<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 JUNE 30, 1998
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)
(not applicable)
------------------------------------------------
(Former name, former address and
former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
At August 6, 1998, there were 11,552,387 shares outstanding of the
Registrant's common stock, $0.01 par value.
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998 (Unaudited). . . . . . . . . 3
Consolidated Statements of Operations (Unaudited) for
the Three and Six Months Ended June 30, 1997 and 1998. . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended June 30, 1997 and 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2 -- Management's Discussion and Analysis of the Results of Operations. . . . . . . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 2 -- Changes in Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3 -- Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 4 -- Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . 17
Item 5 -- Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 6 -- Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
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.
June 30, 1998 Page 2
<PAGE>
PART I -- FINANCIAL INFORMATION
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ -----------
Assets (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,021 $ 2,393
Accounts receivable, net of allowance for doubtful accounts 21,835 23,712
Prepaid expenses and other 3,457 2,877
------------ -----------
Total current assets 26,313 28,982
Property and equipment, net of accumulated depreciation 218,948 230,666
Debt issuance costs, net of accumulated amortization 7,641 7,141
Other assets, net 7,392 12,345
------------ -----------
$260,294 $279,134
------------ -----------
------------ -----------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 17,930 $ 14,287
Current maturities of long-term debt 705 857
Accrued expenses 7,010 7,905
------------ -----------
Total current liabilities 25,645 23,049
Deferred revenue 2,069 2,210
Long-term debt 182,691 220,309
Minority interest in consolidated subsidiary 310 310
------------ -----------
Total liabilities 210,715 245,878
------------ -----------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized;
11,322,058 shares outstanding at December 31, 1997 and
11,548,531 shares outstanding at June 30, 1998 113 115
Additional paid-in capital 120,792 120,978
Accumulated deficit (71,326) (87,837)
------------ -----------
Total stockholders' equity 49,579 33,256
------------ -----------
$260,294 $279,134
------------ -----------
------------ -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
June 30, 1998 Page 3
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Guest Pay $ 28,119 $ 35,901 $ 53,686 $ 67,750
Free-to-guest 2,105 1,921 4,271 3,982
Other 2,908 3,076 4,831 5,513
---------- ---------- ---------- ----------
Total revenues 33,132 40,898 62,788 77,245
---------- ---------- ---------- ----------
Direct costs:
Guest Pay 10,604 14,679 20,330 27,750
Free-to-guest 1,628 1,628 3,363 3,173
Other 2,106 1,880 3,462 3,344
---------- ---------- ---------- ----------
Total direct costs 14,338 18,187 27,155 34,267
---------- ---------- ---------- ----------
Gross profit 18,794 22,711 35,633 42,978
---------- ---------- ---------- ----------
Operating expenses:
Guest Pay operations 5,006 6,245 9,699 12,382
Selling, general and administrative 4,727 4,961 9,783 9,787
Depreciation and amortization 10,495 13,407 20,190 25,986
---------- ---------- ---------- ----------
Total operating expenses 20,228 24,613 39,672 48,155
---------- ---------- ---------- ----------
Operating loss (1,434) (1,902) (4,039) (5,177)
Interest expense, net 4,302 5,571 8,366 10,780
---------- ---------- ---------- ----------
Loss before income taxes (5,736) (7,473) (12,405) (15,957)
Provision for income taxes 20 75 30 226
---------- ---------- ---------- ----------
Net loss $ (5,756) $ (7,548) $ (12,435) $ (16,183)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Per common share (basic and diluted):
Net loss $ (0.51) $ (0.65) $ (1.11) $ (1.41)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding 11,262,099 11,545,121 11,211,292 11,451,473
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
June 30, 1998 Page 4
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1997 1998
---------- ----------
<S> <C> <C>
Operating activities:
Net loss $ (12,435) $ (16,183)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 20,190 25,986
Gain on sale of property and equipment -- (309)
Minority interest (76) --
Change in operating assets and liabilities:
Accounts receivable (2,990) (1,911)
Prepaid expenses and other (4,546) 688
Accounts payable (1,239) (3,638)
Accrued expenses and deferred revenue 2,110 1,037
Other (150) (92)
---------- ----------
Net cash provided by operating activities 864 5,578
---------- ----------
Investing activities:
Property and equipment additions (48,417) (36,971)
Purchase of cable television operations (4,562) --
Proceeds from sale of property and equipment -- 412
Investment in unconsolidated affiliate -- (5,590)
---------- ----------
Net cash used for investing activities (52,979) (42,149)
---------- ----------
Financing activities:
Proceeds from long-term debt 509 1,685
Repayment of long-term debt (254) (417)
Borrowings under revolving credit facility -- 36,500
Stock option activity 131 188
---------- ----------
Net cash provided by financing activities 386 37,956
---------- ----------
Effect of exchange rates on cash (12) (13)
---------- ----------
Increase (decrease) in cash and cash equivalents (51,741) 1,372
Cash and cash equivalents at beginning of period 86,177 1,021
---------- ----------
Cash and cash equivalents at end of period $ 34,436 $ 2,393
---------- ----------
---------- ----------
Supplemental cash flow information:
Cash paid for interest $ 8,088 $ 10,362
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
June 30, 1998 Page 5
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Basis of Presentation
The accompanying consolidated financial statements as of June 30, 1998,
and for the three and six month periods ended June 30, 1997 and 1998, 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 1997, as filed with the Commission. The results of
operations for the three and six month periods ended June 30, 1998 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):
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------- ---------
<S> <C> <C>
Land, building and equipment $ 40,051 $ 45,971
Free-to-guest equipment 11,855 14,031
Cable television equipment 13,877 20,444
Guest pay systems:
Installed 220,778 241,178
System components 30,720 28,163
Software costs 8,053 9,103
----------- ---------
Total 325,334 358,890
Less - depreciation and amortization (106,386) (128,224)
----------- ---------
Property and equipment, net $ 218,948 $ 230,666
----------- ---------
----------- ---------
</TABLE>
Note 3 -- Loss Per Share Computation
Effective in the fourth quarter of 1997, the Company adopted Statement of
Financial Accounting Standard ("SFAS") No. 128, "Earnings Per Share". SFAS No.
