<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 1997
Commission File Number 0-22334
LODGENET ENTERTAINMENT CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 46-0371161
------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number )
3900 WEST INNOVATION STREET, SIOUX FALLS, SOUTH DAKOTA 57107
------------------------------------------------------------
(Address of Principal Executive Offices) (ZIP code)
(605) 988-1000
-------------------------------
(Registrant's telephone number,
including area code)
808 WEST AVENUE NORTH, SIOUX FALLS, SOUTH DAKOTA 57104
------------------------------------------------------
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
At November 7, 1997, there were 11,386,669 shares outstanding of the
Registrant's common stock, $0.01 par value.
THIS REPORT CONTAINS A TOTAL OF 20 PAGES, EXCLUDING EXHIBITS. THE EXHIBIT INDEX
APPEARS ON PAGE 19.
1
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LODGENET ENTERTAINMENT CORPORATION
FORM 10-Q
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1 -- Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
September 30, 1997 (Unaudited) 3
Consolidated Statements of Operations (Unaudited) for
the Three and Nine Months Ended September 30, 1996 and 1997 4
Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended September 30, 1996 and 1997 5
Notes to Consolidated Financial Statements. 6
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations. 8
PART II. OTHER INFORMATION
- ---------------------------
Item 1 -- Legal Proceedings. 19
Item 2 -- Changes in Securities. 19
Item 3 -- Defaults Upon Senior Securities. 19
Item 4 -- Submission of Matters to a Vote of Security Holders. 19
Item 5 -- Other Information. 19
Item 6 -- Exhibits and Reports on Form 8-K. 19
SIGNATURES 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS -- CERTAIN STATEMENTS IN
THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WHEN USED IN THIS QUARTERLY
REPORT, THE WORDS "EXPECTS," "ANTICIPATES," "ESTIMATES," "BELIEVES," "NO
ASSURANCE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE THE COMPANY'S
ACTUAL PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. IN ADDITION TO THE RISKS AND UNCERTAINTIES
DISCUSSED IN THIS QUARTERLY REPORT, SUCH FACTORS INCLUDE, AMONG OTHERS, THE
FOLLOWING: THE IMPACT OF COMPETITION AND CHANGES TO THE COMPETITIVE
ENVIRONMENT FOR THE COMPANY'S PRODUCTS AND SERVICES, CHANGES IN TECHNOLOGY,
RELIANCE ON STRATEGIC PARTNERS, UNCERTAINTY OF LITIGATION, CHANGES IN
GOVERNMENT REGULATION AND OTHER FACTORS DETAILED, FROM TIME TO TIME, IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY
REPORT. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO
RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH
REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH
ANY SUCH STATEMENT IS BASED.
As used herein (unless the context otherwise requires) "LodgeNet", "the
Company" and/or "the Registrant" means LodgeNet Entertainment Corporation and
its majority-owned subsidiaries.
2
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PART I -- FINANCIAL INFORMATION
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
------------ -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 86,177 $ 20,070
Accounts receivable, net of allowance for doubtful accounts 18,428 22,736
Prepaid expenses and other 1,935 3,206
------------ ------------
Total current assets 106,540 46,012
Property and equipment, net 164,157 207,801
Debt issuance costs, net of accumulated amortization 8,509 8,002
Other assets, net 562 4,249
------------ ------------
$ 279,768 $ 266,064
------------ ------------
------------ ------------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 16,775 $ 16,452
Current portion of long-term debt 425 614
Accrued expenses 4,596 7,255
------------ ------------
Total current liabilities 21,796 24,321
Deferred revenue 2,956 3,717
Long-term debt 179,233 179,460
Minority interest in consolidated subsidiary 231 246
------------ ------------
Total liabilities 204,216 207,744
------------ ------------
Stockholders' equity:
Common stock, $0.01 par value, 20 million shares authorized;
11,125,369 shares outstanding at December 31, 1996 and
11,386,669 shares outstanding at September 30, 1997 111 114
Additional paid-in capital 120,539 120,756
Accumulated deficit (45,098) (62,550)
------------ ------------
Total stockholders' equity 75,552 58,320
------------ ------------
$ 279,768 $ 266,064
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts, except per share amounts, in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Guest Pay $ 23,349 $ 32,164 $ 60,912 $ 85,850
Free-to-guest 2,225 2,146 6,416 6,417
Other 1,345 2,382 3,068 7,213
--------- --------- --------- ---------
Total revenue 26,919 36,692 70,396 99,480
--------- --------- --------- ---------
Direct costs:
Guest Pay 9,545 12,641 24,305 32,971
Free-to-guest 1,775 1,323 5,040 4,686
Other 1,174 1,767 2,591 5,229
--------- --------- --------- ---------
Total direct costs 12,494 15,731 31,936 42,886
--------- --------- --------- ---------
Gross profit 14,425 20,961 38,460 56,594
--------- --------- --------- ---------
Operating expenses:
Guest Pay operations 3,876 5,252 10,614 14,951
Selling, general and administrative 3,068 5,147 9,280 14,930
Depreciation and amortization 7,560 10,963 20,891 31,153
--------- --------- --------- ---------
Total operating expenses 14,504 21,362 40,785 61,034
--------- --------- --------- ---------
Operating loss (79) (401) (2,325) (4,440)
Interest expense, net 1,769 4,638 5,769 13,004
--------- --------- --------- ---------
Loss before income taxes (1,848) (5,039) (8,094) (17,444)
Provision for income taxes 9 11 31 41
--------- --------- --------- ---------
Net loss $ (1,857) $ (5,050) $ (8,125) $ (17,485)
--------- --------- --------- ---------
--------- --------- --------- ---------
Net loss per common share $ (0.17) $ (0.45) $ (0.89) $ (1.55)
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average shares 11,094 11,315 9,126 11,281
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1997
--------- ---------
Operating activities:
Net loss $ (8,125) $ (17,485)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 20,891 31,153
