<PAGE>
UNITED STATES
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 QUARTERLY PERIOD ENDED JUNE 30, 1999
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)
-------------------------------------------------------------------------
(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 2, 1999, there were 11,942,387 shares outstanding of the
Registrant's common stock, $0.01 par value.
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999 (Unaudited).................. 3
Consolidated Statements of Operations (Unaudited) for
the Three and Six Months Ended June 30, 1998 and 1999.......................................... 4
Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended June 30, 1998 and 1999.................................................... 5
Notes to Consolidated Financial Statements......................................................... 6
Item 2 -- Management's Discussion and Analysis of Financial Condition and Results of Operations........ 9
Item 3-- Quantitative and Qualitative Disclosures About Market Risk..................................... 19
PART II. OTHER INFORMATION
Item 1-- Legal Proceedings.............................................................................. 20
Item 2-- Changes in Securities and Use of Proceeds...................................................... 20
Item 3-- Defaults Upon Senior Securities................................................................ 20
Item 4-- Submission of Matters to a Vote of Security Holders............................................ 20
Item 5-- Other Information.............................................................................. 20
Item 6-- Exhibits and Reports on Form 8-K............................................................... 21
SIGNATURES.............................................................................................. 22
</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, AND STATEMENTS WHICH ARE MADE IN THE FUTURE TENSE, 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.
Page 2
<PAGE>
PART I -- FINANCIAL INFORMATIOn
ITEM 1 -- FINANCIAL STATEMENTS
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 5,240 $ 3,969
Accounts receivable, net of allowance for doubtful accounts 27,586 26,843
Prepaid expenses and other 6,086 4,930
------------ ------------
Total current assets 38,912 35,742
Property and equipment, net of accumulated depreciation 209,437 207,967
Investments in and advances to unconsolidated affiliates 32,701 11,739
Debt issuance costs, net of accumulated amortization 6,637 9,445
Other assets, net 18,343 15,658
------------ ------------
$ 306,030 $ 280,551
============ ============
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 13,705 $ 12,558
Accrued expenses and other 9,410 12,148
Current maturities of long-term debt 5,718 5,597
Deferred revenue 2,318 2,331
------------ ------------
Total current liabilities 31,151 32,634
Long-term debt 262,375 270,741
Minority interest in consolidated subsidiary 730 730
------------ ------------
Total liabilities 294,256 304,105
------------ ------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value, 20,000,000 shares authorized; 11,942,387 shares
outstanding at December 31, 1998 and
June 30, 1999 119 119
Additional paid-in capital 123,706 123,724
Accumulated other comprehensive loss (1,512) (1,005)
Accumulated deficit (110,539) (146,392)
------------ ------------
Total stockholders' equity (deficit) 11,774 (23,554)
------------ ------------
$ 306,030 $ 280,551
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- --------------------------------
1998 1999 1998 1999
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Guest Pay $35,901 $ 41,479 $67,750 $ 80,448
Other 4,997 2,790 9,495 5,786
--------------- -------------- -------------- --------------
Total revenues 40,898 44,269 77,245 86,234
--------------- -------------- -------------- --------------
Direct costs:
Guest Pay 14,679 16,840 27,750 32,691
Other 3,508 2,165 6,517 4,562
--------------- -------------- -------------- --------------
Total direct costs 18,187 19,005 34,267 37,253
--------------- -------------- -------------- --------------
Gross profit 22,711 25,264 42,978 48,981
--------------- -------------- -------------- --------------
Operating expenses:
Guest Pay operations 6,245 6,032 12,382 11,899
Selling, general and administrative 4,961 4,218 9,787 8,559
Depreciation and amortization 13,407 14,880 25,986 29,305
--------------- -------------- -------------- --------------
Total operating expenses 24,613 25,130 48,155 49,763
--------------- -------------- -------------- --------------
Operating income (loss) (1,902) 134 (5,177) (782)
Equity in losses of unconsolidated affiliates -- (18,373) -- (22,217)
Interest expense (5,571) (6,874) (10,872) (13,477)
Interest income -- 387 92 780
Provision for income taxes (75) (100) (226) (157)
=============== ============== ============== ==============
Net loss $ (7,548) $ (24,826) $ (16,183) $ (35,853)
=============== ============== ============== ==============
Per common share (basic and diluted):
Net loss $(0.65) $ (2.08) $(1.41) $ (3.00)
=============== ============== ============== ==============
Weighted average shares outstanding 11,545,121 11,942,387 11,451,473 11,942,387
=============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 4
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
1998 1999
--------------- --------------
<S> <C> <C>
Operating activities:
Net loss $ (16,183) $ (35,853)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 25,986 29,305
Gain on sale of property and equipment (309) --
Equity in losses of unconsolidated affiliates -- 22,217
Change in operating assets and liabilities:
Accounts receivable (1,911) 394
Prepaid expenses and other 688 1,158
Accounts payable (3,638) (1,159)
Accrued expenses and other 1,037 2,746
Other (92) 1,726
--------------- --------------
Net cash provided by operating activities 5,578 20,534
--------------- --------------
Investing activities:
Property and equipment additions (36,393) (25,680)
Proceeds from sale of property and equipment 412 --
Investment in unconsolidated affiliates (5,590) (846)
--------------- --------------
Net cash used for investing activities (41,571) (26,526)
--------------- --------------
Financing activities:
Proceeds from long-term debt 1,000 75,000
Repayment of long-term debt (9) (19)
Repayment of capital lease obligations (301) (303)
Borrowings under revolving credit facility 36,500 15,500
Repayments of revolving credit facility -- (82,000)
Debt issuance costs -- (3,501)
Stock option activity 188 --
--------------- --------------
Net cash provided by financing activities 37,378 4,677
--------------- --------------
Effect of exchange rates on cash (13) 44
--------------- --------------
Increase (decrease) in cash and cash equivalents 1,372 (1,271)
Cash and cash equivalents at beginning of period 1,021 5,240
--------------- --------------
Cash and cash equivalents at end of period $ 2,393 $ 3,969
=============== ==============
Supplemental cash flow information:
Cash paid for interest $ 10,362 $ 12,668
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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, 1999,
and for the three and six month periods ended June 30, 1998 and 1999, 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 1998, as filed with the Commission. The results of
operations for the three and six month periods ended June 30, 1999 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,
1998 1999
--------------- ----------------
<S> <C> <C>
Land, building and equipment $ 48,105 $ 52,193
Free-to-guest equipment 16,237 17,355
Guest pay systems:
Installed 257,980 274,697
System components 24,933 26,459
Software costs 8,640 9,203
--------------- ----------------
Total 355,895 379,907
Less - depreciation and amortization (146,458) (171,940)
--------------- ----------------
Property and equipment, net $ 209,437 $ 207,967
=============== ================
</TABLE>
Page 6
<PAGE>
Note 3 -- Investment in Affiliate
The Company obtained a 30% interest in Global Interactive
Communications Corporation ("GICC") resulting from the November 30, 1998 merger
transaction of the Company's majority owned subsidiary, ResNet Communications,
LLC with two other entities. GICC's business consists of providing cable
television programming and telecommunications services to the multi-family
dwelling unit market. The Company recorded losses totaling $3.2 million for the
first six months of 1999 to reflect its 30% interest in GICC's losses.
Additionally, during the second quarter of 1999, the Company recorded a charge
of $16.8 million to write-down its investment in GICC to estimated fair value.
Based on information from independent sources and GICC management, the Company
has reduced the carrying amount of its investment in GICC to approximately $12
million as of June 30, 1999, reflecting estimated amounts available to the
Company upon the sale of GICC's assets to third parties.
Note 4 -- Financing Transaction
On February 25, 1999, the Company amended and restated its bank credit
facility (the "Bank Facility"), increasing the capacity of the Bank Facility to
$150 million, comprised of a $75 million term loan and a $75 million revolving
credit facility. The $76.5 million outstanding at December 31, 1998 under the
previous revolving credit facility was repaid with proceeds from the term loan.
In addition to the $75 million term loan, the Bank Facility provides a $75
million revolving credit facility, which may be increased at the Company's
request to $100 million, subject to certain limitations. Quarterly repayments on
the term loan begin in February 2001 and are as follows for the respective
fiscal years (in thousands of dollars): 2001 -- $15,000; 2002 -- $18,750; 2003
- -- $18,750; 2004 -- $22,500. The revolving credit facility matures in February
2005. Loans under the Bank Facility bear interest at the Company's option of (1)
the bank's prime rate plus a margin of from 1.00% to 1.75%, or (2) the
eurodollar rate plus a margin of from 2.00% to 2.75%; both depending on leverage
as defined. The margins applicable to the bank's prime rate and/or the
eurodollar rate loans are subject to quarterly adjustment as defined in the
agreement.
