service
obligations, capital expenditures or working capital requirements, including its
obligations with respect to the Notes.
The net proceeds of the Refinancing and the funds to be provided by TCI
Satellite together with operating cash flows are expected to fund the planned
expansion of the Company's and ResNet's respective operations and capital
expenditures for 12 to 18 months; however, this is a forward-looking statement
and there can be no assurance in this regard. If the Company's plans or
assumptions change, if its assumptions prove to be inaccurate, if the Company
experiences unanticipated costs or competitive pressures or if the net proceeds
from the Refinancing and the TCI Satellite funds prove insufficient, the Company
may be required to seek additional capital sooner than currently anticipated.
The Company may seek to raise such additional capital from public or private
equity or debt sources. There can be no assurance that the Company will be able
to raise such capital on satisfactory terms or at all. If the Company decides to
raise additional funds through the incurrence of debt, the Company would likely
become subject to additional or more restrictive financial covenants. In the
event that the Company is unable to obtain such additional capital or is unable
to obtain such additional capital on acceptable terms, the Company may be
required to reduce the scope of its presently anticipated expansion, which could
materially adversely affect the Company's business, results of operations and
financial condition and its ability to compete. All of the Company's other
existing indebtedness matures prior to the maturity of the Notes and any
additional indebtedness incurred in the future may mature prior to the Notes.
Accordingly, the Company will have to refinance a substantial amount of
indebtedness prior to the maturity of the Notes. In addition, the Company may
need to refinance the Notes at their maturity. The Company's ability to
refinance its indebtedness or obtain additional capital to fund its growth will
depend on, among other things, its financial condition at the time, the
restrictions in the instruments governing its indebtedness and other factors,
including market conditions, beyond the control of the Company. There can be no
assurance that the Company will be able to refinance such indebtedness or obtain
such additional funds. If the Company is unable to effect such refinancings or
obtain additional funds, the Company's ability to make payments on the Notes
could be adversely affected. For additional information concerning the effects
of the Refinancing, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources," "Credit
Arrangements of the Company" and "Description of the Notes."
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RESTRICTIONS IMPOSED BY THE CREDIT FACILITY, THE INDENTURE AND THE 11.5% SENIOR
NOTES
The Credit Facility, the Indenture and the amended terms of the 11.5% Senior
Notes contain certain restrictive covenants, including, among others, covenants
limiting the Company's and its subsidiaries' ability to incur additional
indebtedness, pay dividends, make investments and certain other restricted
payments, sell assets, enter into transactions with stockholders or affiliates,
create liens, redeem capital stock, issue or sell stock of its subsidiaries,
engage in sale-leaseback transactions or merge or consolidate with any other
person. Although the covenants are subject to various exceptions which are
designed to allow the Company to operate without undue restraint, there can be
no assurance that such covenants will not adversely affect its ability to
finance future operations or capital needs or engage in other business
activities which may be in the interest of the Company. In addition, under the
Credit Facility, the Company is required to maintain specified financial ratios.
The ability of the Company to comply with such provisions may be affected by
events beyond the Company's control. A breach of any of these covenants or the
inability of the Company to comply with the required financial ratios could
result in a default under the Credit Facility, which would entitle the lenders
to accelerate the maturity of the Credit Facility. In such event, substantially
all of the Company's other indebtedness (including the Notes) could become due
and payable. Such an event would adversely affect the Company's ability to make
payments on the Notes. See "Credit Arrangements of the Company" and "Description
of the Notes."
RANKING OF THE NOTES
The Private Notes are and the Exchange Notes will be senior unsecured
obligations of the Company, ranking PARI PASSU with the Company's 11.5% Senior
Notes and effectively subordinated in right of payment to all existing and
future indebtedness under the Credit Facility with respect to the assets of the
Company pledged to the lenders thereunder. Amounts outstanding under the Credit
Facility are 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. In the
event of bankruptcy, liquidation or reorganization of the Company, the assets of
the Company would be available to pay obligations on the Notes only after all
secured indebtedness of the Company has been repaid in full. Consequently,
sufficient assets may not exist to pay amounts due on the Notes.
In addition, the Private Notes are and the Exchange Notes will be
effectively subordinated to all liabilities of the Company's subsidiaries,
including trade payables and any guarantee of indebtedness under the Credit
Facility by ResNet. The right of the Company to receive assets of its
subsidiaries upon liquidation or reorganization will be subordinated to the
claims of the subsidiaries' creditors (including trade creditors), except to the
extent the Company itself is recognized as a creditor of the subsidiaries. See
"Description of the Notes--Ranking."
DEPENDENCE ON THE LODGING INDUSTRY AND CHANGES IN VIEWING HABITS
The Company's business is closely linked to the performance of the lodging
industry. Declines in hotel occupancy or changes in the mix of hotel guests as a
result of general business, economic, seasonal and other factors can have a
significant impact on the Company's revenues. The Company's performance is also
highly sensitive to the rates at which hotel guests purchase its guest pay
services ("buy rates"). Buy rates are subject to various factors beyond the
control of the Company, including the popularity of available movies for the
Company's guest pay systems, competing free-to-guest programming and general
economic conditions. Additionally, the Company's business performance is highly
dependent upon the relative mix of major motion pictures to independently
produced, non-rated features purchased by hotel guests. The Company generally
pays licensing fees for major motion pictures based on a percentage of the
picture's gross revenues, while most independently produced features are
obtained for a flat fee that is nominal in relation to the licensing fees paid
for the major motion pictures. As a result, a shift in the viewing pattern of
hotel guests away from independently produced features, or any limitation
imposed on the offering of such features by hotels, could adversely affect the
Company's financial condition and operating results.
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HIGHLY COMPETITIVE MARKETS
LODGING MARKET. The Company competes on a national scale primarily with a
single competitor, On Command Corporation ("OCC"), which the Company estimates
serves approximately 915,000 hotel rooms. There are also a number of potential
competitors that could use their existing infrastructure to provide in-room
entertainment services to the lodging industry, including franchised cable
operators, wireless cable operators, telecommunications companies and DBS
providers. Some of these potential competitors are already providing
free-to-guest services to the lodging industry and have announced plans to offer
guest pay services. Some of these companies may have substantially greater
financial and other resources than the Company. The Company will need to
continue to enhance its in-room entertainment systems, expand its operations and
meet the increasing demands for competitive pricing, service quality and
availability of value-added product offerings in order to maintain a competitive
position in its existing markets and additional markets it enters.
Because of the high level of penetration in the large hotel segment of the
lodging industry already achieved by guest pay providers, most of the growth
opportunities in this market segment have traditionally involved securing
contracts to serve hotels that are served by a competing vendor. An incumbent
provider may have certain information and installation cost advantages as
compared to outside competitors. These circumstances have led to increasing
competition for contract renewals, particularly at hotels operated by major
hotel chains. The Company believes that certain major hotel chains have awarded
contracts based primarily on the level and nature of financial and other
incentives offered by the guest pay provider. Even if it were able to do so, the
Company may not always be willing to match the incentives provided by its
competitors, some of which have greater access to financial and other resources
than the Company. Because free-to-guest service providers generally have
substantially comparable access to the satellite-delivered programming that
comprises the free-to-guest services, competition in this segment has been based
primarily on price and customer service.
While the Company believes that its proprietary B-LAN-TM- system
architecture is comparable or superior to the systems currently being used by
its competitors in the lodging industry, there can be no assurance that such
competitors will not develop a cost-effective system that is comparable or
superior to the Company's system. In order to broaden its market opportunities,
the Company redesigned its system to be scalable and to enable the delivery of
on-demand movies and network-based video games to mid-size hotels of 100 to 150
rooms, a market segment the Company believes has been historically underserved
by guest pay providers. There can be no assurance that the Company will be
successful in this market segment or that competitors will not develop a
cost-effective system that would allow them to target this market segment.
Further, there can be no assurance that the Company will continue its current
level of success in obtaining new contracts from hotels currently served by
other vendors or previously unserved, or that the Company will be able to retain
contracts with hotels it serves when those contracts expire.
Competitive pressures in the guest pay and free-to-guest segments could
result in reduced market share for the Company, higher hotel commissions, lower
margins and increased expenditures on marketing, product development and systems
installation, each of which could adversely affect the Company's financial
condition and operating results.
MULTI-FAMILY RESIDENTIAL MARKET. The provision of cable television services
to the MDU market is highly competitive and competition is expected to increase.
The Company anticipates that the primary competitors in each of its markets will
include SMATV operators, DBS providers, wireless cable providers, and the local
franchised cable operator. Certain of these competitors may be able to provide
cable television and other entertainment and communications services to the MDU
market on a more cost-effective basis than the Company and may have
substantially greater resources and experience in this market than the Company.
Further, as residents of the high-quality MDUs that are targeted by the Company
come to expect a wider selection of cable, interactive video and
telecommunications services, property owners may be inclined to enter into
exclusive right-of-entry ("ROE") contracts with companies that can offer such a
selection. Increasing competition among such providers for right of entry
contracts
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could result in greater financial incentives being offered to property owners,
thereby adversely affecting the financial return expected to be realized by
ResNet from such contracts. See "Business--Competition."
EARLY STAGE OF BUSINESS SERVING MULTI-FAMILY RESIDENTIAL MARKET
ResNet has only recently begun marketing its cable television services to
multi-family residential complexes. The Company has no material operating
history in this market. The success of ResNet's multi-family residential
strategy requires it to negotiate a significant number of long-term exclusive
ROE contracts on favorable terms with property owners or managers and to
maintain good relations with its strategic partners. See "--Right of Entry
Contracts." The Company may not be able to implement its growth plan as
currently contemplated if the demographics or occupancy rates of the MDUs served
or targeted by the Company change. ROE contracts will typically involve the
payment of a percentage of monthly revenue (a portion of which may be paid
up-front) to the property owner or manager. Certain of the Company's competitors
may have greater financial resources and may agree to pay property owners fees
at a level that, even if it were able to do so, the Company may not always be
willing to match. Further, as a new participant in the multi-family residential
market, without a recognized brand name, the Company may need to offer lower
prices than its competitors to attract customers. Accordingly, there can be no
assurance that the Company's services will achieve market acceptance or
financial returns sufficient to justify the investment or continued operation in
such market.
RISKS RELATED TO STRATEGIC ALLIANCES AND JOINT VENTURES
The Company has formed a strategic alliance with PRIMESTAR and ResNet has
recently formed strategic alliances with TCI Satellite and GE ResCom. The
Company and ResNet expect to enter into strategic alliances, joint ventures and
other similar arrangements in the future. The other parties to such existing
arrangements, and to arrangements in which the Company or ResNet may
subsequently participate, may at any time have economic, business or legal
interests or goals that are inconsistent with those of the strategic alliance,
joint venture or similar arrangement or those of the Company. In addition, a
joint venture partner may be unable to meet its economic or other obligations to
the venture, which, depending upon the nature of such obligations, could
adversely affect the Company or ResNet, as the case may be.
On March 6, 1997, in connection with a reevaluation of its business plan, GE
ResCom entered into an agreement with Shared Technologies Fairchild, Inc.
("STF"), one of the nation's larger providers of private telephony services to
commercial office buildings. GE ResCom has advised the Company that its revised
business plan calls for the formation of a new venture ("ResCom"), to be managed
by STF, that will continue the business of GE ResCom and in which GE Capital and
STF will hold significant equity interests. The restructuring of ResCom is
subject to certain consents, including the successful transition of GE ResCom's
portfolio of telephony contracts. There can be no assurance that ResCom will be
successfully restructured or that, if restructured, that the Company and ResNet
will be able to continue their contractual relationship with ResCom on terms
similar to the existing video services agreement or otherwise on mutually
acceptable terms.
TCI Satellite has informed the Company that counsel for PRIMESTAR has
advised TCI Satellite that its rights to distribute the PRIMESTAR Signal to
private cable systems, such as ResNet, may conflict with the rights of PRIMESTAR
under existing agreements between PRIMESTAR and TCI Satellite (or its
affiliates). TCI Satellite has advised the Company that it believes that its
transaction with ResNet and similar transactions are permitted under its
agreements, and TCI Satellite has represented in its agreement with ResNet that
it has all necessary rights to enter into and perform its obligations
thereunder. If TCI Satellite were to lose its ability to make the PRIMESTAR
Signal or a comparable signal available to ResNet, TCI Satellite is obligated to
reimburse ResNet for its costs in obtaining a comparable digital signal from
another source, including the cost of replacement equipment if the new digital
signal is not compatible with ResNet's equipment.
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RAPIDLY CHANGING TECHNOLOGY
Technology in the cable, entertainment and communications industries is
subject to rapid and significant change. There can be no assurance that future
technological advances will not result in improved equipment or software systems
that could adversely affect the Company's competitive position and its business.
In order to remain competitive, the Company must continue to make programming
enhancements and maintain engineering and technical capability and flexibility
to respond to customer demands for new or improved versions of its systems and
new technological developments. The Company's continued success will depend in
part upon its ability to identify promising emerging technologies and to
develop, refine and introduce high quality services in a timely manner on
competitive and cost-effective terms. Certain of the Company's competitors use
or have announced their intention to use technologies different from the
Company's in providing their guest pay or cable television services. Although
the Company does not believe that any of these competing technologies is
currently superior to its own in cost effectively providing guest pay and
interactive services, there can be no assurance that the Company's assessment of
the strengths, weaknesses, costs and benefits of competing technologies has been
or will be accurate. Further, a recent trend in the telecommunications industry
has been the anticipated "convergence" of traditional telephone and data
services with broadcast video services. The telephone, cable, wireless and
computer industries are evolving to provide traditional telecommunications,
cable and multimedia services to their customers on a fully integrated basis.
Such convergence can be expected to present risks for the Company, including
enhanced competition from traditional and new competitors, some of which may
have greater name recognition and financial and other resources than the
Company. The implementation of new technologies, as it becomes necessary to
remain competitive, may entail substantial capital expenditures beyond the
levels currently contemplated.
RIGHT OF ENTRY CONTRACTS
ResNet's current multiple-dwelling unit strategy relies substantially on its
ability to enter into long-term exclusive ROE contracts on favorable terms with
owners of MDU properties. Current trends at the state and federal levels, if
they continue, may render the legality of the exclusivity provisions of such ROE
contracts uncertain. Although the majority of the states currently do not
prohibit exclusive right-of-entry contracts, certain states in which ResNet will
operate (including New York and New Jersey) have legislated (and certain courts
have held) that no resident of a multi-family residence should be denied access
to programming provided by hard-wire cable systems, notwithstanding the fact
that the MDU owner may have entered into an exclusive ROE agreement with another
cable video program distributor. The Federal Communications Commission ("FCC")
also has initiated rulemaking proceedings to consider, among other issues,
whether to adopt uniform regulations governing cable and telephone inside
wiring, and the appropriate treatment of inside wiring in MDUs. If current
trends continue, it is possible that such laws or regulations will be enacted in
other states or at the federal level in the future. Future federal or state
judicial, legislative or regulatory action allowing such access, or a successful
challenge to this exclusivity by one or more of the Company's competitors, could
increase competition for subscribers in MDUs, which may materially adversely
affect ResNet's financial condition and operating results. Moreover, even if the
exclusivity provisions of ROE contracts remain fully enforceable, emerging
technologies or changing regulations may enable competitors of the Company to
by-pass property owners entirely and market their products and services directly
to MDU residents via satellite broadcast, wireless transmission or otherwise,
which would reduce the competitive advantage provided by the Company's exclusive
ROE contracts. See "--Competition," "--Rapidly Changing Technology" and
"Business--Government Regulation."
GOVERNMENT REGULATION
The FCC has broad jurisdiction over the telecommunications and cable
industries. However, because the Company constructs and operates a separate
headend system at each hotel or MDU property and such systems do not utilize
public rights-of-way, the Company believes its operations comply with a
statutory exemption from regulation as a "cable system" operator under
applicable federal law. As a "private cable" operator under applicable federal
law, the FCC does not directly regulate the Company's guest pay, free-
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to-guest, or multi-family residential cable television activities. For example,
the Company is not subject to the franchise requirements, "must-carry"
obligations and rate regulations applicable to "cable system" operators. It is
possible, however, that laws or regulations could be adopted in the future which
would impose additional regulatory burdens on private cable operators. Private
cable operators such as the Company are, however, subject to certain regulatory
requirements. For instance, private cable operators, with certain exceptions,
are prohibited from carrying the signal of a commercial television broadcast
station without the broadcaster's "retransmission" consent. If the cable
operator and the broadcaster fail to reach an agreement on terms and conditions
for retransmission, the cable operator is prohibited from carrying the
broadcaster's signal. Although there can be no assurance, the Company believes
it has obtained and will continue to obtain all necessary retransmission
consents in its markets.
The Telecommunications Act of 1996 (the "Act") is intended, in part, to
promote substantial competition for telephone and video services and alters
federal, state and local laws and regulations regarding telecommunications
providers and services. The Act generally removes previous restrictions
preventing cable firms, telephone companies, long distance carriers and public
utilities from entering into certain new markets, removes many cross-ownership
restrictions and modifies rate regulations applicable to franchised cable
operators. In particular, the Act authorizes local telephone companies to
provide video programming directly to subscribers in their service areas and
eliminates the requirement that "private cable" operators serve only buildings
"under common ownership, management or control," but preserves the requirement
that such operations not use closed transmission paths to cross public
rights-of-way. The Act also permits franchised cable operators to offer bulk
discounts to multiple dwelling units; provided, however, that such discounts may
not constitute "predatory pricing." Prior to the adoption of the Act, franchised
cable operators were subject to a uniform rate requirement which generally
prohibited such bulk discounts. There are numerous rulemakings that have and are
still being undertaken by the FCC which will interpret and implement the
provisions of the Act. It is anticipated that the Act will stimulate increased
competition generally in the telecommunications and cable industries, which may
adversely impact the Company. No assurance can be given that changes in current
or future laws or regulations, including those limiting or abrogating exclusive
ROE contracts, in whole or in part, adopted by the FCC or other federal, state
or local regulatory authorities would not have a material adverse effect on the
Company's business. See "Business--Regulation."
DEPENDENCE ON KEY PERSONNEL
The Company's success is dependent upon the continued contributions of its
senior corporate management and key employees. The loss of the services of its
key personnel could have a material adverse effect on the Company. The Company
depends on its continued ability to attract and retain highly skilled and
qualified personnel. Rapid expansion of the Company's operations may place a
strain on management's ability to manage the growth of its operations. There can
be no assurance that the Company will be successful in attracting and retaining
such personnel. See "Management."
ABSENCE OF PUBLIC MARKET
The Exchange Notes are new securities for which there is currently no
market. The Company does not intend to apply for listing of the Exchange Notes
on any securities exchange or for the inclusion of the Exchange Notes in any
automated quotation system. Although the Company has been advised by the
Placement Agents that, following completion of the Sale of the Private Notes,
the Placement Agents intended to make a market in the Notes, they are not
obligated to do so and any such market making activities may be discontinued at
any time without notice. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Exchange Notes. If a market for
the Notes were to develop, the trading prices of the Notes would depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results and prospects, any difference between the Company's actual
results and the results expected by investors and analysts and the market for
similar securities.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Private Notes were originally issued and sold by the Company on December
19, 1996 to the Placement Agents in reliance on Section 4(2) of the Securities
Act. The Placement Agents offered and sold the Private Notes only to "qualified
institutional buyers" (as defined in Rule 144A) in compliance with Rule 144A and
to a limited number of other institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act) that, prior to their
purchase of Private Notes, delivered to the Placement Agents a letter containing
certain representations and agreements.
In connection with the sale of the Private Notes, the Company and the
Placement Agents entered into a Registration Rights Agreement dated December 16,
1996 (the "Registration Rights Agreement"), which generally requires the Company
(i) to file with the Commission the Exchange Offer Registration Statement with
respect to the Exchange Offer or (ii) to cause the Private Notes to be
registered under the Securities Act pursuant to a Shelf Registration Statement
(as defined herein). The sole purpose of this Exchange Offer is to fulfill the
obligations of the Company with respect to the Registration Rights Agreement.
The term "holder" with respect to the Exchange Offer means any person in whose
name Notes are registered on the registrar's books or any other person who has
obtained a properly completed bond power from the registered Holder, or any
person whose Notes are held of record by The Depository Trust Company ("DTC")
who desires to deliver such Private Notes, by book-entry transfer at DTC.
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes the Exchange
Notes issued pursuant to the Exchange Offer in exchange for Private Notes may be
offered for resale, resold and otherwise transferred by any Holder thereof
(other than broker-dealers, as set forth below, and any such Holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such Holder's business and that such Holder
has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. Any Holder who tenders in the Exchange
Offer with the intention to participate, or for the purpose of participating, in
a distribution of the Exchange Notes or who is an affiliate of the Company may
not rely upon such interpretations by the staff of the Commission and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction. Failure to comply with such requirements in such
instance may result in such Holder incurring liabilities under the Securities
Act for which the Holder is not indemnified by the Company. Each broker-dealer
(other than an affiliate of the Company) that receives Exchange Notes for its
own account in exchange for Private Notes, where such Private Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution."
The Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make the
Prospectus available to any broker-dealer for use in connection with any such
sale. See "Plan of Distribution." Any broker-dealer who is an affiliate of the
Company may not rely on such no-action letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction.
The Exchange Offer is not being made to, nor will the Company accept
surrenders for exchange from, Holders of Private Notes in any jurisdiction in
which this Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
By tendering in the Exchange Offer, each Holder of Private Notes will
represent to the Company that, among other things, (i) the Exchange Notes
acquired pursuant to the Exchange Offer are being acquired in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
such person is
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the Holder, (ii) neither the Holder of Private Notes nor any such other person
has an arrangement or understanding with any person to participate in the
distribution of such Exchange Notes, (iii) neither the Holder nor any such other
person is an "affiliate" of the Company as defined in Rule 405 under the
Securities Act or, if such Holder is an "affiliate," that such Holder will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable, (iv) if the Holder is not a
broker-dealer, that neither the Holder nor any such other person is engaged in
or intends to engage in the distribution of such Exchange Notes, and (v) if such
Holder is a broker-dealer, that it will receive Exchange Notes for its own
account in exchange for Private Notes that were acquired as a result of
market-making activities or other trading activities and that it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes.
Participation in the Exchange Offer is voluntary and Holders should
carefully consider whether to participate. Holders of the Private Notes are
urged to consult their financial and tax advisors in making their own decisions
on whether to participate in the Exchange Offer.
Pursuant to the terms of the Registration Rights Agreement, if, under
certain circumstances, the Exchange Offer is not permitted, the Company shall
use its best efforts to, as promptly as practicable, file with the Commission
and thereafter shall cause to be declared effective under the Securities Act a
Shelf Registration Statement (as defined herein) relating to the offer and sale
of the Private Notes by the Holders from time to time in accordance with the
methods of distribution elected by such Holders and set forth in such Shelf
Registration Agreement. The Company shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the prospectus
forming part thereof to be usable by the Holders until the expiration of the
time period referred to in Rule 144(k) under the Securities Act after the
Closing Date or such shorter period that will terminate when all the Notes
covered by the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement. See "Description of the Notes--Registration Rights."
TERMS OF THE EXCHANGE OFFER
GENERAL. Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Company hereby offers to
exchange any and all Private Notes validly tendered and not withdrawn prior to
5:00 p.m., New York City time, on the Expiration Date. Subject to the minimum
denomination requirements of the Exchange Notes, the Company will issue $1,000
principal amount of Exchange Notes in exchange for each $1,000 principal amount
of outstanding Private Notes accepted in the Exchange Offer. Holders may tender
some or all of their Private Notes pursuant to the Exchange Offer. However,
Private Notes may be tendered only in amounts that are integral multiples of
$1,000 principal amount.
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Private Notes except that (i) the Exchange
Notes will be registered under the Securities Act and, therefore, will not bear
legends restricting the transfer and (ii) Holders of the Exchange Notes will not
be entitled to certain rights of Holders of Private Notes under the Registration
Rights Agreement, which will terminate upon consummation of the Exchange Offer.
The Exchange Notes will evidence the same debt as the Private Notes, will be
entitled to the benefits of the Indenture and will be treated as a single class
thereunder with any Private Notes that remain outstanding. The Exchange Offer is
not conditioned upon any minimum aggregate principal amount of Private Notes
being tendered for exchange.
As of the date of this Prospectus, $150,000,000 aggregate principal amount
of Private Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1997 to all Holders
known to the Company.
Holders of Private Notes do not have any appraisal or dissenters' rights
under the Delaware General Corporation Law or the Indenture in connection with
the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and
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the applicable requirements of the Exchange Act, and the rules and regulations
of the Commission thereunder. Private Notes which are not tendered for exchange
in the Exchange Offer will remain outstanding and interest thereon will continue
to accrue.
The Company shall be deemed to have accepted validly tendered Private Notes
when, as and if the Company has given written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purposes of receiving the Exchange Notes from the Company. If any tendered
Private Notes are not accepted for exchange because of an invalid tender, the
occurrence of certain other events set forth herein or otherwise, certificates
for any such unaccepted Private Notes will be returned, without expense, to the
tendering Holder thereof as promptly as practicable after the Expiration Date.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on , 1997, unless the Company, in
its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended. Although the Company has no current intention to extend the
Exchange Offer, the Company reserves the right to extend the Exchange Offer at
any time and from time to time by giving oral or written notice to the Exchange
Agent and by timely public announcement communicated, unless otherwise required
by applicable law or regulation, by making a release to the Dow Jones News
Service. During any extension of the Exchange Offer, all Notes previously
tendered pursuant to the Exchange Offer and not withdrawn will remain subject to
the Exchange Offer. The date of the exchange of the Exchange Notes for Private
Notes will be the first New York Stock Exchange trading day following the
Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Private Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth under "--Conditions of the
Exchange Offer" below shall not have been satisfied, by giving oral or written
notice of such delay, extension or termination to the Exchange Agent or (ii) to
amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly as
practicable by oral or written notice thereof to the Holders of Private Notes.
If the Exchange Offer is amended in any manner determined by the Company to
constitute a material change, the Company will promptly disclose such amendment
by means of a prospectus supplement that will be distributed to the Holders of
Private Notes, and the Company will extend the Exchange Offer for a period of
time, depending upon the significance of the amendment and the manner of
disclosure to such Holders, if the Exchange Offer otherwise would expire during
such period.
In all cases, issuance of the Exchange Notes for Private Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of a properly completed and duly executed
Letter of Transmittal and all other required documents; provided, however, that
the Company reserves the absolute right to waive any conditions of the Exchange
Offer or defects or irregularities in the tender of Private Notes. If any
tendered Private Notes are not accepted for any reason set forth in the terms
and conditions of the Exchange Offer or if Private Notes are submitted for a
greater principal amount than the Holder desires to exchange, such unaccepted or
non-exchanged Private Notes or substitute Private Notes evidencing the
unaccepted portion, as appropriate, will be returned without expense to the
tendering Holder (or, in the case of Private Notes tendered by book-entry
transfer into the Exchange Agent's account at DTC pursuant to the book-entry
procedures described below, such non-exchanged Private Notes will be credited to
an account maintained with DTC), unless otherwise provided
25
<PAGE>
in the Letter of Transmittal, as promptly as practicable after the expiration or
termination of the Exchange Offer.
INTEREST ON THE EXCHANGE NOTES. Holders of Private Notes that are accepted
for exchange will not receive accrued interest thereon at the time of exchange.
However, each Exchange Note will bear interest from the last Interest Payment
Date on which interest has been paid on the Private Notes so surrendered, or if
no interest has been paid on such Private Notes, from the Closing Date.
PROCEDURES FOR TENDERING PRIVATE NOTES. The tender to the Company of
Private Notes by a Holder thereof pursuant to one of the procedures set forth
below will constitute an agreement between such Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal. A Holder of the Private Notes may tender such Private
Notes by (i) properly completing and signing a Letter of Transmittal or a
facsimile thereof (all references in this Prospectus to a Letter of Transmittal
shall be deemed to include a facsimile thereof) and delivering the same,
together with any corresponding certificate or certificates representing Private
Notes being tendered (or confirmation of a book-entry-transfer of such Private
Notes into the Exchange Agent's account at DTC pursuant to the book-entry
procedures described below) and any required signature guarantees, to the
Exchange Agent at its address set forth in the Letter of Transmittal on or prior
to the Expiration Date (or complying with the procedure for book-entry transfer
described below) or (ii) complying with the guaranteed delivery procedures
described below.
If tendered Private Notes are registered in the name of the signer of the
Letter of Transmittal and the Exchange Notes to be issued in exchange therefor
are to be issued (and any untendered Private Notes are to be reissued) in the
name of the registered Holder (which term, for the purposes described herein,
shall include any participant in DTC, also referred to as a book-entry facility)
whose name appears on a security listing as the owner of Private Notes, the
signature of such signer need not be guaranteed. In any other case, the tendered
Private Notes must be endorsed or accompanied by written instruments of transfer
in form satisfactory to the Company and duly executed by the registered Holder
and the signature on the endorsement or instrument of transfer must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" as defined by rule 17Ad-15 under the Exchange Act (any of
the foregoing hereinafter referred to as an "Eligible Institution"). If the
Exchange Notes or Private Notes not exchanged are to be delivered to an address
other than that of the registered Holder appearing on the note register for the
Private Notes, the signature in the Letter of Transmittal must be guaranteed by
an Eligible Institution.
THE METHOD OF DELIVERY OF PRIVATE NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT
BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD BE
SENT TO THE COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS,
COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS
FOR SUCH HOLDERS.
A tender will be deemed to have been received as of the date when (i) the
tendering Holder's properly completed and duly signed Letter of Transmittal
accompanied by the Private Notes (or a confirmation of book-entry transfer of
such Private Notes into the Exchange Agent's account at DTC) is received by the
Exchange Agent or (ii) a Notice of Guaranteed Delivery or letter or facsimile
transmission to similar effect (as provided below) from an Eligible Institution
is received by the Exchange Agent. Issuances of Exchange Notes in exchange for
Private Notes tendered pursuant to a Notice of Guaranteed Delivery or letter or
facsimile transmission to similar effect (as provided below) by an Eligible
Institution will be made only
26
<PAGE>
against submission of a duly signed Letter of Transmittal (and any other
required documents) and deposit of the tendered Private Notes (or confirmation
of a book-entry transfer of such Private Notes into the Exchange Agent's account
at DTC pursuant to the book-entry procedures described below).
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Private Notes tendered for exchange will be
determined by the Company, which determination will be final and binding. The
Company reserves the absolute right to reject any and all tenders not in proper
form or the acceptance for exchange of which may, in the opinion of the
Company's counsel, be unlawful. The Company also reserves the absolute right to
waive any of the conditions of the Exchange Offer or any defect or irregularity
in the tender of any Private Notes. None of the Company, the Exchange Agent or
any other person will be under any duty to give notification of any defects or
irregularities in tenders or incur any liability for failure to give any such
notification. Any Private Notes received by the Exchange Agent that are not
validly tendered and as to which the defects or irregularities have not been
cured or waived, or if Private Notes are submitted in principal amount greater
than the principal amount of Private Notes being tendered by such tendering
Holder, such unaccepted or non-exchanged Private Notes will be returned by the
Exchange Agent to the tendering Holder, unless otherwise provided in the Letter
of Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion (i) to
purchase or make offers for any Private Notes that remain outstanding subsequent
to the Expiration Date and (ii) to the extent permitted by applicable law, to
purchase Private Notes in the open market, in privately negotiated transactions
or otherwise. The terms of any such purchases or offers may differ from the
terms of the Exchange Offer.
BOOK-ENTRY TRANSFER. The Company understands that the Exchange Agent will
make a request promptly after the date of this Prospectus to establish an
account with respect to the Private Notes at DTC for the purpose of facilitating
the Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in DTC's system may make book-entry delivery
of Private Notes by causing DTC to transfer such Private Notes into the Exchange
Agent's account with respect to the Private Notes in accordance with DTC's
Automated Tender Offer Program ("ATOP") procedures for such book-entry
transfers. Although delivery of the Private Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, the exchange for
Private Notes so tendered will only be made after timely confirmation (a
"Book-Entry Confirmation") of such book-entry transfer of the Private Notes into
the Exchange Agent's account, and timely receipt by the Exchange Agent of an
Agent's Message (as defined herein) and any other documents required by the
Letter of Transmittal. The term "Agent's Message" means a message, transmitted
by DTC and received by the Exchange Agent and forming part of the Book-Entry
Confirmation, which states that DTC has received express acknowledgment from a
participant tendering Private Notes that such participant has received and
agrees to be bound by the terms of the Letter of Transmittal, and that such
agreement may be enforced against such participant.
GUARANTEED DELIVERY PROCEDURES. If a Holder desires to participate in the
Exchange Offer and such Holder's Private Notes are not immediately available, or
time will not permit such Holder's Private Notes or other required documents to
reach the Exchange Agent before the Expiration Date, or the procedure for
book-entry transfer cannot be completed on a timely basis, a tender may be
effected if (i) the tender is made through an Eligible Institution, (ii) on or
prior to the Expiration Date, the Exchange Agent has received from an Eligible
Institution a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form
provided by the Company (by telegram, telex, facsimile transmission, mail or
hand delivery), setting forth the name and address of the tendering Holder, the
name(s) in which the Private Notes are registered, the certificate number(s) of
the Private Notes to be tendered and the amount tendered, and stating that the
tender is being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the date of execution of the Notice of Guaranteed
Delivery, such Private Notes, in proper form for transfer (or a confirmation of
book-entry transfer of such Private Notes into the Exchange Agent's account at
DTC), will be delivered by such Eligible Institution together with any other
documents required by the Letter of
27
<PAGE>
Transmittal and (iii) the certificates for all physically tendered Private
Notes, in proper form for transfer, or a confirmation of book-entry transfer of
such Private Notes into the Exchange Agent's account at DTC, as the case may be,
and all other documents required by the Letter of Transmittal are received by
the Exchange Agent within three New Stock Exchange Trading Days after the date
of execution of the Notice of Guaranteed Delivery. Unless Private Notes being
tendered by the above-described method are deposited with the Exchange Agent
within the time period set forth above (accompanied or preceded by a properly
completed Letter of Transmittal and any other required documents), the Company
may, at its option, reject the tender. Copies of a Notice of Guaranteed Delivery
which may be used by Eligible Institutions for the purposes described in this
paragraph are available from the Exchange Agent.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL. The Letter of
Transmittal contains, among other things, the following terms and conditions,
which are part of the Exchange Offer.