Minority interest - 15
Change in current assets and liabilities:
Accounts receivable (6,374) (4,256)
Prepaid expenses and other (2,067) (1,271)
Accounts payable 4,125 (436)
Accrued expenses and deferred revenue 2,406 3,420
Other - 57
-------- ---------
Net cash provided by operating activities 10,856 11,197
-------- ---------
Investing activities:
Property and equipment additions (61,106) (73,222)
Purchase of Cable TV operation - (4,562)
-------- ---------
Net cash used in investing activities (61,106) (77,784)
-------- ---------
Financing activities:
Proceeds from long-term debt 901 665
Debt issuance costs (1,169) -
Repayments of long-term debt (4,327) (411)
Borrowings under revolving credit facility 35,858 -
Repayments of revolving credit facility (25,858) -
Proceeds from issuance of common stock 44,635 -
Stock option activity 42 193
-------- ---------
Net cash provided by financing activities 50,082 447
-------- ---------
Effect of exchange rates on cash (1) 33
-------- ---------
Decrease in cash and cash equivalents (169) (66,107)
Cash and equivalents at beginning of period 2,252 86,177
-------- ---------
Cash and equivalents at end of period $ 2,083 $ 20,070
-------- ---------
-------- ---------
Supplemental cash flow information:
Cash paid for interest $ 6,246 $ 10,010
-------- ---------
-------- ---------
The accompanying notes are an integral part of these
consolidated financial statements.
September 30, 1997 Page 5
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The accompanying consolidated financial statements as of September 30,
1997, and for the three and nine month periods ended September 30, 1996 and
1997, have been prepared by LodgeNet Entertainment Corporation (the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). The information
furnished in the accompanying consolidated financial statements reflects all
adjustments, consisting only of normal recurring adjustments, which, in the
opinion of management, are necessary for a fair presentation of such
financial statements.
Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to the rules
and regulations of the Commission. Although the Company believes that the
disclosures are adequate to make the information presented herein not
misleading, it is recommended that these unaudited consolidated financial
statements be read in conjunction with the more detailed information
contained in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996, as filed with the Commission. The results of
operations for the three and nine month periods ended September 30, 1997 are
not necessarily indicative of the results of operations for the full year.
The consolidated financial statements include the accounts of LodgeNet
Entertainment Corporation and its majority-owned subsidiaries. All
significant inter-company accounts and transactions have been eliminated in
consolidation.
Note 2 -- Property and Equipment, net
Property and equipment was comprised as follows at (in thousands of
dollars):
December 31, September 30,
1996 1997
------------ -------------
Land, building and equipment $ 15,914 $ 21,107
Free-to-guest equipment 7,369 10,645
Cable television equipment 5,291 9,397
Guest Pay systems:
Installed 173,607 208,908
System components 23,290 34,064
Software costs 6,266 7,536
Building construction in progress 2,528 12,500
------------ -------------
234,265 304,157
Depreciation and amortization (70,108) (96,356)
------------ -------------
Property and equipment, net $ 164,157 $ 207,801
------------ -------------
------------ -------------
Note 3 -- Net Loss Per Common Share
The net loss per common share was computed using the weighted average
number of shares outstanding and, where applicable, outstanding warrants and
options.
6
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Note 4 -- Effect of Recently Issued Accounting Pronouncements
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share", which requires the disclosure of basic earnings per share and
diluted earnings per share. The Company will adopt SFAS 128 at the end of
1997 and anticipates that it will have no effect on previously reported
earnings per share.
Note 5 -- Reclassifications
Certain amounts have been reclassified to conform to the 1997
presentation. Such reclassifications had no effect on previously reported
results of operations or stockholders' equity.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 dwelling unit markets utilizing its
proprietary b-LAN-SM- (broadband local area network) 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 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 based on 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 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.
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 Partners, L.P.
("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.
RESIDENTIAL INDUSTRY SERVICES
In January 1996, the Company formed ResNet Communications, Inc.
("ResNet") for the purpose of extending the Company's proprietary b-LAN-SM-
system architecture and operational expertise into the Multi-family Dwelling
Unit ("MDU") market. In October 1996, TCI Satellite ("TSAT"), an affiliate
of Tele-Communications,
8
<PAGE>
Inc. ("TCI"), agreed to invest up to $40 million in ResNet in exchange for up
to a 36.9% interest in ResNet and agreed to provide ResNet with long-term
access to DBS signals for the MDU market on a nationwide basis. In June
1997, the Company and TSAT reorganized ResNet as a Delaware limited liability
company, "ResNet Communications, LLC." The Company believes that the MDU
business has financial and technological requirements similar to those of the
Company's lodging industry business. ResNet began installations of its first
systems during the quarter ended September 30, 1996. During the quarter
ended March 31, 1997, ResNet purchased, for approximately $4.6 million, the
assets and contracts of a private cable television operation with
approximately 11,000 passings in the Detroit metropolitan area. The results
of ResNet's operations during the three and nine months ended September 30,
1997 were not material to the Company's consolidated results of operations.