128 changed the manner in which earnings per share ("EPS") are calculated and
presented. The new standard requires the computation and disclosure of two EPS
amounts, basic and diluted. Basic EPS is computed based only on the weighted
average number of common shares actually outstanding during the period. Diluted
EPS is computed based on the weighted average number of common shares
outstanding plus all potentially dilutive common shares outstanding during the
period. The loss per share amount for the six months ended June 30, 1997 has
been restated from $(1.10) per share to $(1.11) per share to give effect to the
June 30, 1998 Page 6
<PAGE>
adoption of SFAS No. 128. No change occurred to the loss per share amount for
the three months ended June 30, 1997.
June 30, 1998 Page 7
<PAGE>
Note 4 -- Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement established standards for reporting and
disclosure of comprehensive income and its components. Comprehensive income
reflects the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For the
Company, comprehensive income primarily represents net income adjusted for
foreign currency translation adjustments. Comprehensive income was $(7,953) and
$(5,671) for the quarters ended June 30, 1998 and 1997, respectively. For the
six months ended June 30, 1998 and 1997, comprehensive income was $(16,511) and
$(12,371), respectively.
Note 5 -- Effect of Recently Issued Accounting Standards
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position ("SOP")
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 provides guidance on the accounting for the costs of
computer software developed or obtained for internal use and provides guidance
for determining whether computer software is for internal use. The SOP is
effective for financial statements for fiscal years beginning after December 15,
1998. The Company has reviewed its accounting for computer software development
costs and believes that the adoption of SOP 98-1 will not have a material effect
on the Company's financial condition or results of operations.
June 30, 1998 Page 8
<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 residential unit markets utilizing its
proprietary B-LAN-SM- system architecture.
LODGING SERVICES
GUEST PAY SERVICES. The Company's Guest Pay services include Guest
Scheduled-TM- 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, hotel guest demographics, 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, (ii) nominal one-time license fees paid
for independent films, (iii) license fees for video games and other services,
and (iv) the commission retained by the hotel. Guest pay operating expenses
include costs of system maintenance and support, in-room marketing, video tape
duplication and distribution, data retrieval, insurance and personal property
taxes.
The Company also provides video games and interactive multimedia
entertainment and information services through its guest pay systems. Services
include folio review, video check-out 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- Entertainment System ("SNES") video game
playing system. During the second quarter of 1998, the Company entered into a
new ten year non-exclusive license agreement with Nintendo to become the first
provider of Nintendo 64-SM- ("N64") video games to the lodging industry. The
Company anticipates the rollout of the N64 game technology to begin in late
1998.
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. The hotel pays the Company a fixed
monthly charge per room for each programming channel provided. The Company
obtains its free-to-guest programming pursuant to multi-year agreements with the
programmers and pays a fixed monthly fee per room which varies 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
(since succeeded by PRIMESTAR, Inc. ("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 pays a fee to PRIMESTAR for
access to the PRIMESTAR DBS signal, which enables 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.
June 30, 1998 Page 9
<PAGE>
During the three months and twelve months ended June 30, 1998, the Company
installed its systems in the following number of rooms, net of de-installations:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended Ended
June 30, 1998 June 30, 1998
------------- -------------
<S> <C> <C>
Guest Pay rooms 22,664 91,041
------------- -------------
------------- -------------
Nintendo game system rooms 28,097 108,572
------------- -------------
------------- -------------
Free-to-guest rooms 10,296 53,915
------------- -------------
------------- -------------
</TABLE>
The room installations for the twelve months ended June 30, 1998
represent increases of 19.6% for Guest Pay, 27.5% for Nintendo, and 17.3% for
free-to-guest, over the room bases at June 30, 1997.
The Company's base of installed rooms was comprised as follows at June 30:
<TABLE>
<CAPTION>
1997 1998
------------------ --------------------
Rooms % Rooms %
------- ----- -------- -----
<S> <C> <C> <C> <C>
Guest Pay Rooms:
Scheduled 34,383 7.4 21,034 3.8
On-demand 430,844 92.6 535,234 96.2
------- ----- -------- -----
465,227 100.0 556,268 100.0
------- ----- -------- -----
------- ----- -------- -----
Nintendo game system rooms 394,469 503,041
------- --------
------- --------
Free-to-guest rooms:
At hotels with Guest Pay services 218,570 271,254
At hotels with only free-to-guest services 93,857 95,088
------- --------
312,427 366,342
------- --------
------- --------
</TABLE>
RESIDENTIAL SERVICES
In January 1996, the Company formed ResNet Communications, Inc. (later
reorganized as a Delaware limited liability company, "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 MDU, Inc. ("TSAT") agreed to invest up to
$40 million in cash and satellite receiving equipment in ResNet in exchange for
up to a 36.99% interest in ResNet and agreed to provide ResNet with long-term
access to the PRIMESTAR DBS signals for the MDU market on a nationwide basis.