The Bank Facility includes terms and conditions which require the
maintenance of certain financial ratios and place certain limitations on capital
expenditures, investments, additional indebtedness, liens, guarantees, and
certain payments or distributions in respect of common stock of the Company.
Loans under the Bank Facility are secured by a first priority security interest
in all of the Company's assets. As of June 30, 1999, $10 million was outstanding
under the revolving credit facility, and the Company was in compliance with all
covenants, terms and conditions of the Bank Facility.
Note 5 -- 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 loss was $24,514 and
$7,953 for the quarters ended June 30, 1999 and 1998, respectively, and $35,346
and $16,511 for the six months ended June 30, 1999 and 1998, respectively.
Note 6 -- Reclassification
Beginning in 1999, the Company has chosen to reflect the results of its
free-to-guest business within the "other" components of revenues and direct
costs in the statements of operations. Accordingly, the statement of operations
for the three and six months ended June 30, 1998 includes these
reclassifications to conform to the 1999 presentation. These changes had no
impact on total revenues, direct costs or net loss for the period.
Page 7
<PAGE>
Note 7 -- Effect of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. In June 1999, the
FASB issued SFAS No. 137 which amended SFAS No. 133 to delay its effective date
to fiscal quarters beginning after June 15, 2000. Accordingly, the Company plans
to adopt the requirements of SFAS No. 133 in the third quarter of 2000. SFAS No.
133 could increase volatility in earnings and other comprehensive income.
Page 8
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE HEREIN.
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, AND STATEMENTS WHICH ARE MADE IN THE FUTURE TENSE, 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.
OVERVIEW
LodgeNet is a specialized communications company which provides
video on-demand, network-based video games, high-speed internet access, cable
television programming and other interactive entertainment and information
services to the lodging industry utilizing its B-LAN-Registered Trademark-
open system architecture.
GUEST PAY SERVICES. Guest Pay services are purchased by guests on a
per-view or hourly basis and include Guest Scheduled-SM- on-demand movies and
network-based Nintendo-Registered Trademark- video games. Guest Pay packages
may also include additional services such as satellite-delivered basic and
premium cable television programming , and other interactive entertainment
and information services that are paid for by the hotel and provided to
guests at no charge. The growth that the Company has experienced has
principally resulted from its rapid expansion of Guest Pay 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,
programming delivery and distribution, data retrieval, insurance and personal
property taxes.
The Company provides video games and interactive multimedia
entertainment and information services including folio review, video
checkout, guest satisfaction survey, advertising and merchandising services
through its Guest Pay systems. 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. During 1998, the Company entered into a new,
ten-year non-exclusive license agreement with Nintendo to become the first
provider of Nintendo 64 ("N64-Registered Trademark-") video games to the
lodging industry. The Company began the rollout of the N64 game technology to
its Guest Pay rooms during the second quarter of 1999.
Page 9
<PAGE>
During the three months and twelve months ended June 30, 1999, 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, 1999 June 30, 1999
------------------ ------------------
<S> <C> <C>
Guest Pay rooms 17,610 77,018
================== ==================
Nintendo game system rooms 26,134 73,292
================== ==================
</TABLE>
The room installations for the twelve months ended June 30, 1999 represent
increases of 13.8% for Guest Pay and 14.6% for Nintendo, over the room bases at
June 30, 1998.
The Company's base of installed rooms was comprised as follows at June 30:
<TABLE>
<CAPTION>
1998 1999
------------------------ ------------------------
<S> <C> <C>
Rooms % Rooms %
------------ -------- ------------ --------
Guest Pay rooms:
Scheduled 21,034 3.8 9,997 1.6
On-demand 535,234 96.2 623,289 98.4
------------ -------- ------------ --------
556,268 100.0 633,286 100.0
------------ -------- ------------ --------
Nintendo game system rooms 503,041 576,333
============ ============
</TABLE>
Total rooms served, representing rooms receiving one or more of the
Company's services, including rooms served by international licensees, were as
follows at June 30:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Total rooms served 659,866 735,726
============ ============
</TABLE>
FREE-TO-GUEST SERVICES. In addition to Guest Pay services, the Company
provides cable television programming for which the hotel, rather than its
guests, pays the charges. Free-to-guest services include the satellite delivery
of various programming channels through a satellite earth station, which
generally is owned or leased by the hotel. 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.
Results from free-to-guest services delivered to rooms not receiving Guest Pay
services are included in the "other" components of revenues and direct costs in
the statements of operations.
RESIDENTIAL SERVICES. Effective November 30, 1998, the operations of
the Company's majority-owned subsidiary, ResNet Communications, LLC ("ResNet")
were merged with two non-affiliated entities to form a new entity, Global
Interactive Communications Corporation ("GICC"). The Company has a 30% equity
interest in GICC. GICC's business consists of providing cable television
programming and telecommunications services to the multi-family dwelling unit
market. The Company has accounted for its investment in GICC using the equity
method of accounting for an investment, recording losses totaling $3.2 million
for its share of GICC's losses for the six months ending June 30, 1999.
Additionally, during the second quarter of 1999, the Company recorded a charge
of $16.8 million to write-down its investment in GICC to estimated fair value.
Based on information from independent sources and GICC management, the Company
has reduced the carrying amount of its investment in GICC to
Page 10
<PAGE>
approximately $12 million as of June 30, 1999, reflecting estimated amounts
available to the Company upon the sale of GICC's assets to third parties.
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUE ANALYSIS
The Company's total revenue for the second quarter of 1999 increased
8.2%, or $3.4 million, in comparison to the second quarter of 1998. The
following table sets forth the components of the Company's revenue (in
thousands) for the quarter ending June 30:
<TABLE>
<CAPTION>
1998 1999
--------------------------- -----------------------------
Percent Percent
of Total of Total
Amount Revenue Amount Revenue
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Guest Pay $ 35,901 87.8 $ 41,479 93.7
Other 4,997 12.2 2,790 6.3
------------ ----------- ------------- -----------
Total $ 40,898 100.0 $ 44,269 100.0
============ =========== ============= ===========
</TABLE>
GUEST PAY SERVICES. Guest Pay revenue increased 15.5%, or $5.6 million,
in the second quarter of 1999 in comparison to the same quarter of 1998. This
increase was attributable to a 14.7% increase in the average number of installed
Guest Pay rooms and a .7% increase in average monthly revenue per room. The
following table sets forth information in regard to average monthly revenue per
installed Guest Pay room for the quarter ending June 30:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Average monthly revenue per room:
Movie revenue $ 18.54 $ 18.51
Video game and other service revenue 3.54 3.73
----------- ------------
Total per Guest Pay room $ 22.08 $ 22.24
=========== ============
</TABLE>
Average movie revenue per Guest Pay room decreased .2% in the second
quarter of 1999 compared to the same quarter of 1998. This decrease was due to
lower average buy rates and hotel occupancy levels, partially offset by higher
average movie prices.
Average video game and other service revenue per Guest Pay room
increased 5.4% primarily as a result of increased revenue per Guest Pay room
from cable television programming services, partially offset by a decrease in
average monthly video game revenue per room.
OTHER. Revenue from other sources includes revenue from free-to-guest
services provided to hotels not receiving Guest Pay services and sales of
televisions, system equipment, and service parts and labor. Additionally, in
1998, other revenue includes revenue generated by ResNet. The decrease in the
second quarter of 1999 from the second quarter of 1998 of $2.2 million or 44.2%,
is primarily due to $1.4 million of revenue generated by ResNet in the second
quarter of 1998. In addition, sales of televisions and system equipment were
lower in the second quarter of 1999 from the year earlier quarter.
Page 11
<PAGE>
EXPENSE ANALYSIS
DIRECT COSTS. The following table sets forth information in regard to
the Company's direct costs (in thousands) and gross profit margin for the
quarter ending June 30:
<TABLE>
<CAPTION>
1998 1999
------------ -----------
<S> <C> <C>
Direct costs:
Guest Pay $ 14,679 $ 16,840
Other 3,508 2,165
------------ -----------
$ 18,187 $ 19,005
============ ===========
Gross profit margin:
Guest Pay 59.1% 59.4%
Other 29.8% 22.4%
Composite 55.5% 57.1%
</TABLE>
Guest Pay direct costs increased 14.7%, or $2.2 million, in the second
quarter of 1999 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 costs tend
to vary directly with revenue. As a percentage of revenue, such costs decreased
from 40.9% in the second quarter of 1998 to 40.6% in the current quarter,
primarily due to a slight decrease in commissions earned by the hotels and
increased margins earned on cable television programming services provided to
Guest Pay rooms.