LODGING ROOM BASE
During the three months ended September 30, 1997, the Company installed
26,396 new Guest Pay rooms, equipped 29,721 rooms with its Nintendo game
system, and installed 18,128 free-to-guest rooms. From September 30, 1996
through September 30, 1997, the Company has installed 121,641 new Guest Pay
rooms, equipped 135,782 rooms with its Nintendo game system, and installed
47,918 free-to-guest rooms; representing increases of 32.9%, 47.1% and 17.0%,
respectively, in its installed room bases. The Company's base of installed
rooms was comprised as follows at September 30:
1996 1997
-------------------- --------------------
Rooms % Rooms %
------- ------ ------- ------
Guest Pay rooms:
Scheduled 44,497 12.0% 31,683 6.4%
On-demand 325,485 88.0% 459,940 93.6%
------- ------ ------- ------
369,982 100.0% 491,623 100.0%
------- ------ ------- ------
------- ------ ------- ------
Nintendo game system rooms 288,408 424,190
------- -------
------- -------
Free-to-guest rooms (1) 282,637 330,555
------- -------
------- -------
(1) - Includes rooms which receive only free-to-guest services as well as
rooms which receive both free-to-guest and Guest Pay services.
YEAR 2000 INFORMATION
The Divisions of Corporation Finance and Investment Management of the
Securities and Exchange Commission have issued Staff Legal Bulletin No. 5
regarding disclosure obligations associated with computer software year 2000
issues. The Company has undertaken a comprehensive review of its computer
systems and software and has determined that the Company does not anticipate
any material costs, problems or uncertainties, nor any material adverse
change in the Company's future operating results, financial condition,
products, services or competitive position as a result of such issues.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
REVENUE ANALYSIS
The Company's total revenue for the third quarter of 1997 increased 36.3%,
or $9.8 million, in comparison to the third quarter of 1996. The following
table sets forth the components of the Company's revenue for the quarter ending
September 30 (dollar amounts in thousands):
1996 1997
---------------------- ----------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES
--------- -------- --------- --------
Guest Pay $ 23,349 86.7% $ 32,164 87.7%
Free-to-guest 2,225 8.3% 2,146 5.8%
Other 1,345 5.0% 2,382 6.5%
--------- -------- --------- --------
Total revenue $ 26,919 100.0% $ 36,692 100.0%
--------- -------- --------- --------
--------- -------- --------- --------
Guest Pay Revenue -- Guest Pay revenues increased 37.8%, or $8.8 million,
in the third quarter of 1997 in comparison to the same quarter of 1996. This
increase was primarily the result of a 36.2% increase in the average number of
installed Guest Pay rooms. Additionally, average monthly revenue per room
increased slightly as illustrated in the following table.
THREE MONTHS ENDED
SEPTEMBER 30,
1996 1997
-------- ---------
Average monthly revenue per room:
Movie revenue $ 18.80 $ 18.66
Video game/information service 3.51 3.91
-------- ---------
Total per Guest Pay room $ 22.31 $ 22.57
-------- ---------
-------- ---------
Average movie revenue per room, for all Guest Pay rooms, was impacted by
lower average buy rates and lower hotel occupancy rates, and partially offset
by the effect of higher average movie prices; all in comparison to the year
earlier period. The comparative decrease in buy rates is attributed to a
relatively less popular selection of newly-released major motion pictures,
and to the effect of viewers' interest in the television coverage concerning
the death of Princess Diana, both in the current quarter as compared to the
year earlier period. The slight increase in average movie price is due to
price increases in certain Guest Pay rooms; the Company's movie prices are
generally $7.95 or $8.95.
Average video game and information service revenue per room increased
primarily as a result of the increase in the average number of rooms with
video game services installed. On a per-room basis, average monthly video
game revenues were $2.90 and $2.86 during the quarters ended September 30,
1997 and 1996, respectively. The Company had installed its video game
service in 424,190 and 288,408 Guest Pay rooms as of September 30, 1997 and
1996, respectively.
Free-to-guest Revenue -- Free-to-guest revenues decreased 3.6%, or
$79,000, in the third quarter of 1997 as compared to the same quarter of
1996. This decrease is the result of reclassifying the revenue from certain
rooms, which had previously only received free-to-guest service, to Guest Pay
services revenue upon the installation of Guest Pay systems for those rooms.
10
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Other Revenue -- Revenue from other sources, including sales of cable
television services by ResNet and the sale of televisions, system equipment,
and service parts and labor, increased by $1.0 million or 77.1%, in the third
quarter of 1997 as compared to the same quarter of 1996. The increase was
attributable to higher sales of cable television services by ResNet and
increased sales of televisions and service labor.