The party tendering Notes for exchange (the "Transferor") exchanges, assigns
and transfers the Private Notes to the Company and irrevocably constitutes and
appoints the Exchange Agent as the Transferor's true and lawful agent and
attorney-in-fact with respect to such tendered Private Notes, with full power of
substitution, among other things, to cause the Private Notes to be assigned,
transferred and exchanged. The Transferor represents and warrants that it has
full power and authority to tender, exchange, assign and transfer the old Notes
and to acquire Exchange Notes issuable upon the exchange of such tendered
Private Notes, and that, when the same are accepted for exchange, the Company
will acquire good and unencumbered title to the tendered Private Notes, free and
clear of all liens, restrictions, charges, encumbrances and adverse claims. The
Transferor also warrants that it will, upon request, execute and deliver any
additional documents reasonably requested by the Company or the Exchange Agent
as necessary or desirable to complete and give effect to the transactions
contemplated by the Letter of Transmittal. The Transferor further agrees that
acceptance of any tendered Private Notes by the Company and the issuance of
Exchange Notes in exchange therefor shall constitute performance in full by the
Company of their obligations under the Registration Rights Agreement and that
the Company shall have no further obligations or liabilities thereunder (except
in certain limited circumstances). All authority conferred by the Transferor
will survive the death, bankruptcy or incapacity of the Transferor and every
obligation of the Transferor shall be binding upon the heirs, personal
representatives, executors, administrators, successors, assigns, trustees in
bankruptcy and other legal representatives of such Transferor.
By executing a Letter of Transmittal, each Holder will make to the Company
the representations set forth above under the heading "--Purpose and Effect of
the Exchange Offer."
WITHDRAWAL OF TENDERS OF NOTES. Tenders of Private Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having tendered the Private Notes to be withdrawn (the "Depositor"),
(ii) identify the Notes to be withdrawn (including the certificate number or
numbers and principal amount of such Private Notes), (iii) contain a statement
that such Holder is withdrawing his election to have such Private Notes
exchanged, (iv) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Private Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to have the Trustee with respect to the Private Notes
register the transfer of such Private Notes in the name of the person
withdrawing the tender and (v) specify the name in which any such Private Notes
are to be registered, if different from that of the Depositor. If Private Notes
have been tendered pursuant to the procedure for book-entry transfer, any notice
of withdrawal must specify the name and number of the account at DTC. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, which determination shall be
final and binding on all parties. Any Private Notes so withdrawn will be deemed
not
28
<PAGE>
to have been validly tendered for purposes of the Exchange Offer and no Exchange
Notes will be issued with respect thereto unless the Private Notes so withdrawn
are validly retendered. Any Private Notes which have been tendered but which are
not accepted for exchange will be returned to the Holder thereof without cost to
such Holder (or, in the case of Private Notes tendered by book-entry transfer
into the Exchange Agent's account at DTC pursuant to the book-entry transfer
procedures described above, such Private Notes will be credited to an account
maintained with DTC for the Private Notes) as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Private Notes may be retendered by following one of the procedures
described above under "--Terms of the Exchange Offer--Procedures for Tendering
Private Notes" at any time on or prior to the Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, or any extension of
the Exchange Offer, the Company will not be required to accept for exchange, or
exchange Exchange Notes for, any Private Notes, and may terminate the Exchange
Offer or, at their option, modify or otherwise amend the Exchange Offer as
provided herein before the acceptance of such Private Notes, if:
(a) any statute, rule or regulation shall have been enacted, or any action
shall have been taken by any court or governmental authority which, in the
reasonable judgment of the Company, seeks to or would prohibit, restrict,
materially delay or otherwise render illegal consummation of the Exchange Offer,
or
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries has
occurred which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or materially impair
the contemplated benefits of the Exchange Offer to the Company, or
(c) there shall occur a change in the current interpretations by the staff
of the Commission which, in the Company' reasonable judgment, might materially
impair the Company' ability to proceed with the Exchange Offer.
If the Company determines in its sole discretion that any of the above
conditions is not satisfied, the Company may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering Holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
Expiration Date, subject, however, to the right of Holders to withdraw such
Private Notes (see "--Terms of the Exchange Offer--Withdrawal of Tenders of
Notes") or (iii) waive such unsatisfied conditions with respect to the Exchange
Offer and accept all validly tendered Private Notes which have not been
withdrawn. If such waiver constitutes a material change to the Exchange Offer,
the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the Holders of Private Notes, and the
Company will extend the Exchange Offer for a period of time, depending upon the
significance of the waiver and the manner of disclosure to such Holders, if the
Exchange Offer otherwise would expire during such period.
29
<PAGE>
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. All executed Letters of Transmittal must be directed to the Exchange
Agent at one of the addresses set forth below.
By registered or certified mail or over-night delivery:
Marine Midland Bank
140 Broadway, Level A
New York, New York 10005-1180
Attn: Corporate Trust Operations
By hand: Marine Midland Bank
140 Broadway, Level A
New York, New York 10005-1180
Attn: Corporate Trust Operations
By Facsimile Transmission (for Eligible Institutions only):
Marine Midland Bank
Corporate Trust Operations
Facsimile: (212) 658-2292
Confirm by Telephone:
(212) 658-5931
Delivery to an address other than as set forth above, or transmissions of
instructions via a facsimile number other than the one set forth above, will not
constitute a valid delivery.
FEES AND EXPENSES
The Company has not retained any dealer-manager or other soliciting agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptance of the Exchange Offer. The Company,
however, will pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company also may pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, the Letter of
Transmittal and related documents to the beneficial owners of the Private Notes
and in handling or forwarding tenders for exchange. The expenses to be incurred
in connection with the Exchange Offer will be paid by the Company. Such expenses
include, among others, fees and expenses of the Exchange Agent, accounting and
legal fees and printing costs.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Private Notes pursuant to the Exchange Offer. If, however, Exchange
Notes, or Private Notes for principal amounts not tendered or accepted for
exchange, are to be delivered to, or are to be issued in the name of, any person
other than the registered Holder of the Private Notes tendered or if a transfer
tax is imposed for any reason other than the exchange of the Private Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the Holder or any other persons) will be payable by the
tendering Holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering Holder.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information
30
<PAGE>
or representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the respective dates as of which
information is given herein. The Exchange Offer is not being made to (nor will
tenders be accepted from or on behalf of) Holders of Private Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance thereof
would not be in compliance with the laws of such jurisdiction. However, the
Company may, in its discretion, take such action as it may deem necessary to
make the Exchange Offer in any such jurisdiction and extend the Exchange Offer
to Holders of Private Notes in such jurisdiction. In any jurisdiction the
securities laws or blue sky laws of which require the Exchange Offer to be made
by a licensed broker or dealer, the Exchange Offer is being made on behalf of
the Company by one or more registered brokers or dealers which are licensed
under the laws of such jurisdiction.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Private Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities within the meaning of Rule 144
of the Securities Act. Accordingly, such Private Notes may be resold only (i) to
the Company or any subsidiary thereof, (ii) inside the United States to a
qualified institutional buyer in compliance with Rule 144A, (iii) inside the
United States to an institutional accredited investor that, prior to such
transfer, furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer of the
Private Notes (the form of which letter can be obtained from the Trustee) and,
if such transfer is in respect of an aggregate principal amount of Private Notes
at the time of transfer of less than $100,000, an opinion of counsel acceptable
to the Company that such transfer is in compliance with the Securities Act, (iv)
outside the United States in compliance with Rule 904 under the Securities Act,
(v) pursuant to the exemption from registration provided by Rule 144 under the
Securities Act (if available) or (vi) pursuant to an effective registration
statement under the Securities Act. The liquidity of the Private Notes could be
adversely affected by the Exchange Offer. See "Risk Factors--Consequences of
Exchange and Failure to Exchange."
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Private Notes, as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The costs of the Exchange Offer and the unamortized
expenses related to the issuance of the Private Notes will be amortized over the
term of the Exchange Notes.
31
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer, and no
underwriter is being utilized in connection with the Exchange Offer.
The net proceeds to the Company from the sale of the Private Notes was
approximately $143.2 million after deducting placement fees and offering
expenses of approximately $6.8 million. Of the net proceeds, approximately $20.4
million was used to prepay all outstanding borrowings under the Old Credit
Facility and approximately $31.7 million was used to redeem the Old Senior
Notes, $24.5 million principal amount of which bore interest at 9.95% per annum
and $4.4 million principal amount of which bore interest at 10.35% per annum,
all maturing on August 1, 2003 (approximately $28.9 million in aggregate
outstanding principal plus accrued interest and a make-whole premium of
approximately $2.8 million). The remainder of the net proceeds will be used to
fund capital expenditures to continue to expand the Company's lodging business
and ResNet's residential business and for working capital and general corporate
purposes. Pending such uses, the Company has invested the net proceeds in highly
liquid, interest-bearing securities. The prepayment of all outstanding
borrowings under the Old Credit Facility and the prepayment of the Old Senior
Notes occurred concurrently with the closing of the Sale of the Private Notes.
See "Summary-- The Refinancing" and Notes 4, 5 and 10 of "Notes to Consolidated
Financial Statements."
32
<PAGE>
CAPITALIZATION
The following table sets forth the cash and consolidated capitalization of
the Company as of December 31, 1996. The following table should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents.................................................. $ 86,177
--------
--------
Long-term debt (1):
Credit Facility (2)...................................................... $ --
Notes offered hereby..................................................... 150,000
11.5% Senior Notes, less unamortized discount (3)........................ 28,616
Other.................................................................... 1,042
Less current maturities.................................................. (425)
--------
Total long-term debt................................................... 179,233
--------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none
outstanding............................................................ --
Common stock, $.01 par value; 20,000,000 shares authorized; 11,125,369
shares issued and outstanding.......................................... 111
Additional paid-in capital............................................... 120,539
Accumulated deficit...................................................... (45,098)
--------
Total stockholders' equity............................................. 75,552
--------
Total capitalization................................................. $ 254,785
--------
--------
</TABLE>
- ------------------------
(1) See Notes 4 and 5 of "Notes to Consolidated Financial Statements."
(2) Subject to compliance with certain covenants and maintenance of certain
financial ratios, the Company may borrow up to $175 million under the Credit
Facility. See "Credit Arrangements of the Company."
(3) As part of the Refinancing, the terms of the Company's Senior Subordinated
Notes due 2005 were amended such that they rank PARI PASSU with, and have
substantially the same covenants as, the Private Notes and the Exchange
Notes and are referred to herein, as amended, as the "11.5% Senior Notes."
33
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT ROOM AND PER ROOM AMOUNTS)
The statement of operations data for the five years ended December 31, 1996
and the balance sheet data as of the end of each such year have been derived
from the Consolidated Financial Statements of the Company, which have been
audited by Arthur Andersen LLP, independent public accountants. The data should
be read in conjunction with the Company's Consolidated Financial Statements, the
notes thereto, and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," all included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Guest pay............................................. $ 13,828 $ 21,471 $ 29,927 $ 50,758 $ 84,504
Free-to-guest......................................... 6,125 7,478 8,397 8,060 8,645
Other................................................. 4,098 2,363 2,070 4,395 4,572
--------- --------- --------- --------- ----------
Total revenues........................................ 24,051 31,312 40,394 63,213 97,721
Direct costs.......................................... 12,827 14,848 18,181 28,910 44,379
--------- --------- --------- --------- ----------
Gross profit............................................ 11,224 16,464 22,213 34,303 53,342
Operating expenses...................................... 13,238 16,425 24,573 36,741 58,428
--------- --------- --------- --------- ----------
Operating income (loss)................................. (2,014) 39 (2,360) (2,438) (5,086)
Interest expense........................................ 1,783 2,096 966 4,522 8,243
--------- --------- --------- --------- ----------
Loss before income tax and extraordinary loss........... (3,797) (2,057) (3,326) (6,960) (13,329)
Provision for income taxes.............................. -- -- -- 66 28
--------- --------- --------- --------- ----------
Loss before extraordinary loss.......................... (3,797) (2,057) (3,326) (7,026) (13,357)
Extraordinary loss (1).................................. -- -- 1,324 -- 3,253
--------- --------- --------- --------- ----------
Net loss................................................ (3,797) (2,057) (4,650) (7,026) (16,610)
Cumulative preferred dividends.......................... 1,872 1,557 -- -- --
--------- --------- --------- --------- ----------
Net loss attributable to Common Stock................... $ (5,669) $ (3,614) $ (4,650) $ (7,026) $ (16,610)
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
OTHER DATA:
EBITDA (2).............................................. $ 3,472 $ 7,215 $ 9,301 $ 15,898 $ 24,729
EBITDA margin (2)....................................... 14.4% 23.0% 23.0% 25.1% 25.3%
Capital expenditures.................................... $ 18,044 $ 14,311 $ 43,521 $ 51,497 $ 85,258
Depreciation and amortization........................... 5,486 7,176 11,661 18,336 29,815
Annualized EBITDA (3)................................... 4,676 7,990 11,250 18,246 27,290
Ratio of earnings to fixed charges (4).................. -- -- -- -- --
Ratio of long-term debt to annualized
EBITDA (3)............................................ 6.31x .75x 2.49x 3.15x 6.57x
Ratio of EBITDA to interest expense (2)................. 1.95x 3.44x 9.63x 3.52x 3.00x
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 92 $ 12,256 $ 4,302 $ 2,252 $ 86,177
Total assets............................................ 42,238 64,300 88,265 125,507 279,768
Long-term debt (5)...................................... 29,500 6,000 28,000 57,497 179,233
Redeemable preferred stock (6).......................... 13,519 -- -- -- --
Total stockholders' equity (deficit).................... (7,272) 52,665 47,942 42,726 75,552
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
CERTAIN PRO FORMA DATA: (7)
Pro forma interest expense......................................................................... $ 19,266
Ratio of EBITDA to pro forma interest expense (2).................................................. 1.28x
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Guest pay rooms served (8)
On-demand............................................. 21,871 59,169 119,680 209,487 358,842
Scheduled............................................. 81,294 77,650 65,351 58,720 41,403
--------- --------- --------- --------- ----------
Total Guest pay rooms................................. 103,165 136,819 185,031 268,207 400,245
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
Rooms with Super Nintendo-Registered Trademark- game
systems (8)........................................... -- 225 69,806 163,879 322,903
Free-to-guest rooms served (8).......................... 176,651 191,893 220,534 249,779 294,882
Total rooms served (8)(9)............................... 227,697 267,171 314,184 388,088 516,348
Average monthly revenue per Guest pay room:
Movie revenue......................................... $ 13.00 $ 14.68 $ 15.03 $ 17.08 $ 18.38
Video game/information services....................... .27 .39 1.01 2.21 2.93
--------- --------- --------- --------- ----------
Total................................................. $ 13.27 $ 15.07 $ 16.04 $ 19.29 $ 21.31
--------- --------- --------- --------- ----------
--------- --------- --------- --------- ----------
</TABLE>
- ------------------------
(1) Includes extraordinary loss on early termination of the Company's bank
credit facility of $1.3 million in 1994 and extraordinary loss of $3.3
million in 1996 relating to the redemption of the Old Senior Notes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations."
(2) EBITDA is not intended to represent an alternative to net income or cash
flows from operating, financing or investing activities (as determined in
accordance with generally accepted accounting principles) as a measure of
performance. Rather, it is included herein because EBITDA is a widely
accepted financial indicator used by certain investors and financial
analysts to assess and compare companies on the basis of operating
performance. Management believes that EBITDA provides 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.
(3) "Annualized EBITDA" represents the sum of the quarterly EBITDA for the two
most recently completed fiscal quarters multiplied by two.
(4) Earnings are defined as net loss before income taxes, extraordinary items
and fixed charges, except where capitalized. Fixed charges are defined as
the portion of rental expense under operating leases representing interest,
and interest, including amortization of debt expense, whether expensed or
capitalized. Earnings were insufficient to cover fixed charges for the
following periods by the amounts indicated.
<TABLE>
<CAPTION>
COVERAGE
PERIOD DEFICIENCY
- --------------------------------------------------------------------------------------- -----------
<S> <C>
Year ended December 31, 1993........................................................... $ (2,057)
Year ended December 31, 1994........................................................... (3,326)
Year ended December 31, 1995........................................................... (6,960)
Year ended December 31, 1996........................................................... (13,329)
</TABLE>
(5) Excludes current maturities. See "Capitalization."
(6) Includes cumulative preferred dividends payable.
(7) Adjusted to give effect to the Refinancing as if the Refinancing had
occurred on January 1, 1996. The effect of such adjustment would have
precluded the necessity for other borrowings during year ended December 31,
1996 and therefore it reflects that no amounts would have been outstanding
under the Old Credit Facility. The adjustment reflects outstanding
indebtedness of $150 million of the Notes, and $30 million of the 11.5%
Senior Notes for a total interest expense of $19.3 million.
(8) At end of period.
(9) Total rooms served include those rooms receiving one or more of the
Company's services.
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS
PROSPECTUS. CERTAIN STATEMENTS IN THIS PROSPECTUS, INCLUDING, WITHOUT
LIMITATION, STATEMENTS UNDER THE HEADINGS "SUMMARY," "BUSINESS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
SECURITIES ACT OF 1933, AS AMENDED. WHEN USED IN THIS PROSPECTUS, 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, INCLUDING BUT NOT LIMITED TO THOSE DISCUSSED IN CONJUNCTION WITH
SUCH FORWARD-LOOKING STATEMENTS AND UNDER THE HEADING "RISK FACTORS," WHICH MAY
CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS
SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS. 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.
OVERVIEW
The Company provides video on-demand, network-based video games, cable
television programming and other interactive entertainment and information
services to the lodging and multi-family residential unit markets utilizing its
proprietary B-LAN-TM- system architecture.
LODGING SERVICES
GUEST PAY SERVICES.The Company's Guest Pay services include Guest
Scheduled-SM- on-demand movies, network-based Super
Nintendo-Registered Trademark- video games and other interactive entertainment
and information services for which the hotel guest pays on a per-view or
per-play basis. 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 following table sets forth information in regard to guest
pay rooms installed as of December 31:
<TABLE>
<CAPTION>
1994 1995 1996
-------------------- -------------------- --------------------
ROOMS % ROOMS % ROOMS %
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Scheduled.......................... 65,351 35.3 58,720 21.9 41,403 10.3
On-demand.......................... 119,680 64.7 209,487 78.1 358,842 89.7
--------- --------- --------- --------- --------- ---------
Total.......................... 185,031 100.0 268,207 100.0 400,245 100.0
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
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
direct 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 the Company's gross revenues
derived from each picture, (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
36
<PAGE>
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 and guest satisfaction surveys. In 1993
the Company entered into a seven-year non-exclusive license agreement with
Nintendo of America, Inc. ("Nintendo") to provide hotels with a network-based
Super Nintendo-Registered Trademark- video game playing system. The following
table sets forth the number of guest pay rooms with game systems installed as of
December 31:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Super Nintendo-Registered Trademark- game systems rooms....... 69,806 163,879 322,903
</TABLE>
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 $2.90 to $3.50 per room per
month for premium channels and from $.15 to $.85 per room per month for non-
premium channels. The Company obtains its free-to-guest programming pursuant to
multi-year agreements with the programmers and pays a fixed monthly fee per
room, which ranges generally from 75% to 80% of revenues for such services,
depending on incentive programs in effect from time to time from the programming
networks. In April 1996, the Company entered into an agreement with PRIMESTAR
pursuant to which the Company was appointed as the exclusive third-party
provider (other than partners in PRIMESTAR and their affiliated distributors) of
the PRIMESTAR-Registered Trademark- DBS (digital direct broadcast satellite)
signal to the lodging industry. Pursuant to this agreement, the Company will pay
a fee to PRIMESTAR for access to the PRIMESTAR signal, which will enable the
Company to provide free-to-guest digital satellite programming to a broader
segment of the lodging industry than can be cost-effectively served with
traditional C-band satellite systems. The following table sets forth the number
of free-to-guest rooms served as of December 31:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Free-to-guest rooms.......................................... 220,534 249,779 294,882
</TABLE>
RESIDENTIAL SERVICES
In January 1996, the Company formed 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 generally similar to those of the Company's lodging industry
business. ResNet began installations 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 operations of the Company for 1996. See
"Business--Services and Products, Multi-Family Residential Services."
37
<PAGE>
RESULTS OF OPERATIONS--YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE ANALYSIS
The Company's total revenue for 1996 increased 54.6%, or $34.5 million, in
comparison to 1995. The following table sets forth the components of the
Company's revenue (in thousands) for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Guest Pay......................................... $ 84,504 86.5 $ 50,758 80.2
Free-to-guest..................................... 8,645 8.8 8,060 12.8
Other............................................. 4,572 4.7 4,395 7.0
--------- ----- --------- -----
Total......................................... $ 97,721 100.0 $ 63,213 100.0
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
GUEST PAY SERVICES. Guest Pay revenues increased 66.5%, or $33.7 million,
in 1996 as compared to 1995. This increase is attributable to (i) a 50.7%
increase in the average number of installed guest pay rooms, all of which were
installed with the Company's on-demand technology, and (ii) a 10.5% increase in
average monthly revenue per guest pay room. The following table sets forth
information with respect to guest pay rooms for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Average monthly revenue per room:
Movie revenue............................................................ $ 18.38 $ 17.08
Video game and information service revenue............................... 2.93 2.21
--------- ---------
Total per Guest Pay room............................................... $ 21.31 $ 19.29
--------- ---------
--------- ---------
For all Guest Pay rooms:
Movie buy rates.......................................................... 10.7% 10.1%
Average movie price...................................................... $ 8.26 $ 8.28
Average hotel occupancy rate............................................. 69.4% 69.0%
For on-demand Guest Pay rooms:
Movie buy rates.......................................................... 11.4% 11.2%
Average movie price...................................................... $ 8.28 $ 8.34
Average hotel occupancy rate............................................. 70.0% 69.8%
</TABLE>
Average movie revenue per room, for all guest pay rooms, was favorably
impacted by a combination of higher average buy rates and higher average
occupancies, all in comparison to the comparable period in the previous year,
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 rooms 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 1996 as compared to 1995. The slight decrease in average
movie prices for both all and 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. The
Company's movie prices were generally $7.95 or $8.95 during the periods.
Average video game and information service revenue per room, for all guest
pay rooms, increased primarily as a result of the increase in the number of
rooms with video game services installed. On a per-room basis, average monthly
video game revenues were $2.26 and $1.70 during the years ended December 31,
1996 and 1995, respectively.
38
<PAGE>
FREE-TO-GUEST SERVICES. Free-to-guest revenues increased 7.3%, or $585,000,
in 1996 as compared to 1995. The comparative increase in revenues resulted from
the 18.1% increase in the number of installed free-to-guest rooms since December
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.
OTHER. 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 $177,000, or 4.0% in 1996 as compared to 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 regarding the
Company's direct costs (in thousands) and gross profit margin for the years
ended December 31:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Direct costs:
Guest Pay............................................................. $ 34,283 $ 19,053
Free-to-guest......................................................... 6,482 6,117
Other................................................................. 3,614 3,740
--------- ---------
$ 44,379 $ 28,910
--------- ---------
--------- ---------
Gross profit margin:
Guest Pay............................................................. 59.4% 62.5%
Free-to-guest......................................................... 25.0% 24.1%
Other................................................................. 21.0% 14.9%
Composite............................................................. 54.6% 54.3%
</TABLE>
Guest Pay direct costs increased 79.9%, or $15.2 million, in 1996 as
compared to the prior year. Since guest pay direct costs (primarily studio and
other license fees, video game license fees and the commission retained by the
hotel) are primarily based on related revenue, such direct costs generally vary
directly with revenue. As a percentage of guest pay revenue, such costs
increased from 37.5% in 1995 to 40.6% in 1996. The relative increase in guest
pay direct costs (as a percentage of revenue), in 1996 as compared to the prior
year, reflects higher movie-related costs due to proportionately higher revenue
from newly-released motion pictures and substantially increased video game
revenue in the guest pay revenue mix, which increases were mitigated by a slight
decrease in hotel commissions.
Free-to-guest direct costs increased 6.0% to $6.5 million in 1996 from $6.1
million in the prior year. As a percentage of free-to-guest revenue,
free-to-guest direct costs decreased to 75.0% in 1996 from 75.9% in the prior
year. The slight decrease in free-to-guest direct costs (as a percentage of
revenue) reflected the effect of price increases for certain programming.
Direct costs associated with other revenue decreased 3.4%, or $126,000, in
1996 as compared to the prior year. As a percentage of related revenues, such
direct costs decreased to 79.0% of other revenue in 1996 versus 85.1% in 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 $19.0 million, to
$53.3 million in 1996 on a 54.6% increase in revenues in comparison to the prior
year. The Company's overall gross profit margin was 54.6% in 1996 and 54.3% for
the prior year.
39
<PAGE>
OPERATING EXPENSES. The following table sets forth information in regard to
the Company's operating expenses (in thousands) for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Operating expenses:
Guest Pay operations............................ $ 15,032 15.4% $ 9,767 15.5%
Selling and marketing............................. 2,708 2.8% 1,871 3.0%
General and administrative........................ 10,873 11.1% 6,767 10.7%
Depreciation and amortization..................... 29,815 30.5% 18,336 29.0%
--------- --- --------- ---
Total operating expenses...................... $ 58,428 59.8% $ 36,741 58.2%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
Guest Pay operations expenses increased 53.9%, or $5.3 million, in 1996 from
$9.8 million in the previous year. Such increase is primarily attributable to
the 50.7% increase in average installed Guest Pay rooms in 1996 as compared to
1995. Per average installed guest pay room, such expenses averaged $3.79 per
month in 1996 as compared to $3.71 per month in 1995, primarily reflecting
increased marketing, service and support costs and property taxes.
Selling and marketing expenses increased 44.7%, or $837,000, in 1996 from
$1.9 million in the prior year. This increase reflects the effect of additional
sales and marketing personnel and increased promotional and marketing
activities. As a percentage of revenue, such expenses represented 2.8% of
revenue in 1996 as compared to 3.0% in the prior year.
General and administrative expenses increased 60.7%, or $4.1 million, in
1996 from $6.8 million in the prior year. This increase reflects the effect of
substantially increased legal expenses, an increase in the number of development
and administrative personnel and increased facilities-related expenses. As a
percentage of revenue, general and administrative expenses represented 11.1% of
total revenue in 1996 as compared to 10.7% in the year earlier period.
Depreciation and amortization expenses increased 62.6% to $29.8 million in
1996 from $18.3 million in the prior year. This increase is directly
attributable to the increases in the number of installed guest pay and game
service equipped rooms previously discussed, as well as the associated software
costs and other capitalized costs such as service vans, equipment and computers
that are related to the increased number of rooms in service since the prior
year.
OPERATING LOSS. The Company's operating loss, as a result of the factors
previously discussed, increased to $5.1 million in 1996 from $2.4 million in
1995.
INTEREST EXPENSE. Interest expense increased to $8.2 million in 1996 from
$4.5 million in 1995 due to increases in long-term debt to fund the Company's
continuing expansion of its businesses. Long-term debt increased from $57.5
million at December 31, 1995 to $179.2 million at December 31, 1996, reflecting
the Company's issuance of the Private Notes. The average principal amount of
long-term debt (excluding amounts outstanding under the revolving credit
facility) outstanding during 1996 was approximately $65.4 million (at a weighted
average interest rate of approximately 10.0%) as compared to an average
principal amount outstanding of approximately $40.6 million (at a weighted
average interest rate of approximately 10.3%) during 1995. The weighted average
amount outstanding under the revolving credit facility was approximately $9.4
million during 1996 as compared to approximately $2.1 million in 1995.
EXTRAORDINARY LOSS. As a result of the early redemption of the Old Senior
Notes, the Company incurred a make-whole premium of approximately $2.8 million,
and wrote off unamortized debt issuance costs related to the notes of
approximately $0.5 million.
40
<PAGE>
NET LOSS. For the reasons previously discussed, the Company's net loss
increased to $16.6 million in 1996 from a net loss of $7.0 million in the prior
year.
EBITDA. As a result of increasing revenues from guest pay services, and the
other factors previously discussed, EBITDA ("Earnings Before Interest, Income
Taxes and Depreciation and Amortization") increased 55.5% to $24.7 million in
1996 as compared to $15.9 million in 1995. EBITDA as a percentage of total
revenue increased to 25.3% in 1996 as compared to 25.1% in 1995. EBITDA is not
intended to represent an alternative to net income or cash flows from operating,
financing or investing activities (as determined in accordance with generally
accepted accounting principles) as a measure of performance. Rather, it is
included herein because EBITDA is a widely accepted financial indicator used by
certain investors and financial analysts to assess and compare companies on the
basis of operating performance. Management believes that EBITDA provides 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--YEARS ENDED DECEMBER 31, 1995 AND 1994
REVENUE ANALYSIS
The Company's total revenues increased 56.5% in 1995 as compared to 1994.
The following table sets forth the various components of the Company's total
revenue (in thousands) for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Guest Pay......................................... $ 50,758 80.2% $ 29,927 74.1%
Free-to-guest..................................... 8,060 12.8% 8,397 20.8%
Other............................................. 4,395 7.0% 2,070 5.1%
--------- ----- --------- -----
Total......................................... $ 63,213 100.0% $ 40,394 100.0%
--------- ----- --------- -----
--------- ----- --------- -----
</TABLE>
GUEST PAY SERVICES. Guest Pay revenues increased 69.6%, or $20.8 million,
in 1995 as compared to 1994. This increase is attributable to (i) an approximate
41% increase in the average number of guest pay rooms installed during 1995 as
compared to the prior year and (ii) increases in movie and video game and
information service revenue on a per-room basis of 13.6% and 118.8%,
respectively, both as compared to 1994. Higher average buy rates and higher
average movie prices combined with higher average occupancy rates such that
average monthly movie revenues increased on a per-room basis. Video game and
information service revenues increased from approximately $1.9 million in 1994
to approximately $5.8 million in 1995, primarily as a result of the increase in
the number of rooms with video game services
41
<PAGE>
installed. The following table sets forth information with respect to guest pay
rooms for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Average monthly revenue per room:
Movie revenue............................................................ $ 17.08 $ 15.03
Video game and information service revenue............................... 2.21 1.01
--------- ---------
Total per Guest Pay room............................................... $ 19.29 $ 16.04
--------- ---------
--------- ---------
For all Guest Pay rooms:
Movie buy rates.......................................................... 10.1% 9.5%
Average movie price...................................................... $ 8.28 $ 7.81
Average hotel occupancy rate............................................. 69.0% 68.7%
For on-demand Guest Pay rooms:
Movie buy rates.......................................................... 11.2% 11.1%
Average movie price...................................................... $ 8.34 $ 7.90
Average hotel occupancy rate............................................. 69.8% 69.9%
</TABLE>
FREE-TO-GUEST SERVICES. Free-to-guest revenues decreased 4.0%, or $337,000,
in 1995 as compared to the prior year. The comparative decrease is primarily
attributable to a relative decline in the proportion of free-to-guest rooms
receiving premium services.
OTHER. 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 112.3%, or $2.3 million, in 1995 as compared to 1994.
This increase is directly attributable to increases in television sales between
the periods.
EXPENSE ANALYSIS
DIRECT COSTS. The following table sets forth information regarding the
Company's direct costs (in thousands) and gross profit margin for the years
ended December 31:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Direct costs:
Guest Pay............................................................. $ 19,053 $ 10,050
Free-to-guest......................................................... 6,117 6,412
Other................................................................. 3,740 1,719
--------- ---------
$ 28,910 $ 18,181
--------- ---------
--------- ---------
Gross profit margin:
Guest Pay............................................................. 62.5% 66.4%
Free-to-guest......................................................... 24.1% 23.6%
Other................................................................. 14.9% 17.0%
Composite............................................................. 54.3% 55.0%
</TABLE>
Guest pay direct costs increased 89.6%, or $9.0 million, in 1995 as compared
to 1994. Since guest pay direct costs (primarily studio and other license fees,
video game license fees and the commission retained by the hotel), are primarily
based on related revenue, such direct costs generally vary directly with
revenue. As a percentage of guest pay revenue, guest pay direct costs were 37.5%
of related revenues versus 33.6% in 1994. 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, as compared to 1994.
42
<PAGE>
Free-to-guest direct costs decreased 4.6%, or $295,000, in 1995 compared to
the prior year, and such direct costs also decreased, as a percentage of
free-to-guest revenues, to 75.9% in 1995 from 76.4% in the prior year, primarily
due to a comparative decrease in the relative proportion of premium channels in
the programming mix, as previously mentioned.
Direct costs related to other revenue increased 117.6%, or $2.0 million, in
1995 as compared to 1994. This increase was directly attributable to the
increased level of television sales discussed above. As a percentage of other
revenue, direct costs increased to 85.1% in 1995 as compared to 83.0% in 1994
due to the relative increase in revenue from television sales, which have a
lower margin than other components of the other revenue category.
The Company's overall gross profit margin was 54.3% in 1995 as compared to
55.0% in 1994. The slight decrease is attributable to the lower guest pay gross
profit margin, and to the effect of the increased sales of televisions in the
other revenue category, both as previously discussed.
OPERATING EXPENSES. The following table sets forth information in regard to
the Company's operating expenses (in thousands) for the years ended December 31:
<TABLE>
<CAPTION>
1995 1994
------------------------ ------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Operating expenses:
Guest Pay operations...................................... $ 9,767 15.5% $ 7,244 17.9%
Selling and marketing..................................... 1,871 3.0% 1,541 3.8%
General and administrative................................ 6,767 10.7% 4,127 10.2%
Depreciation and amortization............................. 18,336 29.0% 11,661 28.9%
--------- --- --------- ---
Total operating expenses................................ $ 36,741 58.2% $ 24,573 60.8%
--------- --- --------- ---
--------- --- --------- ---
</TABLE>
Guest pay operations expense increased 34.8%, or $2.5 million, in 1995 as
compared to the prior year. This increase was primarily attributable to the
addition of 83,176 guest pay rooms since December 31, 1994. Per installed guest
pay room, such expenses averaged $3.71 per month during 1995 as compared to
$3.88 for 1994. Lower service and maintenance costs and lower administrative
support costs combined to offset higher property taxes, all on a per-room basis.
Selling and marketing expenses increased 21.4%, or $330,000, in 1995 as
compared to 1994, reflecting an increase in marketing and promotional activities
and the addition of sales and marketing personnel. Sales and marketing expenses
represented 3.0% of revenues in 1995 as compared to 3.8% in the prior year.