ResNet began installations of its first systems during the quarter ended
September 30, 1996. The following table sets forth the number of residential
units passed as of June 30:
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Residential units passed 16,581 32,332
</TABLE>
June 30, 1998 Page 10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 AND 1998
REVENUE ANALYSIS
The Company's total revenue for the second quarter of 1998 increased 23.4%,
or $7.8 million, in comparison to the second quarter of 1997. The following
table sets forth the components of the Company's revenue for the quarter ending
June 30 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
---------------------- --------------------
Percent Percent
of Total of Total
Amount Revenue Amount Revenue
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Guest Pay $ 28,119 84.9 $ 35,901 87.8
Free-to-guest 2,105 6.3 1,921 4.7
Other 2,908 8.8 3,076 7.5
-------- ------- -------- --------
Total $ 33,132 100.0 $ 40,898 100.0
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
Guest Pay Revenue -- Guest Pay revenue increased 27.7%, or $7.8 million, in
the second quarter of 1998 in comparison to the same quarter of 1997. This
increase was the result of a 21.8% increase in the average number of installed
Guest Pay rooms and an increase in the average monthly revenue per room. The
following table sets forth information in regard to average monthly revenue per
installed Guest Pay room for the quarter ending June 30:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Average monthly revenue per room:
Movie revenue $ 17.89 $ 18.68
Video game and other service revenue 3.17 3.40
------- -------
Total per Guest Pay room $ 21.06 $ 22.08
------- -------
------- -------
</TABLE>
Average movie revenue per room was impacted by higher average buy rates
attributable to a more popular selection of newly-released major motion pictures
in the current quarter as compared to the year earlier quarter. This increase
was partially offset by lower average hotel occupancy levels in the current
quarter compared to the year earlier quarter.
Average video game and other service revenue per room increased primarily
as a result of the increase in the number of rooms with information and other
services installed, partially offset by a decrease in average monthly video game
revenue per room.
Free-to-Guest Revenue -- Free-to-guest revenue decreased 8.7%, or $184,000,
in the second quarter of 1998 as compared to the same quarter of 1997. This
decrease is primarily the result of a slight decrease in the average number of
rooms at hotels receiving only free-to-guest services during the period
(although total rooms receiving free-to-guest services increased 17.3%).
Other Revenue -- Revenue from other sources includes cable television
revenue generated by the residential services segment, revenue from
international license arrangements, and revenue from the sale of televisions,
system equipment, and service parts and labor. The increase in the second
quarter of 1998 from the second quarter of 1997 of $168,000 or 5.8%, is
primarily due to increased cable television revenue generated by the residential
services segment of $672,000, partially offset by a decrease in television
sales.
June 30, 1998 Page 11
<PAGE>
EXPENSE ANALYSIS
Direct Costs -- The following table sets forth information in regard to the
Company's direct costs and gross profit margin for the quarter ending June 30
(dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Direct costs:
Guest Pay $ 10,604 $ 14,679
Free-to-guest 1,628 1,628
Other 2,106 1,880
-------- --------
$ 14,338 $ 18,187
-------- --------
-------- --------
Gross profit margin:
Guest Pay 62.3% 59.1%
Free-to-guest 22.7% 15.3%
Other 27.6% 38.9%
Composite 56.7% 55.5%
</TABLE>
Guest Pay direct costs increased 38.4%, or $4.1 million, in the second
quarter of 1998 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 directly with revenue. As a percentage of
revenue, such costs increased from 37.7% in the second quarter of 1997 to
40.9% in the current quarter. The increase in Guest Pay direct costs as a
percentage of revenue reflects higher video game costs (which are incurred
based on the number of rooms receiving video game services rather than the
number of game buys), an increasing proportion of guest pay rooms subscribing
to lower margin free-to-guest services, and slight increases in studio
license fees and commissions paid to the hotels.
Free-to-guest direct costs were $1,628,000 in the second quarter of 1998
and 1997. As a percentage of free-to-guest revenue, free-to-guest direct
costs increased to 84.7% from 77.3% in the year-earlier quarter. The
increase in free-to-guest direct costs as a percentage of revenue is the
result of increased signal carriage fees owed to PRIMESTAR under the
agreement previously described. This increase was partially offset by a shift
of certain free-to-guest rooms, which have historically incurred direct costs
higher than the average free-to-guest room, from the free-to-guest revenue
component to the Guest Pay revenue component in the second quarter of 1998.
Direct costs associated with other revenue decreased $226,000 or 10.7% in
the second quarter of 1998 from the year earlier quarter. As a percentage of
related revenues, such direct costs decreased to 61.1% of other revenue in the
current quarter versus 72.4% in the second quarter of 1997, primarily reflecting
the effect of the increased cable television revenue previously described, which
generally earns a higher margin than the other sources of other revenue.