Expense Analysis
Direct Costs -- The following table sets forth information in regard to the
Company's direct costs and gross profit margin for the quarter ending September
30 (dollar amounts in thousands):
1996 1997
-------- ---------
Direct costs:
Guest Pay $ 9,545 $ 12,641
Free-to-guest 1,775 1,323
Other revenue 1,174 1,767
-------- ---------
Total direct costs $ 12,494 $ 15,731
-------- ---------
-------- ---------
Gross profit margin:
Guest Pay 59.1% 60.7%
Free-to-guest 20.2% 38.4%
Other revenue 12.7% 25.8%
Overall (composite) 53.6% 57.1%
Guest Pay direct costs increased 32.4%, or $3.1 million, in the third
quarter of 1997 as compared to the year earlier quarter. Since Guest Pay
direct costs (primarily studio license fees, video game license fees and the
commission retained by the hotel) are primarily based on related revenue,
such direct costs tend to vary more or less directly with revenue. As a
percentage of revenue, such costs decreased from 40.9% in the third quarter
of 1996 to 39.3% in the current quarter. The relative decrease in Guest Pay
direct costs (as a percentage of revenue) reflects lower movie-related costs
due to proportionately less revenue from newly-released motion pictures,
partially offset by the cost-related effect of increased video game revenue
(which generally has a higher direct cost on a percentage of revenue basis
than movies) in the Guest Pay revenue mix.
Free-to-guest direct costs decreased 25.5% or $452,000 in the third
quarter of 1997 as compared to the year earlier quarter. As a percentage of
free-to-guest revenue, free-to-guest direct costs were 79.8% in the third
quarter of 1996 compared to 61.6% in the current quarter. The relative
decrease in free-to-guest direct costs is due to incentive discounts earned
from programming networks, partially offset by higher costs for both premium
and non-premium programming.
Direct costs associated with other revenue increased 50.5% to $1.8
million in the third quarter of 1997 from $1.2 million in the year earlier
quarter. As a percentage of related revenues, such direct costs decreased to
74.2% of other revenue in the current quarter versus 87.3% in the third
quarter of 1996. This relative decrease was due to increased sales of cable
television services by ResNet, which typically earn margins above those
earned from sales of televisions, system equipment, and service parts and
labor.
The Company's overall gross profit increased 45.3%, or $6.5 million, to
$21.0 million in the third quarter of 1997 on a 36.3% increase in revenues in
comparison to the same period in the prior year. The Company's overall gross
profit margin was 57.1% in the current quarter, as compared to the year
earlier 53.6%.
11
<PAGE>
Operating Expenses -- The following table sets forth information in
regard to the Company's operating expenses for the quarter ending September
30 (dollar amounts in thousands):
1996 1997
-------------------- ------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES
-------- -------- -------- --------
Guest Pay operations $ 3,876 14.4% $ 5,252 14.3%
Selling, general and administrative 3,068 11.4% 5,147 14.0%
Depreciation and amortization 7,560 28.1% 10,963 29.9%
-------- -------- -------- --------
Total operating expenses $ 14,504 53.9% $ 21,362 58.2%
-------- -------- -------- --------
-------- -------- -------- --------
Guest Pay operations expense increased 35.5%, or $1.4 million, from $3.9
million in the comparable quarter of the previous year. This increase is
primarily attributable to the 36.2% increase in the average number of
installed Guest Pay rooms in the current period as compared to the year
earlier quarter. Per average installed Guest Pay room, such expenses averaged
$3.46 per month in the current quarter as compared to $3.72 per month in the
same quarter of 1996. The comparative decrease on a per-room basis was
primarily the result of lower service and support expenses.
Selling, general and administrative expenses increased 67.8%, or $2.1
million, from $3.1 million in the third quarter of 1997. The increase
reflects the effects of increased litigation-related expenses, an increase
in the number of development and administrative personnel and increased
facilities-related expenses. As a percentage of revenue, such expenses were
14.0% in the current quarter as compared to 11.4% in the year earlier quarter.
Depreciation and amortization expenses increased 45.0% to $11.0 million
in the third quarter of 1997 from $7.6 million in the year earlier quarter.
This increase is directly attributable to the increases in the number of
installed Guest Pay and game service equipped rooms previously discussed,
associated software and other capitalized costs such as service vans,
equipment and computers that are related to the increased number of rooms in
service since the year earlier quarter.
Operating Loss -- The Company's operating loss, as a result of the
factors previously discussed, was $(401,000) in the current quarter as
compared to $(79,000) in the same quarter of 1996.
Interest Expense -- Interest expense, net of interest income, increased
to $4.6 million in the current quarter from $1.8 million in the comparable
quarter of 1996 due to increases in long-term debt to fund the Company's
continuing expansion of its business. Long-term debt increased from $68.3
million at September 30, 1996 to $180.0 million at September 30, 1997.
Average principal amount of long-term debt outstanding, during the quarter
ended September 30, 1997, was approximately $180 million (at an average
interest rate of approximately 10.5%) as compared to an average principal
amount outstanding of approximately $66 million (at an average interest rate
of approximately 10.7%) during the comparable period of 1996.
Net Loss -- For the reasons previously discussed, the Company's net loss
increased to $(5.1) million in the third quarter of 1997 from a net loss of
$(1.9) million in the same quarter a year earlier.