Direct costs associated with other revenue decreased $1.3 million or
38.3% in the second quarter of 1999 from the year earlier quarter. This decrease
is primarily due to $642,000 of direct costs incurred by ResNet in the second
quarter of 1998 and the lower volume of television and equipment sales
previously described. As a percentage of related revenues, direct costs
increased to 77.6% of other revenue in the current quarter versus 70.2% in the
second quarter of 1998. The resulting decrease in gross profit margin from 29.8%
in the second quarter of 1998 to 22.4% in the current quarter is due to the fact
that the ResNet business, which generally earned a higher margin than the other
sources of other revenue, is not included in the 1999 results due to the merger
transaction previously described.
The Company's overall gross profit increased 11.2%, or $2.6 million, to
$25.3 million in the second quarter of 1999 on a 8.2% increase in revenues in
comparison to the same period of the prior year. The Company's overall gross
profit margin increased to 57.1% in the current quarter from 55.5% in the year
earlier quarter.
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>
1998 1999
--------------------------- ---------------------------
Percent Percent
of Total of Total
Amount Revenues Amount Revenues
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating expenses:
Guest Pay operations $ 6,245 15.3 $ 6,032 13.7
Selling, general and administrative 4,961 12.1 4,218 9.5
Depreciation and amortization 13,407 32.8 14,880 33.6
------------ ----------- ----------- -----------
Total operating expenses $ 24,613 60.2 $ 25,130 56.8
============ =========== =========== ===========
</TABLE>
Guest Pay operations expenses consist of costs directly related to the
operation of systems at the hotel sites. Additionally, prior to the ResNet
merger, costs incurred to operate the ResNet systems were included in Guest Pay
operations. Such costs totaled $710,000 in the second quarter of 1998. Excluding
the expenses incurred to operate the
Page 12
<PAGE>
systems at residential sites, expenses related to Guest Pay operations
increased 9.0%, or $497,000 in the second quarter of 1999 compared to the
year earlier quarter. This increase is primarily attributable to the 14.7%
increase in average installed Guest Pay rooms in the second quarter of 1999
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 $3.23 per month in the second
quarter of 1999 as compared to $3.40 per month in the second quarter of 1998.
Selling, general and administrative expenses decreased 15.0%, or
$743,000 in the second quarter of 1999 compared to the year earlier quarter. The
decrease is due in part to the ResNet merger as $424,000 of selling, general and
administrative expenses were incurred by ResNet in the second quarter of 1998.
As a percentage of revenue, such expenses were 9.5% in the current quarter as
compared to 12.1% in the year earlier quarter.
Depreciation and amortization expenses increased 11.0% to $14.9 million
in the second quarter of 1999 from $13.4 million in the year earlier quarter.
This increase is attributable to the increases in the number of installed Guest
Pay rooms, 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. This increase was partially offset by
the ResNet merger as ResNet depreciation and amortization during the second
quarter of 1998 was $969,000.
OPERATING INCOME. As a result of the factors previously described, the
Company generated operating income of $134,000 in the second quarter of 1999
compared to an operating loss of $1.9 million in the same quarter of 1998.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. As previously described
in Note 3 to the financial statements and the Overview section of Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
merger of ResNet with two other entities effective November 30, 1998 to form
GICC resulted in the Company obtaining a 30% equity interest in GICC. The
Company's portion of GICC's 1999 second quarter loss was $1.6 million. In
addition, the Company recorded a $16.8 million charge in the second quarter of
1999 to write-down its investment in GICC to estimated fair value.
INTEREST EXPENSE. Interest expense increased to $6.9 million in the
current quarter from $5.6 million in the year earlier quarter due to increases
in long-term debt to fund the Company's continuing expansion of its business.
Total debt increased from $221.2 million at June 30, 1998 to $276.3 million at
June 30, 1999. Average principal amount of long-term debt outstanding during the
quarter ended June 30, 1999 was approximately $269 million (at an average
interest rate of approximately 10.2%) as compared to an average principal amount
outstanding of approximately $213 million (at an average interest rate of
approximately 10.5%) during the second quarter of 1998.
INTEREST INCOME. Interest income, earned on loans to unconsolidated
affiliates, was $387,000 in the second quarter of 1999. No such interest was
earned during the same period of 1998.
NET LOSS. For the reasons previously described, the Company's net loss
increased to $24.8 million in the second quarter of 1999 from a net loss of $7.5
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") excluding equity in
losses of unconsolidated affiliates increased 30.5% to $15.0 million in the
second quarter of 1999 as compared to $11.5 million in the second quarter of
1998. EBITDA as a percentage of total revenues was 33.9% in the current quarter
as compared to 28.1% in the same quarter of 1998. 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.
Page 13
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
REVENUE ANALYSIS
The Company's total revenue for the six months ended June 30, 1999
increased 11.6%, or $9.0 million, in comparison to the six months ended June 30,
1998. 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>
1998 1999
--------------------------- -----------------------------
Percent Percent
of Total of Total
Amount Revenue Amount Revenue
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Guest Pay $ 67,750 87.7 $ 80,448 93.3
Other 9,495 12.3 5,786 6.7
------------ ----------- ------------- -----------
Total $ 77,245 100.0 $ 86,234 100.0
============ =========== ============= ===========
</TABLE>
GUEST PAY REVENUE. Guest Pay revenue increased 18.7%, or $12.7 million,
in the first half of 1999 in comparison to the same period of 1998. This
increase was the result of a 15.3% increase in the average number of installed
Guest Pay rooms and a 3.1% increase 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 six months ending June 30:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Average monthly revenue per room:
Movie revenue $ 17.93 $ 18.28
Video game and other service revenue 3.31 3.61
----------- ------------
Total per Guest Pay room $ 21.24 $ 21.89
=========== ============
</TABLE>
Average movie revenue per room increased 2.0% in the first six months
of 1999 compared to the same period of 1998. This increase was due to higher
average movie prices, partially offset by lower average buy rates and hotel
occupancy levels.
Average video game and other service revenue per room increased 9.1%
primarily as a result of increased revenue per Guest Pay room from cable
television programming services, partially offset by a decrease in average
monthly video game revenue per room.
OTHER REVENUE. Revenue from other sources includes revenue from
free-to-guest services provided to hotels not receiving Guest Pay services and
sales of televisions, system equipment, and service parts and labor.
Additionally, in 1998, other revenue includes revenue generated by ResNet. The
decrease in the first six months of 1999 from the same period of 1998 of $3.7
million or 39.1%, is primarily due to $2.6 million of revenue generated by
ResNet in the first six months of 1998. In addition, sales of televisions and
system equipment were lower in the first half of 1999 from the year earlier
period.
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>
1998 1999
------------ -----------
<S> <C> <C>
Direct costs:
Guest Pay $ 27,750 $ 32,691
Other 6,517 4,562
------------ -----------
$ 34,267 $ 37,253
============ ===========
Gross profit margin:
Guest Pay 59.0% 59.4%
Other 31.4% 21.2%
Composite 55.6% 56.8%
</TABLE>
Guest Pay direct costs increased 17.8%, or $4.9 million, in the first
half of 1999 as compared to the first half of 1998. 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 costs tend
to vary directly with revenue. As a percentage of revenue, such costs decreased
from 41.0% during the first six months of 1998 to 40.6% during the same period
of 1999. This decrease is primarily due to a slight decrease in commissions
earned by the hotels and increased margins earned on cable television
programming services provided to Guest Pay rooms.
Direct costs associated with other revenue decreased $2.0 million or
30.0% in the first half of 1999 from the year earlier period. This decrease is
primarily due to $1.2 million of direct costs incurred by ResNet in the first
six months of 1998 and the lower volume of television and equipment sales
previously described. As a percentage of related revenues, direct costs
increased to 78.8% of other revenue in the current six month period versus 68.6%
in the same period of 1998. The resulting decrease in gross profit margin from
31.4% in the first half of 1998 to 21.2% in the first half of 1999 is due to the
fact that the ResNet business, which generally earned a higher margin than the
other sources of other revenue, is not included in the 1999 results due to the
merger transaction previously described.
The Company's overall gross profit increased 14.0%, or $6.0 million, to
$49.0 million in the first six months of 1999 on an 11.6% increase in revenues
in comparison to the same period of the prior year. The Company's overall gross
profit margin was 56.8% in the current six month period, as compared to the year
earlier 55.6%.