The Company's overall gross profit increased 20.8%, or $3.9 million, to
$22.7 million in the second quarter of 1998 on a 23.4% increase in revenues in
comparison to the same period in the prior year. The Company's overall gross
profit margin was 55.5% in the current quarter, as compared to the year earlier
56.7%.
Operating Expenses -- The following table sets forth information in regard
to the Company's operating expenses for the quarter ending June 30 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
------------------------ -----------------------
Percent Percent
of Total of Total
Amount Revenues Amount Revenues
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Operating expenses:
Guest Pay operations $ 5,006 15.1% $ 6,245 15.3%
Selling, general and administrative 4,727 14.3% 4,961 12.1%
Depreciation and amortization 10,495 31.7% 13,407 32.8%
-------- -------- ------- --------
Total operating expenses $ 20,228 61.1% $ 24,613 60.2%
-------- -------- ------- --------
-------- -------- ------- --------
</TABLE>
June 30, 1998 Page 12
<PAGE>
Guest Pay operations expenses consist of costs directly related to the
operation of systems at the hotel sites as well as at residential sites serviced
by the residential services segment. Excluding the expenses incurred to operate
the systems at residential sites, which were $710,000 in the second quarter of
1998 and $297,000 in the second quarter of 1997, expenses related to Guest Pay
operations increased 17.5%, or $826,000 in the second quarter of 1998 compared
to the year earlier quarter. This increase is primarily attributable to the
21.8% increase in average installed Guest Pay rooms in the second quarter of
1998 as compared to the year earlier quarter, partially offset by lower average
operating and service expenses incurred on a per room basis. Per average
installed Guest Pay room, such expenses were $3.40 per month in the second
quarter of 1998 as compared to $3.52 per month in the second quarter of 1997.
Selling, general and administrative expenses increased 5.0%, or $234,000 in
the second quarter of 1998 compared to the year earlier quarter. As a
percentage of revenue, such expenses decreased to 12.1% in the current quarter
as compared to 14.3% in the year earlier quarter.
Depreciation and amortization expenses increased 27.7% to $13.4 million in
the second quarter of 1998 from $10.5 million in the year earlier quarter. This
increase is directly attributable to the increases in the number of installed
Guest Pay rooms and ResNet units, associated software and other capitalized
costs such as service vans, equipment and computers that are related to the
increased number of rooms and units in service since the year-earlier quarter.
ResNet depreciation and amortization was $969,000 in the second quarter of 1998
compared to $345,000 in the year earlier quarter.
Operating Loss -- The Company's operating loss, as a result of the factors
previously described, was $(1.9) million in the current quarter as compared to
$(1.4) million in the same quarter of 1997.
Interest Expense -- Interest expense, net of interest income, increased to
$5.6 million in the current quarter from $4.3 million in the comparable quarter
of 1997 due to increases in long-term debt to fund the Company's continuing
expansion of its business and decreased interest income. Long-term debt
increased from $180.0 million at June 30, 1997 to $221.2 million at June 30,
1998. Average principal amount of long-term debt outstanding during the quarter
ended March 31, 1998 was approximately $202 million (at an average interest rate
of approximately 10.5%) as compared to an average principal amount outstanding
of approximately $180 million (at an average interest rate of approximately
10.5%) during the comparable period of 1997. Interest income decreased from
$592,000 in the second quarter of 1997 to $16,000 in the second quarter of 1998
due to the use of proceeds from previous borrowings to fund the Company's
expansion.
Net Loss -- For the reasons previously described, the Company's net loss
increased to $(7.5) million in the second quarter of 1998 from a net loss of
$(5.8) million in the same quarter a year earlier.
EBITDA -- As a result of increasing revenues from Guest Pay services, and
the other factors previously described, EBITDA (defined as "earnings before
interest, income taxes, depreciation and amortization") increased 27.0% to $11.5
million in the second quarter of 1998 as compared to $9.1 million in the second
quarter of 1997. EBITDA as a percentage of total revenue was 28.1% in the
current quarter as compared to 27.3% in the same quarter of 1997. 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.
June 30, 1998 Page 13
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 AND 1998
REVENUE ANALYSIS
The Company's total revenue for the six months ended June 30, 1998
increased 23.0%, or $14.5 million, in comparison to the six months ended June
30, 1997. The following table sets forth the components of the Company's
revenue for the six months ended June 30 (dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
----------------------- -----------------------
Percent Percent
of Total of Total
Amount Revenue Amount Revenue
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Guest Pay $ 53,686 85.5 $ 67,750 87.7
Free-to-guest 4,271 6.8 3,982 5.2
Other 4,831 7.7 5,513 7.1
-------- -------- -------- --------
Total $ 62,788 100.0 $ 77,245 100.0
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
Guest Pay Revenue -- Guest Pay revenue increased 26.2%, or $14.1 million,
in the first half of 1998 in comparison to the same period of 1997. This
increase was the result of a 23.9% increase in the average number of installed
Guest Pay rooms and an increase in the average monthly revenue per room. The
following table sets forth information in regard to average monthly revenue per
installed Guest Pay room for the six months ending June 30:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Average monthly revenue per room:
Movie revenue $ 17.77 $ 18.01
Video game and other service revenue 3.11 3.23
------- -------
Total per Guest Pay room $ 20.87 $ 21.24
------- -------
------- -------
</TABLE>
Average movie revenue per room was impacted by higher average buy rates
attributable to a more popular selection of newly-released major motion pictures
in the current period as compared to the year earlier period. This increase was
partially offset by lower average hotel occupancy levels.