General and administrative expenses increased 64.0%, or $2.6 million, in
1995 as compared to the prior year, primarily reflecting increases in legal and
personnel-related costs. As a percentage of revenues, general and administrative
costs were 10.7% in 1995 as compared to 10.2% in 1994.
Depreciation and amortization expenses increased 57.2%, or $6.7 million, in
1995 as compared to 1994. This increase directly reflects the effect of the
approximate 45% increase in the number of installed guest pay rooms, as well as
the effect of expenditures to upgrade previously installed rooms to provide
video game and information services, and the associated software and other
capitalized costs such as service vans and equipment, computers and office
furniture, fixtures and other equipment related to the Company's continuing
expansion.
OPERATING LOSS. The Company's operating loss was $2.4 million in both 1995
and 1994.
INTEREST EXPENSE. Interest expense increased 368.1%, or $3.6 million, in
1995 as compared to 1994. The increase is directly attributable to increased
borrowing to fund the Company's continuing investments
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in both newly-installed and upgraded rooms. The average amount of long-term debt
outstanding during 1995, excluding amounts outstanding under the Company's then
existing revolving credit facility, was approximately $40.6 million as compared
to an average of approximately $12.4 million during 1994. The average amount
outstanding under the revolving credit facility was approximately $2.1 million
during 1995 as compared to approximately $1.9 million in 1994.
NET LOSS. The Company's net loss increased to $7.0 million in 1995 from
$4.6 million in 1994, as a result of the foregoing factors.
EBITDA. EBITDA increased 70.9%, or $6.6 million, in 1995 as compared to
1994. EBITDA, as a percentage of total revenues, increased to 25.1% in 1995 as
compared to 23.0% in 1994.
SEASONALITY
The Company's quarterly operating results are subject to fluctuation
depending upon hotel occupancy rates and other factors. Typically, occupancy
rates are higher during the second and third quarters due to seasonal travel
patterns.
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 Refinancing, 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. See "Use of Proceeds."
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 Refinancing, 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 the same covenants as, the Private 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. See "Credit Arrangements of the Company--11.5% Senior
Notes."
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 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 Refinancing, 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 "Credit 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. The Credit
Facility is secured by (i) a first priority security interest in all of the
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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 Credit 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 Credit 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%. See
"Credit Arrangements of the Company--Credit Facility."
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 then outstanding under the
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). See "Business-- Strategic
Initiatives--Residential Alliances with GE ResCom and TCI Satellite."
On December 19, 1996, the Company issued $150 million, principal amount, of
unsecured 10.25% Senior Notes (the "Private 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 Private Notes, which were issued at par,
after placement fees and offering expenses, were approximately $143.2 million.
Of the net proceeds approximately $20.4 million was used to prepay outstanding
borrowings under the Old Credit Facility and 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.
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 indebtedness 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 $85.3 million during 1996, and net cash provided by operating
activities was approximately $9.5 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 $90 to $125 million in 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
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statement and there can be no assurance in this regard. In addition, the Credit
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 Private Notes, the funds
to be provided by TCI Satellite, its operating cash flows and borrowings
permitted under the Credit 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. See "Risk
Factors--High Level of Indebtedness; Ability to Service Debt" and "--Historical
and Future Operating Losses; Need for Additional Capital; Refinancing Risk."
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" ("Statement 123"), 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 elected to continue to measure compensation cost in
accordance with APB 25, and to comply with the pro forma disclosure requirements
of Statement 123.
Financial Accounting Standards Board Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was
adopted by the Company as of January 1, 1996. This statement was 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 adoption did not have a material impact on the Company's
financial position or results of operations.
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BUSINESS
CERTAIN STATEMENTS IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION,
STATEMENTS UNDER THE HEADINGS "SUMMARY," "BUSINESS" AND "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES ACT OF 1933,
AS AMENDED. WHEN USED IN THIS PROSPECTUS, 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, INCLUDING BUT
NOT LIMITED TO THOSE DISCUSSED IN CONNECTION WITH SUCH FORWARD-LOOKING
STATEMENTS AND UNDER THE HEADING "RISK FACTORS," WHICH MAY CAUSE THE COMPANY'S
ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF
THE DATE OF THIS PROSPECTUS. 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.
OVERVIEW
LodgeNet provides video on-demand, network-based video games, cable
television programming and other interactive entertainment and information
services to the lodging and multi-family dwelling unit ("MDU") markets utilizing
its proprietary broadband local area network ("B-LAN"-SM-) system architecture.
Through its rapid growth, the Company has become the second largest provider of
such services to the lodging market (based on total rooms served), currently
serving over 516,000 rooms in over 3,400 hotel properties throughout the United
States and Canada. In January 1996, the Company formed ResNet Communications,
Inc. ("ResNet") to extend its B-LAN-SM- system architecture and operational
expertise into the MDU market. In October 1996, TCI Satellite MDU, Inc. ("TCI
Satellite"), an affiliate of Tele-Communications, Inc. ("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 the digital DBS signals
provided by TCI Satellite for the MDU market on a nationwide basis.
LodgeNet and ResNet generally operate under exclusive long-term contracts in
the lodging and MDU markets. The Company's lodging guest pay contracts typically
have terms of 5 to 7 years and ResNet's MDU contracts are expected to have terms
of 8 to 12 years. The exclusive nature of these contracts allows the Company to
estimate, based on certain operating assumptions, future revenues, cash flows
and rates of return related to the contracts prior to making a capital
investment decision.
The Company has experienced substantial growth in the number of guest pay
rooms served, total revenue and earnings before interest, taxes, depreciation
and amortization ("EBITDA"). From 1991 through 1996, guest pay rooms served
increased from 73,415 to 400,245, revenues increased from $19.6 million to $97.7
million, and EBITDA increased from $2.9 million to $24.7 million.
LODGING SERVICES. The Company provides its services in the lodging market
to corporate-managed hotel chains such as ITT Sheraton, The Ritz-Carlton
Company, Harrah's Casino Hotels, Delta Hotels and Resorts, Outrigger, La Quinta
Inns, Red Roof Inns and Budgetel Inns, as well as many individual properties
flying the Marriott, Holiday Inn, Hilton, Inter-Continental, Prince, Radisson,
Westin, Doubletree, Embassy Suites, and other flags. The lodging market in the
United States comprises approximately 3.4 million rooms. The Company believes
that approximately 1.9 million of these rooms are located in the Company's
target market of hotels having more than 100 rooms. The Company provides its
services under exclusive, long-term contracts throughout the United States and
Canada, and in other select countries through licensing arrangements with
strategic partners. The average remaining life of the Company's existing guest
pay contracts is over four years, with less than 7% of these contracts due to
expire before 1998.
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In the lodging market, the Company's services include Guest Scheduled-SM-
on-demand movies, network-based Super Nintendo-Registered Trademark- video
games, PRIMESTAR digital-Registered Trademark- satellite-delivered basic and
premium cable television programming, and other interactive entertainment and
information services. On-demand services enable a guest to purchase and start a
movie on-demand, rather than restricting the guest to a predetermined start
time. Video games can be started on-demand by a hotel guest who is charged an
hourly rate for play time. Free-to-guest services typically involve a customized
package of basic and premium cable television programming which the hotel
purchases from the Company and provides at no charge to guests. Other services,
which are typically provided at no charge to the guest, include guest surveys,
folio review and video checkout. The Company is able to offer its interactive
services by virtue of the high-speed, two-way digital communications design of
its proprietary B-LAN-SM- system architecture. The Company's open-architecture,
UNIX-based platform enables the Company to upgrade system software to support
the introduction of new services or integrate new technologies as they become
commercially available and economically viable.
The Company believes it is a leader in providing innovative products and
services to the lodging industry. The Company believes that it was the first in
the lodging market to install network-based interactive video games, the first
to install in-room printers for video checkout and other applications, and the
first to utilize a Video Room Card-SM- (an image-based menu and purchasing
protocol, utilizing pictures and graphics to replace the simple text menus
traditionally utilized by its competitors). In 1995, LodgeNet redesigned its
interactive system, enabling the Company to deliver what it believes is the
first cost-effective system for on-demand movies and network-based video games
to mid-size hotels of 100 to 150 rooms, a market segment the Company believes
has been historically underserved by guest pay providers. The Company believes
that the scalability and advanced features of its redesigned system for mid-size
hotels were principal factors in the recent awarding by La Quinta Inns of its
over 30,000-room account, Red Roof Inns of its over 27,000-room account and
Budgetel Inns of its over 8,000-room account to the Company over other
competitors. The Company believes that the mid-size hotel segment represents a
large and attractive market for the Company's services that will generate
financial returns similar to those achieved by the Company in larger
full-service hotels. In April 1996, the Company entered into an agreement with
PRIMESTAR Partners L.P. ("PRIMESTAR") pursuant to which the Company was
appointed as the exclusive third-party provider (other than the partners in
PRIMESTAR and their affiliated distributors) of the
PRIMESTAR-Registered Trademark- DBS signal to the lodging industry. This
arrangement enables the Company to provide free-to-guest, digital
satellite-delivered cable television programming to a broader segment of the
lodging industry than can be cost-effectively served with traditional C-band
satellite systems. Since February 1997, the Company has been testing an Internet
browser at a hotel property that enables the hotel guest to access and navigate
the World Wide Web from any guest room television in the hotel, and the Company
intends to install and test the Internet browser at additional hotels over the
next several months.
MULTI-FAMILY RESIDENTIAL SERVICES. The Company views the MDU market as
attractive due to: (i) the large market size; (ii) the portability to this
market of the Company's B-LAN-SM- system architecture and operating expertise
developed for the lodging market; (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
traditional franchised cable operators); and (iv) the exclusive long-term
contracts that have customarily been available in the MDU market.
The Company believes it is well positioned to pursue the large MDU private
cable market with its proprietary B-LAN-SM- system architecture and the ability
to offer the DBS signals provided by TCI Satellite on a nationwide basis. The
Company believes there are approximately 6 million multi-family residential
units in the United States that are located in apartment complexes having more
than 200 units, the Company's primary market, which represents a market more
than three times as large as the Company's traditional lodging market. The
Company believes that its proprietary B-LAN-SM- system architecture enables
ResNet to offer a differentiated and cost effective solution for the video
service needs of property owners
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and their tenants. In addition, the Company believes that its existing
nationwide installation and field service organization enables ResNet to operate
effectively throughout the United States wherever MDU contracts may be obtained,
which the Company believes is a significant strategic advantage for ResNet over
local satellite master antenna television ("SMATV") and franchised cable
operators in addressing the needs of large multi-state property portfolios.
ResNet's video service agreement with each property owner grants ResNet the
exclusive right and access on a long-term basis to provide video services to
tenants of the MDU complex, in return for which the owner receives a monthly
commission based on revenues. These agreements generally prohibit the property
owner from installing or marketing an alternative video system and prohibit the
owner from allowing tenants to install an antenna, satellite or microwave dish
on the exterior of the building.
ResNet's private cable television system has the capacity to deliver over
100 channels, although the Company expects that the typical system will deliver
35 to 50 channels of basic and premium programming, depending principally upon
the size of the property, the length of the contract and local competitive
considerations. ResNet may elect to provide approximately 10 to 35 additional
channels for scheduled pay-per-view, video on-demand, and other interactive
services, such as Internet access. ResNet intends to tailor the programming
lineup at each multi-family residential complex, based on the particular
demographic profile of that complex. ResNet's private cable television system is
based on the proprietary B-LAN-SM- system architecture deployed by the Company
in the lodging market and will utilize the DBS signal provided by TCI Satellite
nationwide. ResNet's access to TCI Satellite's digital Ku-band technology
provides it with a more capable and cost-effective system than the C-band
systems generally used by most SMATV cable operators. ResNet's private cable
television system also utilizes addressable interdiction technology, enabling
ResNet to remotely initiate, modify or terminate service, prevent signal theft
and respond to many other service needs.
In February 1996, ResNet entered into an agreement with GE Capital-ResCom,
L.P. ("GE ResCom"), an affiliate of General Electric Co. and a provider of
private telephony services to MDUs, pursuant to which GE ResCom was appointed
the exclusive sales and marketing agent for ResNet in the MDU market. Pursuant
to the terms of the agreement, ResNet was prohibited from selling, marketing or
providing video services in the MDU market other than to customers obtained by
GE ResCom. Subject to the terms of the agreement, GE ResCom was required to
provide ResNet contracts for a minimum of 200,000 passings by January 31, 1998,
including 70,000 passings by January 31, 1997, such contracts to have an average
term of not less than ten years. At January 31, 1997, ResNet had contracts
covering approximately 3,225 passings, less than the required benchmark under
its agreement. Pursuant to the terms of ResNet's agreement with GE ResCom,
ResNet will now be able to independently market and provide its services
directly to large property portfolios, property management companies, and owners
of MDU properties and pursue other available opportunities in the MDU market
(whereas previously it had been restricted contractually from doing so).
On March 6, 1997, in connection with a reevaluation of its business plan, GE
ResCom entered into an agreement with Shared Technologies Fairchild, Inc.
("STF"), one of the nation's larger providers of private telephony services to
commercial office buildings. GE ResCom has advised the Company that its revised
business plan calls for the formation of a new venture ("ResCom"), to be managed
by STF, that will continue the business of GE ResCom and in which GE Capital and
STF will hold significant equity interests. The restructuring of ResCom is
subject to certain consents, including the successful transition of GE ResCom's
portfolio of telephony contracts. There can be no assurance that ResCom will be
successfully restructured or that, if restructured, that the Company and ResNet
will be able to continue their contractual relationship with ResCom on terms
similar to the existing video services agreement or otherwise on mutually
acceptable terms.
ResNet intends to grow its business by (i) taking over the management and
control of the sales and marketing of its unique B-LAN-SM- solution and customer
service capabilities to large multi-state MDU
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property portfolios, property owners and property managers, and (ii) considering
selected acquisitions of private cable operations where the expected return on
capital meets ResNet's investment criteria.
The Company's predecessor commenced business in 1980 as Satellite Movie
Company, incorporated as a South Dakota corporation in February 1983 and changed
its name to LodgeNet Entertainment Corporation in September 1991. On October 13,
1993, LodgeNet Entertainment Corporation changed its state of incorporation from
South Dakota to Delaware by merging with and into the Company, its newly-formed
Delaware subsidiary, which then adopted the LodgeNet name. Interested persons
may access additional information concerning the Company and ResNet through the
Company's Web Site at:
HTTP://WWW.LODGENET.COM.
BUSINESS STRATEGY
The Company's business strategy is to: (i) continue to expand its lodging
industry base of guest pay and free-to-guest rooms; (ii) expand into the MDU
private cable television market; (iii) maximize the revenue generated per
lodging room or residential unit served by exploiting new revenue opportunities;
(iv) extend the application of the Company's proprietary B-LAN-SM- system
architecture and operating expertise to new markets; and (v) enhance financial
performance by increasing operating margins and reducing the average capital
invested per new unit installed.
EXPANDING THE COMPANY'S LODGING INDUSTRY FRANCHISE. The Company believes
that there are substantial opportunities for continued domestic growth in an
estimated pool of over 1.9 million rooms located in hotels having more than 100
rooms (from the approximately 3.4 million guest rooms industry-wide), of which
the Company estimates approximately 500,000 are either served by the Company's
competitors under contracts due to expire before the end of 1997 or are
presently unserved by any movie system vendor. The Company's marketing plan is
to capitalize on the strength of its innovative product offerings, deliverable
by virtue of the high-speed, two-way digital communications design of its
scalable proprietary
B-LAN-SM- system architecture, together with its expertise in installation,
programming, technical support and customer service.
Internationally, the Company is expanding into selected countries in the Far
East, South America, Central America and other regions through licensing
agreements with established partners in these countries. Under these agreements,
the Company generally sells equipment at cost plus an agreed markup and receives
a royalty based on gross revenues. The Company believes there are additional
opportunities to enter into international strategic alliances in other regions
to exploit further the Company's proprietary B-LAN-SM- system architecture and
multimedia capabilities.
EXPANDING INTO THE MULTI-FAMILY RESIDENTIAL MARKET. The Company believes
there are substantial opportunities to provide its services in the MDU market.
The Company believes there are approximately 6 million multi-family residential
units located in apartment complexes having more than 200 units, the Company's
primary market. This represents a market that is more than three times the size
of the Company's target lodging market.
MAXIMIZING REVENUE PER UNIT. In addition to increasing and expanding its
installed customer base, the Company also seeks to maximize the revenue
generated by each of its installed guest rooms and apartment units. In
furtherance of this strategy, the Company intends in the lodging market to
continue to install its interactive Guest Scheduled-SM- on-demand movie and
network-based Super Nintendo-Registered Trademark- video game system in all new
guest pay hotel rooms. From the Company's experience, rooms with this system
generate significantly more revenue and gross profit than comparable rooms
having only the scheduled format which allows guests to watch movies only at
predetermined times. The Company's current installed guest pay base of over
400,000 rooms hosts more than 90 million guests each year (based on current
average hotel occupancy and length-of-stay data). The Company believes there may
be significant opportunities to generate revenues from third-party providers of
content and services who would pay the Company for
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access to its valuable consumer base, as well as from usage fees charged to the
guests who utilize such services. Since February 1997, the Company has been
testing an Internet browser at a hotel property that enables the hotel guest to
access and navigate the World Wide Web from any guest room television in the
hotel, and the Company intends to install and test the Internet browser at
additional hotels over the next several months. The Company is reviewing other
new services, such as advertiser-supported visitor information for specific
cities, as well as "advertorials" and other "push media" strategies to deliver
targeted product or service information directly to the consumer. The Company is
evaluating these and other opportunities as well as appropriate business models
that would enable the Company to maximize the return on its investment in these
activities.
EXPANDING INTO NEW MARKETS. The Company seeks to extend the application of
its proprietary
B-LAN-SM- system architecture, products and services to an increasingly broad
range of property sizes and types. In addition to the mid-size hotel,
international lodging and multi-family residential markets, other future
potential markets may include hospitals, single-family residences, cruise ships
and educational institutions, among others.
ENHANCING FINANCIAL PERFORMANCE. Complementing the Company's growth
objective is its ongoing goal to enhance financial performance. The Company
seeks to increase its operating margins by reducing direct and overhead
expenses, as measured on a percentage of revenue and on a per-installed unit
basis. As a result of its efforts, the Company has experienced increasing EBITDA
margins during the past three years as it has reduced per-room operating costs
and leveraged its infrastructure over a larger base of installed rooms.
Additionally, the Company will continue its program to reduce the average
capital invested per new unit, thereby increasing its return on investment. As a
result of engineering efforts to reduce the cost of its system, increased
installation efficiencies and the ability of the Company to negotiate guest pay
contracts under which hotels are sharing a greater percentage of the cost of
installing televisions, the Company's average investment per new guest pay room
decreased approximately 17% during 1996 from approximately $450 in 1995 to
approximately $375 in 1996.
STRATEGIC INITIATIVES
The Company has recently implemented the following strategic initiatives to
further its goal of creating a more diversified revenue base.
EXPANSION INTO THE RESIDENTIAL MARKET. The Company believes it is well
positioned with its proprietary B-LAN-SM- system architecture and nationwide
field service organization to pursue the promising MDU private cable market, a
potential market that is over three times larger than the Company's targeted
lodging market. The Company believes its existing nationwide installation and
field service organization enables ResNet to operate effectively throughout the
United States wherever its sales force may obtain MDU contracts. For large
multi-state MDU portfolios, this capability represents a significant strategic
advantage over franchised cable operators which are limited to their designated
service area and other private cable operators, the majority of which operate on
a more limited regional or local basis.
On October 21, 1996, the Company and ResNet entered into agreements with TCI
Satellite pursuant to which TCI Satellite acquired a 4.99% interest in ResNet
for $5.4 million (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 ResNet up to $34.6 million to purchase certain DBS
reception equipment pursuant to a subordinated convertible term loan agreement
(the "TCI Convertible Note"). ResNet has delivered to TCI Satellite an initial
purchase order for equipment in an amount equal to the Stock Payment. The TCI
Convertible Note has a five year term (subject to a one year extension at the
option of ResNet), is non-recourse to the Company and is payable solely in
shares of ResNet's common stock. Subject to certain vesting provisions, the TCI
Convertible Note is subject to mandatory conversion into up to an additional 32%
interest in ResNet at such time as conversion is not restricted by Federal
Communication Commission ("FCC") regulations (as described below). As part of
the transaction, TCI Satellite was
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granted an option (the "TCI Option"), exercisable after three years, to acquire
an additional 13.01% interest in ResNet for a purchase price equal to the fair
market value of such shares at the time of exercise. ResNet and TCI Satellite
also agreed to rights of first refusal on the sale of any interest in ResNet and
to certain standstill provisions that, among other things, prohibit TCI
Satellite from acquiring more than 10% of the Company's outstanding common stock
or participating in any effort to influence or control the Company's management
or Board of Directors.
Under current interpretations of FCC regulations relating to restrictions on
cross-ownership of franchised cable and SMATV operations, TCI Satellite may be
prevented from holding 5% or more of ResNet's capital stock and consequently
could not exercise the conversion and purchase rights under the TCI Convertible
Note and the TCI Option. See "--Regulation." TCI Satellite is required to
convert the loan into ResNet common stock at such time as conversion would not
violate the aforementioned FCC restrictions. 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 such FCC restrictions, the unconverted portion of the TCI
Convertible Note and the TCI Option will be canceled and replaced with newly
issued warrants to acquire a like number of ResNet shares. The exercise price of
the warrants for the shares issuable upon conversion of the loan will be de
minimis, because ResNet will already have received the funds pursuant to the
loan, and the purchase price of the warrants for the option shares will be
equivalent to the exercise price under such option agreement.
PRIMESTAR AGREEMENT. In April 1996, the Company and PRIMESTAR entered into
an agreement appointing the Company as the exclusive third party provider (other
than the partners in PRIMESTAR and their affiliated distributors) of the
PRIMESTAR DBS signal to the lodging industry. PRIMESTAR is a consortium of the
nation's largest cable companies, including TCI, Time-Warner Cable, Comcast
Cable, Continental Cablevision, Cox Cable Communications and GE-Americom
Communications. The Company expects that the alliance, bringing together
PRIMESTAR's digital satellite technology and the Company's programming and
marketing expertise, will provide the Company with a technologically superior
and more flexible service, and extend the market for free-to-guest systems to a
much broader segment of the lodging industry than can be served cost-effectively
with traditional C-band satellite systems. The Company markets the "PRIMESTAR by
LodgeNet" service as a complement to its interactive guest pay systems and on a
stand-alone basis to hotels not served by the Company's guest pay system.
EXPANSION INTO MID-SIZE HOTEL MARKET. In addition to the large hotel
market, which traditionally has been the segment subject to the most competition
for guest pay services, the Company is now targeting mid-size hotels of 100 to
150 rooms as part of its marketing strategy. The Company believes that this
market segment, which the Company estimates contains over 500,000 rooms, has not
been broadly served by the guest pay industry because of certain diseconomies of
scale resulting from the smaller average property size. In 1995, the Company
redesigned and modified its B-LAN-SM- system architecture to permit the delivery
of on-demand movies and network-based Super Nintendo video games more
cost-effectively to mid-size hotels. The Company believes that its ability to
deliver this full array of services (in contrast to competing systems that do
not offer network-based video games and require the guest to take the extra step
of ordering the movie purchase by telephone) and the scalability of its system
for mid-size hotels, were significant factors in the recent awarding by La
Quinta Inns of its over 30,000-room account, Red Roof Inns of its over
27,000-room account and Budgetel Inns of its over 8,000-room account to the
Company over other competitors. The Company believes that the mid-size hotel
segment represents a large and attractive new market for the Company's services
and expects that its scalable B-LAN-SM- system architecture will allow it to
generate financial returns similar to those achieved by the Company in larger
full-service hotels.
INTERNET AND OTHER INTERACTIVE SERVICES. The Company is continuing the
development and implementation of Internet and other interactive services
deliverable over the Company's B-LAN-SM- system, accessible by the hotel guest
through the in-room television, designed to bring consumers together
electronically with providers of merchandising and information services. The
Company believes there may be significant
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opportunities to generate revenues from third-party providers of content and
services who would pay the Company for access to its valuable consumer base, as
well as from usage fees charged to the guests who utilize such services. The
Company recently completed beta testing of an interactive, on-screen
merchandising service at two hotels in New York City. Since February 1997, the
Company has been testing an Internet browser at a hotel property that enables
the hotel guest to access and navigate the World Wide Web from any guest room
television in the hotel, and the Company intends to install and test the
Internet browser at additional hotels over the next several months. The Company
is reviewing other new services, such as advertiser-supported visitor
information for specific cities, as well as "advertorials" and other "push
media" strategies to deliver targeted product or service information directly to
the consumer. The Company is evaluating these and other opportunities as well as
appropriate business models that would enable the Company to maximize the return
on its investment in these activities.
MARKETS AND CUSTOMERS
LODGING MARKET. The lodging market in the United States comprises
approximately 3.4 million hotel rooms. Guest pay services were introduced in the
lodging market in the early 1970s and have since become a standard amenity
offered by many hotels to their guests. Virtually all hotels offer free-to-guest
services as well. In 1986, certain hotels began offering their guests limited
interactive services and in 1991, on-demand movies became available. Guest pay
services are attractive to hotel operators because they provide an additional
amenity for their guests as well as incremental revenue.
LARGE HOTEL MARKET. The Company's primary market for guest pay services has
been large hotels with over 150 rooms located in metropolitan areas in the U.S.
and Canada, and the Company estimates that this market segment contains
approximately 1.3 million rooms. The Company currently provides its services to
large hotels that are generally part of chains such as ITT Sheraton, The
Ritz-Carlton Hotel Company, Harrah's Casino Hotels, Delta Hotels and Resorts,
Outrigger, Holiday Inn, Inter-Continental, Embassy Suites, Prince, Radisson,
Westin, Hilton and Marriott. No single contract represented greater than 10% of
the Company's combined guest pay and free-to-guest revenues for the twelve
months ended December 31, 1996.
MID-SIZE HOTEL MARKET. The Company is also now targeting mid-size hotels of
100 to 150 rooms as part of its guest pay marketing strategy. The Company
believes that this market segment, which the Company estimates contains over
500,000 rooms, has not been broadly served by the guest pay industry because of
certain diseconomies of scale resulting from the smaller average property size.
In 1995, LodgeNet redesigned its interactive system, enabling the Company to
deliver on-demand movies and network-based video games more cost-effectively to
mid-size hotels. The Company believes that the mid-size hotel segment represents
a large and attractive new market for the Company's services and expects that
its scalable B-LAN-SM- system architecture will allow it to generate financial
returns similar to those achieved by the Company in the large hotel market.
FREE-TO-GUEST MARKET. Almost all of the approximately 3.4 million hotel
rooms in the United States are served by some form of free-to-guest television
service. Free-to-guest television typically involves a package of basic and
premium programming which the hotel purchases and provides at no charge to its
guests. These services can be purchased on a stand-alone basis or as part of a
package which includes guest pay services. Historically, only hotels with more
than 100 rooms could generally justify the expense of buying or leasing the
large C-band satellite dish required to receive satellite-delivered,
free-to-guest services. Smaller hotels who wanted to offer free-to-guest
services generally purchased the service from local cable operators. The
Company's agreement with PRIMESTAR allows LodgeNet to provide digital
satellite-delivered free-to-guest television programming on a cost-effective
basis to hotels with as few as 50 rooms.
MULTI-FAMILY RESIDENTIAL MARKET. The Company believes that there are
substantial opportunities for growth in the multi-family residential market. The
Company believes there are approximately 26,000
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apartment complexes having more than 200 units, with an aggregate of
approximately 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's
agreement with TCI Satellite will facilitate the expansion into this market by
providing ResNet with DBS equipment and access to a DBS signal nationwide.
SERVICES AND PRODUCTS
GUEST PAY SERVICES. The Company's primary source of revenue is providing
in-room, interactive television services to the lodging industry, for which the
hotel guest pays on a per-view or per-play basis. The high-speed, two-way
digital communications design of the Company's proprietary B-LAN-SM- system
architecture enables the Company to provide sophisticated interactive features
such as on-demand movies, network-based Super Nintendo video games, and a
variety of other interactive services, such as folio review, video checkout,
in-room printers, guest surveying, advertising and merchandising services.
Guest pay services include in-room television viewing of recently released
major motion pictures and independent films for which a hotel guest pays on a
per-view basis. The Company's Guest Scheduled-SM- interactive video-on-demand
service, which is provided in approximately 90% of the Company's guest pay
rooms, allows a guest to choose from an expanded menu of video selections and
individually start the selected video at the guest's convenience rather than
restricting the guest to a predetermined start time. It has been the Company's
experience that rooms having the on-demand format generate significantly greater
movie revenues than comparable rooms having only the pre-scheduled format. As of
December 31, 1996, the Company served over 400,000 guest pay rooms, of which
nearly 359,000, or approximately 90%, featured the Company's interactive
on-demand system. The Company's original scheduled guest pay service, which is
provided in approximately 10% of the Company's guest pay rooms, offers guests a
choice of up to nine movie titles shown at predetermined times, offering a new
film approximately every half hour. The Company continuously monitors guests'
entertainment selections and adjusts its programming to respond to viewing
patterns. The system also enables hotel owners to broadcast informational and
promotional messages and to monitor room availability.
In May 1993, the Company entered into a seven-year non-exclusive license
agreement with Nintendo to provide hotels with a network-based Super
Nintendo-Registered Trademark- video game playing system. Pursuant to this
agreement, Nintendo provides the Company with access to a minimum of ten popular
Super Nintendo-Registered Trademark- video games, which selection of games is
updated periodically, and the Company uses its proprietary high-speed B-LAN-SM-
system architecture to allow guests to play the video games over the hotel's
master antenna television system. Hotel guests are charged a fee based on the
amount of time they play the video games. Presently, the Company charges $5.95
per hour of play. The Company had over 322,900 rooms installed with the Super
Nintendo-Registered Trademark- system as of December 31, 1996.
The revenue generated from the guest pay service is dependent upon three
factors at each location: (i) the occupancy rate at the property; (ii) the "buy
rate" or percentage of occupied rooms that buy movies or video games/information
services at the property; and (iii) the price of the movie, video game or
service. For example, a property installed with the Company's interactive system
with a 70% occupancy rate, a buy rate of 11.4% and an $8.95 movie price will
generate an average of $21.71 of gross movie revenue per installed room per
month, plus an average of $3.90 in additional gross revenues per month from
video games and information services (assuming 30.4 days per month), resulting
in total gross revenue per room per month of $25.61. Occupancy rates vary by
property based on the property's competitive position within its marketplace and
over time based on seasonal factors and general economic conditions. Buy rates
generally reflect the hotel's guest mix profile, the popularity of the motion
pictures available and the guests' other entertainment alternatives. Buy rates
also vary over time with general economic conditions. Movie price levels are
established by the Company and are set based on the guest mix profile at each
property and overall economic conditions. Currently, the Company's movie prices
are generally $7.95 or $8.95.
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The cost of installation varies depending on the size of the hotel property
and the configuration of the system being installed. The average installed cost
of a new on-demand guest pay room with interactive and video game services
capabilities, including the headend equipment and, in some cases, televisions,
is approximately $375 to $400 per room. In addition to hotel commissions and
royalties paid to movie studios, operating costs of the guest pay systems
include preview tapes, tape duplication, taxes, freight, insurance, personal
property taxes, maintenance and data line costs. The average cost to upgrade a
room from the original scheduled guest pay system to the on-demand system is
approximately $75 to $175 per room, depending on the size of the movie library
installed in the hotel, whether video games are provided and the configuration
of the headend computer and system hardware.
FREE-TO-GUEST SERVICES. In addition to guest pay services, the Company
provides television programming for which the hotel, rather than its guests,
pays the charges. Free-to-guest services allow a hotel to receive one or more
satellite-distributed programming channels via a satellite earth station, which
are then distributed to guest rooms over the hotel's existing master antenna
system.
Traditionally, this service has required little capital expenditure by the
Company, since the earth station equipment either was provided independently by
the hotel or purchased or leased from the Company. For free-to-guest services,
the hotel pays the Company a fixed monthly charge per room for each programming
channel selected and provides these channels to its guests free of charge. The
Company generally charges $2.90 - $3.50 per room per month for each premium
channel and $.15 - $.85 per room per month for each non-premium channel. Premium
channels, such as HBO, Showtime and The Disney Channel, broadcast major motion
pictures and specialty programming, while non-premium channels, such as CNN,
ESPN and WTBS, broadcast news, sports and informational programs. Premium
programming suppliers typically contract only with cable companies and other
large volume subscribers, such as the Company, and will not generally provide
programming directly to individual hotel properties. The Company successfully
competes with local cable television operators by customizing packages of
programming to provide only those channels desired by the hotel subscriber,
which typically reduces the overall cost of the services provided.
In April 1996, the Company and PRIMESTAR entered into an agreement to
provide digital satellite-delivered basic and premium television services to the
lodging industry. The alliance brings together PRIMESTAR's digital satellite
technology and the Company's programming and marketing expertise, will enable
the Company to offer the lodging industry a technologically superior and more
flexible service, and will extend the market for free-to-guest services to a
much broader segment of the lodging industry than can be served cost-effectively
with traditional C-band satellite systems. Pursuant to the agreement with
PRIMESTAR, the Company will pay PRIMESTAR a signal carriage fee for providing
access to the PRIMESTAR-Registered Trademark- signal. The agreement with
PRIMESTAR may be terminated by either party upon notice if certain cash flow
targets are not met during any two consecutive years. The Company is responsible
for the installation and servicing of all equipment required by each lodging
customer to receive the PRIMESTAR-Registered Trademark- digital
satellite-delivered signal. Installations began in May 1996 and approximately
50,700 rooms at 329 hotel properties had been installed through December 31,
1996. The Company intends to sell or lease such equipment to its customers and
is entitled to retain all revenues associated with the sale, lease, installation
and service of all such PRIMESTAR-related equipment.
MULTI-FAMILY RESIDENTIAL SERVICES. ResNet's multi-family residential
private cable system has the capacity to deliver over 100 channels, although the
typical system will deliver approximately 35 to 50 channels of programming.
ResNet may elect to provide from approximately 10 to 35 additional channels for
scheduled pay-per-view, video on-demand and other interactive services, such as
Internet access. ResNet designs a specific programming lineup for each specific
multi-family residential complex, based on the particular demographic profile of
that complex. These systems 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. Delivery of private cable television
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services to multi-family residential complexes involves technology similar to
that used in the Company's hotel systems. The hub of each multi-family
residential system is a headend, which will gather basic and premium cable
television programming from a variety of sources using a combination of the DBS
signal provided by TCI Satellite and off-air antennae and then redistribute
these signals throughout the apartment complex using the Company's proprietary
B-LAN-SM- system architecture.