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>
1998 1999
--------------------------- ---------------------------
Percent Percent
of Total of Total
Amount Revenues Amount Revenues
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating expenses:
Guest Pay operations $ 12,382 16.0% $ 11,899 13.8%
Selling, general and administrative 9,787 12.7% 8,559 9.9%
Depreciation and amortization 25,986 33.6% 29,305 34.0%
------------ ----------- ----------- -----------
Total operating expenses $ 48,155 62.3% $ 49,763 57.7%
============ =========== =========== ===========
</TABLE>
Guest Pay operations expenses consist of costs directly related to the
operation of systems at the hotel sites. Additionally, prior to the ResNet
merger, costs incurred to operate the ResNet systems were included in Guest Pay
Page 15
<PAGE>
operations. Such costs totaled $1.5 million in the first six months of 1998.
Excluding the expenses incurred to operate the systems at residential sites,
expenses related to Guest Pay operations increased 8.9%, or $973,000 in the
first six months of 1999 compared to the year earlier period. This increase is
primarily attributable to the 15.3% increase in average installed Guest Pay
rooms in the current period 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 $3.24 per month
in the current period as compared to $3.43 per month in the prior year period.
Selling, general and administrative expenses decreased 12.5%, or $1.2
million in the first six months of 1999 compared to the year earlier period.
This decrease is primarily due to the ResNet merger as $1.0 million of selling,
general and administrative expenses were incurred by ResNet in the first six
months of 1998. As a percentage of revenue, such expenses were 9.9% in the
current period as compared to 12.7% in the year earlier period.
Depreciation and amortization expenses increased 12.8% to $29.3 million
in the first six months of 1999 from $26.0 million in the year earlier period.
This increase is attributable to the increases in the number of installed Guest
Pay rooms, 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 period. This increase was partially offset by the
ResNet merger as ResNet depreciation and amortization during the first six
months of 1998 was $1.8 million.
OPERATING LOSS. The Company's operating loss, as a result of the
factors previously described, decreased to $782,000 for the six months ending
June 30, 1999 as compared to $5.2 million in the same period of 1998.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. During 1998, the Company
acquired a 10% interest in Across Media Networks, LLC ("AMN"), a company engaged
in the creation and distribution of digitally produced on-screen content for
television and the internet. Prior to the second quarter of 1999, the Company
had applied the equity method of accounting for this investment to reflect the
fact that the Company had certain financing obligations to AMN. Losses of $2.2
million related to this investment were recorded in the first quarter of 1999.
During the second quarter of 1999, AMN was able to secure other financing
resources eliminating the Company's obligation to provide future financing.
Accordingly, the Company discontinued the use of the equity method of accounting
for this investment and, as such, no further equity losses have been recorded.
Additionally, as previously described, the merger of ResNet with two other
entities effective November 30, 1998 to form GICC resulted in the Company
obtaining a 30% equity interest in GICC. The Company's portion of GICC's net
losses for the first six months of 1999 totaled $3.2 million. In addition, the
Company recorded a $16.8 million charge in the second quarter of 1999 to
write-down its investment in GICC to estimated fair value.
INTEREST EXPENSE. Interest expense increased to $13.5 million in the
current six month period from $10.9 million in the year earlier period due to
increases in long-term debt to fund the Company's continuing expansion of its
business. Total debt increased from $221.2 million at June 30, 1998 to $276.3
million at June 30, 1999. Average principal amount of long-term debt outstanding
during the six months ended June 30, 1999 was approximately $266 million (at an
average interest rate of approximately 10.2%) as compared to an average
principal amount outstanding of approximately $204 million (at an average
interest rate of approximately 10.6%) during the first six months of 1998.
INTEREST INCOME. Interest income increased to $780,000 in the first
half of 1999 from $92,000 during the same period of 1998. This increase is
primarily due to increased loans to unconsolidated affiliates.
NET LOSS. For the reasons previously described, the Company's net loss
increased to $35.9 million in the first half of 1998 from a net loss of $16.2
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 increased 37.1% to $28.5 million
in the first six months of 1999 as compared to $20.8 million in the first six
months of 1998. EBITDA as a percentage of total revenue was 33.1% in the current
six month period as compared to 26.9% in the same period of 1998. EBITDA is
included herein because it is a widely accepted
Page 16
<PAGE>
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.
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 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. During 1998, capital expenditures were $69.7 million (of which
$14.2 million was incurred by ResNet) and net cash provided by operating
activities was $13.2 (after the reduction of net cash used in operating
activities of $5.0 million by ResNet). During the first six months of 1999,
capital expenditures were approximately $25.7 million as compared to $36.4
million in the first six months of 1998, and net cash provided by operating
activities was $20.5 million as compared to $5.6 million in the same period of
1998.
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 $30 million during the remainder of 1999. In addition, the
Company's cash requirements during 1999 and 2000 are expected to include (i)
payments to OCC of $5.85 million on each of July 15, 1999 and July 15, 2000
pursuant to the terms of the multiple cross licenses and (ii) deferred purchase
payments of up to $1 million in each of 1999 and 2000 in connection with the
Company's acquisition of Connect Group Corporation in 1998. The foregoing
statements regarding capital expenditures and cash requirements are
forward-looking statements and there can be no assurance in this regard. 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.
On February 25, 1999, the Company amended and restated its existing
bank credit facility. This amended facility (the "Bank Facility") consists of a
$150 million secured credit facility which combines a $75 million term loan (the
"Term Loan") and a $75 million revolving loan facility (the "Revolving Loan").
Proceeds under the Term Loan were used to repay amounts outstanding under the
revolving loan facility that existed prior to the amendment and restatement.
Minimum required prepayments of borrowings under the Term Loan for the
respective years are (in thousands of dollars): 2001 -- $15,000; 2002 --
$18,750; 2003 -- $18,750; 2004 -- $22,500. The Bank Facility includes covenants
which require the maintenance of certain financial ratios and which impose
certain limitations on such matters as the incurrence of additional indebtedness
and payments in respect of common stock of the Company, among others. As of June
30, 1999, the Company was in compliance with all such covenants.
As previously described, effective November 30, 1998 the Company
contributed its interest in the ResNet business to GICC. The Company has no
continuing obligation to fund any of GICC's operating and/or investing
activities. During 1998, the Company provided $19.3 million to fund ResNet's
operating and investing activities, all of which funding occurred prior to
November 30, 1998.
The Company believes that its operating cash flows and borrowings
available under its revolving credit facility will be sufficient to fund the
Company's future growth as contemplated under its current business plan,
depending on the rate of the Company's growth and other factors. 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. There can be no assurance
that the Company will
Page 17
<PAGE>
be able to obtain financing, if additional long-term financing should be
required, 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.
YEAR 2000 INFORMATION
The Company has engaged in a comprehensive review of its internal
computer systems and software and external business relationships in regard to
Year 2000 issues.
STATE OF READINESS. The Company has a project team comprised of key
members from cross-organization departments. The team's objectives are to gather
information and facilitate research on Year 2000 issues that could affect the
Company, and to take necessary actions to eliminate or minimize the impact of
such issues. Internally the Company has completed its efforts to identify the
computer hardware and software that is used both at its in-house facilities as
well as at its hotel properties. Research and testing of these systems for Year
2000 compliance is near completion. The Company expects to substantially
complete its research and testing of internal computer hardware and software by
the end of the third quarter of 1999. Correction or replacement of hardware and
software containing Year 2000 issues is in progress and is estimated for
completion during the fourth quarter of 1999.
Externally, the Company is working to identify third party business
relationships that are impacted by the Year 2000 issue. Research and review of
these relationships, including contacting the third parties to solicit
information and assurances relating to potential Year 2000 issues and reviewing
responses, is nearly complete The Company expects to substantially complete its
review of third party relationships by the end of the third quarter of 1999,
although no assurance can be given as to the Year 2000 remediation of third
parties.
COSTS ASSOCIATED WITH YEAR 2000. Incremental costs are expected to be
comprised primarily of costs to purchase software upgrades and hardware.
Additionally, external consulting, programming and training costs may be
incurred. Estimated costs of Year 2000 compliance are not fully determined at
this time, however, the Company expects to incur less than $500,000 in aggregate
out-of-pocket costs in 1998 and 1999 to complete its Year 2000 compliance
program, excluding the costs of internal staffing. As of June 30, 1999 the
Company has incurred out-of-pocket costs totaling approximately $275,000 toward
Year 2000 compliance efforts. Such funds have been provided from the Company's
bank credit facility. Although the Company intends to develop and implement, if
necessary, appropriate contingency plans to mitigate to the extent possible the
effects of any Year 2000 noncompliance, such plans may not be adequate and the
cost of Year 2000 compliance may be greater than $500,000.