Average video game and other service revenue per room increased primarily
as a result of the increase in the number of rooms with information and other
services installed, partially offset by a decrease in average monthly video game
revenue per room.
Free-to-Guest Revenue -- Free-to-guest revenue decreased 6.8%, or $289,000
in the first six months of 1998 as compared to the same period of 1997. This
decrease is primarily the result of a slight decrease in the average number of
rooms at hotels receiving only free-to-guest services during the period
(although total rooms receiving free-to-guest services increased 17.3%).
Other Revenue -- Revenue from other sources includes cable television
revenue generated by the residential services segment, revenue from
international license arrangements, and revenue from the sale of televisions,
system equipment, and service parts and labor. The increase in the first half
of 1998 from the same period of 1997 of $682,000 or 14.1%, is primarily due to
increased cable television revenue generated by the residential services segment
of $1,624,000, partially offset by a decrease in television and system equipment
sales.
June 30, 1998 Page 14
<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 six months ending June 30
(dollar amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Direct costs:
Guest Pay $ 20,330 $ 27,750
Free-to-guest 3,363 3,173
Other 3,462 3,344
-------- --------
$ 27,155 $ 34,267
-------- --------
-------- --------
Gross profit margin:
Guest Pay 62.1% 59.0%
Free-to-guest 21.3% 20.3%
Other 28.3% 39.3%
Composite 56.8% 55.6%
</TABLE>
Guest Pay direct costs increased 36.5%, or $7.4 million, in the first half
of 1998 as compared to the first half of 1997. 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 directly with revenue. As a percentage of revenue, such costs
increased from 37.9% during the first six months of 1997 to 41.0% during the
same period of 1998. The increase in Guest Pay direct costs as a percentage of
revenue reflects higher video game costs (which are incurred based on the number
of rooms receiving video game services rather than the number of game buys), an
increasing proportion of guest pay rooms subscribing to lower margin
free-to-guest services, and slight increases in studio license fees and
commissions paid to the hotels.
Free-to-guest direct costs decreased from $3.4 million during the first
half of 1997 to $3.2 million. As a percentage of free-to-guest revenue,
free-to-guest direct costs increased to 79.7% from 78.7% in the year-earlier
period. The increase in free-to-guest direct costs as a percentage of revenue
is the result of increased signal carriage fees owed to PRIMESTAR under the
agreement previously described. This increase was partially offset by a
shift of certain free-to-guest rooms, which have historically incurred direct
costs higher than the average free-to-guest room, from the free-to-guest
revenue component to the Guest Pay revenue component in the first half of
1998.
Direct costs associated with other revenue decreased $118,000 or 3.4% in
the first half of 1998 from the year earlier period. As a percentage of related
revenues, such direct costs decreased to 60.7% of other revenue in the current
period versus 71.7% in the year earlier period, primarily reflecting the effect
of the increased cable television revenue previously described, which generally
earns a higher margin than the other sources of other revenue.
The Company's overall gross profit increased 20.6%, or $7.3 million, to
$43.0 million in the first six months of 1998 on a 23.0% increase in revenues in
comparison to the same period in the prior year. The Company's overall gross
profit margin was 55.6% in the current six month period, as compared to the year
earlier 56.8%.
Operating Expenses -- The following table sets forth information in regard
to the Company's operating expenses for the six months ending June 30 (dollar
amounts in thousands):
<TABLE>
<CAPTION>
1997 1998
-------------------- -----------------
Percent Percent
of Total of Total
Amount Revenues Amount Revenues
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating expenses:
Guest Pay operations $ 9,699 15.4% $ 12,382 16.0%
Selling, general and administrative 9,783 15.6% 9,787 12.7%
Depreciation and amortization 20,190 32.2% 25,986 33.6%
-------- -------- -------- --------
Total operating expenses $ 39,672 63.2% $ 48,155 62.3%
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
June 30, 1998 Page 15
<PAGE>
Guest Pay operations expenses consist of costs directly related to the
operation of systems at the hotel sites as well as at residential sites serviced
by the residential services segment. Excluding the expenses incurred to operate
the systems at residential sites, which were $1,456,000 in the first half of
1998 and $438,000 in the first half of 1997, expenses related to Guest Pay
operations increased 18.0%, or $1,665,000 in the first half of 1998 compared to
the year earlier period. This increase is primarily attributable to the 23.9%
increase in average installed Guest Pay rooms in the first half of 1998 as
compared to the year earlier period, partially offset by lower average operating
and service expenses incurred on a per room basis. Per average installed Guest
Pay room, such expenses were $3.43 per month during the first six months of 1998
as compared to $3.65 per month in the same period of 1997.
Selling, general and administrative expenses were $9.8 million in the first
half of 1998 and 1997. As a percentage of revenue, such expenses decreased to
12.7% in the current period as compared to 15.6% in the year earlier period.
Depreciation and amortization expenses increased 28.7% to $26.0 million in
the first six months of 1998 from $20.2 million in the year earlier period.