The Company estimates that the average installed cost per unit passed for
basic and premium cable television services will range from approximately $500
to $700. The Company estimates that the average cost per unit passed to add
scheduled pay-per-view movies and/or video on-demand movies to the basic cable
system will range from $30 to $155, depending on the system configuration and
the size of the movie library installed. The foregoing estimates of installation
costs are forward-looking in nature and actual costs could vary based on the
factors discussed elsewhere herein.
ENTERTAINMENT HARDWARE. The Company also sells and leases entertainment
hardware, including satellite earth stations, televisions and off-air signal
reception and processing equipment, to the lodging industry. The Company
believes that this service complements its goal of being a full-service provider
of in-room entertainment and information services to the lodging industry.
OPERATIONS
CONTRACTS. The Company provides guest pay services under contracts with
lodging properties that generally run for a term of five to seven years. Under
these contracts, the Company installs its system into the hotel free of charge
and retains ownership of all equipment utilized in providing the service.
Traditionally, the hotel provides and owns the television set; however, the
Company in some cases provides televisions incorporating the Company's
integrated guest pay terminal units to hotels which meet certain economic
criteria. The Company's contracts generally provide that the Company will be the
exclusive provider of in-room, scheduled pay-per-view or on-demand television
entertainment services to the hotels, permit the Company to set the movie price
and allow the Company to terminate the contract if the hotel is not meeting the
Company's economic criteria. The contracts also typically grant the Company a
right of first refusal regarding the provision of additional video related
services to the hotel. The hotels collect movie viewing charges from their
guests and retain a commission, generally equal to 10% to 15% of the total guest
pay revenue depending upon the size and profitability of the system. At the
scheduled expiration of a contract, the Company generally seeks to extend the
contract on substantially similar terms. The average remaining life of the
Company's current guest pay contracts is over four years, with less than 7% of
these contracts coming up for renewal before 1998.
The Company typically enters into a separate contract with each hotel for
the services provided. The terms contained in the contracts with the
corporate-managed hotels in any one chain generally are negotiated by that
chain's corporate management, and the hotels subscribe at the direction of
corporate management. In the case of franchised hotels, the contracts are
generally negotiated separately with each hotel.
ResNet enters into long-term exclusive right-of-entry contracts with
property owners and managers to provide cable television services to
multi-family residential complexes. The lengths of term of such contracts
generally run longer than those in the lodging industry. The form of agreement
to be entered into with each multi-family residential property grants ResNet the
right to provide cable television programming and other video services, such as
video on-demand, merchandising, and access to the Internet. The property owner
or manager typically receives a commission generally from 6% to 12% of
subscriber revenues, depending upon the penetration rate at a particular
property. See "Risk Factors--Right of Entry Contracts."
TECHNOLOGY, PRODUCT DEVELOPMENT AND PATENTS. The Company designs and
develops high quality interactive, multimedia entertainment and information
systems. Because such systems utilize an open architecture, UNIX-based platform
incorporating industry standard interfaces, the Company can upgrade
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system software to support the introduction of new services or integrate new
technologies as they become economically viable. The Company's interactive
system incorporates the Company's scalable proprietary B-LAN-SM- system
architecture with commercially manufactured, readily available components and
hardware such as video cassette players, modulators and computers.
The Company's B-LAN-SM- system architecture utilizes the Company's
proprietary high-speed, two-way digital communications design to process and
respond to keystroke commands from the viewer very rapidly. This capability
enables the Company to provide sophisticated interactive features such as
network-based Super Nintendo video games and on-demand movies, and a variety of
other interactive services such as folio review, video checkout, in-room
printers supporting video checkout and other applications, guest surveying,
advertising and shopping services. The Company recently completed beta testing
of an interactive, on-screen merchandising service at two hotels in New York
City. Since February 1997, the Company has been testing an Internet browser at a
hotel property that enables the hotel guest to access and navigate the World
Wide Web from any guest room television in the hotel, and the Company intends to
install and test the Internet browser at additional hotels over the next several
months.
In the lodging industry, the Company's guest pay systems consist of
equipment located within the guest room connected via a local-area cable
distribution network to a headend located elsewhere in the hotel. Typical
in-room equipment includes a terminal unit, a hand-held remote control and a
video game controller. The in-room terminal unit may be integrated within the
television set or located behind or on top of the set. Movie programming
originates from video cassette players located within the headend rack and is
transmitted to individual rooms over the hotel's master antenna system. Video
game programs are downloaded into dedicated video game processors also located
within the headend rack. The guest's keystrokes are transmitted from the room to
the game processor using the Company's proprietary high-speed communications
infrastructure and the video signal produced by the game processor is
transmitted to the guest room over the hotel's master antenna system. Both movie
and video game starts are controlled automatically by the system computer. The
system computer also automatically records the purchase of a guest pay movie or
video game and reports billing data to the hotel's accounting system, which
automatically posts the charge to the guest's bill.
Although the Company's products are compatible with all brands of
televisions, the Company has arrangements with Zenith Electronics Corporation,
Phillips Electronics and Sony Electronics, Inc., leading suppliers of
televisions to the lodging industry and other markets, who provide the Company
with commercial televisions into which the Company can integrate its
custom-designed circuit boards. The Company is also working with other
television manufacturers to integrate the Company's systems into their
commercial television sets. Integration eliminates the need for an external
terminal unit and costs less than an external unit of comparable utility.
ResNet's private cable television systems serving the multi-family
residential market are based on the Company's scalable proprietary B-LAN-SM-
system architecture developed for the lodging market. ResNet's private cable
television system has the capacity to deliver over 100 channels, although ResNet
expects that the typical system will deliver 35 to 50 channels of basic and
premium programming, depending principally upon the size of the property, the
length of the contract and local competitive considerations. ResNet may elect to
provide from approximately 10 to 35 additional channels for scheduled
pay-per-view, video on-demand and other interactive services, such as Internet
access. ResNet's interactive cable television systems utilize the DBS signal
provided by TCI Satellite, off-air and/or microwave receiving antennas and
headend equipment which process and amplify the broadcast and cable television
programming signals. These signals are then transmitted to subscribers at the
property via the Company's B-LAN-SM- system architecture. The Company integrates
addressable interdiction jamming technology within its proprietary system.
Addressable interdiction enables the Company to control subscriber access to
premium channels and other enhanced services through a computer located
off-site. This capability eliminates the necessity of having to dispatch field
personnel to a property to initiate, modify or terminate service and eliminates
the costs associated with damage or loss of traditional set-top converters
located in the subscriber's premises.
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As a result, the relatively high rate of subscriber turn-over in the
multi-family residential market represents an additional revenue stream for the
Company to be generated from "activation" and "new service" charges paid by
subscribers.
The Company designs its systems through its staff of approximately 85
software and hardware engineers and support personnel (as of December 31, 1996).
Development activities are oriented toward the continued enhancement and cost
reduction of the Company's system and the further development of additional
interactive, multimedia entertainment and information services, such as
advertising and shopping services.
It is the Company's policy to apply for patents on those product designs
which management believes may be of significance to the Company. The Company
owns four United States patents, has received an official notice of allowance
from the U.S. Patent and Trademark Office ("USPTO") of its decision to grant
another patent to the Company, and has other applications for patents pending in
the USPTO dealing with various aspects of the Company's interactive multimedia
systems.
The Company uses a number of registered and unregistered trademarks for its
products and services. The Company has applications for registration pending for
certain of the unregistered trademarks, and those trademarks for which the
Company has not sought registration are governed by common law and state unfair
competition laws. Because the Company believes that these trademarks are
significant to the Company's business, the Company has taken legal steps to
protect its trademarks in the past and intends to actively protect these
trademarks in the future. The Company believes that its trademarks are generally
well recognized by consumers of its products and are associated with a high
level of quality and value.
SALES AND MARKETING. The Company focuses its sales and marketing strategies
on acquiring new contracts from hotels and marketing the Company's guest pay,
video game and other interactive services to the hotel guest. The Company's
sales organization consisted of approximately 50 employees as of December 31,
1996, including national account representatives, who develop relationships with
national hotel franchise organizations and management groups, and regional sales
representatives who maintain relationships primarily with regional hotel
management and ownership organizations. The Company has established a separate
sales group responsible for sales and marketing of "PRIMESTAR by LodgeNet." The
Company markets its services and products to hotels by advertising in industry
trade publications, attending industry trade shows, direct marketing and
telemarketing. Sales activities are coordinated from the Company's headquarters.
The Company markets its services to hotel guests by means of its Video Room
Card-SM-, on-screen graphics and by in-room tent cards which contain movie and
video game programming information that are placed near the television set and
highlight the feature film selections of the month. In-room marketing
advertisements are designed and produced by the Company's marketing department.
The system also generates a "Welcome Channel," which appears on-screen when the
television is turned on and describes the programming and interactive services
available through the Company's system.
INSTALLATION AND SERVICE OPERATIONS. The Company believes that high quality
and consistent systems support and maintenance are essential to competitive
success in its industry. The Company's installation and service organization
consists of approximately 300 installation and service personnel in
approximately 30 locations in the United States and Canada, as of December 31,
1996. The Company emphasizes the use of Company-employed installation and
service personnel, but also uses Company-trained subcontractors in areas where
there is not a sufficient concentration of Company-served hotels to warrant a
Company-employed service representative. Currently, the Company's in-house
installation and service organization has responsibility for approximately 80%
of the guest pay hotel rooms served by the Company. Service personnel are
responsible for systems maintenance and distribution and collection of video
cassettes. The Company's installation personnel prepare site surveys to
determine the type of equipment to be installed at each particular hotel,
install the Company's systems, train the hotel staff to operate the systems and
perform preliminary quality control tests.
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The Company maintains a toll-free customer support hot line,
Tech-Connect-SM-, which is monitored 24 hours a day by trained support
technicians. The on-line diagnostic capability of the Company's system enables
the Company to identify and resolve a majority of the reported system
malfunctions from the Company's service control center without visiting the
hotel property. When a service visit is required, the modular design of the
Company's systems permits installation and service personnel to replace
defective components at the hotel site.
In the multi-family residential market, ResNet installation supervisors and
support personnel oversee and coordinate installation crews comprised of
experienced subcontractors. Initially, ResNet will utilize field service and
component assembly resources developed by the Company for the lodging industry.
PROGRAMMING. In the lodging market, the Company obtains non-exclusive
rights to show recently released major motion pictures from motion picture
studios pursuant to a master agreement with each studio. The license period and
percentage fee for each movie are negotiated separately, with the studio
receiving a percentage, generally ranging from 35% to 50%, of the Company's
gross revenue from the movie. For recently released motion pictures, the Company
typically obtains rights to exhibit the picture after the film has been in
theaters, but prior to its release to the home video market or exhibition on
cable television. Generally, studios make master video tapes of their movies
available for duplication sufficiently in advance of the release dates for the
lodging industry so that all of the Company's hotels can offer the movies as of
the first date they are available for exhibition. The Company obtains
independent films, most of which are non-rated and intended for mature
audiences, for a one-time flat fee that is nominal in relation to the licensing
fees paid for major motion pictures and which permits the Company to duplicate
the films as necessary to supply copies to its hotel sites. The Company
continuously monitors guests' entertainment selections and adjusts its
programming to respond to viewing patterns.
The Company obtains its basic and premium cable television programming
pursuant to multi-year license agreements generally containing automatic renewal
provisions and pays its programming suppliers a fixed, monthly fee for each room
or subscriber receiving the service. Management believes that relations with the
programming suppliers are good and expects to renew these contracts as necessary
on competitive terms. The Company intends to tailor the programming lineup at
each multi-family residential complex based on the particular demographic
profile of that complex. Cable operators and multi-channel video programming
distributors such as ResNet, with certain exceptions, are prohibited from
carrying the signal of a commercial television broadcast station without the
broadcaster's "retransmission" consent. ResNet believes it can obtain all
necessary retransmission consents in its markets.
As part of its transaction with TCI Satellite, ResNet entered into a
long-term signal availability agreement with TCI Satellite pursuant to which
ResNet will be granted nationwide access to a DBS signal, such signal to be the
same as that used by PRIMESTAR to transmit the PRIMESTAR-Registered Trademark-
programming service (the "PRIMESTAR Signal") or the signal of a substantially
comparable service. TCI Satellite is acting solely to make the DBS signal
available to ResNet and is not acting as a distributor of any programming
services to ResNet. ResNet must obtain its own rights, as described above, from
the applicable programmers to receive and distribute such service. TCI Satellite
has informed the Company that counsel for PRIMESTAR has advised TCI Satellite
that its rights to distribute the PRIMESTAR Signal to private cable systems,
such as ResNet, may conflict with the rights of PRIMESTAR under existing
agreements between PRIMESTAR and TCI Satellite (or its affiliates). TCI
Satellite has advised the Company that it believes that its transaction with
ResNet and similar transactions are permitted under its agreements, and TCI
Satellite has represented in its agreement with ResNet that it has all necessary
rights to enter into and perform its obligations thereunder. If TCI Satellite
were to lose its ability to make the PRIMESTAR Signal or a comparable signal
available to ResNet, TCI Satellite is obligated to reimburse ResNet for its
costs in obtaining a comparable digital signal from another source, including
the cost of replacement equipment if the new digital signal is not compatible
with ResNet's equipment.
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SYSTEMS PRODUCTION GROUP AND EQUIPMENT SUPPLIERS. The Company contracts
directly with various electronics firms for the manufacture and assembly of its
systems hardware, the design of which is controlled by the Company. The Company
has found these suppliers to be dependable and able to meet delivery schedules
on time. The Company believes that, in the event of a termination of any of its
sources, with proper notification from the supplier, alternate suppliers could
be located without incurring significant costs or delays. Certain electronic
component parts used within the Company's products are available from a limited
number of suppliers and can be subject to temporary shortages because of general
economic conditions and the demand and supply for such component parts. If the
Company were to experience a shortage of any given electronic part, the Company
believes that alternative parts could be obtained or system design changes
implemented. In such event, the Company could experience a temporary reduction
in the rate of new room installations and/or an increase in the cost of such
installations. All other components of the Company's systems are standard
commercial products, such as video cassette players, modulators and amplifiers,
that are available from multiple sources.
The headend electronics are assembled at the Company's facilities for
testing prior to shipping. The Company samples the room units at the supplier's
facilities periodically for reliability. Following assembly of head-end
equipment with a configuration designed specifically for a particular customer,
the system is shipped to the location, where it is installed by Company-employed
technicians or Company-trained subcontractors. The Company believes that its
anticipated growth can be accommodated through existing suppliers.
COMPETITION
LODGING MARKET. The Company is the second largest provider (by total number
of rooms served) of interactive and cable television services to the lodging
industry, currently serving over 516,000 installed hotel rooms. The Company
competes on a national scale primarily with On Command Corporation ("OCC"), the
successor corporation to the merger of SpectraVision, Inc. and On Command Video
Corporation, and on a regional basis with certain other smaller entities. Based
upon publicly available information, the Company estimates that OCC currently
serves approximately 900,000 hotel rooms. The aforementioned merger combined two
of the largest providers of cable television services in the lodging industry
based on the aggregate number of rooms served. The Company historically competed
against these two companies prior to the merger and believes that it will be
able to compete in the same manner against the newly combined entity.
OCC and DirecTV, Inc. ("DirecTV") have entered into an agreement pursuant to
which OCC will deliver free-to-guest television programming using DirecTV's DBS
signal. The Company believes that its agreement with PRIMESTAR will allow it to
provide comparable services to OCC on a competitive basis.
There are also a number of potential competitors that could use their
existing infrastructure to provide in-room entertainment services to the lodging
industry, including franchised cable operators, wireless cable operators,
telecommunications companies and DBS providers. Some of these potential
competitors are already providing free-to-guest services to the lodging industry
and have announced plans to offer guest pay services. Some of these companies
may have substantially greater financial and other resources than the Company.
Competition with respect to new guest pay contracts centers on a variety of
factors, depending upon the features important to a particular hotel. Among the
more important factors are: (i) the features and benefits of the entertainment
systems; (ii) the quality of the vendor's technical support and maintenance
services; (iii) the financial terms and conditions of the proposed contract
(including payments to the hotel); and (iv) the ability to complete system
installation in a timely and efficient manner. In addition, with respect to
hotel properties already receiving in-room entertainment services, the incumbent
provider may have certain informational and installation cost advantages as
compared to outside competitors.
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The Company believes that its competitive advantages include: (i) its
proprietary B-LAN-SM- system architecture that enables the Company to deliver a
broad range of interactive features and services such as on-demand movies and
network-based Super Nintendo-Registered Trademark- video games; (ii) the
flexible design of the Company's system which enables it to add enhancements or
integrate new technologies as they become commercially available and
economically viable; (iii) high quality customer support and nationwide field
service operations; and (iv) an experienced management team and professional and
well-trained sales organization. The Company believes that its success in
securing contracts reflects the strong competitive position of the Company's
products and services.
Because of the high level of penetration in the large hotel segment of the
lodging industry already achieved by guest pay providers, most of the growth
opportunities in this market segment have traditionally involved securing
contracts to serve hotels that are served by a competing vendor. An incumbent
provider may have certain information and installation cost advantages as
compared to outside competitors. These circumstances have led to increasing
competition for contract renewals, particularly at hotels operated by major
hotel chains. The Company believes that certain major hotel chains have awarded
contracts based primarily on the level and nature of financial and other
incentives offered by the guest pay provider. Even if it were able to do so, the
Company may not always be willing to match the incentives provided by its
competitors, some of which have greater access to financial and other resources
than the Company. Because free-to-guest service providers generally have
substantially comparable access to the satellite delivered programming that
comprises the free-to-guest services, competition in this segment has been based
primarily on price and customer service.
While the Company believes that its proprietary B-LAN-SM- system
architecture is comparable or superior to the systems currently being used by
its competitors in the lodging industry, there can be no assurance that such
competitors will not develop a cost-effective system that is comparable or
superior to the Company's system. In order to broaden its market opportunities,
the Company redesigned its system to permit the delivery of on-demand movies and
network-based video games to mid-size hotels of 100 to 150 rooms, a market
segment the Company believes has been historically underserved by guest pay
providers. There can be no assurance that the Company will be successful in this
market segment or that competitors will not develop a cost-effective system that
would allow them to target this market segment. Further, there can be no
assurance that the Company will continue its current level of success in
obtaining new contracts from hotels currently served by other vendors or
previously unserved, or that the Company will be able to retain contracts with
hotels it serves when those contracts expire.
Although in the free-to-guest market the local franchised cable operator in
a hotel's market may have a substantial market presence, such operators
typically offer the hotel owner only standard packages of programming developed
for the residential market and not the lodging market, and at a fixed price per
room based on all the channels provided. The Company competes with the
franchised cable operator for free-to-guest contracts by customizing packages of
programming to provide only those channels desired by the hotel, typically
reducing the overall cost per room. The Company believes that its agreement with
PRIMESTAR to deliver the PRIMESTAR DBS signal to the lodging industry will
enable it to compete more effectively in the free-to-guest area and to extend
this market segment to smaller sized properties that historically could not be
cost-effectively served with the more expensive traditional C-band technology.
Competitive pressures in the guest pay and free-to-guest segments could
result in reduced market share for the Company, higher hotel commissions, lower
margins and increased expenditures on marketing, product development and systems
installation, each of which could adversely affect the Company's financial
condition and operating results.
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MULTI-FAMILY RESIDENTIAL MARKET. The provision of cable television services
to the MDU market is highly competitive and competition is expected to increase.
The Company anticipates that the primary competitors in each of its markets will
include SMATV operators, wireless cable operators, DBS providers, as well as
local franchised cable operators. The Company believes that the largest private
cable competitors are OpTel, Inc., CablePlus and ICS Communications, Inc.
However, the most substantial competitor for ResNet in each of its markets is
expected to be the local franchised cable operator, most of whom have
substantially greater resources than the Company and ResNet. Many of ResNet's
competitors also have brand names that may be more recognizable to consumers
than those of the Company and ResNet, and that may provide such competitors
certain competitive advantages. Further, a growing number of companies have
begun to market, or have announced plans to market, packages of services that
are considerably more extensive than those currently offered by the Company.
ResNet's success in this market will depend in large part upon its ability
to secure a significant number of long-term exclusive right-of-entry contracts
with property owners or managers. These contracts generally involve a revenue
sharing arrangement with the property owner or manager. Certain of ResNet's
competitors have significantly greater financial resources and may offer
property owners and managers more lucrative financial arrangements than ResNet
may be able or willing to offer. As residents of the high-quality MDUs that are
targeted by the Company come to expect a wider selection of cable, interactive
video and telecommunications services, property owners may be inclined to enter
into ROE contracts with companies that can offer such a selection. Increasing
competition among such providers for right of entry contracts could result in
greater financial incentives being offered to property owners, thereby adversely
affecting the financial return expected to be realized by ResNet from such
contracts. The Company believes that ResNet's competitive advantages include (i)
the broad range of features and services made possible by the Company's
proprietary B-LAN-SM- system architecture, (ii) the Company's experience and
capabilities in conducting nationwide installation and field service operations,
and (iii) the availability of the DBS signal and DBS equipment provided by TCI
Satellite at a lower cost than traditional C-band satellite signals and
equipment.
REGULATION
TELECOMMUNICATIONS ACT OF 1996. The Telecommunications Act of 1996 (the
"Act") is intended, in part, to promote substantial competition for telephone
and video services and will alter federal, state and local laws and regulations
regarding telecommunications providers and services. The Act generally removes
previous restrictions preventing cable firms, telephone companies, long distance
carriers and public utilities from entering into certain new markets, removes
many cross-ownership restrictions and modifies rate regulations applicable to
franchised cable operators. In particular, the Act authorizes local telephone
companies to provide video programming directly to subscribers in their service
areas and eliminates the requirement that "private cable" operators serve only
buildings "under common ownership, management or control," but preserves the
requirement that such operations not use closed transmission paths to cross
public rights-of-way. The Act also permits franchised cable operators to offer
bulk discounts to multiple dwelling units; provided, however, that such
discounts may not constitute "predatory pricing." Prior to the adoption of the
Act, franchised cable operators were subject to a uniform rate requirement which
generally prohibited such bulk discounts. There are numerous rulemakings that
have and are still being undertaken by the FCC which will interpret and
implement the provisions of the Act. It is anticipated that the Act will
stimulate increased competition generally in the telecommunications and cable
industries which may adversely impact the Company. No assurance can be given
that changes in current or future laws or regulations adopted by the FCC or
state or local regulatory authorities would not have a material adverse effect
on the Company's business.
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It is premature to predict the effect of the Act on the cable and
telecommunications industries in general or the Company in particular. The
Company's business may be adversely affected by the entry of additional
competitors in the multichannel video programming distribution market. In part,
the Company's competitiveness also will depend upon the outcome of various FCC
rulemaking proceedings to interpret and implement the provisions of the Act. It
is not possible at this time to predict the outcome of those rulemaking
proceedings or their effect on the Company.
CABLE TELEVISION REGULATION. The Communications Act of 1934, as amended by
the Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable
Television Consumer Protection and Competition Act of 1992 (the "Cable Act"),
and the Act, governs the regulation of "cable systems." The law defines a "cable
system" as a facility, consisting of a set of closed transmission paths and
associated signal generation, reception, and control equipment that is designed
to provide cable service which includes video programming and which is provided
to multiple subscribers within a community, but the law exempts from that
definition, among other facilities, a facility that serves subscribers without
using any public rights-of-way. The Company constructs and operates separate
headend systems at each hotel or MDU complex or transmits cable signals from
microwave transmitters to each separate property, and those systems do not use
public rights-of-way. Thus, with respect to its private cable systems, the
Company is not required to comply with many of the FCC's rules relating to cable
systems, including, among other things, rate regulation and the requirement to
obtain a franchise from local government authorities in order to provide video
services.
As a "multichannel video programming distributor" ("MVPD"), however, the
Company is subject to various provisions of the Communications Act of 1934, as
amended. Laws and regulations applicable to MVPDs generally apply to the
Company. These include laws and regulations that benefit the Company, such as
provisions that ensure the Company access to programming on fair, reasonable and
nondiscriminatory terms, as well as provisions that subject the Company to
additional requirements, such as the requirement to obtain consent from
broadcasters in order to retransmit their signals over the Company's systems.
CABLE AND TELEPHONE WIRING. Although the majority of the states currently
do not prohibit exclusive right-of-entry contracts, current trends at the state
and federal levels, if they continue, may render the legality of such
exclusivity provisions uncertain. Several states have enacted, and additional
states are expected to enact, mandatory access statutes that require MDU owners
to grant a cable franchisee access to its buildings in order to offer cable
services to tenants that want to receive the franchisee's service. The FCC also
has initiated rulemaking proceedings to consider, among other issues, whether to
adopt uniform regulations governing cable and telephone inside wiring, and the
appropriate treatment of inside wiring in MDUs. In addition, the FCC has
initiated a rulemaking proceeding to determine whether to prohibit restrictions
against the placement on rental property of devices designed for over-the-air
reception of television broadcast signals, multichannel multipoint distribution
services, or DBS services. The regulations that the FCC ultimately adopts could
affect the Company's continued ability to enter into or enforce exclusive
contracts, as well as its access to inside wiring used to provide telephony and
video programming services.
SIGNAL CARRIAGE. Private cable operators, with certain exceptions, are
prohibited from carrying the signal of a commercial television broadcast station
without the broadcaster's "retransmission" consent. If the cable operator and
the broadcaster fail to reach an agreement on terms and conditions for
retransmission, the cable operator is prohibited from carrying the broadcaster's
signal. Although there can be no assurance, the Company believes it has obtained
and will continue to obtain all necessary retransmission consents in its
markets.
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CROSS-OWNERSHIP. In order to encourage competition in the provision of
video programming, the Cable Act generally prohibits a franchised cable operator
not subject to "effective competition" from holding a license for a multichannel
multipoint service or from offering SMATV service separate and apart from any
franchised cable service, in any portion of the franchise area served by the
cable operator's cable system.
Under current interpretations of FCC rules and regulations implementing the
foregoing provisions, TCI Satellite may be prevented from acquiring a 5% or
greater interest in ResNet and consequently would be unable to exercise its
conversion rights under the TCI Convertible Loan or the TCI Option. TCI
Satellite is required to convert the TCI Convertible Loan into an equity
interest in ResNet at such time as conversion would not violate the
aforementioned FCC restriction. TCI Satellite has advised the Company that it
may seek a formal interpretive letter or waiver by the FCC with respect to the
acquisition of a further interest in ResNet. See "--Strategic
Initiatives--Residential Alliances with GE ResCom and TCI Satellite."
MICROWAVE LICENSING. Where appropriate the Company's or ResNet's systems
may use 18 GHz microwave relays to link more than one hotel or MDU complex to a
single headend without using public rights-of-way. The FCC has the power to
issue, revoke, modify, and renew licenses within the radio frequency spectrum
utilized by the Company or ResNet for microwave relays. The FCC also may approve
changes in the ownership of such licenses. The Company and ResNet have obtained
all necessary FCC authorizations to operate their microwave relays. There can be
no assurance, however, that the Company and/or ResNet will continue to be able
to retain or obtain such authorizations in the future or that existing
authorizations will be renewed.
CABLE ENTRY INTO TELECOMMUNICATIONS. The Act declares that no state or
local laws or regulations may prohibit or have the effect of prohibiting the
ability of any entity to provide any interstate or intrastate telecommunications
service. States are authorized to impose "competitively neutral" requirements
regarding universal service, public safety and welfare, service quality, and
consumer protection. The Act further provides that the cable operators and
affiliates providing telecommunications services are not required to obtain a
separate franchise from the local franchising authority for such services. The
Act prohibits local franchising authorities from requiring cable operators to
provide telecommunications services or facilities as a condition of a grant of a
franchise, franchise renewal, or franchise transfer, except that local
franchising authorities can seek "institutional networks" as part of franchise
negotiations. The law also provides that, when cable operators provide
telecommunications services, local franchising authorities may require
reasonable, competitively neutral compensation for management of the public
rights-of-way.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION. The Act allows telephone
companies to compete directly with franchised and private cable operators by
repealing the previous telephone company-cable cross-ownership ban and replacing
the FCC's video dialtone regulations with an "open video system" ("OVS") plan by
which local exchange carriers can provide cable service in their telephone
service area. The FCC has adopted regulations prohibiting an OVS operator from
discriminating among programmers and ensuring that OVS rates, terms, and
conditions for service are reasonable and nondiscriminatory. Further, those
regulations prohibit a local exchange carrier, OVS operator or its affiliates
from occupying more than one-third of a system's activated channels when demand
for channels exceeds supply, although there are no numeric limits. Additional
OVS regulations include rules governing channel sharing; extending the FCC's
sports exclusivity, network nonduplication, and syndicated exclusivity
regulations; and controlling the positioning of programmers on menus and program
guides. Local franchising authorities may require OVS operators to pay
"franchise fees" only to the extent that the OVS provides or its affiliates
provide cable services over the OVS; such fees may not exceed the franchise fees
charged to cable operators in the area, and the OVS provider may pass through
the fees as a separate subscriber bill item. OVS operators are subject to local
franchising authorities' general right-of-way management regulations.
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ELECTRIC UTILITY ENTRY INTO CABLE AND TELECOMMUNICATIONS. The Act provides
that registered utility holding companies and subsidiaries may provide
telecommunications services (including cable television) notwithstanding the
Public Utility Holding Company Act. Electric utilities must establish separate
subsidiaries, known as "exempt telecommunications companies" and must apply to
the FCC for operating authority. Large utility holding companies may become
significant competitors to both cable television and other telecommunications
providers.
COPYRIGHT LICENSING. Both private and franchise cable systems are subject
to federal copyright licensing covering carriage of broadcast signals. In
exchange for making semi-annual payments to a federal copyright royalty pool and
meeting certain other obligations, cable operators obtain a blanket license to
retransmit broadcast signals. Bills have been introduced in Congress over the
past several years that would eliminate or modify the cable compulsory license.
Without the compulsory license, cable operators such as the Company might need
to negotiate rights from the copyright owners for each program carried on each
broadcast station in the channel lineup. Such negotiated agreements could
increase the cost to cable operators of carrying broadcast signals. The Cable
Act's retransmission consent provisions expressly provide that retransmission
consent agreements between the television stations and cable operators do not
obviate the need for cable operators to obtain a copyright license for the
programming carried on each broadcaster's signal.
The foregoing does not purport to describe all present and proposed federal,
state and local regulations and legislation relating to the video programming
industry. Other existing federal, state and local laws and regulations currently
are, or may be, the subject of a variety of judicial proceedings, legislative
hearings, and administrative and legislative proposals that could change in
varying degrees, the manner in which private cable operators and other video
programming distributors operate. The Company cannot estimate the outcome of
these proceedings or their impact upon its operations at this time. See "Risk
Factors--Government Regulation."
EMPLOYEES
As of December 31, 1996, the Company had 584 employees in the United States
and Canada. None of these employees is covered by a collective bargaining
agreement. The Company has not experienced any significant labor problems and
believes that its relationship with its employees is good.
PROPERTIES
The Company's present headquarters and principal executive offices are
located in Sioux Falls, South Dakota. This facility is leased from an
unaffiliated third party pursuant to a lease which expires on July 31, 1997
(with month-to-month extensions thereafter, at the option of the Company),
contains approximately 24,000 square feet, and houses the Company's executive,
administrative and operational functions. The Company leases four additional
facilities in Sioux Falls from unaffiliated third parties, including a warehouse
and assembly facility (approximately 15,000 square feet) and three office
facilities for administrative and support personnel (approximately 30,000 square
feet in total). The Company also owns an office building in Sioux Falls
containing approximately 8,000 square feet which previously served as the
Company's headquarters and is currently used in the Company's operations.
The Company leases ten facilities, in various other locations, from
unaffiliated third parties. One, located in Dallas, Texas, is an office facility
for sales and sales-support personnel. The remaining nine are combination
warehouse/office facilities for installation and service operations and are
located in Atlanta, Georgia; Honolulu, Hawaii; Las Vegas, Nevada; Cleveland,
Ohio; Buffalo, New York; Los Angeles and San Francisco, California; Tampa,
Florida; and Toronto, Ontario, Canada. Each of these facilities occupies less
than 3,500 square feet.
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In June 1996, the Company acquired an approximately 22.6 acre parcel of land
in Sioux Falls for a purchase price of approximately $339,000 and in September
1996 entered into a contract for the construction of the Company's National
Headquarters and Distribution Center. Construction of the approximately $15
million facility began in September 1996 and is expected to be completed in
September 1997. The National Headquarters and Distribution Center will occupy
approximately 228,500 square feet including approximately 116,500 square feet
for executive, administrative and support functions, approximately 60,000 square
feet for assembly and distribution functions, and approximately 42,000 square
feet for warehouse space. The National Headquarters and Distribution Center will
allow the Company to consolidate all of its local operations into a single,
multipurpose facility and is designed to enhance the operational efficiency and
to facilitate any necessary future expansions needs of the Company. The Company
believes that the site of its National Headquarters and Distribution Center is
sufficient to accommodate its foreseeable local operational space requirements.
LEGAL PROCEEDINGS
On February 16, 1995, OCC 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 that 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 financial condition or results of operations.
The Company is subject to other litigation arising in the ordinary course of
business. As of the date hereof, the Company believes the resolution of such
other litigation will not have a material adverse effect upon the Company's
financial condition or results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the executive officers
and directors of the Company as of March 19, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Tim C. Flynn......................................... 47 Chairman, President and Chief Executive Officer
Scott C. Petersen.................................... 41 Executive Vice President, Chief Operating Officer and
Director
Jeffrey T. Weisner................................... 49 Vice President, Finance
Eric R. Jacobsen..................................... 40 Vice President, General Counsel and Secretary
John M. O'Haugherty.................................. 58 Senior Vice President and Chief Operating Officer,
Lodging Division
David M. Bankers..................................... 40 Vice President, Corporate Technologies
Steven D. Truckenmiller (1).......................... 44 Vice President, Guest Pay Services
Douglas D. Truckenmiller (1)......................... 47 Vice President and Chief Operating Officer, ResNet
Theodore P. Racz..................................... 56 Vice President, Sales
David Austad (2)(3).................................. 36 Director
Lawrence Flinn, Jr. (2)(3)........................... 61 Director
Richard R. Hylland (3)............................... 36 Director
R.F. Leyendecker (2)................................. 51 Director
</TABLE>
- ------------------------
(1) Steven D. Truckenmiller and Douglas D. Truckenmiller are brothers.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
TIM C. FLYNN founded the Company in 1980 and has been its President and
Chief Executive Officer since incorporation in 1983. Mr. Flynn is a member of
the American Hotel and Motel Association and the National Cable Television
Association. Prior to founding the Company, Mr. Flynn was involved in the
lodging and retail industries.