RISKS ASSOCIATED WITH YEAR 2000 ISSUES. The Company is highly dependent
upon its own information technology systems and those of its suppliers and
customers. The Company's or a third party's failure to correct a material Year
2000 problem could result in a failure of or interruption in the Company's
business activities and operations. Such interruptions and failures could
materially and adversely affect the Company's results of operation, liquidity
and financial condition. The Company's Year 2000 project is expected to reduce
significantly the Company's level of uncertainty and the possibility of
significant or long-lasting interruptions of the Company's business operations;
however, the Company believes that it is impossible to predict all of the areas
in which material problems may arise.
CONTINGENCY PLANS. The Company has not yet completed specific
contingency plans for Year 2000 issues. The Company is in the process of
identifying the most reasonably likely worst-case scenarios, so that it may
attempt to secure alternate vendors and service providers for these functions as
well as to develop alternative systems which could be used to process data.
While the Company anticipates achieving Year 2000 compliance in a
timely manner, there can be no assurance that all processes will be compliant,
that there will be no significant delay or loss of revenues, or that no material
supply sources will be interrupted. However, the Company believes that its
planning and action efforts will help reduce any loss or disruption.
Page 18
<PAGE>
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including potential
losses resulting from adverse changes in interest rates and foreign currency
exchange rates. The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes.
INTEREST. At June 30, 1999, the Company had debt totaling $276.3
million. During the second quarter of 1999, the Company entered into interest
rate swap arrangements covering debt with a notional amount of $75 million to
effectively change the underlying debt from a variable interest rate to a fixed
interest rate for the term of the swap agreements. After giving effect to the
interest rate swap arrangements the Company had fixed rate debt of $266.3
million and variable rate debt of $10 million at June 30, 1999. For fixed rate
debt, interest rate changes affect the fair market value but do not impact
earnings or cash flows. Conversely, for variable rate debt, interest rate
changes generally do not affect the fair market value but do impact future
earnings and cash flows, assuming other factors are held constant. Assuming
other variables remain constant (such as debt levels), a one percentage point
increase in interest rates would decrease the unrealized fair market value of
the fixed rate debt by an estimated $24.7 million. The impact on earnings and
cash flow for the next year resulting from a one percentage point increase in
interest rates would be approximately $100,000, assuming other variables remain
constant.
FOREIGN CURRENCY TRANSACTIONS. A minor portion of the Company's
revenues are derived from the sale of Guest Pay services in Canada. The results
of operations and financial position of the Company's operations in Canada are
measured in Canadian dollars and translated into U.S. dollars. The effects of
foreign currency fluctuations in Canada are somewhat mitigated by the fact that
expenses are generally incurred in Canadian dollars. The reported income of the
Company's Canadian subsidiary will be higher or lower depending on a weakening
or strengthening of the U.S. dollar against the Canadian dollar. In addition, a
minor portion of the Company's assets are based in Canada and are translated
into U.S. dollars at foreign currency exchange rates in effect as of the end of
each period, with the impact of such translation reflected within the Company's
consolidated stockholders' equity. Accordingly, the Company's consolidated
stockholders' equity will fluctuate depending on the weakening or strengthening
of the U.S. dollar against the Canadian dollar. The Company manages its
potential adverse currency fluctuation risk by conducting the majority of its
Canadian operations in Canadian dollars.
Page 19
<PAGE>
PART II -- OTHER INFORMATIOn
ITEM 1 -- LEGAL PROCEEDINGS
The Company is subject to litigation arising in the ordinary course of
business. As of the date hereof, the Company believes the resolution of such
litigation will not have a material adverse effect upon the Company's financial
condition or results of operations.
ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS
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 12, 1999 for the following purposes:
1. Election of two directors to serve for a three-year term
expiring in 2002;
2. Ratification of the appointment of independent public
accountants; and
3. Action on such matters as may properly come before the Meeting.
b. The directors who were elected at the Meeting are as follows:
Tim C. Flynn
R. F. Leyendecker
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>
Tim C. Flynn 9,870,213 - - 510,213 - -
R. F. Leyendecker 9,870,213 - - 510,213 - -
</TABLE>
Ratification of Public Accountants -
<TABLE>
<CAPTION>
For Against Abstain
<C> <C> <C>
10,377,263 1,363 1,800
</TABLE>
ITEM 5 -- OTHER INFORMATION
Not applicable.
Page 20
<PAGE>
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
EXHIBIT
NO.
10.30 Form of Employment Agreement between the Company and
Scott C. Petersen.
10.31 Form of Employment Agreement between the Company and each of
David M. Bankers, John M. O'Haugherty and Jeffrey T. Weisner.
B. REPORTS ON FORM 8-K:
The Company filed no Reports on Form 8-K during the quarter ended June
30, 1999.
Page 21
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
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 12, 1999 / s/ Scott C. Petersen
----------------------------------------------------
Scott C. Petersen
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 12, 1999 / s / Jeffrey T. Weisner
----------------------------------------------------
Jeffrey T. Weisner
Senior Vice President, Chief Financial Officer
(Principal Financial Officer)
Date: August 12, 1999 / s / Ronald W. Pierce
----------------------------------------------------
Ronald W. Pierce
Vice President, Corporate Controller
(Principal Accounting Officer)
Page 22
<PAGE>
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of July 22, 1998
is made by and between LodgeNet Entertainment Corporation, a Delaware
corporation (the "Corporation" or "LodgeNet"), and Scott C. Petersen
("Executive") with reference to the following circumstances, namely:
A. Executive is employed by LodgeNet as its President and Chief
Executive Officer, and as such is, and will be, making an
important contribution to the development and operation of
LodgeNet's business.
B. Because of the foregoing, the Corporation desires to provide for
its employment of Executive as hereinafter provided, and Executive
desires such employment, upon the terms hereinafter provided.
NOW, THEREFORE, the Corporation agrees to employ Executive, and Executive
agrees to such employment, upon the following terms and conditions:
1. PERIOD OF EMPLOYMENT. The employment of Executive by the
Corporation pursuant to this Agreement shall be for a period (sometimes
referred to herein as the "period of employment") beginning on the date
hereof and continuing, unless sooner terminated as provided in Section 6 or 8
herein, through June 30, 2000; provided, however, that on each December 31,
commencing with December 31, 1999, such period of employment shall
automatically be extended for an additional year unless sixty (60) days prior
thereto either party hereto has given written notice to the other that such
party does not wish to extend the period of employment.
<PAGE>
2. DUTIES. During the period of employment, Executive shall serve as
President and Chief Executive Officer of the Corporation, or in such other
office or offices to which he shall be elected by the Board of Directors of
the Corporation ("Board") with his approval, performing the duties of such
office or offices held at the time and such other duties not inconsistent
with his position as such an officer as are assigned to him by the Board or
committees of the Board. During the period of employment, Executive shall
devote his full time and attention to the business of the Corporation and the
discharge of the aforementioned duties, except for permitted vacations,
absences due to illness, and reasonable time for attention to personal
affairs.
3. OFFICE FACILITIES. During the period of employment, Executive shall
have his office where the Corporation's principal executive offices are
located from time to time, which currently are at 3900 West Innovation
Street, Sioux Falls, South Dakota, and the Corporation shall furnish
Executive with office facilities reasonably suitable to his position at such
location.
4. COMPENSATION. As compensation for his services performed hereunder,
the Corporation shall pay or provide to Executive the following:
(a.) The Corporation shall pay Executive a salary (the "Base Salary"),
calculated at the rate of Three Hundred Twenty Thousand Dollars
($320,000.00) per annum (which Base Salary may be increased by the Board
at any time and from time to time in its discretion), payable monthly,
semi-monthly or weekly according to the Corporation's general practice for
its executives, for the period of employment under this Agreement.
2
<PAGE>
(b.) During the period of employment, Executive shall be allowed to
participate in such bonus and other incentive compensation programs in
accordance with their terms as the Corporation may have in effect from
time to time for its executive personnel, and all compensation and other
entitlements earned thereunder shall be in addition to, and shall not in
any way reduce, the amount payable as Base Salary.