This increase is directly attributable to the increases in the number of
installed Guest Pay rooms and ResNet units, associated software and other
capitalized costs such as service vans, equipment and computers that are related
to the increased number of rooms and units in service since the year-earlier
quarter. ResNet depreciation and amortization was $1,772,000 in the first half
of 1998 compared to $535,000 in the year earlier period.
Operating Loss -- The Company's operating loss, as a result of the factors
previously described, was $(5.2) million in the current period as compared to
$(4.0) million in the same period of 1997.
Interest Expense -- Interest expense, net of interest income, increased to
$10.8 million in the current six month period from $8.4 million in the
comparable period of 1997 due to increases in long-term debt to fund the
Company's continuing expansion of its business and decreased interest income.
Long-term debt increased from $180.0 million at June 30, 1997 to $221.2 million
at June 30, 1998. Average principal amount of long-term debt outstanding during
the six months ended June 30, 1998 was approximately $204 million (at an average
interest rate of approximately 10.5%) as compared to an average principal amount
outstanding of approximately $180 million (at an average interest rate of
approximately 10.5%) during the comparable period of 1997. Interest income
decreased from $1,447,000 in the first half of 1997 to $22,000 in the first of
1998 due to the use of proceeds from previous borrowings to fund the Company's
expansion.
Net Loss -- For the reasons previously described, the Company's net loss
increased to $(16.2) million in the first half of 1998 from a net loss of
$(12.4) million in the same period of the prior year.
EBITDA -- As a result of increasing revenues from Guest Pay services, and
the other factors previously described, EBITDA (defined as "earnings before
interest, income taxes, depreciation and amortization") increased 28.8% to $20.8
million in the first six months of 1998 as compared to $16.2 million in the
first six months of 1997. EBITDA as a percentage of total revenue was 26.9% in
the current six month period as compared to 25.7% in the same period of 1997.
EBITDA is included herein because it is a widely accepted financial indicator
used by certain investors and financial analysts to assess and compare companies
on the basis of operating performance. EBITDA is not intended to represent an
alternative to net income (as determined in accordance with generally accepted
accounting principles) as a measure of performance, but management believes that
it does provide an important additional perspective on the Company's operating
results and the Company's ability to service its long-term debt and to fund the
Company's continuing growth.
SEASONALITY
The Company's quarterly operating results are subject to fluctuation
depending upon hotel occupancy rates and other factors. Typically, occupancy
rates are higher during the second and third calendar quarters due to seasonal
travel patterns.
June 30, 1998 Page 16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the growth of the Company's business has required substantial
amounts of capital. The Company has incurred operating and net losses due in
large part to the depreciation, amortization and interest expenses related to
the capital expenditures required to expand its lodging and residential
businesses. Historically, cash flow from operations has not been sufficient to
fund the cost of expanding the Company's business and to service existing
indebtedness. Capital expenditures were approximately $105.5 million during
1997, and net cash provided by operating activities was approximately $16.7
million. During the first six months of 1998, capital expenditures were
approximately $37.0 million (of which $7.0 million was incurred by ResNet) and
net cash provided by operating activities was $5.6 million (including negative
operating cash flow of $2.4 million from ResNet).
June 30, 1998 Page 17
<PAGE>
Depending on the rate of growth of its lodging business and other factors,
the Company expects to incur capital expenditures of between approximately $25
to $35 million during the remainder of 1998 and between approximately $50 to $75
million in 1999. 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. This a forward-looking statement and there
can be no assurance in this regard. In addition, the Company's Revolving 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 its operating cash flows and borrowings permitted
under its $100 million Revolving Credit Facility (which may be increased to $175
million, subject to certain conditions) will be sufficient to fund the Company's
cash requirements through 1999. However, 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.
ResNet is currently at a stage of development during which it will consume,
through operating losses and capital expenditures for installations,
substantially more capital than it is generating. The Company is currently
assessing alternative strategies to establish ResNet as a self-financing
enterprise that will not be reliant on the Company for the funding of its
business plan. The successful deconsolidation of ResNet's operations from the
Company's consolidated operating results would eliminate the negative financial
impact of the operating losses and capital requirements of ResNet expected to be
incurred during its growth phase.
YEAR 2000 INFORMATION
The Company is engaged in a comprehensive review of its computer systems
and software in regard to "Year 2000" issues. The Company is cooperating with
its customers and suppliers to assess the extent, if any, of Year 2000 issues
pertaining to such third party hardware and software systems and to obtain
assurances, where appropriate, that these systems are Year 2000 compliant or
that timely updates will be made available to make any such systems Year 2000
compliant. Based on its review, the Company does not anticipate any material
costs or expenses, or any material adverse effect on its operations, financial
condition, products or services, or competitive position as a result of such
issues.
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.
June 30, 1998 Page 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 and trial is expected to begin on September 29, 1998.
Based on the advice of special patent counsel and technical experts retained by
the Company, as well as the Company's independent analysis, the Company believes
that the claims of infringement are unfounded. The Company has and will
continue to vigorously defend itself in this matter. Patent litigation is
especially complex, both as to factual allegations and the legal interpretation
of patent claims, which makes such lawsuits difficult to assess with certainty.