SCOTT C. PETERSEN joined the Company in 1987 as Senior Vice President for
Corporate and Legal Affairs, was appointed Executive Vice President and Chief
Operating Officer in 1991 and was elected a director in 1993. Prior to 1987, Mr.
Petersen acted as legal counsel to the Company as a partner in the law firm of
McFarland, Petersen and Nicholson, Sioux Falls, South Dakota. Mr. Petersen
received his Bachelor of Arts degree in economics from Dartmouth College and his
Juris Doctorate degree from Georgetown University Law Center.
JEFFREY T. WEISNER joined the Company in February 1994 as Vice President,
Finance. Mr. Weisner was Chief Financial Officer and Treasurer of Teltech
Resource Network Corporation from June 1991 to September 1993. Prior to 1991,
Mr. Weisner was Vice President, Secretary and Treasurer of CompuServe
Incorporated and in such capacity served as Chief Financial Officer and Chief
Administrative Officer for that company. Mr. Weisner is a certified public
accountant.
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ERIC R. JACOBSEN joined the Company in May 1995 as Vice President and
General Counsel, and became Secretary in October 1995. Prior to joining the
Company, Mr. Jacobsen was a partner with the law firm of Manatt, Phelps &
Phillips of Los Angeles, California. Mr. Jacobsen acted as underwriters' counsel
in connection with the Company's initial public offering in October 1993 and
acted as outside legal counsel to the Company from December 1993 until joining
the Company. Mr. Jacobsen received his Juris Doctorate and Master of Business
Administration degrees from The University of Southern California.
JOHN M. O'HAUGHERTY joined the Company in 1992 as Vice President, Sales and
in January 1997 was appointed Senior Vice President and Chief Operating Officer,
Lodging Division. Mr. O'Haugherty was Vice President for Sales and Marketing at
Spectradyne, Inc., a provider of in-room entertainment services to the lodging
industry, in Richardson, Texas from 1982 through 1989. During 1990, Mr.
O'Haugherty served as Sales Manager of ITEC, Inc. in Chicago, Illinois and
during 1991 served as President of JD, Inc. in Plano, Texas.
DAVID M. BANKERS joined the Company in 1989 as Director of Information
Systems Development and was appointed Vice President, Systems Development in
1992 and Vice President, Corporate Technologies in 1996. Prior to joining the
Company, Mr. Bankers was the Supervisor of Digital Data Production for TGS
Technology, Inc., a supplier of technical support services for government
facilities, at the Earth Resources Observation Systems (EROS) Data Center in
Sioux Falls, South Dakota. Mr. Bankers received his Bachelor of Science and
Master of Science degrees from Creighton University.
STEVEN D. TRUCKENMILLER joined the Company in 1985 as Vice President of
Technical Services. He was appointed Vice President, Technical Development in
1988 and Vice President, Guest Pay Services in 1991. Mr. Truckenmiller was a
director of the Company from 1983 to 1993.
DOUGLAS D. TRUCKENMILLER joined the Company in 1991 as Vice President for
Technical Operations. In February 1996, Mr. Truckenmiller was appointed Vice
President and Chief Operating Officer of ResNet. From 1989 to 1991, Mr.
Truckenmiller was the President/General Manager for Heritage Cablevision of
Rhode Island. Prior to 1989, he was the Senior Vice President of Engineering for
Heritage Communications, a major cable multiple systems operator based in Des
Moines, Iowa.
THEODORE P. RACZ joined the Company in September 1996 as Vice President,
Sales. Prior to joining the Company, Mr. Racz was Regional Director of
Operations, Eastern Europe at Metromedia Communications, Inc. from January 1995
to September 1996. From April 1993 to January 1995, Mr. Racz served as Director
of Sales & Marketing at United International Inc. Cable T.V. in Prague, Czech
Republic.
DAVID AUSTAD has served as a Director of the Company since 1993. From 1988
to early 1996, Mr. Austad served as President and Chief Executive Officer of The
Austad Company, Inc. ("TACI"), a worldwide distributor of golf equipment and
apparel. In February 1996, Mr. Austad started AGS, Inc. which owns and manages
TACI's retail stores.
LAWRENCE FLINN, JR. has served as a Director of the Company since 1994. Mr.
Flinn is Chairman and Chief Executive Officer of United Video Satellite Group,
Inc. He has over 35 years of experience in the video and satellite
communications business.
RICHARD R. HYLLAND has served as a Director of the Company since 1990. Mr.
Hylland is a Director and Executive Vice President--Strategic Development since
1995 and Vice President--Corporate Development since 1993 of Northwestern Public
Service Corporation ("NPSC"), a publicly held utility company; President, Chief
Operating Officer and a Director of Northwestern Growth Corporation (a
subsidiary of NPSC); Vice Chairman of SYN, Inc.; Vice Chairman of Cornerstone
Propane GP, Inc.; Director of Lucht Inc., Franklin Industries, Empire Energy and
Northwestern Networks, Inc. ("NNI").
R.F. LEYENDECKER has served as a Director of the Company since 1986. Mr.
Leyendecker is Vice President--Marketing Development, NPSC; served as Vice
President--Energy Service, NPSC from 1994 to 1996; and served as Vice
President--Rates and Regulations, NPSC from 1987 to 1994. He was elected
Assistant Corporate Secretary of NPSC in 1993. Mr. Leyendecker also serves as a
director of NNI.
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<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to the Company's five most highly compensated executive
officers other than the Chief Executive Officer whose total annual salary and
bonus exceeded $100,000, for services rendered in all capacities to the Company
during the three fiscal years ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------- STOCK
OTHER ANNUAL OPTIONS(#)
COMPENSATION LONG-TERM
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($)(1) COMPENSATION
- -------------------------------------------- --------- ----------- ----------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Tim C. Flynn 1996 250,000 92,404 28,614 --
President and Chief Executive Officer 1995 250,000 103,306 20,916 40,000
1994 200,000 -- 15,631 22,222
Scott C. Petersen 1996 240,000 88,708 27,386 --
Executive Vice President and Chief Operating 1995 240,000 99,174 20,165 40,000
Officer 1994 190,000 -- 14,161 21,111
John M. O'Haugherty 1996 125,400 37,073 11,216 --
Senior Vice President and Chief Operating 1995 115,000 37,510 10,408 20,000
Officer, Lodging Division 1994 110,000 10,000 8,547 12,222
Douglas D. Truckenmiller (2) 1996 156,200(2) 24,000 13,801 75,000
Vice President and Chief Operating Officer, 1995 105,000 34,248 10,041 20,000
ResNet 1994 95,000 -- 7,486 11,111
David M. Bankers 1996 114,500 33,850 13,801 --
Vice President, Corporate Technologies 1995 105,000 34,248 10,041 20,000
1994 95,000 -- 7,486 11,111
Eric R. Jacobsen 1996 114,500 33,850 10,754 --
Vice President, General Counsel and 1995 70,000(3) 22,832 6,875 80,000
Secretary
</TABLE>
- ------------------------
(1) Reflects compensation paid to the executive officers listed above by the
Company in order for them to purchase individual supplemental insurance
coverage and other benefits.
(2) In February 1996, Mr. Truckenmiller was appointed Vice President and Chief
Operating Officer of ResNet. Prior to such appointment, Mr. Truckenmiller
was Vice President, Technical Operations of the Company. Compensation for
1996 was based on an annual salary of $114,500 for the month of January and
an annual salary of $160,000 thereafter.
(3) Mr. Jacobsen joined the Company as Vice President and General Counsel in May
1995. Compensation for 1995 was based on an annual salary of $105,000.
EMPLOYMENT AGREEMENTS
In connection with the Company's initial public offering in October 1993,
the Company entered into an employment agreement with Mr. Flynn, dated August
16, 1993, retaining his services as the Company's President and Chief Executive
Officer. The initial term of this agreement was extended for an additional year
on January 1, 1996 and will be automatically extended each January 1 thereafter
unless prior to any such date either Mr. Flynn or the Company notifies the other
of an election not to extend. The agreement may also be earlier terminated as
discussed below. Under the agreement, Mr. Flynn's salary is currently set at
$250,000 per year. In addition to his salary, Mr. Flynn is entitled to
participate in any bonus program, insurance program, stock benefit plan and
other employment benefits that may be provided by the Company from time to time
to its executive officers.
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<PAGE>
Mr. Flynn's employment may be terminated prior to the expiration of the term
of the agreement (i) automatically upon Mr. Flynn's death, disability or
retirement at age 65; (ii) by the Company at any time, with or without cause, by
action of its Board of Directors; or (iii) by Mr. Flynn or the Company within
three months after a change of control of the Company. In the event of any such
termination of employment, the following termination benefits apply: (x) for any
termination, other than for cause (including a termination due to death,
disability or retirement at age 65), the Company will pay a pro rata portion of
the maximum bonus for the then current year under any bonus program in which Mr.
Flynn may be participating at the time, unless such payment is not permitted by
the terms of the plan; and (y) for any termination by the Board of Directors
without cause, the Company will continue to pay Mr. Flynn's salary at the rate
last in effect prior to termination for the balance of the term of his
employment agreement or until his earlier death or reaching age 65, and the
Company will continue at its expense any health, disability and life insurance
coverage in effect immediately prior to his termination. In the event of a
termination after a change in control involving the Company, the terms of Mr.
Flynn's agreement will be superseded by the terms and conditions of the
Severance Agreements described below. The employment agreement contains a
covenant by Mr. Flynn not to compete with the Company, or to work for a
competing business, for the term of his employment and six months thereafter,
provided that employment with a cable television vendor will not be considered
to be a competing business.
The Company entered into an employment agreement with Mr. Petersen, dated
August 16, 1993, retaining his services as the Company's Executive Vice
President and Chief Operating Officer. The terms of his employment agreement are
the same as those in Mr. Flynn's agreement summarized above, except that Mr.
Petersen's salary is currently set at $240,000 per year.
In July 1995, the Compensation Committee authorized the Company to enter
into agreements (the "Severance Agreements") with the Company's President and
its other executive officers, including the officers named in the Summary
Compensation Table, providing for the payment of certain compensation and other
benefits in the event of a covered termination of the executive's employment
within two years following a "change in control" involving the Company. No
compensation is payable to any executive under the Severance Agreements unless
(i) there has been a change in control and (ii) the executive's employment with
the Company shall have been terminated (including a substantial reduction in
duties or compensation, but excluding termination as a result of the death or
permanent disability of the executive or for cause or voluntary retirement). A
"change in control" is generally defined as the occurrence of any of the
following: (i) any person or group becomes the beneficial owner of securities
representing 30% or more of the voting power of the Company's outstanding
capital stock having the right to vote in the election of directors (excluding
any such transaction that is effected at an actual or implied average valuation
of less than $6.75 per share of common stock); (ii) a majority of the members of
the Board shall not for any reason be the individuals who at the beginning of
such period constitute the Board or persons nominated by such members; (iii) any
merger, consolidation or sale of all or substantially all of the assets of the
Company (meaning assets representing 30% or more of the net tangible assets of
the Company or generating 30% or more of the Company's operating cash flow),
excluding a business combination or transaction in which : (a) the stockholders
of the Company prior to such transaction continue to represent more than 70% of
the voting power of the Company immediately after giving effect to such
transaction; (b) no person or group becomes the beneficial owner of 30% or more
of the Company's voting stock; or (c) the purchase price results in an actual or
implied average valuation of less than $6.75 per share of common stock; (iv) the
adoption of any plan or proposal for the liquidation or dissolution of the
Company; or (v) the occurrence of any other event that would be required to be
reported as a change in control in response to Item 6(e) of Schedule 14A of
Regulation 14A of the Exchange Act.
Upon a covered termination, the executive is entitled to receive a lump sum
payment equal to the compensation the executive would have received over a
30-month period, a pro rata portion of any bonus the executive would have
received for the year in which such termination occurs, any stock options
previously granted to the executive will become fully vested, and the executive
will be entitled to the continuation of the insurance and other welfare benefits
then being received by such executive for a
70
<PAGE>
30-month period. The Severance Agreements contain a covenant not to compete with
the Company for a period of six months following a covered termination, and
executives are not required to mitigate any termination benefits (nor will such
benefits be reduced by compensation received from other employment). The
Severance Agreements terminate upon the earlier of: (i) five years (subject to
automatic one-year extensions unless the Board otherwise notifies the
executive); (ii) the termination of the executive's employment other than
pursuant to a covered termination described above; (iii) two years from the date
of a change in control of the Company if there has not been a covered
termination; and (iv) prior to a change in control upon the executive's ceasing
to be an executive officer of the Company.
STOCK OPTIONS
The following table contains information concerning the grant of stock
options during the fiscal year ended December 31, 1996 to the officers named in
the Summary Compensation Table.
OPTION(1) GRANTS IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF TOTAL STOCK PRICE
SECURITIES OPTIONS/SARS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM (3)
OPTIONS/SARS EMPLOYEES IN 1996 EXERCISE OR BASE EXPIRATION ---------------------
NAME GRANTED (#)(2) (%) PRICE ($/SH) DATE 5% ($) 10% ($)
- ---------------------------------- -------------- ------------------- ----------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Douglas D. Truckenmiller.......... 75,000 45.2 13.00 5/6/06 613,200 1,553,900
</TABLE>
- ------------------------
(1) The Company has no plans pursuant to which stock appreciation rights may be
granted.
(2) The options were granted pursuant to the Company's 1993 Stock Option Plan
and have a ten-year term. The options become exercisable over time based on
achievement of certain ResNet operating performance targets.
(3) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent on a variety of
factors, including market conditions and the price performance of the Common
Stock. There can be no assurance that the rates of appreciation presented in
this table can be achieved.
OPTION EXERCISES AND HOLDINGS
The following table provides information with respect to the officers named
in the Summary Compensation Table concerning the exercise of options during the
fiscal year ended December 31, 1996 and unexercised options held by such
officers as of December 31, 1996:
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<PAGE>
AGGREGATED OPTION EXERCISES IN 1996
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING OPTIONS AT IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE 12/31/96 (#) AT 12/31/96 ($)(1)
EXERCISE REALIZED -------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------- ----------- ----------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tim C. Flynn...................... 80,000 1,303,200 97,784 41,111 1,485,800 298,100
Scott C. Petersen................. N/A N/A 367,020 40,555 5,745,800 293,559
John M. O'Haugherty............... N/A N/A 49,006 21,111 634,800 153,600
Douglas D. Truckenmiller.......... N/A N/A 10,556 95,555 80,100 503,309
David M. Bankers.................. N/A N/A 43,951 20,555 565,000 149,059
Eric R. Jacobsen.................. N/A N/A 35,000 45,000 357,000 426,000
</TABLE>
- ------------------------
(1) Value of unexercised "in-the-money" options is the difference between the
market price of the Common Stock on December 31, 1996 ($17.75 per share) and
the exercise price of the option, multiplied by the number of shares subject
to the option.
COMPENSATION OF DIRECTORS
The compensation to be paid to each non-employee director is $20,000 per
year, $300 for each committee meeting attended and reimbursement for travel and
related expenses for attendance at Board and committee meetings. The
non-employee directors can elect to receive their annual retainer and meeting
fees in the form of cash, options, shares of Common Stock or a combination
thereof in accordance with such rules as shall be established by the
Compensation Committee. Non-employee directors automatically receive upon their
initial election or appointment to the Board a nonqualified stock option to
purchase 6,000 shares of Common Stock under the Company's 1993 Stock Option Plan
(the "Plan") plus an additional 6,000 options to be granted on each anniversary
of such election during the term of service. In addition, in recognition of
their long service to the Board (for which they had not previously received
stock option grants), in May 1996 the Company granted Mr. Leyendecker a
nonqualified stock option to purchase 15,000 shares of Common Stock and granted
Mr. Hylland a nonqualified stock option to purchase 10,000 shares of Common
Stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee reviews and approves the compensation
and benefits for the Company's executive officers, administers the Company's
stock option and other benefit plans and makes recommendations to the Board of
Directors regarding such matters. The Committee is currently composed of Messrs.
Austad, Flinn and Leyendecker. No interlocking relationships exist between any
member of the Company's Compensation Committee and any member of any other
company's board of directors or compensation committee.
AUDIT COMMITTEE
The Company's Audit Committee recommends the selection of auditors for the
Company and reviews the results of the audits and other reports and services
provided by the Company's independent auditors. The Audit Committee is currently
composed of Messrs. Austad, Flinn and Hylland.
STOCK OPTION PLAN
The Plan provides for the grant of (i) incentive stock options and
nonqualified stock options to key managerial employees of the Company and its
subsidiaries and (ii) nonqualified stock options to non-employee directors of
the Company. The Plan provides that the total number of shares of Common Stock
that may be subject to options shall be 1,000,000 shares (of which 280,933
shares were available for the grant of options as of December 31, 1996).
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of Common Stock as
of March 26, 1997 by each person known to the Company to be the record or
beneficial owner of more than five percent of the outstanding shares of Common
Stock (other than depositories holding shares of Common Stock on behalf of
brokers, dealers and others who are the record stockholders for beneficial
owners desiring to have their shares held in "street name"), by each director,
by each executive officer named in the Summary Compensation Table, and by all
directors and executive officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1) (2) CLASS (3)
- ------------------------------------------------------------------------------ ---------------------- -------------
<S> <C> <C>
Tim C. Flynn, (4) Chairman, President and Chief Executive Officer............. 602,727 5.3%
Scott C. Petersen, (4) Executive Vice President, Chief Operating Officer and
Director.................................................................... 427,725 3.7
John M. O'Haugherty, (4) Senior Vice President and Chief Operating Officer,
Lodging Division............................................................ 105,117 *
Douglas D. Truckenmiller, (4) Vice President, Chief Operating Officer, ResNet
(5)......................................................................... 279,343 2.5
David M. Bankers, (4) Vice President, Corporate Technologies.................. 77,006 *
Eric R. Jacobsen, (4) Vice President, General Counsel and Secretary........... 92,500 *
David Austad, Director (6).................................................... 11,892 *
Lawrence Flinn, Jr., Director (6)............................................. 11,892 *
Richard R. Hylland, (7)(8) Director........................................... 933,158 8.3
R.F. Leyendecker, (7)(8) Director............................................. 938,158 8.3
Northwestern Networks, Inc. (8)............................................... 916,266 8.2
Wellington Management Company (9)............................................. 1,537,100 13.7
Directors and Executive Officers (4) (A group of 12 persons).................. 2,863,206 23.2
</TABLE>
- ------------------------
* Less than 1%.
(1) Unless otherwise indicated, the address of such person is 808 West Avenue
North, Sioux Falls, South Dakota 57104.
(2) Each named person has sole voting and investment power with respect to the
shares listed, except as noted below.
(3) Shares which the person (or group) has the right to acquire pursuant to
stock options (whether or not vested) are deemed to be outstanding in
calculating the percentage ownership of the person (or group) but are not
deemed to be outstanding as to any other person (or group).
(4) Includes shares issuable upon the exercise of options to purchase Common
Stock as follows: Mr. Flynn, 158,895 shares; Mr. Petersen, 427,575 shares;
Mr. Truckenmiller, 106,111; Mr. O'Haugherty, 105,117 shares; Mr. Bankers,
77,006 shares; and Mr. Jacobsen, 92,500 shares; and all directors and
executive officers as a group, 1,140,926 shares. Does not include 5,379
shares held in the Company's 401(k) Plan of which Mr. Flynn and Mr. Petersen
are Trustees; and for Mr. Flynn, includes 300 shares owned by Mr. Flynn's
minor children, and for Mr. Petersen includes 150 shares owned by Mr.
Petersen's minor children.
(5) ResNet Communications, Inc. is a majority-owned subsidiary of the Company.
(6) Includes 11,000 shares of Common Stock which each of Messrs. Austad and
Flinn have the right to acquire by the exercise of vested stock options.
(7) Messrs. Hylland and Leyendecker are directors of NNI, which is a subsidiary
of NPSC. The shares attributable to Messrs. Hylland and Leyendecker include
16,000 and 21,000 shares, respectively, which they have the right to acquire
by the exercise of vested stock options, and 916,266 shares held by NNI as a
result of their being directors of NNI. Messrs. Hylland and Leyendecker
disclaim beneficial ownership of the shares attributable to NNI.
(8) The address of NNI and Messrs. Hylland and Leyendecker is 33 Third Street,
S.E., Huron, South Dakota 57350-1318; share ownership information is based
on Schedule 13G filed for the year ended December 31, 1995.
(9) The address of Wellington Management Company is 75 State Street, Boston,
Massachusetts 02109; address and share ownership information is based on
Schedule 13G filed for the month ended August 31, 1996.
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<PAGE>
CERTAIN TRANSACTIONS
MANAGEMENT AGREEMENT. Pursuant to a Management and Shared Services
Agreement dated as of January 10, 1996 (the "Management Agreement"), the Company
provides ResNet with certain (i) management and financial services; (ii) office
and warehouse space; and (iii) administrative and payroll services. The
Management Agreement also provides for participation by employees of ResNet in
the Company's group health and other benefit plans and provides for general
liability, property, personal injury, workers' compensation and other insurance
for ResNet and its operations. The Management Agreement additionally provides
for a license of certain of the Company's technology and provides for terms and
conditions of intercompany loans to ResNet. The initial term of the Management
Agreement is ten years, with automatic renewal for successive periods of five
years. Management services provided, or to be provided, by the Company (the
"Management Services") include preparation of business plans, budgets and
financial reports; formulation of all advertising, marketing and sales programs,
selection and pricing of all programming and services to be provided by ResNet;
establishment and maintenance of all financial systems and records relating to
ResNet's business; engaging necessary professionals in furtherance of ResNet's
business; the preparation and filing of all necessary periodic or other reports
to governmental and regulatory agencies; and the performance of all other
aspects of the operation and maintenance of ResNet's business.
ResNet pays an annual management fee (the "Management Fee") to the Company
for providing the Management Services. The Management Fee is three percent of
ResNet's Operating Revenues during the calendar year; provided that the minimum
Management Fee payable for any year shall not be less than $500,000 nor exceed
$2,000,000. The Management Fee is payable quarterly, in arrears, and any overdue
amounts bear interest at a rate equal to the higher of (i) the sum of the prime
or base lending rate announced from time to time by NatWest Bank Plc (New York
Branch) and three percent; and (ii) the highest rate then permitted by
applicable law. For purposes of calculating the Management Fee, "Operating
Revenues" means all revenues of ResNet from services or goods sold to
subscribers or other customers determined in accordance with generally accepted
accounting principles consistently applied, but does not include customer
deposits (prior to forfeiture) and proceeds from the sale of capital equipment,
assets or financing transactions. Allocable amounts for office and warehouse
space, corporate and administrative services, expenses in administering and
funding ResNet's participation in the Company's benefit plans, and insurance
coverage are charged at the Company's cost therefor, calculated and allocated on
the basis of actual cost or best estimates thereof.
TECHNOLOGY LICENSE AGREEMENT. The Company and ResNet entered into a
Technology License Agreement dated as of January 10, 1996 (the "License
Agreement"), as provided in the Management Agreement. The License Agreement
provides a non-exclusive and non-transferable license to ResNet to use certain
of the Company's proprietary technology, trade secrets, know-how or other
intellectual property, whether then existing or thereafter acquired (the
"Technology") and certain of the Company's trademarks. The License Agreement
provides that ResNet shall pay an annual royalty of $100 for its use of the
Technology, for so long as the Management Agreement remains in full force and
effect. The initial term of the License Agreement is ten years, with automatic
renewal of successive two year periods.
LOANS TO RESNET. The Company may advance funds to ResNet, from time to
time, to be used for general working capital. Such advances are to be made on
terms substantially comparable to those available from unaffiliated third
parties and will be evidenced by, and be payable in accordance with the terms
of, one or more promissory notes.
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<PAGE>
CREDIT ARRANGEMENTS OF THE COMPANY
The following is a brief description of the basic terms of and the
instruments governing the credit arrangements of the Company. This description
is qualified in its entirety by reference to the provisions of the 11.5% Senior
Notes and the related purchase agreement and the Credit Agreement (as defined
below), copies of which can be obtained directly from the Company.
THE 11.5% SENIOR NOTES
During 1995, the Company issued $30 million principal amount of 11.5% Senior
Notes due July 15, 2005 to three insurance companies in two separate private
placements. Mandatory annual principal payments of $6 million commence July 15,
2001.
Proceeds from the issuance of the 11.5% Senior Notes, net of original issue
discount and issuance-related expenses, were approximately $27.3 million and
were used to (i) repay previous borrowings and (ii) provide funding for capital
expenditures to expand the Company's guest pay services business. The Company
issued a total of 480,000 Warrants to purchase Common Stock of the Company in
connection with the issuance of the 11.5% Senior Notes and the value of the
Warrants, $1.68 million, is recorded in stockholders' equity and shown as a
discount on the 11.5% Senior Notes.
In connection with the Refinancing, the Company amended the terms of the
11.5% Senior Notes such that they rank PARI PASSU with and have the same
covenants as the Notes.
THE CREDIT FACILITY
Concurrently with the closing of the Private Offering on December 19, 1996,
the Company entered into an Amended and Restated Credit Agreement (the "Credit
Agreement") with certain banks and NatWest Bank, as agent (collectively, the
"Lenders"). Defined terms that are used but not defined in this section have the
meanings given such terms in the Credit Agreement.
The Credit Facility provides total lending commitments of $100 million,
which may be increased at the election of the Company up to $175 million with
the consent of NatWest Bank. The Credit Facility is secured by a perfected first
priority security interest in all of the Company's and certain of its
subsidiaries' tangible and intangible assets. The Credit Facility is guaranteed
by the Company's Canadian subsidiary and by ResNet, to the extent borrowings
thereunder are contributed to ResNet (together, the "Guarantors").
The Credit Facility matures on December 31, 2002. Amounts borrowed under the
Credit 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 Debt to EBITDA ratio. Borrowings under the Credit Facility will be subject
to a scheduled reduction of 15% beginning on December 31, 1998 and annually
thereafter as follows: December 31, 1999--20%; December 31, 2000--20%; December
31, 2001--20%; and December 31, 2002--25%.
The Credit Facility requires that (i) proceeds from the sale of assets
accounting for less than 15% of assets/EBITDA not reinvested within 180 days and
(ii) commencing in 1999, 50% of the Excess Cash Flow when Total Debt to
Annualized EBITDA exceeds 4.0x, be used to reduce the principal amount
outstanding thereunder.
The Credit Facility contains certain covenants, which include certain
minimum numbers of guest pay rooms served, limitations on the ability of the
Company and the Guarantors to incur additional indebtedness, create certain
liens, or enter into guarantees and limitations on the ability of the Company to
make investments in certain subsidiaries and other entities. In addition, the
Company's capital expenditures are subject to limitations equal to a base amount
plus funds raised through issuances of capital stock, unsecured debt or
increases in the total commitment of the Credit Facility. The base amount of
capital
75
<PAGE>
expenditures are capped at $100 million in 1996, $130 million in 1997, $60
million in 1998, $30 million in 1999, $35 million in 2000, $40 million in 2001
and $25 million in 2002. Amounts not expended may be carried forward to the
following year. The Company is also required to maintain certain financial
ratios, including a requirement that the Company not permit (i) the ratio of
Total Debt to trailing two quarters annualized EBITDA to exceed 5.75x through
1997, 5.25x for 1998 and 4.50x for 1999 and thereafter and (ii) the ratio of
EBITDA to interest expense to be less than 1.25x for the quarter ending March
31, 1997, 1.50x for the two quarters ending June 30, 1997 and three quarters
ending September 30, 1997, 1.75x for the four quarters ending December 31, 1997
and 2.00x for the four quarters ending March 31, 1998 and thereafter.
The failure to satisfy the financial covenants constitutes an Event of
Default under the Credit Facility, notwithstanding the ability of the Company to
meet its debt obligations. The Credit Facility also includes other customary
events of default, including cross defaults to other indebtedness, change of
control provisions and certain events including bankruptcy, reorganization and
insolvency. An Event of Default under the Credit Facility would allow the
lenders thereunder to accelerate the maturity of the indebtedness under the
Credit Facility and would adversely affect the ability of the Company to meet
its obligations on the Notes.
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<PAGE>
DESCRIPTION OF THE NOTES
The Private Notes were issued and the Exchange Notes will be issued pursuant
to an Indenture, dated as of December 19, 1996 (the "Closing Date") (the
"Indenture"), between the Company, as issuer, and Marine Midland Bank, as
Trustee (the "Trustee"). A copy of the Indenture is available upon request from
the Company. The following summary of certain provisions of the Indenture does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Indenture, including the definitions
of certain terms therein and those terms made a part thereof by reference to the
Trust Indenture Act of 1939, as amended. Whenever particular defined terms of
the Indenture not otherwise defined herein are referred to, such defined terms
are incorporated herein by reference. For definitions of certain capitalized
terms used in the following summary, see "--Certain Definitions."
GENERAL
The Notes will be unsecured unsubordinated obligations of the Company,
limited to $150 million aggregate principal amount, and will mature on December
15, 2006. Each Note will initially bear interest at the rate shown on the front
cover of this Prospectus from the Closing Date or from the most recent Interest
Payment Date to which interest has been paid or provided for, payable
semiannually (to Holders of record at the close of business on the June 1 or
December 1 immediately preceding the Interest Payment Date) on June 15 and
December 15 of each year, commencing June 15, 1997. See "--Registration Rights"
for a description of the circumstances under which the interest rate on the
Notes may be increased.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially will
be the corporate trust office of the Trustee at 140 Broadway, New York, New York
10005); PROVIDED that, at the option of the Company, payment of interest may be
made by check mailed to the address of the Holders as such address appears in
the Security Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount and any integral multiple thereof.
See "--Book-Entry; Delivery and Form." No service charge will be made for any
registration of transfer or exchange of Notes, but the Company may require
payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after December 15, 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holders' last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest, if any, to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date that is on or prior to the Redemption Date to receive interest due on an
Interest Payment Date), if redeemed during the 12-month period commencing
December 15, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2001........................................................................ 105.125%
2002........................................................................ 102.563
2003 and thereafter......................................................... 100.000
</TABLE>
In addition, at any time prior to December 15, 1999, the Company may redeem
up to 35% of the aggregate principal amount of the Notes with the proceeds of
one or more Public Equity Offerings, at any
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time as a whole or from time to time in part, at a Redemption Price (expressed
as a percentage of principal amount on the Redemption Date) of 110.250%, plus
accrued and unpaid interest, if any, to the Redemption Date; PROVIDED that,
immediately after any such redemption at least $97.5 million aggregate principal
amount of the Notes remains outstanding.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the principal
national securities exchange, if any, on which the Notes are listed or, if the
Notes are not listed on a national securities exchange, on a pro rata basis, by
lot or by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate; PROVIDED that no Note of $1,000 in principal amount or
less shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
REGISTRATION RIGHTS
On December 16, 1996, pursuant to the Registration Rights Agreement, the
Company agreed with the Placement Agents, for the benefit of the Holders of the
Private Notes, that the Company would use its best efforts, at its cost, to file
and cause to become effective a registration statement with respect to a
registered exchange offer to exchange the Private Notes for the Exchange Notes.
Upon such registration statement being declared effective, the Company will
offer the Exchange Notes in return for surrender of the Private Notes. Such
offer shall remain open for not less than 20 business days after the date notice
of the Exchange Offer is mailed to Holders. For each Private Note surrendered to
the Company under the Exchange Offer, the Holder will receive an Exchange Note
of equal principal amount. Interest on each Exchange Note shall accrue from the
last Interest Payment Date on which interest was paid on the Private Notes so
surrendered or, if no interest has been paid on such Private Notes, from the
Closing Date. In the event that applicable interpretations of the staff of the
Securities and Exchange Commission (the "Commission") do not permit the Company
to effect the Exchange Offer, or under certain other circumstances, the Company
shall, at its cost, use its best efforts to cause to become effective a shelf
registration statement (the "Shelf Registration Statement") with respect to
resales of the Private Notes and to keep such registration statement effective
until the expiration of the time period referred to in Rule 144(k) under the
Securities Act after the Closing Date. The Company shall, in the event of such a
shelf registration, provide to each Holder copies of the prospectus, notify each
Holder when the Shelf Registration Statement for the Private Notes has become
effective and take certain other actions as are required to permit resales of
the Private Notes. A Holder that sells its Private Notes pursuant to the Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder (including certain indemnification obligations).
In the event that the Exchange Offer is not consummated and a Shelf
Registration Statement is not declared effective on or prior to the date that is
six months after the Closing Date, the annual interest rate borne by the Private
Notes shall be increased by 0.5% per annum over the rate shown on the cover page
of this Prospectus and if the Exchange Offer is not consummated and a Shelf
Registration Statement is not declared effective on or prior to the date that is
nine months after the Closing Date, the annual interest rate borne by the
Private Notes shall be increased by an additional 0.5% per annum. Once the
Exchange Offer is consummated or a Shelf Registration Statement is declared
effective, the annual interest rate borne by the Private Notes shall be changed
to again be the rate shown on the cover page of this Prospectus.
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If the Company effects the Exchange Offer, the Company will be entitled to
close the Exchange Offer 20 business days after the commencement thereof,
PROVIDED that it has accepted all Private Notes theretofore validly surrendered
in accordance with the terms of the Exchange Offer. Private Notes not tendered
in the Exchange Offer shall bear interest at the rate set forth on the cover
page of this Prospectus and be subject to all of the terms and conditions
specified in the Indenture and to the transfer restrictions described in the
legends on such Private Notes.
This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Rights Agreement, a copy
of which is available from the Company upon request.