(c.) During the period of employment, Executive shall be entitled to:
(i) participate in such retirement, investment, health
(medical, hospital and/or dental) insurance, life insurance,
disability insurance and accident insurance plans and programs as
are maintained in effect from time to time by the Corporation for
its salaried employees;
(ii) participate in other non-duplicative benefit programs
which the Corporation may from time to time offer generally to
executive personnel of the Corporation; and
(iii) take vacations and be entitled to sick leave in
accordance with the Corporation's policy for executive personnel of
the Corporation.
(d.) During the period of employment, the Board from time to time in
its discretion may grant to Executive stock options, and other rights
related to shares of the Corporation's common stock.
(e.) During the period of employment, the Corporation shall provide
Executive with a monetary allowance in an amount acceptable to Executive
which is approved by the Board for the lease of a suitable automobile and
insurance therefor.
5. EFFECT OF DISABILITY AND CERTAIN HAZARDS. Executive shall not be
obligated to perform the services required of him by this Agreement during any
period in which he is
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disabled or his health is impaired to an extent which would render his
performance of such services hazardous to his health or life, and relief from
such obligation shall not in any way affect his rights hereunder except to
the extent that such disability may result in termination of his employment
by the Corporation pursuant to Section 6 herein.
6. TERMINATION OF EMPLOYMENT. The employment of Executive by the
Corporation pursuant to this Agreement may be terminated prior to June 30, 2000,
or any subsequent June 30 to which the end of the period of employment may have
been extended under Section 1, as follows:
(a) In the event of Executive's death prior to said date, such
employment shall terminate on the date of death.
(b) Such employment may be terminated prior to said date due to
Executive's physical or mental disability which prevents the effective
performance by Executive of his duties hereunder on a full time basis,
with such termination to occur on or after the time which Executive
becomes entitled to disability compensation benefits under the
Corporation's long term disability benefit program then in effect. Any
dispute as to Executive's physical or mental disability shall be settled
by the opinion of an impartial physician selected by the parties or their
representatives or, in the event of failure to make a joint selection
after request therefore by either party to the other, a physician selected
by the Corporation, with the fees and expenses of any such physician to be
borne by the Corporation.
(c) The Corporation, by giving written notice of termination to
Executive, may terminate such employment at any time prior to said date
for Cause, which means that such termination must be due to (1) acts
during the term of this Agreement (A) resulting
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in a felony conviction under any Federal or state statute (B)
substantial non-performance of Executive of his employment duties
required by this Agreement or (2) Executive willfully engaging in
dishonesty or gross misconduct injurious to the Corporation during the
term of this Agreement, with "Cause" to be determined in any case by
the Board after reasonable written notice to Executive and an
opportunity for Executive to be heard at a meeting of the Board and
with reasonable opportunity (of not less than 30 days) in the case of
clause (1)(B) to cease substantial non-performance.
(d) The Corporation may terminate such employment at any time prior to
said date without Cause (which shall be for any reason not covered by
preceding subsections (a) through (c)) upon 60 days prior written notice
to Executive.
(e) In the event that a Termination Event (as that term is defined in
the Executive Severance Agreement, dated July 25, 1995) has occured, then
the Executive may terminate such employment according to the terms and
conditions set forth in said Executive Severance Agreement, and shall then
be exclusively entitled to any and all payments and benefits provided
under said Agreement to the exclusion of any provisions contained herein.
7. PAYMENTS UPON TERMINATION.
(a) Except as otherwise provided in subsection (b) of this Section 7,
upon termination of Executive's employment by the Corporation, all
compensation due Executive under this Agreement and under each plan or
program of the Corporation in which he may be participating at the time shall
cease to accrue as of the date of such termination (except, in the case of
any such plan or program, if and to the extent otherwise provided in the
terms of such plan or program), and all such compensation accrued as of
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the date of such termination but not previously paid shall be paid to
Executive at the time such payment otherwise would be due. Unless
otherwise expressly provided in the terms of the bonus plan or program
of the Corporation in which the Executive is a participant at the time
of his termination, if the termination of Executive's employment is not
for Cause, then a pro rata portion of the "target" full year's bonus
shall be deemed to have accrued for the Executive under such bonus plan
or program for the portion of the year ended on the date of the
termination, which shall be paid to the Executive at the time bonus
payment otherwise would be due.
(b) If Executive's employment pursuant to this Agreement is terminated
without Cause pursuant to subsection (d) of Section 6 herein, then, in
addition to the payments required by subsection (a) of this Section 7,
Executive shall be entitled to the vesting of all options previously
granted but still subject to vesting, and shall receive, subject to the
mitigation provisions of Section 11(a) below, for a period of twenty-four
months (the "Severance Period") a cash severance payment (the "Severance
Payment") from the Corporation. The amount of the Severance Payment shall
be equal to the Executive's then monthly Base Salary increased by a factor
of twenty percent (20%) to account for the Executive's loss of benefits.
Executive shall have the right to purchase health and dental coverage
under the Company's group policies then in effect for the Severance
Period. The Severance Payment shall be due and payable on the 20th day of
each month and is subject to required withholding. The Executive shall
also be entitled to the benefits under this Section in the event the
Corporation elects at any time not to renew or extend this Agreement
pursuant to Section 1. The Executive shall not be entitled to a Severance
Payment in any event if he is terminated for Cause as permitted by Section
6.
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<PAGE>
8. CONFIDENTIAL INFORMATION. Executive shall not at any time during the
period of employment and thereafter disclose to others or use any trade secrets
or any other confidential information belonging to the Corporation or any of its
subsidiaries, including, without limitation, drawings, plans, programs,
specifications and non-public information relating to customers of the
Corporation or its subsidiaries, except as may be required to perform his duties
hereunder. The Corporation or its subsidiaries, except as may be required to
perform his duties hereunder. The provisions of this Section 9 shall survive the
termination of Executive's employment with the Corporation, provided that after
the termination of Executive's employment with the Corporation, the restrictions
contained in this Section 8 shall not apply to any such trade secret or
confidential information which becomes generally known in the trade.
9. PATENTS AND OTHER INTELLECTUAL PROPERTY The Corporation shall be
entitled to any and all ideas, know-how and inventions, whether patentable or
not, which Executive shall conceive, make or develop during the period of his
employment with the Corporation, relating to the business of the Corporation or
any of his subsidiaries. Executive shall, from time to time, at the request of
the Corporation, execute and deliver such instruments or documents, and shall
perform or do such acts or things, as reasonably may be requested in order that
the Corporation may have the benefit of such ideas, know-how and inventions and,
in particular, so that patent applications may be prepared and filed in the
United States Patent Office, or in appropriate places in foreign countries,
covering any of the patentable ideas on intentions covered by this Agreement as
aforesaid, including appropriate assignments vesting in the Corporation or any
of its subsidiaries (or any successor to the Corporation or any of its
subsidiaries) full title to any and all such ideas, inventions and applications.
Further,
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<PAGE>
Executive will cooperate and assist the Corporation in the prosecution of any
such applications in order that patents may issue thereon.
10. NON-COMPETITION: NON-MITIGATION: LITIGATION EXPENSES.
(a) For the first eighteen months following termination of his
employment with the Corporation, Executive shall not be required to mitigate
the amount of any termination benefits due him under Section 7 herein, by
seeking employment with others, or otherwise, nor shall the amount of such
benefits be reduced or offset in any way by any income or benefits earned by
Executive from another employer or other source during said period;
thereafter, said termination benefits shall be reduced by one-half of the
amount Executive may earn from any full time employment position or
occupation. However, if Executive becomes employed, as a full or part time
employee, or as a consultant or advisor, to any enterprise engaged in
competition with the business then being conducted by the Corporation, any
obligation which the Corporation otherwise would have had under Section 7
shall thereupon terminate and cease to be of any further force and effect
other than to the extent theretofore performed by the Corporation.
(b) Until the period of employment expires (which for these purposes shall
be calculated without giving effect to early termination pursuant to Section
6), Executive shall not enter into endeavors that are competitive with the
business or operations of the Corporation in the lodging pay-per-view/guest
services market, and shall not own an interest in, manage, operate, join,
control, lend money or render financial or other assistance to or participate
in or be connected with, as an officer, employee, director, partner,
stockholder (expect for passive investments of not more than a one percent
interest in the securities of a publicly held corporation regularly traded on
a national
8
<PAGE>
securities exchange or in an over-the-counter securities market),
consultant or otherwise, any individual, partnership, firm, corporation
or other business organization or entity that engages in a business
which competes with the Company in the lodging pay-per-view/guest
services market. For these purposes, employment with a vendor of cable
television services shall not be treated as competitive with the
business or operations of the Corporation in the lodging per-view/guest
services market.