EBITDA -- As a result of increasing revenues from Guest Pay services, and
the other factors previously discussed, EBITDA (defined as "earnings before
interest, income taxes, depreciation and amortization") increased 41.2% to
$10.6 million in the third quarter of 1997 as compared to $7.5 million in the
third quarter of 1996. EBITDA as a percentage of total revenues was 28.8% in
the current quarter as compared to 27.8% in the same quarter of 1996. EBITDA
is included herein because it is a widely accepted financial indicator used
by certain investors and financial analysts to assess and compare companies
on the basis of operating performance. EBITDA is not intended to represent
an alternative to net income (as determined in accordance with generally
accepted accounting principles) as a measure of performance, but management
believes that it does provide an important additional perspective on the
Company's operating results and the Company's ability to service its
long-term debt and to fund the Company's continuing growth.
12
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
Revenue Analysis
The Company's total revenue for the first nine months of 1997 increased
41.3%, or $29.1 million, in comparison to the same period in 1996. The
following table sets forth the components of the Company's revenue for the
nine months ended September 30 (dollar amounts in thousands):
1996 1997
--------------------- ---------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES
--------- -------- --------- --------
Guest Pay $ 60,912 86.5% $ 85,850 86.2%
Free-to-guest 6,416 9.1% 6,417 6.5%
Other 3,068 4.4% 7,213 7.3%
--------- -------- --------- --------
Total revenue $ 70,396 100.0% $ 99,480 100.0%
--------- -------- --------- --------
--------- -------- --------- --------
Guest Pay Revenue -- Guest Pay revenues increased 40.9%, or $24.9
million, in the first nine months of 1997 in comparison to the same period of
1996. This increase was primarily the result of a 41.5% increase in the
average number of installed Guest Pay rooms, which offset a slight decline in
average monthly revenue per room. The following table sets forth information
in regard to average monthly revenue per installed Guest Pay room for the
nine months ended September 30:
1996 1997
-------- --------
Average monthly revenue per room:
Movie revenue $ 18.60 $ 18.09
Video game/information service 2.96 3.39
-------- --------
Total per Guest Pay room $ 21.56 $ 21.48
-------- --------
-------- --------
Average movie revenue per room, for all Guest Pay rooms, was impacted by
lower average buy rates and lower hotel occupancy rates, and partially offset
by the effect of higher average movie prices. The comparative decrease in buy
rates is attributed to a relatively less popular selection of newly-released
major motion pictures in the current period as compared to a year earlier.
The slight increase in average movie price is due to price increases in
certain Guest Pay rooms; the Company's movie prices are generally $7.95 or
$8.95.
Average video game and information service revenue per room increased
primarily as a result of the increase in the average number of rooms with
video game services installed. On a per-room basis, average monthly video
game revenues were $2.43 and $2.34 during the nine months ended September 30,
1997 and 1996, respectively. The Company had installed its video game
service in 424,190 and 288,408 Guest Pay rooms as of September 30, 1997 and
1996, respectively.
Free-to-guest Revenue -- Free-to-guest revenues were $6.4 million in the
first nine months of 1997 and 1996. Increased revenue per room offset the
effect of the reclassification of revenue from certain rooms, which had
previously only received free-to-guest service, to Guest Pay services revenue
upon the installation of Guest Pay systems for those rooms.
Other Revenue -- Revenue from other sources, including sales of cable
television services by ResNet and the sale of televisions, system equipment,
and service parts and labor, and increased by $4.1 million or 135%, in the
first nine months of 1997 as compared to the same period of 1996. The
increase was attributable to increased sales of cable television services by
ResNet, and increased sales of televisions, system equipment, and service
labor.
13
<PAGE>
Expense Analysis
Direct Costs -- The following table sets forth information in regard to
the Company's direct costs and gross profit margin for the nine months ended
September 30 (dollar amounts in thousands):
1996 1997
--------- ---------
Direct costs:
Guest Pay $ 24,305 $ 32,971
Free-to-guest 5,040 4,686
Other revenue 2,591 5,229
--------- ---------
Total direct costs $ 31,936 $ 42,886
--------- ---------
--------- ---------
Gross profit margin:
Guest Pay 60.1% 61.6%
Free-to-guest 21.4% 27.0%
Other revenue 15.5% 27.5%
Overall (composite) 54.6% 56.9%
Guest Pay direct costs increased 35.7%, or $8.7 million, in the first
nine months of 1997 as compared to the same period of 1996. Since Guest Pay
direct costs (primarily studio license fees, video game license fees and the
commission retained by the hotel) are primarily based on related revenue,
such direct costs tend to vary more or less directly with revenue. As a
percentage of revenue, such costs decreased from 39.9% in the first nine
months of 1996 to 38.4% in the current period. The relative decrease in
Guest Pay direct costs (as a percentage of revenue) reflects lower
movie-related costs due to proportionately less revenue from newly-released
motion pictures, partially offset by the cost-related effect of increased
video game revenue (which generally has a higher direct cost on a percentage
of revenue basis than movies) in the Guest Pay revenue mix.