RANKING
The Notes will be unsubordinated unsecured indebtedness of the Company, and
will rank PARI PASSU in right of payment with all existing and future
unsubordinated unsecured indebtedness of the Company, including the Company's
11.5% Senior Notes, and senior in right of payment to all subordinated
indebtedness of the Company. The Notes will be effectively subordinated to all
secured indebtedness, including indebtedness under the Credit Facility, and
effectively subordinated to all liabilities of the Company's subsidiaries,
including trade payables. At December 31, 1996, the Company (excluding its
subsidiaries) had approximately $179.7 million of indebtedness outstanding, and
the Company's subsidiaries had approximately $.7 million of liabilities. ResNet
will guarantee indebtedness under the Credit Facility to the extent borrowings
thereunder are contributed to ResNet and the Notes will be effectively
subordinated to such guarantee. See "Risk Factors--High Level of Indebtedness;
Ability to Service Debt," "--Historical and Future Operating Losses; Need for
Additional Capital; Refinancing Risk," "--Ranking of the Notes," and
"Capitalization."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a Restricted
Subsidiary or such Asset Acquisition shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with generally accepted accounting principles ("GAAP");
PROVIDED that the following items shall be excluded in computing Adjusted
Consolidated Net Income (without duplication): (i) the net income of any Person
(other than net income attributable to a Restricted Subsidiary) in which any
Person (other than the Company or any of its Restricted Subsidiaries) has a
joint interest and the net income of any Unrestricted Subsidiary, except to the
extent of the amount of dividends or other distributions actually paid to the
Company or any of its Restricted Subsidiaries by such other Person or such
Unrestricted Subsidiary during such period; (ii) solely for the purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below (and in such case, except to the extent includable
pursuant to clause (i) above), the net income (or loss) of any Person accrued
prior to the date it becomes a Restricted Subsidiary or is merged into or
consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) solely for the purposes
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of calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, the net income of any Restricted Subsidiary to the
extent that the declaration or payment of dividends or similar distributions by
such Restricted Subsidiary of such net income is not at the time permitted by
the operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
such Restricted Subsidiary; (iv) any gains or losses (on an after-tax basis)
attributable to Asset Sales; (v) except for purposes of calculating the amount
of Restricted Payments that may be made pursuant to clause (C) of the first
paragraph of the "Limitation on Restricted Payments" covenant described below,
any amount paid or accrued as dividends on Preferred Stock of the Company or any
Restricted Subsidiary owned by Persons other than the Company and any of its
Restricted Subsidiaries; and (vi) all extraordinary gains and extraordinary
losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recent quarterly or annual consolidated balance sheet of the
Company and its Restricted Subsidiaries, prepared in conformity with GAAP and
filed with the Commission pursuant to the "Commission Reports and Reports to
Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with the
Company or any of its Restricted Subsidiaries; PROVIDED that such Person's
primary business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by the Company or any of its Restricted Subsidiaries of the
property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or line
of business of such Person; PROVIDED that the property and assets acquired are
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary of the Company or (ii) all or substantially all of the
assets that constitute a division or line of business of the Company or any of
its Restricted Subsidiaries.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property and assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary and, in each case, that is not governed by the provisions
of the Indenture applicable to mergers, consolidations and sales of assets of
the Company; provided that "Asset Sale" shall not include (a) sales or other
dispositions of inventory, receivables and
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other current, obsolete or worn out assets, (b) sales or other dispositions of
assets for consideration at least equal to the fair market value of the assets
sold or disposed of, provided that the consideration received would satisfy
clause (B) of the "Limitation on Asset Sales" covenant or (c) issuances or sales
of Common Stock of ResNet pursuant to the ResNet Transaction Documents.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, memberships, participations or other equivalents (however designated,
whether voting or non-voting) in equity of such Person, whether now outstanding
or issued after the Closing Date, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under such lease.
"Change of Control" means such time as (i) (a) a "person" or "group" (within
the meaning of Sections 13(d) or 14(d)(2) of the Exchange Act) other than the
Permitted Holders becomes the ultimate "beneficial owner" (as defined in Rule
13d-3 of the Exchange Act) of Voting Stock representing more than 40% of the
total voting power of the total Voting Stock of the Company on a fully diluted
basis and (b) such person or group beneficially owns more Voting Stock than the
Permitted Holders; or (ii) individuals who at the beginning of any 24 month
period constitute the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
members of the Board of Directors then in office who either were members of the
Board of Directors on the Closing Date or whose election or nomination for
election was previously so approved) cease for any reason during such 24 month
period to constitute a majority of the members of the Board of Directors then in
office.
"Closing Date" means December 19, 1996.
"Consolidated EBITDA" means, for any period, the sum of the amounts for such
period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, and (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income,
all as determined on a consolidated basis for the Company and its Restricted
Subsidiaries in conformity with GAAP; PROVIDED that, Consolidated EBITDA will
not be reduced as a result of a minority interest in the net income of a
Restricted Subsidiary except to the extent that dividends in cash or other
distributions of cash, property or other assets (other than dividends or
distributions payable solely in shares of Capital Stock) are actually paid to
the holders of such minority interest.
"Consolidated Fixed Charges" means, for any period, the aggregate amount of
(i) interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective
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interest method of accounting; all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries), (ii) all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period and (iii) one-third of rental expense attributable to all leases other
than Capitalized Leases; EXCLUDING, HOWEVER, (i) any amount of such interest of
any Restricted Subsidiary if the net income of such Restricted Subsidiary is
excluded in the calculation of Adjusted Consolidated Net Income pursuant to
clause (iii) of the definition thereof (but only in the same proportion as the
net income of such Restricted Subsidiary is excluded from the calculation of
Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof) and (ii) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes, all as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of (i) interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; the net costs associated with Interest Rate Agreements; and
Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and (ii) all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; EXCLUDING, HOWEVER, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof) and (ii) any
premiums, fees and expenses (and any amortization thereof) payable in connection
with the offering of the Notes, all as determined on a consolidated basis
(without taking into account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis as at such Transaction Date to (ii) the
aggregate amount of Consolidated EBITDA for the two most recent fiscal quarters
prior to such Transaction Date for which financial statements of the Company
have been filed with the Commission pursuant to the "Commission Reports and
Reports to Holders" covenant described below (such two fiscal quarter periods
being the "Two Quarter Period"), multiplied by two; PROVIDED that (A) PRO FORMA
effect shall be given to (x) any Indebtedness Incurred from the beginning of the
Two Quarter Period through the Transaction Date (the "Reference Period"), to the
extent such Indebtedness is outstanding on the Transaction Date and (y) any
Indebtedness that was outstanding during such Reference Period but that is not
outstanding or is to be repaid on the Transaction Date; (B) PRO FORMA effect
shall be given to Asset Dispositions and Asset Acquisitions (including giving
PRO FORMA effect to the application of proceeds of any Asset Disposition) that
occur during such Reference Period, as if they had occurred and such proceeds
had been applied on the first day of such Reference Period; and (C) PRO FORMA
effect shall be given to asset dispositions and asset acquisitions (including
giving PRO FORMA effect to the application of proceeds of any asset disposition)
that have been made by any Person that has become a Restricted Subsidiary or has
been merged with or into the Company or any Restricted Subsidiary during such
Reference Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person was a Restricted
Subsidiary as if such asset dispositions or asset acquisitions were Asset
Dispositions or Asset Acquisitions that occurred on the first day of such
Reference Period; PROVIDED that to the extent that clause (B) or (C) of this
sentence requires that PRO FORMA effect be given to an Asset Acquisition or
Asset Disposition, such PRO FORMA calculation shall be based upon the two full
fiscal quarters immediately preceding
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the Transaction Date of the Person, or division or line of business of the
Person, that is acquired or disposed for which financial information is
available, multiplied by two as provided in clause (i) above.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive if
evidenced by a Board Resolution.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained or referred to in
the Indenture shall be computed in conformity with GAAP applied on a consistent
basis, except that calculations made for purposes of determining compliance with
the terms of the covenants and with other provisions of the Indenture shall be
made without giving effect to (i) the amortization of any expenses incurred in
connection with the offering of the Notes and (ii) except as otherwise provided,
the amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Indebtedness by reason of a Person becoming a
Restricted Subsidiary of the Company; PROVIDED that neither the accrual of
interest nor the accretion of original issue discount shall be considered an
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v), (vi)
or (vii) below) entered into in the ordinary course of business of such Person
to the extent such letters of credit are not drawn upon or, if drawn upon, to
the extent such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement), (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, which purchase price is due more than six months after the
date of placing such property in service or taking delivery and title thereto or
the completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such
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Person; PROVIDED that the amount of such Indebtedness shall be the lesser of (A)
the fair market value of such asset at such date of determination and (B) the
amount of such Indebtedness, (vii) all Indebtedness of other Persons Guaranteed
by such Person to the extent such Indebtedness is Guaranteed by such Person and
(viii) to the extent not otherwise included in this definition, obligations
under Currency Agreements and Interest Rate Agreements. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, PROVIDED (A) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the face amount of such Indebtedness less the unamortized portion of the
original issue discount of such Indebtedness at the time of its issuance as
determined in conformity with GAAP, (B) that Indebtedness shall not include any
liability for federal, state, local or other taxes and (C) that Indebtedness
shall not include any obligations owed to TCI Satellite that do not provide for
or permit payments in cash and that may only be repaid or satisfied through the
issuance of Common Stock of ResNet.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee or
similar arrangement; but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock (or any other Investment), held by the Company
or any of its Restricted Subsidiaries, of (or in) any Person that has ceased to
be a Restricted Subsidiary, including without limitation, by reason of any
transaction permitted by clause (iii) or clause (iv) of the "Limitation on the
Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant. For
purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on
Restricted Payments" covenant described below, (i) "Investment" shall include
the fair market value of the assets (net of liabilities (other than liabilities
to the Company or any of its Subsidiaries)) of any Restricted Subsidiary at the
time that such Restricted Subsidiary is designated an Unrestricted Subsidiary,
(ii) the fair market value of the assets (net of liabilities (other than
liabilities to the Company or any of its Subsidiaries)) of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary shall be considered a reduction in outstanding Investments
and (iii) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or other
title retention agreement or lease in the nature thereof or any agreement to
give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) and proceeds
from the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of the Company and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be PROVIDED by the
Company or any Restricted Subsidiary of the Company as a reserve against any
liabilities associated with such Asset Sale, including, without limitation,
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pension and other post-employment benefit liabilities, liabilities related to
environmental matters and liabilities under any indemnification obligations
associated with such Asset Sale, all as determined in conformity with GAAP and
(b) with respect to any issuance or sale of Capital Stock, the proceeds of such
issuance or sale in the form of cash or cash equivalents, including payments in
respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary of the Company)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of attorney's fees, accountants' fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof.
"Credit Facility" means the Credit Agreement dated as of December 19, 1996
among the Company, its Subsidiaries named therein, and the Lenders, together
with all other agreements, instruments and documents executed or delivered
pursuant thereto or in connection therewith, in each case as such agreements,
instruments or documents may be amended, supplemented, extended, renewed,
replaced or otherwise modified from time to time (including increases in the
principal amount thereof); PROVIDED that, with respect to any agreement
providing for the refinancing of Indebtedness under the Credit Facility, such
agreement shall be the Credit Facility under the Indenture only if a notice to
that effect is delivered by the Company to the Trustee and there shall be at any
time only one instrument that is (together with the aforementioned related
agreements, instruments and documents) the Credit Facility under the Indenture.
"Offer to Purchase" means an offer to purchase Notes by the Company from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is mailed)
(the "Payment Date"); (iii) that any Note not tendered will continue to accrue
interest pursuant to its terms; (iv) that, unless the Company defaults in the
payment of the purchase price, any Note accepted for payment pursuant to the
Offer to Purchase shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a Note purchased pursuant to the Offer to
Purchase will be required to surrender the Note, together with the form entitled
"Option of the Holder to Elect Purchase" on the reverse side of the Note
completed, to the Paying Agent at the address specified in the notice prior to
the close of business on the Business Day immediately preceding the Payment
Date; (vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a telegram, facsimile
transmission or letter setting forth the name of such Holder, the principal
amount of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount to the unpurchased portion of the Notes surrendered; PROVIDED
that each Note purchased and each new Note issued shall be in a principal amount
of $1,000 or integral multiples thereof. On the Payment Date, the Company shall
(i) accept for payment on a pro rata basis Notes or portions thereof tendered
pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money
sufficient to pay the purchase price of all Notes or portions thereof so
accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Notes
or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof accepted for payment by the Company.
The Paying Agent shall promptly mail to the Holders of Notes so accepted payment
in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; PROVIDED that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. The Company will publicly announce the results of an
Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
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"Permitted Holders" means, collectively, the executive officers of the
Company and ResNet as of the Closing Date, any Restricted Subsidiary and trusts
established under any employee stock ownership plan that is solely for the
benefit of the employees of the Company and its Subsidiaries.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, the Company
or a Restricted Subsidiary; PROVIDED that such person's primary business is
related, ancillary or complementary to the businesses of the Company and its
Restricted Subsidiaries on the date of such Investment; (ii) Temporary Cash
Investments; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; and (iv) stock, obligations or securities received in
satisfaction of judgments.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (ii) statutory and common law Liens of landlords and
carriers, warehousemen, mechanics, suppliers, materialmen, repairmen or other
similar Liens arising in the ordinary course of business and with respect to
amounts not yet delinquent or being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a reserve
or other appropriate provision, if any, as shall be required in conformity with
GAAP shall have been made; (iii) Liens incurred or deposits made in the ordinary
course of business in connection with workers' compensation, unemployment
insurance and other types of social security; (iv) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, statutory or regulatory
obligations, bankers' acceptances, surety and appeal bonds, government
contracts, performance and return-of-money bonds and other obligations of a
similar nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (v) easements, rights-of-way,
municipal and zoning ordinances and similar charges, encumbrances, title defects
or other irregularities that do not materially interfere with the ordinary
course of business of the Company or any of its Restricted Subsidiaries; (vi)
Liens (including extensions and renewals thereof) upon real or personal (whether
tangible or intangible) property acquired after the Closing Date or associated
with the Company's headquarter offices; PROVIDED that (a) such Lien is created
solely for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, (1) to finance the cost
(including the cost of improvement or construction) of the item of property or
assets subject thereto and such Lien is created prior to, at the time of or
within six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property or (2) to
refinance any Indebtedness previously so secured, (b) the principal amount of
the Indebtedness secured by such Lien does not exceed 100% of such cost and (c)
any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements on such item; (vii) leases
or subleases granted to others that do not materially interfere with the
ordinary course of business of the Company and its Restricted Subsidiaries,
taken as a whole; (viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets; (ix) any interest
or title of a lessor in the property subject to any Capitalized Lease or
operating lease; (x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases; (xi) Liens on property of, or on shares of Capital
Stock or Indebtedness of, any Person existing at the time such Person becomes,
or becomes a part of, any Restricted Subsidiary; PROVIDED that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets acquired; (xii) Liens in favor of
the Company or any Restricted Subsidiary; (xiii) Liens arising from the
rendering of a final judgment or order against the Company or any Restricted
Subsidiary of the Company that does not give rise to an Event of Default; (xiv)
Liens securing reimbursement obligations with respect to letters of credit that
encumber documents and other property relating to such letters of credit and the
products and proceeds thereof; (xv) Liens in favor of customs and revenue
authorities arising as a matter of law to secure payment of customs duties in
connection with the importation of goods; (xvi) Liens
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encumbering customary initial deposits and margin deposits, and other Liens that
are either within the general parameters customary in the industry and incurred
in the ordinary course of business, in each case, securing Indebtedness under
Interest Rate Agreements and Currency Agreements and forward contracts, options,
future contracts, futures options or similar agreements or arrangements designed
solely to protect the Company or any of its Restricted Subsidiaries from
fluctuations in interest rates, currencies or the price of commodities; (xvii)
Liens arising out of conditional sale, title retention, consignment or similar
arrangements for the sale of goods entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business in accordance with
the past practices of the Company and its Restricted Subsidiaries prior to the
Closing Date; (xviii) Liens on or sales of receivables; and (xix) Liens securing
Indebtedness in an amount not to exceed $5 million.
"Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the Stated Maturity of the Notes shall not constitute
Redeemable Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions contained in "Limitation on Asset Sales" and
"Repurchase of Notes Upon a Change of Control" covenants described below and
such Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Asset Sales" and "Repurchase of Notes Upon a Change of Control"
covenants described below.
"ResNet" means ResNet Communications, Inc., a subsidiary of the Company, and
its successors, including, without limitation, its successor to be formed upon
reconstitution of ResNet as a Delaware limited liability company in connection
with the recapitalization of ResNet contemplated by the ResNet Transaction
Documents.
"ResNet Transaction Documents" means the agreements among the Company,
ResNet and TCI Satellite setting forth, among other things, the terms and
conditions of TCI Satellite's investment in ResNet, as in effect on the Closing
Date, and the agreements to be entered into by such parties on substantially
equivalent terms to effect the reconstitution of ResNet as a Delaware limited
liability company.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent fiscal
year of the Company, accounted for more than 10% of the consolidated revenues of
the Company and its Restricted Subsidiaries or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the Company
and its Restricted Subsidiaries, all as set forth on the most recently available
consolidated financial statements of the Company for such fiscal year.
"S&P" means Standard & Poor's Ratings Group and its successors.
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"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"TCI Satellite" means TCI Satellite MDU, Inc., an affiliate of
Tele-Communications, Inc., and its successors and assigns.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
fully and unconditionally guaranteed by the United States of America or any
agency thereof, (ii) time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than 90 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America, any state thereof
or any foreign country recognized by the United States of America with a rating
at the time as of which any investment therein is made of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P, and (v) securities
with maturities of six months or less from the date of acquisition issued or
fully and unconditionally guaranteed by any state, commonwealth or territory of
the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such Indebtedness
is to be Incurred and, with respect to any Restricted Payment, the date such
Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Restricted
Subsidiary (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary owns any
Capital Stock of, or owns or holds any Lien on any property of, the Company or
any Restricted Subsidiary; PROVIDED that (A) any Guarantee by the Company or any
Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated
shall be deemed an "Incurrence" of such Indebtedness and an "Investment" by the
Company or such Restricted Subsidiary (or both, if applicable) at the time of
such designation; (B) either (I) the Subsidiary to be so designated has total
assets of $1,000 or less or (II) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under the "Limitation on Restricted
Payments" covenant described below and (C) if applicable, the Incurrence of
Indebtedness and the Investment referred to in clause (A) of this proviso would
be permitted under the "Limitation on Indebtedness" and "Limitation on
Restricted
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Payments" covenants described below. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; PROVIDED that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant described below and (y) no Default or Event of Default
shall have occurred and be continuing. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the Trustee
a copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
Unrestricted Subsidiaries are not subject to any of the restrictive
covenants set forth in the Indenture.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
COVENANTS
The Indenture contains, among others, the following covenants.
LIMITATION ON INDEBTEDNESS
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness; PROVIDED that the Company may Incur
Indebtedness, and any Restricted Subsidiary may Incur Acquired Indebtedness, if,
after giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Consolidated Leverage Ratio would be
less than or equal to 5.75 to 1 for Indebtedness Incurred prior to December 15,
1999, and 5.25 to 1 for Indebtedness Incurred on or after December 15, 1999.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness outstanding at any time in an aggregate principal amount not to
exceed the amount of the commitments under the Credit Facility on the Closing
Date, less any amount of Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant described below; (ii) Indebtedness (A) to
the Company evidenced by an unsubordinated promissory note or (B) to any of its
Restricted Subsidiaries; PROVIDED that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, then
outstanding Indebtedness, other than Indebtedness Incurred under clause (i),
(ii), (iv) or (vi) of this paragraph, and any refinancings thereof in an amount
not to exceed the amount so refinanced or refunded (plus premiums, accrued
interest, fees and expenses); PROVIDED that Indebtedness the proceeds of which
are used to refinance or refund the Notes or Indebtedness that is PARI PASSU
with, or subordinated in right of payment to, the Notes shall only be permitted
under this clause (iii) if (A) in case the Notes are refinanced in part or the
Indebtedness to be refinanced is PARI PASSU with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new Indebtedness is outstanding, is expressly made PARI
PASSU with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment to
the Notes, such new Indebtedness, by its terms or by the terms of any agreement
or instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new
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Indebtedness, determined as of the date of Incurrence of such new Indebtedness,
does not mature prior to the Stated Maturity of the Indebtedness to be
refinanced or refunded, and the Average Life of such new Indebtedness is at
least equal to the remaining Average Life of the Indebtedness to be refinanced
or refunded; and PROVIDED FURTHER that in no event may Indebtedness of the
Company be refinanced by means of any Indebtedness of any Restricted Subsidiary
pursuant to this clause (iii); (iv) Indebtedness (A) in respect of performance,
surety or appeal bonds provided in the ordinary course of business, (B) under
Currency Agreements and Interest Rate Agreements; PROVIDED that such agreements
(a) are designed solely to protect the Company or its Subsidiaries against
fluctuations in foreign currency exchange rates or interest rates and (b) do not
increase the Indebtedness of the obligor outstanding at any time other than as a
result of fluctuations in foreign currency exchange rates or interest rates or
by reason of fees, indemnities and compensation payable thereunder; and (C)
arising from agreements providing for indemnification, adjustment of purchase
price or similar obligations, or from Guarantees or letters of credit, surety
bonds or performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
of the Company (other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Restricted Subsidiary
of the Company for the purpose of financing such acquisition), in a principal
amount not to exceed the gross proceeds actually received by the Company or any
Restricted Subsidiary in connection with such disposition; and (v) Indebtedness
of the Company, to the extent the net proceeds thereof are promptly (A) used to
purchase Notes tendered in an Offer to Purchase made as a result of a Change in
Control or (B) deposited to defease the Notes as described below under
"Defeasance" and (vi) Indebtedness Incurred by any Restricted Subsidiary in an
amount not to exceed $10 million at any one time outstanding.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding Indebtedness
due solely to the result of fluctuations in the exchange rates of currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under the
Credit Facility on or prior to the Closing Date shall be treated as Incurred
pursuant to clause (i) of the second paragraph of this "Limitation on
Indebtedness" covenant, (2) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (3) any Liens
granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses (other than Indebtedness referred to in clause (1) of the preceding
sentence), the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any distribution
on or with respect to its Capital Stock (other than (x) dividends or
distributions payable solely in shares of its Capital Stock (other than
Redeemable Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders) held by Persons other
than the Company or any of its Restricted Subsidiaries, (ii) purchase, redeem,
retire or otherwise acquire for value any shares of Capital Stock of (A) the
Company or an Unrestricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Person or (B) a
Restricted Subsidiary (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Affiliate of
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the Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or
any Affiliate of such holder) of more than 10% of the Capital Stock of the
Company, (iii) make any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or retirement
for value, of Indebtedness of the Company that is subordinated in right of
payment to the Notes (other than the purchase, repurchase or the acquisition of
Indebtedness in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in any case due within one year of the date of
acquisition) or (iv) make any Investment, other than a Permitted Investment, in
any Person (such payments or any other actions described in clauses (i) through
(iv) being collectively "Restricted Payments") if, at the time of, and after
giving effect to, the proposed Restricted Payment: (A) a Default or Event of
Default shall have occurred and be continuing, (B) the Company could not Incur
at least $1.00 of Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the Board
of Directors, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of (1) the
remainder of (x) the aggregate amount of the Consolidated EBITDA (or, if the
Consolidated EBITDA is negative, minus 100% of such negative amount) (determined
by excluding income resulting from transfers of assets by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a cumulative
basis during the period (taken as one accounting period) beginning on the first
day of the fiscal quarter during which the Closing Date occurs and ending on the
last day of the last fiscal quarter preceding the Transaction Date for which
reports have been filed pursuant to the "Commission Reports and Reports to
Holders" covenant minus (y) the product of two multiplied by the aggregate
amount of Consolidated Fixed Charges for the period referred to in clause (x)
PLUS (2) the aggregate Net Cash Proceeds received by the Company after the
Closing Date from the issuance and sale permitted by the Indenture of its
Capital Stock (other than Redeemable Stock) to a Person who is not a Subsidiary
of the Company or from the issuance to a Person who is not a Subsidiary of the
Company of any options, warrants or other rights to acquire Capital Stock of the
Company (in each case, exclusive of any Redeemable Stock or any options,
warrants or other rights that are redeemable at the option of the holder, or are
required to be redeemed, prior to the Stated Maturity of the Notes) PLUS (3) an
amount equal to the net reduction in Investments (other than reductions in
Permitted Investments) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or any Restricted Subsidiary or from the Net
Cash Proceeds from the sale of any such Investment (except, in each case, to the
extent any such payment or proceeds are included in the calculation of Adjusted
Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the definition of
"Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at said
date of declaration, such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the Notes
including premium, if any, and accrued and unpaid interest, with the proceeds
of, or in exchange for, Indebtedness Incurred under clause (iii) of the second
paragraph of part (a) of the "Limitation on Indebtedness" covenant; (iii)(A) the
repurchase, redemption or other acquisition of Capital Stock of the Company (or
options, warrants or other rights to acquire such Capital Stock) in exchange
for, or out of the proceeds of a substantially concurrent offering of, shares of
Capital Stock (other than Redeemable Stock) of the Company or (B) the
repurchase, redemption or other acquisition of Capital Stock of a Restricted
Subsidiary (or options, warrants or other rights to acquire such Capital Stock)
in exchange for, or out of the proceeds of a substantially concurrent offering
of, shares of Capital Stock (other than Redeemable Stock) of such Restricted
Subsidiary; (iv) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of, a substantially concurrent
offering of, shares of the Capital Stock of the Company (other
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than Redeemable Stock); (v) payments or distributions, to dissenting
stockholders pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions of
the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; (vi) Investments in
Unrestricted Subsidiaries not to exceed $20 million at any one time outstanding;
and (vii) Restricted Payments not to exceed $5 million in the aggregate;
PROVIDED that, except in the case of clauses (i) and (iii), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof and an exchange
of Capital Stock for Capital Stock or Indebtedness referred to in clause (iii)
or (iv) thereof), and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clauses (iii) and (iv), shall be included in calculating whether
the conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is PARI PASSU with the Notes, then the Net Cash
Proceeds of such issuance shall be included in clause (C) of the first paragraph
of this "Limitation on Restricted Payments" covenant only to the extent such
proceeds are not used for such redemption, repurchase or other acquisition of
Indebtedness.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions permitted by
applicable law on any Capital Stock of such Restricted Subsidiary owned by the
Company or any other Restricted Subsidiary, (ii) pay any Indebtedness owed to
the Company or any other Restricted Subsidiary, (iii) make loans or advances to
the Company or any other Restricted Subsidiary or (iv) transfer any of its
property or assets to the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Credit Facility, the
Indenture, the ResNet Transaction Documents or any other agreements in effect on
the Closing Date, and any extensions, refinancings, renewals or replacements of
such agreements; PROVIDED that the encumbrances and restrictions in any such
extensions, refinancings, renewals or replacements are no less favorable in any
material respect to the Holders than those encumbrances or restrictions that are
then in effect and that are being extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law; (iii) existing with respect
to any Person or the property or assets of such Person acquired by the Company
or any Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than such
Person or the property or assets of such Person so acquired; (iv) in the case of
clause (iv) of the first paragraph of this "Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A) that
restrict in a customary manner the subletting, assignment or transfer of any
property or asset that is a lease, license, conveyance or contract or similar
property or asset, (B) existing by virtue of any transfer of, agreement to
transfer, option or right with respect to, or Lien on, any property or assets of
the Company or any Restricted Subsidiary not otherwise prohibited by the
Indenture or (C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company or any Restricted Subsidiary;
or (v) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary. Nothing contained in this "Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall
prevent the Company or any Restricted Subsidiary from (1) creating, incurring,
assuming or suffering to exist any Liens otherwise permitted in the
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"Limitation on Liens" covenant or (2) restricting the sale or other disposition
of property or assets of the Company or any of its Restricted Subsidiaries that
secure Indebtedness of the Company or any of its Restricted Subsidiaries.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary, provided any Investment in such
Person remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant, if
made on the date of such issuance or sale; and (iv) issuances of Common Stock of
ResNet (x) to TCI Satellite pursuant to the terms of the ResNet Transaction
Documents as in effect on the Closing Date and (y) in exchange for, or the net
proceeds of which are used solely for, redemptions of Common Stock of ResNet.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is PARI PASSU
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a Guarantee
(a "Subsidiary Guarantee") of payment of the Notes by such Restricted Subsidiary
and (ii) such Restricted Subsidiary waives and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee; PROVIDED that this paragraph shall not be
applicable to (x) any Guarantee of any Restricted Subsidiary that existed at the
time such Person became a Restricted Subsidiary and was not Incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary or (y) any Guarantee of any Subsidiary of Indebtedness Incurred under
a revolving credit or working capital facility. If the Guaranteed Indebtedness
is (A) PARI PASSU with the Notes, then the Guarantee of such Guaranteed
Indebtedness shall be PARI PASSU with, or subordinated to, the Subsidiary
Guarantee or (B) subordinated to the Notes, then the Guarantee of such
Guaranteed Indebtedness shall be subordinated to the Subsidiary Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated to the
Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the Guarantee
which resulted in the creation of such Subsidiary Guarantee, except a discharge
or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH SHAREHOLDERS AND AFFILIATES
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction (including,
without limitation, the purchase, sale, lease or exchange of property or assets,
or the rendering of any service) with any holder (or any Affiliate of such
holder) of more than 10% of any class of Capital Stock of the Company or with
any Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted Subsidiary
than could be obtained, at the time of such transaction or, if such transaction
is
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pursuant to a written agreement, at the time of the execution of the agreement
providing therefor, in a comparable arm's-length transaction with a Person that
is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized investment
banking firm stating that the transaction is fair to the Company or such
Restricted Subsidiary from a financial point of view; (ii) any transaction
solely between the Company and any of its Wholly Owned Restricted Subsidiaries
or solely between Wholly Owned Restricted Subsidiaries; (iii) the payment of
reasonable and customary regular fees to directors of the Company who are not
employees of the Company; (iv) any payments or other transactions pursuant to
any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part of
a consolidated group for tax purposes; (v) any Restricted Payments not
prohibited by the "Limitation on Restricted Payments" covenant or (vi)
transactions pursuant to the ResNet Transaction Documents. Notwithstanding the
foregoing, any transaction covered by the first paragraph of this "Limitation on
Transactions with Shareholders and Affiliates" covenant and not covered by
clauses (ii) through (vi) of this paragraph, the aggregate amount of which
exceeds $1 million in value, must be approved or determined to be fair in the
manner provided for in clause (i)(A) or (B) above.
LIMITATION ON LIENS
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the Closing
Date; (ii) Liens granted after the Closing Date on any assets or Capital Stock
of the Company or its Restricted Subsidiaries created in favor of the Holders;
(iii) Liens with respect to the assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to the Company or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iii) of the
second paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that
such Liens do not extend to or cover any property or assets of the Company or
any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; (v) Liens securing obligations under the Credit
Facility; or (vi) Permitted Liens.
LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company and
any Wholly Owned Restricted Subsidiary or solely between Wholly Owned Restricted
Subsidiaries; or (iv) the Company or such Restricted Subsidiary, within twelve
months after the sale or transfer of any assets or
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properties is completed, applies an amount not less than the net proceeds
received from such sale in accordance with clause (A) or (B) of the first
paragraph of the "Limitation on Asset Sales" covenant described below.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale in an amount in greater than 10% of the Company's
Adjusted Consolidated Net Tangible Assets, unless (i) the consideration received
by the Company or such Restricted Subsidiary is at least equal to the fair
market value of the assets sold or disposed of and (ii) at least 75% of the
consideration received consists of cash (which shall include any Indebtedness of
the Company or its Restricted Subsidiaries that is assumed by the buyer) or
Temporary Cash Investments. In the event and to the extent that the Net Cash
Proceeds received by the Company or any of its Restricted Subsidiaries from one
or more Asset Sales occurring on or after the Closing Date in any period of 12
consecutive months exceed 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of the Company and its subsidiaries have
been filed pursuant to the "Commission Reports and Reports to Holders"
covenant), then the Company shall or shall cause the relevant Restricted
Subsidiary to (i) within twelve months after the date Net Cash Proceeds so
received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an
amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or Indebtedness
of any other Restricted Subsidiary, in each case owing to a Person other than
the Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) (or enter into a definitive
agreement committing to so invest within twelve months after the date of such
agreement), in property or assets (other than current assets) of a nature or
type or that are used in a business (or in a company having property and assets
of a nature or type, or engaged in a business) similar or related to the nature
or type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such investment and (ii) apply
(no later than the end of the twelve-month period referred to in clause (i))
such excess Net Cash Proceeds (to the extent not applied pursuant to clause (i))
as provided in the following paragraph of this "Limitation on Asset Sales"
covenant. The amount of such excess Net Cash Proceeds required to be applied (or
to be committed to be applied) during such twelve-month period as set forth in
clause (i) of the preceding sentence and not applied as so required by the end
of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10 million, the Company
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of Notes on the relevant Payment Date equal to the
Excess Proceeds on such date, at a purchase price equal to 101% of the principal
amount of the Notes on the relevant Payment Date, plus, in each case, accrued
interest (if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding, at
a purchase price equal to 101% of the principal amount thereof on the relevant
Payment Date, plus accrued interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well as
may be contained in other securities of the Company which might be outstanding
at
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the time). The above covenant requiring the Company to repurchase the Notes
will, unless consents are obtained, require the Company to repay all
indebtedness then outstanding which by its terms would prohibit such Note
repurchase, either prior to or concurrently with such Note repurchase.
COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is required to file reports with the Commission,
for so long as any Notes are outstanding, the Company shall file with the
Commission all such reports and other information as it would be required to
file with the Commission by Sections 13(a) or 15(d) under the Exchange Act if it
were subject thereto. The Company shall supply the Trustee and each Holder or
shall supply to the Trustee for forwarding to each such Holder, without cost to
such Holder, copies of such reports and other information.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the Indenture:
(a) default in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration, redemption
or otherwise; (b) default in the payment of interest on any Note when the same
becomes due and payable, and such default continues for a period of 30 days; (c)
default in the performance or breach of the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially all
of the assets of the Company or the failure to make or consummate an Offer to
Purchase in accordance with the "Limitation on Asset Sales" or "Repurchase of
Notes upon a Change of Control" covenant; (d) the Company defaults in the
performance of or breaches any other covenant or agreement of the Company in the
Indenture or under the Notes (other than a default specified in clause (a), (b)
or (c) above) and such default or breach continues for a period of 30
consecutive days after written notice by the Trustee or the Holders of 25% or
more in aggregate principal amount of the Notes; (e) there occurs with respect
to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $10 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness now
exists or shall hereafter be created, (I) an event of default that has caused
the holder thereof to declare such Indebtedness to be due and payable prior to
its Stated Maturity and such Indebtedness has not been discharged in full or
such acceleration has not been rescinded or annulled within 30 days of such
acceleration and/or (II) the failure to make a principal payment at the final
(but not any interim) fixed maturity and such defaulted payment shall not have
been made, waived or extended within 30 days of such payment default; (f) any
final judgment or order (not covered by insurance) for the payment of money in
excess of $10 million in the aggregate for all such final judgments or orders
against all such Persons (treating any deductibles, self-insurance or retention
as not so covered) shall be rendered against the Company or any Significant
Subsidiary and shall not be paid or discharged, and there shall be any period of
60 consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and not
paid or discharged against all such Persons to exceed $10 million during which a
stay of enforcement of such final judgment or order, by reason of a pending
appeal or otherwise, shall not be in effect; (g) a court having jurisdiction in
the premises enters a decree or order for (A) relief in respect of the Company
or any Significant Subsidiary in an involuntary case under any applicable
bankruptcy, insolvency or other similar law now or hereafter in effect, (B)
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) the winding up or liquidation of the affairs of
the Company or any Significant Subsidiary and, in each case, such decree or
order shall remain unstayed and in effect for a period of 60 consecutive days;
or (h) the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of
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the Company or any Significant Subsidiary or for all or substantially all of the
property and assets of the Company or any Significant Subsidiary or (C) effects
any general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal of,
premium, if any, and accrued interest on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if any,
and accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause (e)
above has occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied or cured by the
Company or the relevant Significant Subsidiary or waived by the holders of the
relevant Indebtedness within 60 days after the declaration of acceleration with
respect thereto. If an Event of Default specified in clause (g) or (h) above
occurs with respect to the Company, the principal of, premium, if any, and
accrued interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder. The Holders of at least a majority in principal
amount of the outstanding Notes by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and interest on the
Notes that have become due solely by such declaration of acceleration, have been
cured or waived and (ii) the rescission would not conflict with any judgment or
decree of a court of competent jurisdiction. For information as to the waiver of
defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the Trustee
in personal liability, or that the Trustee determines in good faith may be
unduly prejudicial to the rights of Holders of Notes not joining in the giving
of such direction and may take any other action it deems proper that is not
inconsistent with any such direction received from Holders of Notes. A Holder
may not pursue any remedy with respect to the Indenture or the Notes unless: (i)
the Holder gives the Trustee written notice of a continuing Event of Default;
(ii) the Holders of at least 25% in aggregate principal amount of outstanding
Notes make a written request to the Trustee to pursue the remedy; (iii) such
Holder or Holders offer the Trustee indemnity satisfactory to the Trustee
against any costs, liability or expense; (iv) the Trustee does not comply with
the request within 60 days after receipt of the request and the offer of
indemnity; and (v) during such 60-day period, the Holders of a majority in
aggregate principal amount of the outstanding Notes do not give the Trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a Note to receive payment of the
principal of, premium, if any, or interest on, such Note or to bring suit for
the enforcement of any such payment, on or after the due date expressed in the
Notes, which right shall not be impaired or affected without the consent of the
Holder.
The Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof. The
Company is also obligated to notify the Trustee of any default or defaults in
the performance of any covenants or agreements under the Indenture.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and assets (as an entirety or substantially an entirety in one transaction or a
series of related transactions) to, any Person or permit any Person to merge
with or into the Company unless: (i) the Company shall be the continuing Person,
or the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or that acquired or leased such property and assets
of the Company shall be a corporation organized and validly existing under the
laws of the United States of America or any jurisdiction thereof and shall
expressly assume, by a supplemental indenture, executed and delivered to the
Trustee, all of the obligations of the Company on all of the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no Default
or Event of Default shall have occurred and be continuing; (iii) immediately
after giving effect to such transaction on a pro forma basis the Company, or any
Person becoming the successor obligor of the Notes, as the case may be, could
Incur at least $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant; PROVIDED that this clause (iii) shall not
apply to a consolidation or merger with or into a Wholly Owned Restricted
Subsidiary with a positive net worth; PROVIDED that, in connection with any such
merger or consolidation, no consideration (other than Common Stock in the
surviving Person or the Company) shall be issued or distributed to the
stockholders of the Company; and (iv) the Company delivers to the Trustee an
Officers' Certificate (attaching the arithmetic computations to demonstrate
compliance with clause (iii)) and Opinion of Counsel, in each case stating that
such consolidation, merger or transfer and such supplemental indenture complies
with this provision and that all conditions precedent provided for herein
relating to such transaction have been complied with; PROVIDED, HOWEVER, that
clause (iii) above does not apply if, in the good faith determination of the
Board of Directors of the Company, whose determination shall be evidenced by a
Board Resolution, the principal purpose of such transaction is to change the
state of incorporation of the Company; and PROVIDED FURTHER that any such
transaction shall not have as one of its purposes the evasion of the foregoing
limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to the
Notes (except for, among other matters, certain obligations to register the
transfer or exchange of the Notes, to replace stolen, lost or mutilated Notes,
to maintain paying agencies and to hold monies for payment in trust) if, among
other things, (A) the Company has deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient to pay the principal of, premium, if any, and accrued
interest on the Notes on the Stated Maturity of such payments in accordance with
the terms of the Indenture and the Notes, (B) the Company has delivered to the
Trustee (i) either (x) an Opinion of Counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of its option under this "Defeasance" provision and will
be subject to federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law after
the Closing Date such that a ruling is no longer required or (y) a ruling
directed to the Trustee received from the Internal Revenue Service to the same
effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days following the
deposit, the trust fund will not be subject to the effect of Section 547 of the
United States Bankruptcy Code or Section 15 of the New York Debtor and Creditor
Law, (C) immediately after giving effect to such deposit on a pro forma basis,
no Event of Default, or event that after the giving of notice or lapse of time
or both would become an Event of Default, shall have
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occurred and be continuing on the date of such deposit or during the period
ending on the 123rd day after the date of such deposit, and such deposit shall
not result in a breach or violation of, or constitute a default under, any other
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound, and (D) if at
such time the Notes are listed on a national securities exchange, the Company
has delivered to the Trustee an Opinion of Counsel to the effect that the Notes
will not be delisted as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT. The
Indenture further provides that the provisions of the Indenture will no longer
be in effect with respect to clauses (iii) and (iv) under "Consolidation, Merger
and Sale of Assets" and all the covenants described herein under "Covenants,"
clauses (c) and (d) under "Events of Default" with respect to such clauses (iii)
and (iv) under "Consolidation, Merger and Sale of Assets" and such covenants and
clauses (e) and (f) under "Events of Default" shall be deemed not to be Events
of Default, upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such deposit
and defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT. In the event the Company
exercises its option to omit compliance with certain covenants and provisions of
the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated Maturity
but may not be sufficient to pay amounts due on the Notes at the time of the
acceleration resulting from such Event of Default. However, the Company will
remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; PROVIDED, HOWEVER, that no
such modification or amendment may, without the consent of each Holder affected
thereby, (i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, (ii) reduce the principal amount of, or premium, if
any, or interest on, any Note, (iii) change the place or currency of payment of
principal of, or premium, if any, or interest on, any Note, (iv) impair the
right to institute suit for the enforcement of any payment on or after the
Stated Maturity (or, in the case of a redemption, on or after the Redemption
Date) of any Note, (v) reduce the above-stated percentage of outstanding Notes
the consent of whose Holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or interest on
the Notes or (vii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose Holders is necessary for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any obligation,
covenant or agreement of the Company in the Indenture, or in any
99
<PAGE>
of the Notes or because of the creation of any Indebtedness represented thereby,
shall be had against any incorporator, stockholder, officer, director, employee
or controlling person of the Company or of any successor Person thereof. Each
Holder, by accepting the Notes, waives and releases all such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in its
exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect of
any such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions; PROVIDED, HOWEVER, that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form without interest coupons. Notes sold in offshore transactions in reliance
on Regulation S under the Securities Act will initially be represented by one or
more permanent global Notes in definitive, fully registered form without
interest coupons (each a "Regulation S Global Note") and will be deposited with
the Trustee as custodian for, and registered in the name of, a nominee of DTC
for the accounts of Euroclear and Cedel Bank. Prior to the 40th day after the
Closing Date, any resale or transfer of beneficial interests in the Regulation S
Global Note to U.S. persons shall not be permitted unless such release or
transfer is made pursuant to Rule 144A or Regulation S.
Notes sold in reliance on Rule 144A will be represented by one or more
permanent global Notes in definitive, fully registered form without interest
coupons (each a "Restricted Global Note"; and together with the Regulation S
Global Note, the "Global Notes") and will be deposited with the Trustee as
custodian for, and registered in the name of, a nominee of DTC.
Each Global Note (and any Notes issued for exchange therefor) will be
subject to certain restrictions on transfer set forth therein as described under
"Transfer Restrictions." Except in the limited circumstances described below
under "Certificated Notes," owners of beneficial interests in a Global Note will
not be entitled to receive physical delivery of Certificated Notes (as defined
below).
Notes originally purchased by or transferred to Institutional Accredited
Investors who are not qualified institutional buyers ("Non-Global Purchasers")
will be issued Notes in registered form without interest coupons ("Certificated
Notes"). Upon the transfer of Certificated Notes initially issued to a Non-
Global Purchaser to a qualified institutional buyer or in accordance with
Regulation S, such Certificated Notes will, unless the relevant Global Note has
previously been exchanged in whole for Certificated Notes, be exchanged for an
interest in a Global Note. For a description of the restrictions on the transfer
of Certificated Notes, see "Transfer Restrictions."
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants). Qualified institutional buyers may hold their
interests in a Restricted Global Note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
100
<PAGE>
Investors may hold their interests in a Regulation S Global Note directly
through Cedel or Euroclear, if they are participants in such systems, or
indirectly through organizations that are participants in such system. Cedel
Bank and Euroclear will hold interests in the Regulation S Global Notes on
behalf of their participants through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. No beneficial owner of an interest
in a Global Note will be able to transfer that interest except in accordance
with the applicable procedures of DTC, in addition to those provided for under
the Indenture and, if applicable, those of Euroclear and Cedel Bank.
Payments of the principal of, and interest on, a Global Note will be made to
DTC or its nominee, as the case may be, as the registered owner thereof. Neither
the Company, the Trustee nor any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in a Global Note or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note as shown on the records of
DTC or its nominee. The Company also expects that payments by participants to
owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
The Company expects that DTC will take any action permitted to be taken by a
holder of Notes (including the presentation of Notes for exchange as described
below) only at the direction of one or more participants to whose account the
DTC interests in a Global Note is credited and only in respect of such portion
of the aggregate principal amount of Notes as to which such participant or
participants has or have given such direction. However, if there is an Event of
Default under the Notes, DTC will exchange the applicable Global Note for
Certificated Notes, which it will distribute to its participants and which may
be legended as set forth under the heading "Transfer Restrictions."
The Company understands that: DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of certificates
and certain other organizations. Indirect access to the DTC system is available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in a Global Note among
participants of DTC, Euroclear and Cedel, they are under no obligation to
perform or continue to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the
101
<PAGE>
performance by DTC, Euroclear or Cedel Bank or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED NOTES
If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Notes, which may bear the
legend referred to under "Transfer Restrictions," in exchange for the Global
Notes. Holders of an interest in a Global Note may receive Certificated Notes,
which may bear the legend referred to under "Transfer Restrictions," in
accordance with the DTC's rules and procedures in addition to those provided for
under the Indenture.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the federal income tax consequences of
exchanging Private Notes for Exchange Notes pursuant to the Exchange Offer is
based upon current provisions of the Internal Revenue Code of 1986, as amended,
existing and proposed regulations thereunder, and current administrative rulings
and court decisions. All of the foregoing are subject to change, possibly on a
retroactive basis, and no ruling has been or will be sought from the Internal
Revenue Service. This discussion does not address any of the federal income tax
consequences of owning or disposing of the Private Notes or Exchange Notes, nor
does it address the applicability or effect of any state, local or foreign tax
laws. Each holder should consult such holder's own tax advisor concerning the
application of federal income tax laws, as well as the laws of any state, local
or foreign taxing jurisdiction, to the holder's particular situation.
Since the terms of the Exchange Notes are identical to those of the Private
Notes, the exchange of Private Notes for Exchange Notes pursuant to the Exchange
Offer should not be treated as a taxable "exchange" for federal income tax
purposes because the Exchange Notes will not differ materially either in kind or
extent from the Private Notes exchanged therefor. As a result, there should be
no federal income tax consequences resulting from the exchange to holders
exchanging Private Notes for Exchange Notes pursuant to the Exchange Offer.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer may be a statutory underwriter and must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of Exchange Notes
received in exchange for Private Notes where such Private Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, starting on the Expiration Date and
ending on the close of business on the 180th day following the Expiration Date,
it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition until
, 199 , all dealers effecting transactions in the Exchange Notes may
be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or
102
<PAGE>
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify the holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Offer are being passed
upon for the Company by Pillsbury Madison & Sutro LLP, San Francisco,
California.
EXPERTS
The consolidated financial statements and schedule of LodgeNet Entertainment
Corporation and Subsidiaries as of December 31, 1995 and 1996 and for each of
the three years in the period ended December 31, 1996, included in this
Prospectus and elsewhere in the Registration Statement, have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange Act
and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Statements made in this Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or document as filed as an exhibit to the Company's
filings with the Commission, each such statement being qualified in all respects
by such reference. Such reports, proxy statements and other information filed by
the Company with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's
regional offices at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and at 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such material can be obtained at prescribed rates upon
request from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Such material may also be accessed electronically
by means of the Commission's Web site on the Internet at http://www.sec.gov.
Reports and other information concerning the Company may be inspected at the
offices of the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C.
20006. The Indenture will require the Company to file with the Commission and
provide to holders of the Notes the reports and other information required to be
filed with the Commission by the Exchange Act, whether the Company is then
subject to such requirements. See "Description of the Notes."
Where any document or part thereof is incorporated by reference in this
Prospectus but not delivered herewith, the Company shall provide without charge
to each person, including any beneficial owner, to whom a Prospectus is
delivered, upon written or oral request of such person, a copy of any and all of
the information that has been incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that the Prospectus incorporates). Such a request is to be directed to the
General Counsel, at the Company's offices at 808 West Avenue North, Sioux Falls,
SD 57194 (605) 330-1330.
103
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996.............. F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996........................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996........................................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996........................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To LodgeNet Entertainment Corporation:
We have audited the accompanying consolidated balance sheets of LodgeNet
Entertainment Corporation (a Delaware corporation) and Subsidiaries as of
December 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of LodgeNet Entertainment
Corporation and Subsidiaries as of December 31, 1995 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 28, 1997
F-2
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 2,252 $ 86,177
Accounts receivable, net of allowance for doubtful accounts............................. 12,150 18,428
Prepaid expenses and other.............................................................. 1,462 1,935
---------- ----------
Total current assets.................................................................. 15,864 106,540
Property and equipment, net............................................................... 108,106 164,157
Debt issuance costs, net of accumulated amortization...................................... 1,537 8,509
Other assets, net......................................................................... -- 562
---------- ----------
$ 125,507 $ 279,768
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 14,911 $ 16,775
Current maturities of long-term debt.................................................... 4,254 425
Accrued expenses........................................................................ 3,745 4,596
---------- ----------
Total current liabilities............................................................. 22,910 21,796
Deferred revenue.......................................................................... 2,374 2,956
Long-term debt............................................................................ 57,497 179,233
Minority interest in consolidated subsidiary.............................................. -- 231
---------- ----------
Total liabilities..................................................................... 82,781 204,216
---------- ----------
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized; 7,352,113 and 11,125,369
shares outstanding at December 31, 1995 and 1996, respectively........................ 74 111
Additional paid-in capital.............................................................. 71,234 120,539
Accumulated deficit..................................................................... (28,582) (45,098)
---------- ----------
Total stockholders' equity............................................................ 42,726 75,552
---------- ----------
$ 125,507 $ 279,768
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS, EXCEPT PER SHARE AMOUNTS, IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Guest Pay................................................................ $ 29,927 $ 50,758 $ 84,504
Free-to-guest............................................................ 8,397 8,060 8,645
Other.................................................................... 2,070 4,395 4,572
---------- ---------- ----------
Total revenues............................................................. 40,394 63,213 97,721
---------- ---------- ----------
Direct costs:
Guest Pay................................................................ 10,050 19,053 34,283
Free-to-guest............................................................ 6,412 6,117 6,482
Other.................................................................... 1,719 3,740 3,614
---------- ---------- ----------
Total direct costs..................................................... 18,181 28,910 44,379
---------- ---------- ----------
Gross profit............................................................... 22,213 34,303 53,342
---------- ---------- ----------
Operating expenses:
Guest Pay operations..................................................... 7,244 9,767 15,032
Selling and marketing.................................................... 1,541 1,871 2,708
General and administrative............................................... 4,127 6,767 10,873
Depreciation and amortization............................................ 11,661 18,336 29,815
---------- ---------- ----------
Total operating expenses............................................... 24,573 36,741 58,428
---------- ---------- ----------
Operating loss............................................................. (2,360) (2,438) (5,086)
Interest expense, net...................................................... 966 4,522 8,243
---------- ---------- ----------
Loss before income taxes and extraordinary loss............................ (3,326) (6,960) (13,329)
Provision for income taxes................................................. -- 66 28
---------- ---------- ----------
Loss before extraordinary loss............................................. (3,326) (7,026) (13,357)
Extraordinary loss......................................................... 1,324 -- 3,253
---------- ---------- ----------
Net loss................................................................... $ (4,650) $ (7,026) $ (16,610)
---------- ---------- ----------
---------- ---------- ----------
Per common share:
Loss before extraordinary loss........................................... $ (0.45) $ (0.95) $ (1.39)
Extraordinary loss....................................................... (0.18) -- (0.34)
---------- ---------- ----------
Net loss attributable to common stock.................................... $ (0.63) $ (0.95) $ (1.73)
---------- ---------- ----------
---------- ---------- ----------
Weighted average shares outstanding........................................ 7,326,748 7,382,471 9,624,226
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993.......................... 7,274,248 $ 73 $ 69,468 $ (16,876) $ 52,665
Common stock option activity...................... 4,500 -- 24 -- 24
Net loss.......................................... -- -- -- (4,650) (4,650)
Foreign currency translation adjustment........... -- -- -- (97) (97)
------------ ----- ---------- ------------ ----------
Balance, December 31, 1994.......................... 7,278,748 73 69,492 (21,623) 47,942
Common stock option activity...................... 73,365 1 62 -- 63
Warrants issued................................... -- -- 1,680 -- 1,680
Net loss.......................................... -- -- -- (7,026) (7,026)
Foreign currency translation adjustment........... -- -- -- 67 67
------------ ----- ---------- ------------ ----------
Balance, December 31, 1995.......................... 7,352,113 74 71,234 (28,582) 42,726
Issuance of common stock.......................... 3,680,000 36 44,599 -- 44,635
Common stock option activity...................... 93,256 1 34 -- 35
Net loss.......................................... -- -- -- (16,610) (16,610)
Sale of interest in subsidiary.................... -- -- 4,672 -- 4,672
Foreign currency translation adjustment........... -- -- -- 94 94
------------ ----- ---------- ------------ ----------
Balance, December 31, 1996.......................... 11,125,369 $ 111 $ 120,539 $ (45,098) $ 75,552
------------ ----- ---------- ------------ ----------
------------ ----- ---------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities:
Net loss.................................................................... $ (4,650) $ (7,026) $ (16,610)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization............................................. 11,661 18,336 29,815
Non-cash portion of extraordinary loss.................................... 1,324 -- 434
Minority interest......................................................... -- -- (16)
Change in operating assets and liabilities:
Accounts receivable..................................................... (2,765) (3,541) (6,278)
Prepaid expenses and other.............................................. 139 (447) (473)
Accounts payable........................................................ 5,735 6,205 1,864
Accrued expenses and deferred revenue................................... 505 1,857 1,433
Other................................................................... -- -- (607)
---------- ---------- ----------
Net cash provided by operating activities..................................... 11,949 15,384 9,562
---------- ---------- ----------
Investing activities:
Property and equipment additions............................................ (43,521) (51,497) (85,258)
Proceeds from sale of interest in subsidiary................................ -- -- 5,396
Proceeds from certificates of deposit....................................... 2,008 -- --
---------- ---------- ----------
Net cash used for investing activities...................................... (41,513) (51,497) (79,862)
---------- ---------- ----------
Financing activities:
Proceeds from long-term debt................................................ 28,000 33,630 151,514
Debt issuance costs......................................................... (462) (1,348) (7,969)
Stock issuance costs........................................................ -- -- (477)
Repayment of long-term debt................................................. (6,000) (89) (33,607)
Borrowings under revolving credit facility.................................. 6,500 10,000 55,958
Repayments of revolving credit facility..................................... (6,500) (10,000) (55,958)
Proceeds from issuance of common stock...................................... -- -- 44,635
Proceeds from issuance of warrants to purchase common stock................. -- 1,680 --
Stock option activity....................................................... 14 63 35
---------- ---------- ----------
Net cash provided by financing activities................................... 21,552 33,936 154,131
---------- ---------- ----------
Effect of exchange rates on cash............................................ 58 127 94
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents............................ (7,954) (2,050) 83,925
Cash and cash equivalents at beginning of period............................ 12,256 4,302 2,252
---------- ---------- ----------
Cash and cash equivalents at end of period.................................. $ 4,302 $ 2,252 $ 86,177
---------- ---------- ----------
---------- ---------- ----------
Supplemental cash flow information:
Cash paid for interest...................................................... $ 836 $ 3,341 $ 7,870
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
LodgeNet Entertainment Corporation ("LodgeNet" or the "Company") and its
wholly-owned Canadian subsidiary assemble, install and operate guest pay movie
systems and provide satellite-delivered, free-to-guest programming, interactive
games and multimedia entertainment, and guest information systems to the lodging
industry, primarily in the United States and Canada. Through its majority-owned
subsidiary, ResNet Communications, Inc. ("ResNet"), the Company installs and
operates private cable television systems in multi-family residential properties
nationwide. The operations of ResNet were not material to the consolidated
results of operations for 1996.
The Company's operating performance and outlook are strongly influenced by
such factors as overall occupancy levels and economic conditions in the lodging
industry, the number of lodging rooms equipped with the Company's systems, the
popularity and availability of programming, and competitive factors.
The rapid growth of the Company's businesses has and is expected to continue
to require capital resources in excess of operating cash flows. While the
Company's working capital, operating cash flows and its revolving credit
facility are expected to be sufficient to fund its growth for 1997, the Company
will likely, depending on its rate of growth, require additional growth capital
in subsequent years.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the accounts of the Company, its wholly-owned Canadian subsidiary, and ResNet
Communications, Inc., which is majority-owned by the Company. All significant
inter-company accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions about certain matters and items. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities, at the date of the financial statements; and
the reported amounts of revenues, expenses and costs during the reporting
periods. The ultimate outcome of the matters and items may be different from the
estimates and assumptions.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents are comprised of demand
deposits and temporary investments in highly liquid securities having original
maturities of 90 days or less.
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost, including
certain payroll costs related to the installation of new systems. Repairs and
maintenance costs, which do not significantly extend the useful lives of the
respective assets, are charged to operations as incurred. Depreciation of guest
pay and free-to-guest systems begins when such systems are installed and
activated. Depreciation on other equipment begins when such equipment is placed
in service. For financial reporting purposes, the Company does not assume a
salvage value for any equipment, and depreciation and amortization are computed
using the straight-line method over the following estimated useful lives of the
assets:
<TABLE>
<CAPTION>
YEARS
---------
<S> <C>
Building............................................................................ 19
Guest Pay systems:
System components................................................................. 5 to 7
In-room equipment................................................................. 3 to 5
Cable television equipment.......................................................... 3 to 10
Free-to-guest systems............................................................... 5
Other equipment..................................................................... 5
</TABLE>
F-7
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRODUCT DEVELOPMENT--The Company has capitalized certain costs of developing
software and other components of its guest pay and residential systems. The
capitalization of these costs begins when a system's technological and
commercial feasibility has been established and ends when such systems are
available for use in guest pay or residential properties. Capitalized costs are
reported at the lower of unamortized costs or net realizable value, and are
amortized over the system's estimated useful life. Guest pay system development
costs capitalized were $936,000, $1,480,000 and $1,616,000 during the years
ended December 31, 1994, 1995 and 1996, respectively. Amortization of such costs
was $344,000, $455,000 and $599,000 for the years ended December 31, 1994, 1995
and 1996, respectively.
DEBT ISSUANCE COSTS--Costs associated with the issuance of debt securities
and with obtaining credit facilities are capitalized and amortized over the term
of the related borrowing or facility. The Company capitalized $462,000,
$1,348,000 and $7,969,000 of debt issuance costs during the years ended December
31, 1994, 1995 and 1996, respectively. Amortization of such costs was $203,000
in 1994, excluding $1,324,000 which was reflected as an extraordinary loss
resulting from the early termination of a bank credit facility during 1994 (see
Note 10); $260,000 in 1995; and $564,000 in 1996, excluding $434,000 included in
an extraordinary loss resulting from the early redemption of the Company's 9.95%
and 10.35% Senior Notes (see Note 10). Accumulated amortization was $13,000,
$273,000 and $1,271,000 at December 31, 1994, 1995 and 1996, respectively.
LOSS PER SHARE COMPUTATION--The net loss per common share was computed using
the weighted average shares outstanding during the periods and, when applicable,
outstanding warrants and options.
REVENUE RECOGNITION--Revenues and related costs are recognized when the
services are rendered. The Company has obtained certain programming agreements
which provide for the receipt of low-cost programming in the earlier years of
such agreements. The Company's policy is to record the costs of such programming
on a straight-line basis. At December 31, 1994, 1995 and 1996 the Company had
recorded deferred revenues, relating to such agreements, of $1,654,000,
$1,579,000 and $1,835,000, respectively. Such amounts represent reductions of
programming costs in future years and are included in deferred revenues.
FOREIGN CURRENCY TRANSLATION--The assets and liabilities of the Company's
Canadian subsidiary were translated at year-end exchange rates. Income statement
items were translated at average exchange rates during the periods.
CONCENTRATION OF CREDIT RISKS AND CUSTOMER DATA--The Company has derived
virtually all of its revenue from entities in the lodging industry, however, no
individual customer accounted for as much as 10% of total revenue in any period
presented in the accompanying consolidated statements of operations. The
allowance for doubtful accounts was $410,000 and $785,000 at December 31, 1995
and 1996, respectively. The provision for doubtful accounts was $226,000 in
1994, $343,000 in 1995, and $922,000 in 1996.
INCOME TAXES--The Company accounts for income taxes under the liability
method, in accordance with the requirements of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Deferred income tax assets and
liabilities are computed annually for differences between the financial
statement and tax basis of assets and liabilities. Measurement is based on
enacted tax rates applicable to the periods in which such differences are
expected to reverse.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying amounts for items
comprising current assets and current liabilities approximate fair value due to
the short period to maturity of these items. The fair value of long-term debt
instruments is estimated by reference to current yields to maturity on similar
instruments
F-8
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
or quotes where available. The fair value of the warrants issued during 1995 was
estimated using option valuation techniques.
STOCK-BASED COMPENSATION--The Company measures compensation costs associated
with its stock option plans in accordance with Accounting Principles Board
Opinion No. 25, as permitted by Statement of Financial Accounting Standards No.
123. The effect of fair value based measurement of such costs on net loss and
net loss per share, in accordance with Statement of Financial Accounting
Standards No. 123, is disclosed on a pro forma basis.
RECENTLY ISSUED ACCOUNTING STANDARDS--Statement of Financial Accounting
Standards Board No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to Be Disposed Of," was adopted by the Company on January
1, 1996. The adoption did not have a material impact on the Company's financial
position or results of operations.
RECLASSIFICATIONS--Certain items in the consolidated financial statements
have been reclassified to conform to 1996 classifications. Such
reclassifications had no effect on previously reported consolidated statements
of operations or stockholders' equity.
NOTE 3--PROPERTY AND EQUIPMENT, NET
Property and equipment was comprised as follows at (in thousands of
dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Land, building and equipment.......................................... $ 8,976 $ 15,914
Free-to-guest equipment............................................... 5,068 7,369
Cable television equipment............................................ -- 5,291
Guest pay systems:
Installed........................................................... 119,354 173,607
System components................................................... 13,468 23,290
Software costs...................................................... 4,649 6,266
Building construction in progress..................................... -- 2,528
---------- ----------
Total............................................................. 151,515 234,265
Less--depreciation and amortization................................... (43,409) (70,108)
---------- ----------
Property and equipment, net........................................... $ 108,106 $ 164,157
---------- ----------
---------- ----------
</TABLE>
F-9
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT
Long-term debt was comprised as follows at (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Unsecured Senior Notes due December 15, 2006
10.25% interest payable semi-annually................................ $ -- $ 150,000
Unsecured Senior Notes repaid in 1996:
9.95% interest payable quarterly..................................... 28,000 --
10.35% interest payable quarterly.................................... 5,000 --
Unsecured Senior Notes due July 15, 2005:
11.5% interest payable semi-annually................................. 30,000 30,000
Less--unamortized discount........................................... (1,599) (1,384)
Other.................................................................. 350 1,042
--------- ----------
61,751 179,658
Less current maturities................................................ (4,254) (425)
--------- ----------
$ 57,497 $ 179,233
--------- ----------
--------- ----------
</TABLE>
Long-term debt has the following scheduled principal maturities for the
years ended December 31 (in thousands of dollars): 1997--$425; 1998--$380;
1999--$221; 2000--$16; 2001--$6,000; thereafter-- $172,616.
10.25% SENIOR NOTES--On December 19, 1996, the Company issued $150 million,
principal amount, of unsecured 10.25% Senior Notes (the "Notes") in a private
offering. 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 were used to redeem the outstanding principal
amounts of the 9.95% and 10.35% Senior Notes, $24.5 million and $4.4 million,
respectively, plus a make-whole premium, resulting from their early redemption,
of approximately $2.8 million. Approximately $20.4 million of the proceeds was
used to prepay all outstanding amounts under the Company's revolving credit
facility. The remaining proceeds of approximately $91.1 million, were invested
in highly liquid, interest-bearing securities pending their use for funding
capital expenditures to expand the Company's businesses.
The Notes were issued to qualified institutional buyers or other accredited
investors pursuant to a registration rights agreement under which the Company is
obligated to either (i) consummate an exchange offer pursuant to an effective
registration statement or (ii) cause resales of the Notes to be registered
pursuant to an effective shelf registration. If one such registration event does
not occur within 180 days of the initial sale, the interest rate on the Notes
will increase by 0.5% per year, and if one such registration event does not
occur within nine months of the initial sale the interest rate on the Notes will
increase by an additional 0.5% per year.
The Notes are unsecured, rank pari passu in right of payment with future
unsubordinated unsecured indebtedness and rank senior in right of payment to all
subordinated indebtedness of the Company. The Notes contain covenants which
restrict the ability of the Company to incur additional indebtedness, create
liens, pay dividends or make certain distributions in respect of its common
stock, redeem capital stock, issue or sell stock of subsidiaries in certain
circumstances, effect certain business combinations, and effect certain
transactions with affiliates or stockholders.
The Notes are redeemable at the option of the Company, in whole or in part,
on or after December 15, 2001, initially at 105.125% of their principal amount
(plus accrued and unpaid interest) declining
F-10
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--LONG-TERM DEBT (CONTINUED)
ratably to 100% of their principal amount (plus accrued and unpaid interest) on
or after December 15, 2003. In addition, at any time prior to December 15, 1999,
the Company may redeem up to 35% of the aggregate principal amount of the Notes
with the proceeds of one or more public equity offerings.
9.95% AND 10.35% SENIOR NOTES--On September 15, 1994, the Company sold $28
million principal amount of 9.95% Senior Notes in a private transaction with
three insurance companies. The 9.95% Senior Notes were issued at par and mature
on August 1, 2003. Proceeds from the sale of the 9.95% Senior Notes, after
issuance expenses, were approximately $27.6 million and such proceeds were used
to repay previous borrowings and to provide approximately $15.1 million of
capital for the continuing growth of the Company's guest pay services business.
On April 13, 1995, the Company and the holders of the Company's 9.95% Senior
Notes amended the Note Purchase Agreement governing such 9.95% Senior Notes and
concurrently the Company issued $5 million principal amount of 10.35% Senior
Notes, under the Note Purchase Agreement, in a private placement to certain
holders of the Company's 9.95% Senior Notes. Proceeds from the issue, after
issuance related expenses, were approximately $4.9 million, and were used to
repay previous borrowings and for expansion of the Company's guest pay services
business. The 9.95% and 10.35% Senior Notes were redeemed as part of the
refinancing in which the 10.25% Senior Notes were issued in 1996.
11.5% SENIOR NOTES--During 1995, the Company issued $30 million principal
amount of 11.5% Senior Subordinated Notes due July 15, 2005 (the "Subordinated
Notes") to three insurance companies in two separate private placements.
Mandatory annual principal payments of $6 million commence July 15, 2001.
Proceeds from the issuance of the Subordinated Notes, net of original issue
discount and issuance-related expenses, were approximately $27.3 million and
were used (i) to repay previous borrowings and (ii) to provide funding for
capital expenditures to expand the Company's guest pay services business. The
Company issued a total of 480,000 warrants (see Note 9) to purchase common stock
of the Company in connection with the issuance of the Subordinated Notes and the
value of the warrants, $1.68 million, was recorded in stockholders' equity and
shown as a discount on the Subordinated Notes. As part of the refinancing
transaction in which the 10.25% Senior Notes were issued, the holders of the
Subordinated Notes adopted the covenants and ranking of the 10.25% Senior Notes.
At December 31, 1995 and 1996, the estimated fair value of the 11.5% Senior
Notes was approximately $31.5 and $29.2 million, respectively. The fair value of
the 10.25% Senior Notes at December 31, 1996 approximated their carrying value.
NOTE 5--REVOLVING CREDIT FACILITY
On December 19, 1996 the Company amended and restated its revolving credit
facility with National Westminster Bank Plc, as Agent ("NatWest"), to provide
for an increase in the total lending commitments under the facility from $60
million to $100 million. The amended 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 outstanding under the amended facility
bear interest at either (i) LIBOR (London Inter Bank Offered Rate) plus from
1.25% to 2.00% or (ii) the greater of (a) the NatWest 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. At December 31, 1996, the
applicable interest rate on the amended facility would have been 9.875%.