(c) The Corporation shall pay Executive's out-of-pocket expenses,
including attorneys' fees, but not to exceed a total of $10,000 for any
proceeding or group of related proceedings to enforce, construe or
determine the validity of the provisions for termination benefits in
Section 7 or 8 herein provided however, that if any arbitration or
litigation results in a finding in favor of the Executive contrary to the
position of the Company, then Executive will be reimbursed for all
reasonable legal and related costs regardless of the limitation set forth
above; and further provided that in no event will Executive be held liable
for the legal and related costs of the Company in an event of a finding in
favor of the Company.
11. ARBITRATION. Any dispute or controversy arising under or in
connection with the Agreement shall be settled exclusively by arbitration in the
city where the principal executive offices of the Corporation are then located,
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
12. MISCELLANEOUS.
(a) This Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Corporation, including any party
with which the
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<PAGE>
Corporation may merge or consolidate or to which it may transfer
substantially all of its assets.
(b) The rights and obligations of Executive under this Agreement are
expressly declared and agreed to be personal, nonassignable and
nontransferable during his life, but upon his death this Agreement shall
inure to the benefit of his heirs, legatees and legal representatives of
his estate.
(c) The waiver by either party hereto of its rights with respect to a
breach of any provision of this Agreement by the other shall not operate
or be construed as a waiver of any rights with respect to any subsequent
breach.
(d) No modification, amendment, addition, alteration or waiver of any
of the terms, covenants or conditions hereof shall be effective unless
made in writing and duly executed by the Corporation and Executive.
(e) This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which together will
constitute but one and the same agreement.
(f) This Agreement shall be construed according to the laws of the
State of South Dakota.
(g) If any provision of this Agreement is determined to be invalid or
unenforceable under any applicable statute or rule of law, it is to that
extent to be deemed omitted and it shall not affect the validity or
enforceability of any other provision.
(h) Any notice required or permitted to be given under this Agreement
shall be in writing, and shall be deemed given when sent by registered or
certified mail, postage prepaid, addressed as follows:
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<PAGE>
If to Executive: Scott C. Petersen
26 Riverview Heights
Sioux Falls, SD 57105
If to the Corporation: LodgeNet Entertainment Corporation
3900 West Innovation Street
Sioux Falls, SD 57107
Attn: General Counsel
or mailed to such other person and/or address as the party to be notified
may hereafter have designated by notice given to the other party in a
similar manner.
13. PRIOR AGREEMENTS SUPERSEDED. This agreement supersedes all prior
agreements between the parties hereto with respect to the subject matter hereof
including any prior employment agreement provided however, that the Executive
Severance Agreement, dated July 25, 1995, shall remain in full force and effect
and shall exclusively govern any payments and benefits in the event that a
Termination Event (as that term is defined in said Agreement) has occurred.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
on the date and year first above written.
LodgeNet Entertainment Corporation
By:
---------------------------
Senior Vice President
---------------------------
Scott C. Petersen
11
<PAGE>
EXHIBIT 10.31
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement"), dated as of May 11, 1999
is made by and between LodgeNet Entertainment Corporation, a Delaware
corporation (the "Corporation" or "LodgeNet"), and ____________ ("Executive")
with reference to the following circumstances, namely:
A. Executive is employed by LodgeNet as its Senior Vice
President and ___________________, and as such is, and will
be, making an important contribution to the development and
operation of LodgeNet's business.
B. Because of the foregoing, the Corporation desires to
provide for its employment of Executive as hereinafter
provided, and Executive desires such employment, upon the
terms hereinafter provided.
NOW, THEREFORE, the Corporation agrees to employ Executive, and
Executive agrees to such employment, upon the following terms and conditions:
1. PERIOD OF EMPLOYMENT. The employment of Executive by the Corporation
pursuant to this Agreement shall be for a period (sometimes referred to herein
as the "period of employment") beginning on the date hereof and continuing,
unless sooner terminated as provided in Section 6 or 8 herein, through December
31, 1999; provided, however, that on each December 31, commencing with December
31, 1999, such period of employment shall automatically be extended for an
additional year unless sixty (60) days prior thereto either party hereto has
given written notice to the other that such party does not wish to extend the
period of employment.
<PAGE>
2. DUTIES. During the period of employment, Executive shall serve as
Senior Vice President and Chief Technology Officer of the Corporation, or in
such other office or offices to which he shall be elected by the Board of
Directors of the Corporation ("Board") with his approval, performing the duties
of such office or offices held at the time and such other duties not
inconsistent with his position as such an officer as are assigned to him by the
Board or committees of the Board. During the period of employment, Executive
shall devote his full time and attention to the business of the Corporation and
the discharge of the aforementioned duties, except for permitted vacations,
absences due to illness, and reasonable time for attention to personal affairs.
3. OFFICE FACILITIES. During the period of employment, Executive shall
have his office where the Corporation's principal executive offices are located
from time to time, which currently are at 3900 West Innovation Street, Sioux
Falls, South Dakota, and the Corporation shall furnish Executive with office
facilities reasonably suitable to his position at such location.
4. COMPENSATION. As compensation for his services performed hereunder,
the Corporation shall pay or provide to Executive the following:
(a.) The Corporation shall pay Executive a salary (the "Base Salary"),
calculated at the rate of _____________________ ($___,000.00) per annum
(which Base Salary may be increased by the Board at any time and from time
to time in its discretion), payable monthly, semi-monthly or weekly
according to the Corporation's general practice for its executives, for the
period of employment under this Agreement.
(b.) During the period of employment, Executive shall be allowed to
participate in such bonus and other incentive compensation programs in
accordance with
2
<PAGE>
their terms as the Corporation may have in effect from time to time for
its executive personnel, and all compensation and other entitlements
earned thereunder shall be in addition to, and shall not in any way
reduce, the amount payable as Base Salary.
(c.) During the period of employment, Executive shall be entitled to:
(i) participate in such retirement, investment, health (medical,
hospital and/or dental) insurance, life insurance, disability
insurance and accident insurance plans and programs as are maintained
in effect from time to time by the Corporation for its salaried
employees;
(ii) participate in other non-duplicative benefit programs which
the Corporation may from time to time offer generally to executive
personnel of the Corporation; and
(iii) take vacations and be entitled to sick leave in accordance
with the Corporation's policy for executive personnel of the
Corporation.
(d.) During the period of employment, the Board from time to time in
its discretion may grant to Executive stock options, and other rights
related to shares of the Corporation's common stock.
5. EFFECT OF DISABILITY AND CERTAIN HAZARDS. Executive shall not be
obligated to perform the services required of him by this Agreement during any
period in which he is disabled or his health is impaired to an extent which
would render his performance of such services hazardous to his health or life,
and relief from such obligation shall not in any way affect his rights hereunder
except to the extent that such disability may result in termination of his
employment by the Corporation pursuant to Section 6 herein.
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<PAGE>
6. TERMINATION OF EMPLOYMENT. The employment of Executive by the
Corporation pursuant to this Agreement may be terminated prior to December 31,
1999, or any subsequent December 31 to which the end of the period of employment
may have been extended under Section 1, as follows:
(a) In the event of Executive's death prior to said date, such
employment shall terminate on the date of death.
(b) Such employment may be terminated prior to said date due to
Executive's physical or mental disability which prevents the effective
performance by Executive of his duties hereunder on a full time basis, with
such termination to occur on or after the time which Executive becomes
entitled to disability compensation benefits under the Corporation's long
term disability benefit program then in effect. Any dispute as to
Executive's physical or mental disability shall be settled by the opinion
of an impartial physician selected by the parties or their representatives
or, in the event of failure to make a joint selection after request
therefore by either party to the other, a physician selected by the
Corporation, with the fees and expenses of any such physician to be borne
by the Corporation.
(c) The Corporation, by giving written notice of termination to
Executive, may terminate such employment at any time prior to said date for
Cause, which means that such termination must be due to (1) acts during the
term of this Agreement (A) resulting in a felony conviction under any
Federal or state statute (B) substantial non-performance of Executive of
his employment duties required by this Agreement or (2) Executive willfully
engaging in dishonesty or gross misconduct injurious to the Corporation
during the term of this Agreement, with "Cause" to be determined in any
case by the Board after
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reasonable written notice to Executive and an opportunity for Executive
to be heard at a meeting of the Board and with reasonable opportunity
(of not less than 30 days) in the case of clause (1)(B) to cease
substantial non-performance.
(d) The Corporation may terminate such employment at any time prior to
said date without Cause (which shall be for any reason not covered by
preceding subsections (a) through (c)) upon 60 days prior written notice to
Executive.