Free-to-guest direct costs decreased 7.0% or $354,000 in the first nine
months of 1997 as compared to the same period of 1996. As a percentage of
free-to-guest revenue, free-to-guest direct costs decreased to 73.0% from
78.6% in the year-earlier period. The relative decrease in free-to-guest
direct costs (as a percentage of revenue) resulted from incentive discounts
earned from programming networks, partially offset by higher costs for both
premium and non-premium programming.
Direct costs associated with other revenue increased 102% to $5.2 million
in the first nine months of 1997 from $2.6 million in the year earlier
period. As a percentage of related revenues, such direct costs decreased to
72.5% of other revenue in the current nine month period versus 84.5% in the
first nine months of 1996, primarily reflecting the effect of the increased
equipment sales and cable television service revenues discussed above.
The Company's overall gross profit increased 47.2%, or $18.1 million, to
$56.6 million in the first nine months of 1997 on a 41.3% increase in
revenues in comparison to the same period in the prior year. The Company's
overall gross profit margin was 56.9% in the current nine month period, as
compared to the year earlier 54.6%.
14
<PAGE>
Operating Expenses -- The following table sets forth information in
regard to the Company's operating expenses for the nine months ended
September 30 (dollar amounts in thousands):
1996 1997
-------------------------------------------
PERCENT OF PERCENT OF
TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES
--------- -------- --------- --------
Guest Pay operations $ 10,614 15.1% $ 14,951 15.0%
Selling, general and administrative 9,280 13.2% 14,930 15.0%
Depreciation and amortization 20,891 29.6% 31,153 31.4%
--------- -------- --------- --------
Total operating expenses $ 40,785 57.9% $ 61,034 61.4%
--------- -------- --------- --------
--------- -------- --------- --------
Guest Pay operations expense increased 40.9%, or $4.3 million during the
nine months ended September 30, 1997, from $10.6 million in the comparable
nine month period of the previous year. This increase is primarily
attributable to the 41.5% increase in the average number of installed Guest
Pay rooms in the current nine month period as compared to the year earlier
period. Per average installed Guest Pay room, such expenses averaged $3.58
per month in the current nine month period as compared to $3.78 per month in
the same period of 1996. The comparative decrease on a per-room basis was
primarily the result of lower service and support expenses.
Selling, general and administrative expenses increased 60.9%, or $5.7
million, from $9.3 million in the first nine months of 1996. The increase
reflects the effects of substantially increased litigation-related expenses,
an increase in the number of development and administrative personnel and
increased facilities-related expenses. As a percentage of revenue, such
expenses were 15.0% in the current nine month period as compared to 13.2% in
the year earlier period.
Depreciation and amortization expenses increased 49.1% to $31.2 million
in the first nine months of 1997 from $20.9 million in the year earlier
period. This increase is directly attributable to the increases in the number
of installed Guest Pay and game service equipped rooms previously discussed,
associated software and other capitalized costs such as service vans,
equipment and computers that are related to the increased number of rooms in
service since the year earlier quarter.
Operating Loss -- The Company's operating loss, as a result of the
factors previously discussed, was $(4.4) million in the current nine month
period as compared to $(2.3) million in the same period of 1996.
Interest Expense -- Interest expense, net of interest income, increased
to $13.0 million in the current nine month period from $5.8 million in the
comparable period of 1996 due to increases in long-term debt to fund the
Company's continuing expansion of its business. Long-term debt increased
from $68.3 million at September 30, 1996 to $180.0 million at September 30,
1997. Average principal amount of long-term debt outstanding during the nine
months ended September 30, 1997, was approximately $180 million (at an
average interest rate of approximately 10.5%) as compared to an average
principal amount outstanding of approximately $70 million (at an average
interest rate of approximately 10.6%) during the comparable period of 1996.
Net Loss -- For the reasons previously discussed, the Company's net loss
increased to $(17.5) million in the first nine months of 1997 from a net loss
of $(8.1) million in the same period a year earlier.
EBITDA -- As a result of increasing revenues from Guest Pay services, and
the other factors previously discussed, EBITDA increased 43.9% (on a 41.3%
increase in revenues) to $26.7 million in the first nine months of 1997 as
compared to $18.6 million in the same period of 1996. EBITDA as a percentage
of total revenues was 26.9% in the current period as compared to 26.4% in the
same period of 1996.
15
<PAGE>
SEASONALITY
The Company's operating results from its lodging activities are subject
to fluctuation depending upon hotel occupancy rates and buy rates, among
other factors. Typically, occupancy rates are higher during the second and
third calendar quarters than in the first and fourth quarters due to seasonal
travel patterns.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
On September 15, 1994, the Company issued $28 million principal amount of
9.95% Senior Notes to three insurance companies in a private placement. On
April 13, 1995, concurrently with certain amendments to the Note Purchase
Agreement, the Company issued $5 million principal amount of 10.35% Senior
Notes under such agreement in a private placement to certain holders of the
9.95% Senior Notes. As part of the transaction in which the Company issued
its 10.25% Senior Notes (discussed further below) the Company redeemed the
9.95% and 10.35% Senior Notes in their entirety, which represented a use of
proceeds of approximately $28.9 million in principal amount, plus accrued
interest, and a make-whole premium of approximately $2.8 million.