While the Company and its patent counsel believe the Company has a number of
defenses available, which, if properly considered, would eliminate or minimize
any liability for the Company, an unexpected unfavorable resolution, depending
on the amount and timing, could adversely affect the Company. Although the
outcome of any litigation cannot be predicted with certainty, the Company
believes that the ultimate disposition of this matter will not have a material
adverse effect on the Company's business or financial condition.
From time to time, the Company is subject to other litigation arising in
the ordinary course of business. As of the date hereof, in the opinion of
management, the resolution of such other litigation will not have a material
adverse effect upon the Company's business or financial condition.
ITEM 2 -- CHANGES IN SECURITIES
Not applicable.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a. The Annual Meeting of Stockholders of the company ("Meeting") was held
on May 13, 1998 for the following purposes:
1. Election of two directors to serve for a three-year term expiring
in 2001;
2. Approval of an amendment ("Plan Amendment") to the Company's 1993
Stock Option Plan, as amended;
3. Ratification of the appointment of independent public
accountants; and
4. Action on such matters as may properly come before the Meeting.
b. The directors who were elected at the Meeting are as follows:
Lawrence Flinn, Jr.
Scott C. Petersen
c. The results of voting at the Meeting were as follows:
Election of Directors -
<TABLE>
<CAPTION>
For Against Withheld Abstentions
<S> <C> <C> <C> <C>
Lawrence Flinn, Jr. 10,039,608 - - 667,342 - -
Scott C. Petersen 10,040,408 - - 666,542 - -
</TABLE>
June 30, 1998 Page 19
<PAGE>
<TABLE>
<CAPTION>
Plan Amendment -
For Against No Voting Authority
<S> <C> <C> <C>
4,829,187 3,159,465 2,705,936
Ratification of Public Accountants -
For Against Abstain
9,647,014 6,555 3,111
</TABLE>
ITEM 5 -- OTHER INFORMATION
In February 1998, the Company acquired a ten percent member interest in
Across Media Networks, LLC ("AMN"), a Delaware limited liability company, for a
purchase price of $150,000, and agreed to advance to AMN up to $5.7 million in
senior secured convertible loans. At any time after January 1, 1999, the loan
is convertible, in whole or in part on a prorata basis, into an additional
eighty percent ownership interest in AMN. AMN designs and operates "private
label" cable channels that enable cable operators to out-source the creation of
branded, advertiser-supported, subscriber information channels, thus converting
underutilized bandwidth into a useful community information channel that
provides the cable operator with a valuable branding opportunity and higher
revenue per subscriber. AMN serves over one million subscribers in over fifty
cities nationwide. AMN's service integrates local advertising, community
information, infomercials, and satellite delivered data streams for weather,
sports scores and other information within a high quality, digitally produced,
template-based format. AMN's technology platform enables the generation of
multiple revenue streams on a single channel with a scalable design that can
serve the needs of the largest urban cable headends down to headend systems
serving as few as 1,000 subscribers.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
10.25 Amendment No. 1 to Amended and Restated Credit
Agreement, dated as of March 20, 1998, among the
Company, the Banks signatory thereto, and National
Westminster Bank Plc, as Agent for such Banks.
B. REPORTS ON FORM 8-K:
The Company filed no Reports on Form 8-K during the three months
ended June 30, 1998.
June 30, 1998 Page 20
<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: August 6, 1998 /S/ SCOTT C. PETERSEN
----------------------------------------
Scott C. Petersen
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 6, 1998 /S/ JEFFREY T. WEISNER
----------------------------------------
Jeffrey T. Weisner
Vice President - Finance
(Principal Financial and Accounting Officer)
June 30, 1998 Page 21
<PAGE>
Exhibit 10.25
June 30, 1998
AMENDMENT NO. 1
TO
AMENDED AND RESTATED CREDIT AGREEMENT
This Amendment No. 1 to Amended and Restated Credit Agreement is dated as
of March 20, by and among LODGENET ENTERTAINMENT CORPORATION, a Delaware
corporation (the "Borrower"), the Banks named in the Credit Agreement referred
to below (the "Banks"), NATIONAL WESTMINSTER BANK PLC, individually and as Agent
and Arranger for the Banks, THE FIRST NATIONAL BANK OF BOSTON, individually and
as Co-Agent for the Banks, and NATIONAL WESTMINSTER BANK OF CANADA, as an
Issuing Bank.
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks, the Agent, the Co-Agent and Issuing Bank
are parties to that certain Amended and Restated Credit Agreement dated as of
December 12, 1996 (the "Agreement");
WHEREAS, the Borrower and the Banks desire to amend the Agreement in
certain respects;
NOW, THEREFORE, in consideration of the premises herein contained, and for
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
I. DEFINED TERMS.
Each capitalized term used herein but not otherwise defined herein shall
have the meaning ascribed to such term in the Agreement.
II. AMENDMENT OF AGREEMENT.
The Agreement is amended as follows:
1. The definition of "Affiliate" in Article 1 of the Agreement is hereby
amended by deleting the entire proviso clause beginning in the sixth line of
such definition and inserting a period after the phrase "contract or otherwise)"
in the sixth line.
2. Article 1 of the Agreement is hereby further amended by adding the
following proviso clause at the end of the definition "Leases":
; PROVIDED, HOWEVER, that "Leases" shall not be deemed to include
video service leases and similar agreement utilized by the Borrower or
its Subsidiaries in the ordinary course of business for the purpose of
obtaining the right to deliver cable television programming and/or
other interactive, multimedia entertainment and information services
to specific customer properties.