(e) In the event that a Termination Event (as that term is defined in
the Executive Severance Agreement, dated July 25, 1995) has occured, then
the Executive may terminate such employment according to the terms and
conditions set forth in said Executive Severance Agreement, and shall then
be exclusively entitled to any and all payments and benefits provided under
said Agreement to the exclusion of any provisions contained herein.
7. PAYMENTS UPON TERMINATION.
(a) Except as otherwise provided in subsection (b) of this Section 7,
upon termination of Executive's employment by the Corporation, all
compensation due Executive under this Agreement and under each plan or
program of the Corporation in which he may be participating at the time shall
cease to accrue as of the date of such termination (except, in the case of
any such plan or program, if and to the extent otherwise provided in the
terms of such plan or program), and all such compensation accrued as of the
date of such termination but not previously paid shall be paid to Executive
at the time such payment otherwise would be due. Unless otherwise expressly
provided in the terms of the bonus plan or program of the Corporation in
which the Executive is a participant at the time of his termination, if the
termination of Executive's employment is not for Cause,
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<PAGE>
then a pro rata portion of the "target" full year's bonus shall be deemed
to have accrued for the Executive under such bonus plan or program for the
portion of the year ended on the date of the termination, which shall be
paid to the Executive at the time bonus payment otherwise would be due.
(b) If Executive's employment pursuant to this Agreement is terminated
without Cause pursuant to subsection (d) of Section 6 herein, then, in
addition to the payments required by subsection (a) of this Section 7,
Executive shall be entitled to the vesting of all options previously
granted but still subject to vesting, and shall receive, subject to the
mitigation provisions of Section 11(a) below, for a period of twenty-four
months (the "Severance Period") a cash severance payment (the "Severance
Payment") from the Corporation. The amount of the Severance Payment shall
be equal to the Executive's then monthly Base Salary increased by a factor
of twenty percent (20%) to account for the Executive's loss of benefits.
Executive shall have the right to purchase health and dental coverage under
the Company's group policies then in effect for the Severance Period. The
Severance Payment shall be due and payable on the 20th day of each month
and is subject to required withholding. The Executive shall also be
entitled to the benefits under this Section in the event the Corporation
elects at any time not to renew or extend this Agreement pursuant to
Section 1. The Executive shall not be entitled to a Severance Payment in
any event if he is terminated for Cause as permitted by Section 6.
8. CONFIDENTIAL INFORMATION. Executive shall not at any time during the
period of employment and thereafter disclose to others or use any trade secrets
or any other confidential information belonging to the Corporation or any of its
subsidiaries, including, without limitation, drawings, plans, programs,
specifications and non-public information relating to
6
<PAGE>
customers of the Corporation or its subsidiaries, except as may be required
to perform his duties hereunder. The Corporation or its subsidiaries, except
as may be required to perform his duties hereunder. The provisions of this
Section 9 shall survive the termination of Executive's employment with the
Corporation, provided that after the termination of Executive's employment
with the Corporation, the restrictions contained in this Section 8 shall not
apply to any such trade secret or confidential information which becomes
generally known in the trade.
9. PATENTS AND OTHER INTELLECTUAL PROPERTY The Corporation shall be
entitled to any and all ideas, know-how and inventions, whether patentable or
not, which Executive shall conceive, make or develop during the period of his
employment with the Corporation, relating to the business of the Corporation or
any of his subsidiaries. Executive shall, from time to time, at the request of
the Corporation, execute and deliver such instruments or documents, and shall
perform or do such acts or things, as reasonably may be requested in order that
the Corporation may have the benefit of such ideas, know-how and inventions and,
in particular, so that patent applications may be prepared and filed in the
United States Patent Office, or in appropriate places in foreign countries,
covering any of the patentable ideas on intentions covered by this Agreement as
aforesaid, including appropriate assignments vesting in the Corporation or any
of its subsidiaries (or any successor to the Corporation or any of its
subsidiaries) full title to any and all such ideas, inventions and applications.
Further, Executive will cooperate and assist the Corporation in the prosecution
of any such applications in order that patents may issue thereon.
7
<PAGE>
10. NON-COMPETITION: NON-MITIGATION: LITIGATION EXPENSES.
(a) For the first eighteen months following termination of his
employment with the Corporation, Executive shall not be required to
mitigate the amount of any termination benefits due him under Section 7
herein, by seeking employment with others, or otherwise, nor shall the
amount of such benefits be reduced or offset in any way by any income or
benefits earned by Executive from another employer or other source during
said period; thereafter, said termination benefits shall be reduced by
one-half of the amount Executive may earn from any full time employment
position or occupation. However, if Executive becomes employed, as a full
or part time employee, or as a consultant or advisor, to any enterprise
engaged in competition with the business then being conducted by the
Corporation, any obligation which the Corporation otherwise would have had
under Section 7 shall thereupon terminate and cease to be of any further
force and effect other than to the extent theretofore performed by the
Corporation.
(b) Until the period of employment expires (which for these purposes
shall be calculated without giving effect to early termination pursuant to
Section 6), Executive shall not enter into endeavors that are competitive
with the business or operations of the Corporation in the lodging
pay-per-view/guest services market, and shall not own an interest in,
manage, operate, join, control, lend money or render financial or other
assistance to or participate in or be connected with, as an officer,
employee, director, partner, stockholder (expect for passive investments of
not more than a one percent interest in the securities of a publicly held
corporation regularly traded on a national securities exchange or in an
over-the-counter securities market), consultant or otherwise, any
individual, partnership, firm, corporation or other business organization
or entity that
8
<PAGE>
engages in a business which competes with the Company in the lodging
pay-per-view/guest services market. For these purposes, employment
with a vendor of cable television services shall not be treated as
competitive with the business or operations of the Corporation in the
lodging per-view/guest services market.
(c) The Corporation shall pay Executive's out-of-pocket expenses,
including attorneys' fees, but not to exceed a total of $10,000 for any
proceeding or group of related proceedings to enforce, construe or
determine the validity of the provisions for termination benefits in
Section 7 or 8 herein provided however, that if any arbitration or
litigation results in a finding in favor of the Executive contrary to the
position of the Company, then Executive will be reimbursed for all
reasonable legal and related costs regardless of the limitation set forth
above; and further provided that in no event will Executive be held liable
for the legal and related costs of the Company in an event of a finding in
favor of the company.
11. ARBITRATION. Any dispute or controversy arising under or in
connection with the Agreement shall be settled exclusively by arbitration in the
city where the principal executive offices of the Corporation are then located,
in accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
12. MISCELLANEOUS.
(a) This Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of the Corporation, including any party
with which the Corporation may merge or consolidate or to which it may
transfer substantially all of its assets.
9
<PAGE>
(b) The rights and obligations of Executive under this Agreement are
expressly declared and agreed to be personal, nonassignable and
nontransferable during his life, but upon his death this Agreement shall
inure to the benefit of his heirs, legatees and legal representatives of
his estate.
(c) The waiver by either party hereto of its rights with respect to a
breach of any provision of this Agreement by the other shall not operate or
be construed as a waiver of any rights with respect to any subsequent
breach.
(d) No modification, amendment, addition, alteration or waiver of any
of the terms, covenants or conditions hereof shall be effective unless made
in writing and duly executed by the Corporation and Executive.
(e) This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which together will
constitute but one and the same agreement.
(f) This Agreement shall be construed according to the laws of the
State of South Dakota.
(g) If any provision of this Agreement is determined to be invalid or
unenforceable under any applicable statute or rule of law, it is to that
extent to be deemed omitted and it shall not affect the validity or
enforceability of any other provision.
(h) Any notice required or permitted to be given under this Agreement
shall be in writing, and shall be deemed given when sent by registered or
certified mail, postage prepaid, addressed as follows:
If to Executive:
10
<PAGE>
If to the Corporation: LodgeNet Entertainment Corporation
3900 West Innovation Street
Sioux Falls, SD 57107
Attn: General Counsel
or mailed to such other person and/or address as the party to be notified
may hereafter have designated by notice given to the other party in a
similar manner.
13. PRIOR AGREEMENTS SUPERSEDED. This agreement supersedes all prior
agreements between the parties hereto with respect to the subject matter hereof
including any prior employment agreement provided however, that the Executive
Severance Agreement, dated July 25, 1995, shall remain in full force and effect
and shall exclusively govern any payments and benefits in the event that a
Termination Event (as that term is defined in said Agreement) has occurred.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on the date and year first above written.
LodgeNet Entertainment Corporation
By:
-----------------------------
President
-----------------------------
11
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<PAGE>
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
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0
0
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</TABLE>