On August 9, 1995, the Company issued $20 million principal amount of its
11.5% Senior Subordinated Notes due July 15, 2005 (the 11.5% Senior Notes) to
three insurance companies in a private placement. On October 4, 1995, the
Company issued an additional $10 million principal amount of such 11.5%
Senior Notes to the same purchasers and under identical terms and conditions.
In connection with the issuance of its 10.25% Senior Notes, the Company and
the holders of the 11.5% Senior Notes amended the terms of the 11.5% Senior
Notes to provide that such notes rank PARI PASSU with, and have
substantially the same covenants as, the 10.25% Senior Notes. The 11.5%
Senior Notes are unsecured and bear interest at the fixed rate of 11.5%,
payable semi-annually. Mandatory annual principal payments of $6 million
commence July 15, 2001.
Net proceeds of the August 9, 1995 issue of the 11.5% Senior Notes, net
of original issue discount and issuance-related expenses, were approximately
$18.1 million, and were used to (i) repay $10.0 million outstanding under the
Company's then existing revolving facility and (ii) provide funding for
capital expenditures to expand the Company's guest pay services business. The
net proceeds from the October 4, 1995 issue of the 11.5% Senior Notes, net
of original issue discount and issuance-related expenses, were approximately
$9.2 million and provided additional capital to fund the expansion of the
Company's guest pay services business.
In connection with the December 19, 1996 issuance of its 10.25% Senior
Notes, the Company repaid all of the outstanding borrowing under its then
bank credit facility, approximately $20.4 million, and amended and restated
such facility. The amended and restated bank credit facility (the 1996
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 Company was in compliance with all
such covenants as of September 30, 1997. The 1996 Facility is secured by (i)
a first priority security interest in all of the Company's and certain of its
subsidiaries' tangible and intangible assets and (ii) a guarantee by ResNet
of all amounts advanced to it by the Company. Amounts borrowed under the
1996 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 1996 Facility is subject to a scheduled reduction of 15% beginning
in December 1998 and annually thereafter as follows: December 1999 -- 20%;
December 2000 -- 20%; December 2001 -- 20%; and December 2002 -- 25%.
On May 23, 1996, the Company sold 3,680,000 shares of the Company's
Common Stock for net proceeds of approximately $44.6 million. Such proceeds
were used to repay approximately $25.9 million of borrowings 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
16
<PAGE>
"Stock Payment") and agreed to provide ResNet with long-term access to a DBS
signal on a nationwide basis. In addition, TCI Satellite agreed to advance up
to $34.6 million to ResNet during the five years ending October 21, 2001,
under a convertible note agreement (the "TCI Convertible Note") to purchase
DBS equipment. The TCI Convertible Note is subject to mandatory conversion
into a maximum 32.0% equity interest in ResNet at such time as conversion is
not restricted by FCC regulations. The TCI Convertible Note is unsecured,
payable solely in shares of ResNet's common stock, non-recourse to the
Company, and subordinated to all present and future borrowings by ResNet
including any borrowings from the Company by ResNet. Interest accrues
(generally at TCI's average borrowing rate) on amounts outstanding under the
TCI Convertible Note, but such interest is not payable in cash (and does not
increase the equity interest into which the TCI Convertible Note will be
converted).
On December 19, 1996, the Company issued $150 million, principal amount,
of unsecured 10.25% Senior Notes (the Notes) in a private offering in
accordance with Rule 144A of The Securities Act of 1933, as amended (the
Securities Act). The proceeds of the Notes, which were issued at par, after
placement fees and offering expenses, were approximately $143.2 million.
Approximately $31.7 million of such proceeds was used to redeem the
outstanding principal amounts of the 9.95% and 10.35% Senior Notes and to
prepay all outstanding amounts under the Company's then revolving credit
facility, both as previously discussed. The remaining proceeds,
approximately $91.1 million, were invested in highly liquid, interest-bearing
securities pending their use for funding capital expenditures to expand the
Company's lodging and residential businesses. On April 11, 1997, the Company
filed a registration statement to effect an offer to exchange the Notes for
identical Notes registered under the Securities Act of 1933, as amended.
The Company has incurred operating and net losses due in large part to
the depreciation, amortization and interest expenses related to the capital
required to expand its lodging and residential businesses. The growth of the
Company's business requires substantial 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 $78 million during the
first nine months of 1997, and net cash provided by operating activities was
approximately $11.2 million.
Depending on the rate of growth of its lodging and residential businesses
and other factors, the Company expects to incur capital expenditures of
between approximately $15 to $25 million during the remainder of 1997 and
anticipates capital expenditures of between approximately $75 to $90 million
for 1998, and substantial amounts thereafter. The actual amount and timing of
the Company's capital expenditures in these periods will vary (and such
variations could be material) depending upon the number of new contracts for
services entered into by the Company, the costs of installations and other
factors; however, this is a forward-looking statement and there can be no
assurance in this regard. In addition, the 1996 Facility limits the amount of
the Company's annual capital expenditures to a certain base amount plus the
amounts of certain additional financing.
The Company believes that the net proceeds from the 10.25% Senior Notes,
the funds to be provided by TCI Satellite, its operating cash flows and
borrowings permitted under the 1996 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.