1
<PAGE>
3. The table contained in subsection 6.9(a) of the Agreement is hereby
amended in its entirety to read as follows:
<TABLE>
<CAPTION>
During each Fiscal Quarter
Ending in Each of the
Following Periods Maximum Total Leverage
----------------------------- ----------------------
<S> <C>
from the Closing Date through
June 30, 1998 5.75 to 1
from July 1, 1998 through
June 30, 1999 5.50 to 1
from July 1, 1999 through
June 30, 2000 4.75 to 1
from July 1, 2000 and
continuing thereafter 4.25 to 1
</TABLE>
4. The table contained in subsection 6.9(b) of the Agreement is hereby
amended in its entirety to read as follows:
<TABLE>
<CAPTION>
Fiscal Period Minimum Interest Coverage
------------------------ -------------------------
<S> <C>
On fiscal quarter ending
March 31, 1997 1.25 to 1
Two fiscal quarters ending
June 30, 1997 1.50 to 1
Three fiscal quarters ending
September 30, 1997 1.50 to 1
Four fiscal quarters ending
at each of the following dates:
December 31, 1997; March 31,
1998; and June 30, 1998 1.75 to 1
Four fiscal quarters ending
at each of the following dates:
September 30, 1998; December 31,
1998; March 31, 1999; and
June 30, 1999 1.88 to 1
2
<PAGE>
<S> <C>
Four fiscal quarters ending at
each of the following dates:
September 30, 1999 and December 31,
1999; and March 31, June 30,
September 30 and December 31
in each of the fiscal years
2000, 2001 and 2002 2.00 to 1
</TABLE>
5. Subsection 7.1(e) of the Agreement is hereby amended by substituting
the figure "$15,000,000" for "$5,000,000" in the third line thereof.
6. Subsection 7.9(b) of the Agreement is hereby amended in its entirety
to read as follows:
(b) Investments in the form of (i) loans or advances to directors,
officers or employees of the Borrower or any Subsidiary, or guarantees
or assumptions of the payment obligations of such Persons with respect
to such loans or advances, made for the purpose of financing the
exercise of stock options or similar instruments issued by the
Borrower to such Persons (and the payment of taxes related thereto in
an aggregate amount not exceeding $3,000,000), which loans or advances
are secured by, and repayable out of the proceeds of any sale of, the
stock issued upon exercise of such options; PROVIDED that the terms of
any such loan, advance, guarantee or assumption have been approved by
the Compensation Committee of the Borrower, and (ii) other loans to
employees of the Borrower or any Subsidiary not exceeding $60,000 to
any one employee, or $250,000 in the aggregate to all employees, in
principal amount at any time outstanding.
III. REPRESENTATIONS.
In order to induce the Banks, the Agent, the Co-Agent and Issuing Bank to
enter into this Amendment, the Borrower represents and warrants that:
1. There exists no Default or Event of Default on the date hereof.
2. The execution and delivery by the Borrower of this Amendment No. 1 has
been duly authorized by all requisite corporate proceedings and this Amendment
No. 1 and the Agreement, as amended by this Amendment No. 1, constitute the
legal, valid and binding obligations of the Borrower.
IV. EFFECTIVENESS.
3
<PAGE>
This Amendment No. 1 shall become effective as of the date first above
written (the "Effective Date") upon receipt by the Agent of counterparts of this
Amendment No. 1 duly executed by the Borrower and the Majority Banks.
V. RATIFICATION.
Except as specifically set forth above, the Agreement shall remain
unaltered and in full force and effect and the respective terms, conditions and
covenants thereof are hereby ratified and confirmed in all respects.
VI. REFERENCE TO AGREEMENT.
Upon the effectiveness of this Amendment No. 1, each reference in the
Agreement to "this Agreement", "hereof", "herein" or "hereunder" or words of
like import, and all references to the Agreement in any of the other Loan
Documents, shall mean and be a reference to the Agreement as amended hereby.
VII. EXECUTION IN COUNTERPARTS.
This Amendment No. 1 may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
VIII. GOVERNING LAW.
This Amendment No. 1 shall be governed by, enforced and construed in
accordance with the internal laws, without regard to conflicts of law
provisions, of the State of New York.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
as of the date first above written.
LODGENET ENTERTAINMENT CORPORATION
By:
---------------------------------------------
Title:
------------------------------------------
NATIONAL WESTMINISTER BANK PLC, as Agent and
as a Bank
By:
---------------------------------------------
Title:
------------------------------------------
THE FIRST NATIONAL BANK OF BOSTON, as Co-Agent
and as a Bank
By:
---------------------------------------------
Title:
------------------------------------------
FIRST BANK NATIONAL ASSOCIATION
By:
---------------------------------------------
Title:
------------------------------------------
MERCANTILE BANK OF ST. LOUIS N.A.
By:
---------------------------------------------
Title:
------------------------------------------
UNION BANK OF CALIFORNIA, N.A.
By:
---------------------------------------------
Title:
------------------------------------------
5
<PAGE>
CORESTATE BANK, N.A.
By:
---------------------------------------------
Title:
------------------------------------------
FIRST HAWAIIAN BANK
By:
---------------------------------------------
Title:
------------------------------------------
6
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0
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