The commitment under the amended facility may be increased to $175 million,
subject to the consent of NatWest, but is subject to a scheduled reduction of
15% beginning in December 1998 and annually
F-11
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--REVOLVING CREDIT FACILITY (CONTINUED)
thereafter as follows: December 1999--20%; December 2000--20%; December
2001--20%; and December 2002--25%. The amended 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, and provide for acceleration of principal repayment in certain
circumstances. As of December 31, 1996, the Company had outstanding Standby
Letters of Credit of $1.2 million, there were no amounts outstanding under the
amended facility, and the Company was in compliance with all covenants, terms
and conditions of the amended facility.
NOTE 6--COMMITMENTS AND CONTINGENCIES
PROGRAMMING AGREEMENTS--The Company, through programming agreements,
provides guest pay and free-to-guest programming services to the lodging and
multi-family residential unit industries. These agreements provide that the
Company receives monthly revenue for such services. Such agreements contain
various restrictions, including default and termination procedures, and
generally range from five to seven years in duration. The Company has also
entered into agreements with certain networks and studios which provide their
programs for redistribution. Under these agreements, the Company pays fees which
are based on revenue generated, or on rate schedules based on the number of
sites under license by the Company. The agreements contain various restrictions,
including default and termination procedures, and generally range from three to
five years in duration.
SIGNAL CARRIAGE AGREEMENT--The Company and PRIMESTAR Partners, L.P. have
entered into a Signal Carriage Agreement (the "Agreement") under which, in
exchange for exclusive distribution of satellite-delivered free-to-guest
programming to the lodging industry, the Company agreed to share certain
operating cash flows, as defined in the agreement, with PRIMESTAR Partners, L.P.
The Agreement has an initial term of 15 years and includes various restrictions,
including default and termination provisions.
PURCHASE COMMITMENTS--In connection with the agreements in which the Company
sold an equity interest in ResNet to TCI Satellite (see Note 11), the Company
agreed to purchase $5.4 million of satellite receiving equipment from TCI
Satellite. The Company has other purchase commitments, in the ordinary course of
business, none of which are expected to result in losses.
OPERATING LEASES--The Company has entered into certain operating leases,
which at December 31, 1996 require future minimum lease payments, as follows (in
thousands of dollars): 1997--$339; 1998-- $135; 1999--$119; 2000 and
thereafter--$132.
LITIGATION--On February 16, 1995, On Command 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 the factual allegations and the legal interpretation of
patent claim language, which makes such lawsuits difficult to assess with
certainty. While the Company and its patent counsel believe that 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
F-12
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 financial position or results of operations.
The Company is subject to other litigation arising in the ordinary course of
its businesses. As of the date hereof, in the opinion of management, the
resolution of such other litigation will not have a material adverse effect on
the Company's financial position or results of operations.
CONSTRUCTION COMMITMENTS--In June 1996, the Company acquired approximately
22.6 acres of land in Sioux Falls, South Dakota for approximately $339,000; and
in September 1996, entered into a contract for construction of a National
Headquarters and Distribution Center. Approximately $2.5 million had been
expended under the construction contract as of December 31, 1996. The completed
cost of the new facility is estimated to be approximately $15.0 million, and the
new facility is expected to be ready for occupancy during the third quarter of
1997.
NOTE 7--STOCKHOLDERS' EQUITY
PREFERRED STOCK--There are 5,000,000 shares of preferred stock, $.01 par
value, authorized by the Company's certificate of incorporation, of which none
were outstanding at December 31, 1995 and 1996. The Board of Directors may
authorize the issuance of preferred stock, $.01 par value, in one or more series
and with rights and privileges for each issue as determined by the Board of
Directors.
COMMON STOCK--On May 23, 1996, the Company sold 3,200,000 shares of common
stock at $13.00 per share in a public offering. On June 10, 1996 the Company
sold an additional 480,000 shares of common stock, representing the
underwriters' exercise of their over-allotment option in accordance with the
underwriting agreement. Net proceeds from these issuances, after underwriters'
commissions and other offering-related 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 capital
for the expansion of the Company's lodging and residential businesses.
NOTE 8--STOCK OPTION PLANS
The Company has stock options plans which provide for the granting of up to
1,926,792 non-qualified or incentive stock options on the Company's common
stock. Certain officers, directors and key employees have been granted options
to purchase common stock of the company under these plans. Options become
exercisable in accordance with vesting schedules determined by a committee of
the Board of Directors, and generally expire ten years after date of grant. No
options had expired as of December 31, 1996 and outstanding options expire
through 2006. The following is a summary of the stock option activity for the
years ending December 31:
<TABLE>
<CAPTION>
1995 1996
----------------------------- -----------------------------
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ----------------- ---------- -----------------
<S> <C> <C> <C> <C>
Beginning of year................................... 1,058,291 $ 2.30 1,318,426 $ 4.21
Granted............................................. 336,000 $ 9.40 239,000 $ 12.66
Exercised........................................... (73,365) $ 0.35 (93,256) $ 0.62
Forfeited or canceled............................... (2,500) $ 8.85 (12,500) $ 8.51
---------- ----------
End of year......................................... 1,318,426 $ 4.21 1,451,670 $ 5.79
---------- ----------
---------- ----------
Exercisable at end of year.......................... 894,010 $ 1.64 907,671 $ 2.66
---------- ----------
---------- ----------
</TABLE>
F-13
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--STOCK OPTION PLANS (CONTINUED)
The following is a summary of stock options outstanding as of December 31,
1996:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------------------------------- EXERCISABLE OPTIONS
WEIGHTED AVERAGE ----------------------------
EXERCISE REMAINING TERM WEIGHTED AVERAGE WEIGHTED AVERAGE
PRICE RANGE NUMBER IN YEARS EXERCISE PRICE NUMBER EXERCISE PRICE
- ------------------ ---------- --------------------- ----------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
$0.23 to $0.46 513,649 6.8 $ 0.38 513,649 $ 0.38
$2.77 to $3.23 244,522 6.6 $ 2.90 244,522 $ 2.90
$7.00 to $9.55 220,999 8.0 $ 8.29 80,250 $ 8.68
$10.78 to $14.75 472,500 9.0 $ 12.00 69,250 $ 11.75
---------- ---------
1,451,670 7.6 $ 5.79 907,671 $ 2.66
---------- ---------
---------- ---------
</TABLE>
The weighted average "fair value" of options granted during the year ended
December 31 was as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Weighted average fair value per option granted............................... $ 4.47 $ 6.01
--------- ---------
--------- ---------
</TABLE>
The "fair value" of each option granted was estimated as of the grant date
using the Black-Scholes option valuation model. The following assumptions were
made in estimating fair value: (i) dividend yield-- none, (ii) weighted average
risk-free interest rate--6.4%, (iii) weighted average expected life--5.0 years,
and (iv) weighted average expected volatility--44.0%.
The Company accounts for its stock option compensation plans in accordance
with Accounting Principles Board Opinion No. 25. Accordingly, because the
Company's stock option plans are fixed plans, no compensation cost has been
charged to operations for any period presented. Had compensation cost been
determined in accordance with Statement of Financial Accounting Standards No.
123, net loss before extraordinary loss and net loss would have been increased,
and the effect of such increases, reflected on those items on a pro forma basis,
would have been as follows (in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Pro Forma:
Loss before extraordinary loss........................................ $ (8,526) $ (14,794)
Net loss.............................................................. (8,526) (18,047)
Per common share:
Loss before extraordinary loss........................................ $ (1.15) $ (1.54)
Net loss.............................................................. (1.15) (1.88)
</TABLE>
NOTE 9--WARRANTS
In connection with the Company's initial public offering in 1993, the
Company issued warrants to purchase 75,000 shares of common stock of the Company
to the underwriters. The exercise price of such warrants is $16.20 and the
warrants expire on October 14, 1998.
In connection with the 1995 issuance of the 11.5% Senior Notes (see Note 4),
the Company issued a total of 480,000 warrants to purchase common stock of the
Company. Each warrant entitles the holder to
F-14
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--WARRANTS (CONTINUED)
purchase one share of common stock at an exercise price of $7.00 per share. The
warrants include demand registration rights and anti-dilution provisions, and
such warrants expire on July 15, 2005. The portion of the proceeds from the 1995
debt issuance deemed attributable to the warrants was recorded as additional
paid-in capital.
NOTE 10--EXTRAORDINARY LOSS
In connection with the issuance of its unsecured, 9.95% Senior Notes during
1994, the Company terminated its then bank credit facility, which had been
secured by all of the Company's assets. As a consequence of the early
termination of this facility, the Company wrote off related, unamortized debt
issuance costs of $1,324,000.
Concurrently with the issuance of its 10.25% Senior Notes in 1996, the
Company redeemed its 9.95% and 10.35% Senior Notes due August 15, 2003. As a
consequence of the early redemption of the 9.95% and 10.35% Senior Notes, the
Company incurred a make-whole premium of $2,819,000 and wrote off related,
unamortized debt issuance costs of $434,000.
NOTE 11--SALE OF EQUITY INTEREST IN SUBSIDIARY
On October 21, 1996, the Company and its subsidiary, ResNet, entered into
agreements with TCI Satellite Entertainment, Inc. ("TCI Satellite") under which
ResNet sold a 4.99% equity interest in ResNet to TCI Satellite in exchange for
$5.4 million in cash. The proceeds related to the change in equity interest were
in excess of the Company's carrying value for its investment, and such excess,
approximately $4.7 million after transaction expenses, was reflected as a credit
to paid-in capital. Pursuant to a signal carriage agreement, TCI Satellite has
agreed to provide ResNet with nationwide access to certain satellite programming
signals.
In addition to the aforementioned cash investment, TCI Satellite agreed to
advance up to $34.6 million to ResNet during the five year period 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 ResNet, 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. Further, the Convertible Note is
subordinated to inter-company loans or advances to ResNet by the Company.
Interest accrues (generally at TCI Satellite'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 mandatorily converted. Such interest 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 will be
distributed in satellite receiving equipment from TCI Satellite. The Company,
ResNet and TCI Satellite have agreed that all amounts advanced by the Company to
ResNet shall be in accordance with an inter-company promissory note, which shall
bear interest.
F-15
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--SALE OF EQUITY INTEREST IN SUBSIDIARY (CONTINUED)
In connection with the aforementioned agreements, the Company has granted
TCI Satellite an option to acquire an additional 13.01% equity interest in
ResNet, first exercisable 60 days following October 21, 1999. Such option is to
be exercised in exchange 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.
LIQUIDATION PREFERENCE--The Company, ResNet and TCI Satellite have agreed
that in the event of a sale of ResNet, or a sale of substantially all of the
assets of ResNet, that (i) repayment of any inter-company loans or advances by
the Company to ResNet shall have preference to any other distribution, (ii) that
after repayment of such advances, that TCI Satellite shall be entitled to a
preferential return of its aggregate investment in ResNet and (iii) that after
the repayment of amounts in accordance with items (i) and (ii), that any further
distribution shall be determined on a per-share basis.
NOTE 12--INCOME TAXES
The provisions for income taxes consisted of State income taxes. The Company
and its subsidiaries file separate federal income tax returns. At December 31,
1996, the Company had net operating loss carry-forwards in excess of $54 million
for Federal income tax purposes. Such carry-forwards expire through 2011, and
Federal tax regulations limit the availability and timing of usage of
carry-forwards. Significant components of the Company's deferred tax liabilities
and assets were as follows at (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
--------- ----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation........................................... $ 3,777 $ 9,899
Deferred tax assets:
Net operating loss carry-forwards.................................... 9,939 18,502
Deferred programming................................................. 540 624
Other................................................................ 345 1,135
--------- ----------
10,824 20,261
Valuation allowance.................................................. (7,047) (10,362)
--------- ----------
3,777 9,899
--------- ----------
Net deferred taxes..................................................... $ -- $ --
--------- ----------
--------- ----------
</TABLE>
The Company established the valuation allowance for deferred tax assets
after considering its historical financial performance, existing deferred tax
liabilities, and certain information about future years.
F-16
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13--ACCRUED EXPENSES
Accrued expenses were comprised as follows at (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Accrued taxes.............................................................. $ 702 $ 523
Accrued compensation....................................................... 1,277 1,953
Accrued interest........................................................... 1,748 2,120
Other...................................................................... 18 --
--------- ---------
$ 3,745 $ 4,596
--------- ---------
--------- ---------
</TABLE>
NOTE 14--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following selected quarterly financial data are in thousands of dollars,
except per share data:
<TABLE>
<CAPTION>
QUARTER QUARTER QUARTER QUARTER
ENDING ENDING ENDING ENDING
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- --------- ------------- ------------
<S> <C> <C> <C> <C>
For 1995:
Total revenue.............................................. $ 13,392 $ 14,581 $ 17,414 $ 17,826
Gross profit............................................... 7,222 8,023 9,484 9,574
Loss before extraordinary loss............................. (1,480) (1,443) (1,292) (2,811)
Net loss................................................... (1,480) (1,443) (1,292) (2,811)
Per common share (1):
Loss before extraordinary loss........................... $ (0.20) $ (0.19) $ (0.17) $ (0.38)
Net loss................................................. (0.20) (0.19) (0.17) (0.38)
For 1996:
Total revenue.............................................. $ 20,368 $ 23,202 $ 27,116 $ 27,035
Gross profit............................................... 11,254 12,780 14,425 14,883
Loss before extraordinary loss............................. (2,873) (3,395) (1,857) (5,232)
Net loss................................................... (2,873) (3,395) (1,857) (8,485)
Per common share (1):
Loss before extraordinary loss........................... $ (0.39) $ (0.38) $ (0.17) $ (.47)
Net loss (2)............................................. (0.39) (0.38) (0.17) (.76)
</TABLE>
- ------------------------
(1) Per share amounts are computed independently for each of the quarters
presented. Therefore, the sum of such amounts will not equal the total for
the year.
(2) The results of the quarter ended December 31, 1996 included an extraordinary
loss of approximately $3.3 million relating to the early retirement of debt
(see Note 10).
NOTE 15--EVENT SUBSEQUENT TO DECEMBER 31, 1996
On February 28, 1997, the Board of Directors of the Company authorized and
adopted a Stockholder Rights Plan. Pursuant to the Rights Plan, the Board of
Directors declared a dividend distribution of one "Right" for each outstanding
share of common stock, par value $.01, of the Company to stockholders of record
at the close of business on March 10, 1997.
Initially, the Rights will be attached to all common stock certificates and
no separate Rights certificates will be distributed. The Rights will separate
from the common stock and be distributed upon
F-17
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--EVENT SUBSEQUENT TO DECEMBER 31, 1996 (CONTINUED)
the occasion of (i) a public announcement that a person, group or entity has
acquired or obtained the right to acquire 15% or more of the common stock of the
Company or (ii) ten days following the commencement of, or an announcement of
the intention to make, a tender or exchange offer which would result in a
person, group or entity becoming the holder of 15% or more of the Company's
common stock. The Rights are not exercisable until distributed.
In general, each Right, when exercisable, initially entitles the registered
holder to purchase from the Company one one-thousandth of a share of a new
series of preferred stock, designated as Series A Participating Preferred Stock,
par value $.01, at a price of $60.00 per share. In certain other events, after
the Rights have become exercisable, each Right entitles the holder to purchase
for $60.00 an amount of common stock of the Company, or in certain circumstances
securities of the acquirer, having a then-current market value of two times the
exercise price of the Right. The Rights include anti-dilution provisions in the
event of a stock dividend, split-up or reclassification of the common stock. The
preferred stock purchasable upon exercise of the Rights will be non-redeemable
and junior to any other issue of preferred stock the Company might issue, and
will include dividend and liquidation preferences. No stockholder privileges
attach to the Rights until exercised.
F-18
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THE EXCHANGE OFFER OTHER THAN THOSE CONTAINED
IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE EXCHANGE NOTES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary........................................ 5
Risk Factors................................... 16
The Exchange Offer............................. 23
Use of Proceeds................................ 32
Capitalization................................. 33
Selected Consolidated Financial and Other
Data......................................... 34
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations................................... 36
Business....................................... 47
Management..................................... 67
Principal Stockholders......................... 73
Certain Transactions........................... 74
Credit Arrangements of the Company............. 75
Description of the Notes....................... 77
Certain Federal Income Tax Consequences........ 102
Plan of Distribution........................... 102
Legal Matters.................................. 103
Experts........................................ 103
Available Information.......................... 103
Index to Consolidated Financial Statements..... F-1
</TABLE>
[LOGO]
OFFER TO EXCHANGE
10 1/4% SENIOR NOTES DUE 2006
FOR
10 1/4% SENIOR NOTES DUE 2006
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
---------------------
PROSPECTUS
---------------------
, 1997
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Article Seven of the Registrant's Certificate of Incorporation
(Exhibit 3.1 hereto) provides for indemnification of the Registrant's directors,
officers, employees and other agents to the extent and under the circumstances
permitted by the Delaware General Corporation Law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ----------------------------------------------------------------------------------------------
<C> <S>
1.1 Placement Agreement (The annex and exhibits have been omitted but a copy will be furnished to
the Commission upon request) (9)
3.1 Certificate of Incorporation, as amended (8)
3.2 Bylaws of the Registrant, as amended (1)
4.1 Registration Rights Agreement dated as of December 16, 1996, between LodgeNet Entertainment
Corporation and Morgan Stanley & Co. Incorporated, NatWest Capital Markets Limited and
Montgomery Securities (8)
4.2 Indenture dated as of December 19, 1996, between LodgeNet Entertainment Corporation and Marine
Midland Bank, as Trustee, including the form of Senior Note (8)
4.3 Form of Senior Notes (included in Exhibit 4.2) (9)
5.1 Opinion of Pillsbury Madison & Sutro LLP
10.1 Form of Employment Agreement between the Company and each of Tim C. Flynn and Scott C.
Petersen (1)
10.2 Form of Agreement between the Company and each of David M. Bankers, John M. O'Haugherty,
Douglas D. Truckenmiller and Steven D. Truckenmiller (1)
10.3 LodgeNet Entertainment Corporation 1993 Stock Option Plan (as amended and restated effective
August 15, 1996) (8)
10.4 Office and Building Lease dated December 9, 1991, regarding principal office of the Company
(1)
10.5 Agreement to Extend Lease dated November 6, 1996, regarding Office and Building Lease dated
December 9, 1991 (8)
10.6 License Agreement dated May 2, 1993 between Nintendo of America, Inc. and LodgeNet
Entertainment Corporation (2)
10.7 Stock Option Agreements dated as of February 29, 1988 between the Company and Tim C. Flynn, as
extended by Extension Agreement dated as of July 15, 1991 (2)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ----------------------------------------------------------------------------------------------
<C> <S>
10.8 Stock Option Agreements dated as of February 29, 1988 between the Company and Scott C.
Petersen, as extended by Extension Agreement dated as of July 15, 1991 (2)
10.9 Stock Option Agreement dated as of December 31, 1992 between the Company and John M.
O'Haugherty (2)
10.10 Stock Option Agreement dated as of December 31, 1992 between the Company and David M. Bankers
(2)
10.11 Form of Stock Option Agreement for Non-Employee Directors (3)
10.12 Form of Incentive Stock Option Agreement for Key Employees (3)
10.13 Securities Purchase Agreement by and between LodgeNet Entertainment Corporation, John Hancock
Mutual Life Insurance Company, Connecticut Mutual Life Insurance Company and CMA Life
Insurance Company, dated as of August 9, 1995 (4)
10.14 Amendment to Securities Purchase Agreement, dated as of December 19, 1996 (8)
10.15 Form of Executive Severance Agreement between the Company and each of Tim C. Flynn, Scott C.
Petersen, Jeffrey T. Weisner, John M. O'Haugherty, David M. Bankers, Douglas D.
Truckenmiller, Steven D. Truckenmiller and Eric R. Jacobsen; all dated as of July 25, 1995
(5)
+10.16 Video Services Agreement by and among GE Capital-ResCom, L.P. and ResNet Communications, Inc.
and LodgeNet Entertainment Corporation dated as of February 9, 1996 (6)
10.17 Amended and Restated Loan Agreement by and among LodgeNet Entertainment Corporation, the Banks
Signatory Thereto, National Westminster Bank Plc, as Agent for such Banks, and National
Westminster Bank of Canada, as an Issuing Bank, dated December 19, 1996 (8)
10.18 Equipment Sales Agreement between ResNet Communications, Inc. and TCI Satellite Entertainment,
Inc., dated as of October 21, 1996 (7)
10.19 Subordinated Convertible Term Loan Agreement between Resnet Communications, Inc. and TCI
Satellite Entertainment, Inc., dated as of October 21, 1996 (7)
10.20 Option Agreement between Resnet Communications, Inc. and TCI Satellite Entertainment, Inc.,
dated as of October 21, 1996 (7)
10.21 Standstill Agreement between Lodgenet Entertainment Corporation and TCI Satellite
Entertainment, Inc., dated as of October 21, 1996 (7)
10.22 Stockholders' Agreement between Lodgenet Entertainment Corporation and TCI Satellite
Entertainment, Inc., dated as of October 21, 1996 (7)
10.23 Subscription Agreement between Resnet Communications, Inc. and TCI Satellite Entertainment,
Inc., dated as of October 21, 1996 (7)
10.24 First Amendment, dated October 17, 1996, to License Agreement between Nintendo of America,
Inc. and Lodgenet Entertainment Corporation (8)
11.1 Statement of computation of earnings per share (8)
12.1 Statement of computation of ratios (8)
21.1 Subsidiaries of the Company (8)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ----------------------------------------------------------------------------------------------
<C> <S>
23.1 Consent of Independent Public Accountants
23.2 Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as Exhibit 5.1 to this
Registration Statement)
24.1 Power of Attorney (included on page II-7) (9)
25.1 Statement of Eligibility under the Trust Indenture Act of 1939 on Form T-1 of Marine Midland
Bank (9)
27.1 Schedule of Financial Data for LodgeNet Entertainment Corporation and Subsidiaries (8)
99.1 Form of Letter of Transmittal (9)
99.2 Form of Exchange Agent Agreement (9)
99.3 Form of Guaranteed Delivery Procedures (9)
</TABLE>
- ------------------------
+ Confidential treatment has been requested with respect to certain portions
of this agreement.
(1) Incorporated by Reference to the Company's Amendment No. 1 to Registration
Statement on Form S-1, as filed with the Securities and Exchange Commission,
September 24, 1993.
(2) Incorporated by Reference to the Company's Amendment No. 2 to Registration
Statement on Form S-1, as filed with the Securities and Exchange Commission,
October 13, 1993.
(3) Incorporated by Reference to the Annual Report on Form 10-K for the year
ended December 31, 1993, as filed with the Securities and Exchange
Commission, March 25, 1994.
(4) Incorporated by Reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, as filed with the Securities and Exchange
Commission, August 14, 1995.
(5) Incorporated by Reference to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, as filed with the Securities and Exchange
Commission, November 14, 1995.
(6) Incorporated by Reference to the Annual Report on Form 10-K for the year
ended December 31, 1995, as filed with the Securities and Exchange
Commission, April 1, 1996.
(7) Incorporated by Reference to TCI Satellite Entertainment, Inc.'s Amendment
No. 1 to Registration Statement on Form 10 as filed with the Securities and
Exchange Commission, October 29, 1996.
(8) Incorporated by Reference to the Annual Report on Form 10-K for the year
ended December 31, 1996, as filed with the Securities and Exchange
Commission, March 18, 1997.
(9) Incorporated by Reference to the same exhibit number to Registrant's Form
S-4 Registration Statement, File No. 333-23629.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
II-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To LodgeNet Entertainment Corporation:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in this registration statement,
and have issued our report thereon dated February 28, 1997. Our audit was made
for the purpose of forming an opinion on those statements taken as a whole. The
following schedule is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 28, 1997
II-4
<PAGE>
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER END OF
CLASSIFICATION OF PERIOD EXPENSES EXPENSES DEDUCTIONS (1) PERIOD
- ----------------------------------------------------- ----------- ------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1994:
Allowance for doubtful accounts.................... $ 179 $ 226 $ -- $ 177 $ 228
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Year Ended December 31, 1995:
Allowance for doubtful accounts.................... $ 228 $ 343 $ -- $ 161 $ 410
----- ----- ----- ----- -----
----- ----- ----- ----- -----
Year Ended December 31, 1996:
Allowance for doubtful accounts.................... $ 410 $ 922 $ -- $ 547 $ 785
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- ------------------------
(1) --All deductions from reserves were for the purposes for which such reserves
were created.
Schedules other than those referred to above have been omitted because they
are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.
II-5
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes: (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement (notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement); and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; (2) that,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and (3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Item 4 of this Form, within one business day of receipt of such request, and to
send the incorporated documents by first class mail or other equally prompt
means. This includes information contained in documents, filed subsequent to the
effective date of the registration statement through the date of responding to
the request.
(d) The undersigned hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sioux
Falls, State of South Dakota, on the 7th day of April, 1997.
LODGENET ENTERTAINMENT CORPORATION
By /s/ SCOTT C. PETERSEN
------------------------------------------
Scott C. Petersen
EXECUTIVE VICE PRESIDENT AND
CHIEF OPERATING OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------------- ------------------------------ --------------------
<C> <S> <C>
* /s/ TIM C. FLYNN President and Chief Executive
------------------------------------ Officer (Principal Executive April 7, 1997
Tim C. Flynn Officer) and Director
* /s/ JEFFREY T. WEISNER Vice President--Finance
------------------------------------ (Principal Financial and April 7, 1997
Jeffrey T. Weisner Accounting Officer)
* /s/ DAVID AUSTAD
------------------------------------ Director April 7, 1997
David Austad
* /s/ LAWRENCE FLINN, JR.
------------------------------------ Director April 7, 1997
Lawrence Flinn, Jr.
* /s/ RICHARD R. HYLLAND
------------------------------------ Director April 7, 1997
Richard R. Hylland
* /s/ R.F. LEYENDECKER
------------------------------------ Director April 7, 1997
R.F. Leyendecker
/s/ SCOTT C. PETERSEN
------------------------------------ Director April 7, 1997
Scott C. Petersen
*By /s/ Scott C. Petersen
--------------------------------
Scott C. Petersen
Attorney-in-fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Placement Agreement (The annex and exhibits have been omitted but a copy will be furnished to the
Commission upon request.)(9)
3.1 Certificate of Incorporation, as amended (8)
3.2 Bylaws of the Registrant, as amended (1)
4.1 Registration Rights Agreement dated as of December 16, 1996, between LodgeNet Entertainment Corporation
and Morgan Stanley & Co. Incorporated, NatWest Capital Markets Limited and Montgomery Securities (8)
4.2 Indenture dated as of December 19, 1996, between LodgeNet Entertainment Corporation and Marine Midland
Bank, as Trustee, including the form of Senior Note (8)
4.3 Form of Senior Notes (included in Exhibit 4.2) (9)
5.1 Opinion of Pillsbury Madison & Sutro LLP
10.1 Form of Employment Agreement between the Company and each of Tim C. Flynn and Scott C. Petersen (1)
10.2 Form of Agreement between the Company and each of David M. Bankers, John M. O'Haugherty, Douglas D.
Truckenmiller and Steven D. Truckenmiller (1)
10.3 LodgeNet Entertainment Corporation 1993 Stock Option Plan (as amended and restated effective August 15,
1996) (8)
10.4 Office and Building Lease dated December 9, 1991, regarding principal office of the Company (1)
10.5 Agreement to Extend Lease dated November 6, 1996, regarding Office and Building Lease dated December 9,
1991 (8)
10.6 License Agreement dated May 2, 1993 between Nintendo of America, Inc. and LodgeNet Entertainment
Corporation (2)
10.7 Stock Option Agreements dated as of February 29, 1988 between the Company and Tim C. Flynn, as extended
by Extension Agreement dated as of July 15, 1991 (2)
10.8 Stock Option Agreements dated as of February 29, 1988 between the Company and Scott C. Petersen, as
extended by Extension Agreement dated as of July 15, 1991 (2)
10.9 Stock Option Agreement dated as of December 31, 1992 between the Company and John M. O'Haugherty (2)
10.10 Stock Option Agreement dated as of December 31, 1992 between the Company and David M. Bankers (2)
10.11 Form of Stock Option Agreement for Non-Employee Directors (3)
10.12 Form of Incentive Stock Option Agreement for Key Employees (3)
10.13 Securities Purchase Agreement by and between LodgeNet Entertainment Corporation, John Hancock Mutual
Life Insurance Company, Connecticut Mutual Life Insurance Company and CMA Life Insurance Company,
dated as of August 9, 1995 (4)
10.14 Amendment to Securities Purchase Agreement, dated as of December 19, 1996 (8)
10.15 Form of Executive Severance Agreement between the Company and each of Tim C. Flynn, Scott C. Petersen,
Jeffrey T. Weisner, John M. O'Haugherty, David M. Bankers, Douglas D. Truckenmiller, Steven D.
Truckenmiller and Eric R. Jacobsen; all dated as of July 25, 1995 (5)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
+10.16 Video Services Agreement by and among GE Capital-ResCom, L.P. and ResNet Communications, Inc. and
LodgeNet Entertainment Corporation dated as of February 9, 1996 (6)
10.17 Amended and Restated Loan Agreement by and among LodgeNet Entertainment Corporation, the Banks Signatory
Thereto, National Westminster Bank Plc, as Agent for such Banks, and National Westminster Bank of
Canada, as an Issuing Bank, dated December 19, 1996 (8)
10.18 Equipment Sales Agreement between ResNet Communications, Inc. and TCI Satellite Entertainment, Inc.,
dated as of October 21, 1996 (7)
10.19 Subordinated Convertible Term Loan Agreement between Resnet Communications, Inc. and TCI Satellite
Entertainment, Inc., dated as of October 21, 1996 (7)
10.20 Option Agreement between Resnet Communications, Inc. and TCI Satellite Entertainment, Inc., dated as of
October 21, 1996 (7)
10.21 Standstill Agreement between Lodgenet Entertainment Corporation and TCI Satellite Entertainment, Inc.,
dated as of October 21, 1996 (7)
10.22 Stockholders' Agreement between Lodgenet Entertainment Corporation and TCI Satellite Entertainment,
Inc., dated as of October 21, 1996 (7)
10.23 Subscription Agreement between Resnet Communications, Inc. and TCI Satellite Entertainment, Inc., dated
as of October 21, 1996 (7)
10.24 First Amendment, dated October 17, 1996, to License Agreement between Nintendo of America, Inc. and
Lodgenet Entertainment Corporation (8)
11.1 Statement of computation of earnings per share (8)
12.1 Statement of computation of ratios (8)
21.1 Subsidiaries of the Company (8)
23.1 Consent of Independent Public Accountants
23.2 Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as Exhibit 5.1 to this
Registration Statement)
24.1 Power of Attorney (included on page II-7) (9)
25.1 Statement of Eligibility under the Trust Indenture Act of 1939 on Form T-1 of Marine Midland Bank (9)
27.1 Schedule of Financial Data for LodgeNet Entertainment Corporation and Subsidiaries (8)
99.1 Form of Letter of Transmittal (9)
99.2 Form of Exchange Agent Agreement (9)
99.3 Form of Guaranteed Delivery Procedures (9)
</TABLE>
- ------------------------
+ Confidential treatment has been requested with respect to certain portions
of this agreement.
(1) Incorporated by Reference to the Company's Amendment No. 1 to Registration
Statement on Form S-1, as filed with the Securities and Exchange Commission,
September 24, 1993.
(2) Incorporated by Reference to the Company's Amendment No. 2 to Registration
Statement on Form S-1, as filed with the Securities and Exchange Commission,
October 13, 1993.
(3) Incorporated by Reference to the Annual Report on Form 10-K for the year
ended December 31, 1993, as filed with the Securities and Exchange
Commission, March 25, 1994.
<PAGE>
(4) Incorporated by Reference to the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995, as filed with the Securities and Exchange
Commission, August 14, 1995.
(5) Incorporated by Reference to the Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, as filed with the Securities and Exchange
Commission, November 14, 1995.
(6) Incorporated by Reference to the Annual Report on Form 10-K for the year
ended December 31, 1995, as filed with the Securities and Exchange
Commission, April 1, 1996.
(7) Incorporated by Reference to TCI Satellite Entertainment, Inc.'s Amendment
No. 1 to Registration Statement on Form 10 as filed with the Securities and
Exchange Commission, October 29, 1996.
(8) Incorporated by Reference to the Annual Report on Form 10-K for the year
ended December 31, 1996, as filed with the Securities and Exchange
Commission, March 18, 1997.
(9) Incorporated by Reference to the same exhibit number to Registrant's Form
S-4 Registration Statement, File No. 333-23629.
<PAGE>
EXHIBIT 5.1
PILLSBURY MADISON & SUTRO LLP
235 MONTGOMERY STREET
SAN FRANCISCO, CALIFORNIA 94104
(415) 983-1000
April 7, 1997
LodgeNet Entertainment Corporation
808 West Avenue North
Sioux Falls, SD 57104
Re: Registration Statement on Form S-4
Ladies and Gentlemen:
This opinion is being delivered in connection with the proposed offer to
exchange (the "Exchange Offer") by LodgeNet Entertainment Corporation (the
"Company") their 10 1/4 Senior Notes Due 2006 (the "Exchange Notes") for any and
all of their 10 1/4 Senior Notes Due 2006 (the "Old Notes"). The Exchange Notes
are to be issued pursuant to a Registration Statement on Form S-4 (the
"Registration Statement"), Registration No. 333-23629, filed by the Company with
the Securities and Exchange Commission under the Securities Act of 1933. The
Exchange Notes will be issued under an Indenture, dated as of December 19, 1996
(the "Indenture"), between the Company and Marine Midland Bank Trustee (the
"Trustee"), in substantially the form filed as Exhibit 4.2.
We are of the opinion that, when (a) the Indenture, under which the Exchange
Notes will be issued, has been qualified under the Trust Indenture Act of 1939,
as amended, (b) the Exchange Notes have been executed by the Company and
authenticated by the Trustee in accordance with the terms of the Indenture and
(c) the Exchange Notes have been delivered in exchange for the Old Notes in the
manner and for the consideration stated in the Registration Statement and the
Indenture, the Exchange Notes will be legally issued and binding obligations of
the Company.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
/s/ PILLSBURY MADISON & SUTRO LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 7, 1997