17
<PAGE>
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
During March 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
per Share", which requires the disclosure of basic earnings per share and
diluted earnings per share. The Company will adopt SFAS 128 at the end of
1997 and anticipates that it will have no effect on previously reported
earnings per share.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS -- CERTAIN STATEMENTS IN
THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. WHEN USED IN THIS QUARTERLY
REPORT, THE WORDS "EXPECTS," "ANTICIPATES," "ESTIMATES," "BELIEVES," "NO
ASSURANCE," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND
UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE THE COMPANY'S
ACTUAL PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. IN ADDITION TO THE RISKS AND UNCERTAINTIES
DISCUSSED IN THIS QUARTERLY REPORT, SUCH FACTORS INCLUDE, AMONG OTHERS, THE
FOLLOWING: THE IMPACT OF COMPETITION AND CHANGES TO THE COMPETITIVE
ENVIRONMENT FOR THE COMPANY'S PRODUCTS AND SERVICES, CHANGES IN TECHNOLOGY,
RELIANCE ON STRATEGIC PARTNERS, UNCERTAINTY OF LITIGATION, CHANGES IN
GOVERNMENT REGULATION AND OTHER FACTORS DETAILED, FROM TIME TO TIME, IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY
REPORT. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO
RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH
REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH
ANY SUCH STATEMENT IS BASED.
18
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS
On February 16, 1995, On Command Video Corporation filed a lawsuit in
Federal District Court for the Northern District of California asserting
patent infringement by the Company relating to its on-demand video system.
The complaint requests an unspecified amount of damages and injunctive
relief. The Company filed an answer and counterclaim to the lawsuit on April
17, 1995, denying the claims, asserting affirmative defenses and asserting a
counterclaim for declaratory relief. The Company is currently engaged in
litigation with respect to this matter, however, as of the date hereof, no
trial date is scheduled. Based on the advice of special patent counsel and
technical experts retained by the Company, as well as the Company's
independent analysis, the Company believes that the claims of infringement
are unfounded. The Company has and will continue to vigorously defend itself
in this matter. Patent litigation is especially complex, both as to factual
allegations and the legal interpretation of patent claims, which makes such
lawsuits difficult to assess with certainty. While the Company and its
patent counsel believe the Company has a number of defenses available, which,
if properly considered, would eliminate or minimize any liability for the
Company, an unexpected unfavorable resolution, depending on the amount and
timing thereof, could adversely affect the Company. Although the outcome of
any litigation cannot be predicted with certainty, the Company believes that
the ultimate disposition of this matter will not have a material adverse
effect on the Company's business or financial condition.
From time to time, the Company is subject to other litigation arising in
the course of its business. As of the date hereof, in the opinion of
management, the resolution of such other litigation will not have a material
adverse effect upon the Company's business or financial condition.
ITEM 2 -- CHANGES IN SECURITIES
Not applicable.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5 -- OTHER INFORMATION
Not applicable.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
Exhibit 11.1 -- Statement Regarding Computation of Net Loss Per
Common Share.
B. REPORTS ON FORM 8-K:
The Company filed no Reports on Form 8-K during the three months
ended September 30, 1997.
19
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LODGENET ENTERTAINMENT CORPORATION
----------------------------------
(Registrant)
Date: November 7, 1997 / s / TIM C. FLYNN
-----------------------------------
Tim C. Flynn
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 7, 1997 / s / JEFFREY T. WEISNER
------------------------------------
Jeffrey T. Weisner
Vice President - Finance
(Principal Financial and Accounting Officer)
20
<PAGE>
EXHIBIT 11.1
SEPTEMBER 30, 1997
LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES
Statement Regarding Computation of Net Loss Per Share of Common Stock
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1996 1997 1996 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net loss (in thousands) $(1,857) $(5,050) $(8,125) $(17,485)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Weighted average shares:
Average shares outstanding 11,042,406 11,266,160 9,073,326 11,229,782
Assumed additional shares (1) 51,249 48,659 52,644 50,928
---------- ----------- ---------- -----------
Weighted average common shares 11,093,655 11,314,819 9,125,970 11,280,710
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Net loss per common share $ (0.17) $ (0.45) $ (0.89) $ (1.55)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
- ------------------
(1) Represents the effect of the assumed exercise of stock options issued
during the twelve months preceding the Company's initial public offering.
The exercise of other options and warrants has not been assumed because
their effect would be anti-dilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000911002
<NAME>NONE
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 20,070
<SECURITIES> 0
<RECEIVABLES> 23,341
<ALLOWANCES> (705)
<INVENTORY> 0
<CURRENT-ASSETS> 46,012
<PP&E> 304,157
<DEPRECIATION> (96,356)
<TOTAL-ASSETS> 266,064
<CURRENT-LIABILITIES> 24,321
<BONDS> 179,460
0
0
<COMMON> 114
<OTHER-SE> 58,206
<TOTAL-LIABILITY-AND-EQUITY> 266,064
<SALES> 99,480
<TOTAL-REVENUES> 99,480
<CGS> 42,886
<TOTAL-COSTS> 61,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,004
<INCOME-PRETAX> (17,444)
<INCOME-TAX> 41
<INCOME-CONTINUING> (17,485)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,485)
<EPS-PRIMARY> (1.55)
<EPS-DILUTED> 0
</TABLE>
