<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 MARCH 31, 2000
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 April 30, 2000, there were 12,161,725 shares outstanding of the
Registrant's common stock, $0.01 par value.
THIS REPORT CONTAINS A TOTAL OF 16 PAGES
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
No.
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1 -- Financial Statements:
Consolidated Balance Sheets (Unaudited) as of December 31, 1999 and March 31, 2000................ 3
Consolidated Statements of Operations (Unaudited) for
the Three Months Ended March 31, 1999 and 2000................................................. 4
Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 1999 and 2000................................................. 5
Notes to Consolidated Financial Statements (Unaudited)............................................. 6
Item 2 -- Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................... 8
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk.................................... 13
PART II. OTHER INFORMATION
Item 1 -- Legal Proceedings............................................................................. 15
Item 2 -- Changes in Securities......................................................................... 15
Item 3 -- Defaults Upon Senior Securities............................................................... 15
Item 4 -- Submission of Matters to a Vote of Security Holders........................................... 15
Item 5 -- Other Information............................................................................. 15
Item 6 -- Exhibits and Reports on Form 8-K.............................................................. 15
SIGNATURES.............................................................................................. 16
</TABLE>
- ----------
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 (UNAUDITED)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
--------- ---------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 1,644 $ 7,680
Marketable securities 25,952 12,349
Accounts receivable, net 29,620 28,432
Note receivable 7,060 --
Prepaid expenses and other 2,413 3,012
--------- ---------
Total current assets 66,689 51,473
Property and equipment, net 204,334 206,363
Investments in and advances to unconsolidated affiliates 11,434 11,537
Debt issuance costs, net 8,710 8,312
Other assets, net 14,108 13,593
========= =========
$ 305,275 $ 291,278
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,610 $ 16,936
Current maturities of long-term debt 5,915 5,827
Accrued expenses 10,643 13,777
Deferred revenue 2,536 2,542
--------- ---------
Total current liabilities 33,704 39,082
Long-term debt 277,075 277,537
--------- ---------
Total liabilities 310,779 316,619
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value, 20,000,000 shares authorized;
11,970,852 and 12,139,799 shares outstanding at December 31,
1999 and March 31, 2000, respectively 120 121
Additional paid-in capital 124,021 125,488
Accumulated deficit (146,967) (154,649)
Accumulated other comprehensive income 17,322 3,699
--------- ---------
Total stockholders' deficit (5,504) (25,341)
========= =========
$ 305,275 $ 291,278
========= =========
</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, except per share amounts, in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1999 2000
------------ ------------
<S> <C> <C>
Revenues:
Guest Pay $ 38,969 $ 45,399
Other 2,996 2,334
------------ ------------
Total revenues 41,965 47,733
------------ ------------
Direct costs:
Guest Pay 15,850 18,764
Other 2,398 1,592
------------ ------------
Total direct costs 18,248 20,356
------------ ------------
Gross profit 23,717 27,377
------------ ------------
Operating expenses:
Guest Pay operations 5,867 7,048
Selling, general and administrative 4,341 4,772
Depreciation and amortization 14,425 16,422
------------ ------------
Total operating expenses 24,633 28,242
------------ ------------
Operating loss (916) (865)
Equity in losses of unconsolidated affiliates (3,844) --
Interest expense (6,603) (6,959)
Interest income 393 224
------------ ------------
Loss before income taxes (10,970) (7,600)
Provision for income taxes (57) (82)
------------ ------------
Net loss $ (11,027) $ (7,682)
============ ============
Per common share (basic and diluted):
Net loss $ (0.92) $ (0.64)
============ ============
Weighted average shares outstanding 11,942,387 12,057,243
============ ============
</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>
Three Months Ended March 31,
----------------------------
1999 2000
-------- --------
<S> <C> <C>
Operating activities:
Net loss $(11,027) $ (7,682)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 14,425 16,422
Equity in losses of unconsolidated affiliates 3,844 --
Change in operating assets and liabilities:
Accounts receivable 362 1,185
Prepaid expenses and other (713) (517)
Accounts payable (160) 2,326
Accrued expenses and other 3,190 3,139
Other 1,946 (164)
-------- --------
Net cash provided by operating activities 11,867 14,709
-------- --------
Investing activities:
Property and equipment additions (13,163) (17,611)
Proceeds from sale of investment -- 7,200
Investment in unconsolidated affiliates (608) (104)
-------- --------
Net cash used for investing activities (13,771) (10,515)
-------- --------
Financing activities:
Proceeds from long-term debt 80,500 --
Repayment of long-term debt (9) (9)
Repayment of capital lease obligations (180) (117)
Borrowings under revolving credit facility 2,000 2,000
Repayments of revolving credit facility (78,500) (1,500)
Debt issuance costs (3,440) --
Stock option activity -- 1,467
-------- --------
Net cash provided by financing activities 371 1,841
-------- --------
Effect of exchange rates on cash 11 1
-------- --------
Increase (decrease) in cash and cash equivalents (1,522) 6,036
Cash and cash equivalents at beginning of period 5,240 1,644
-------- --------
Cash and cash equivalents at end of period $ 3,718 $ 7,680
======== ========
Supplemental cash flow information:
Cash paid for interest $ 4,146 $ 3,803
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
Page 5
<PAGE>
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 -- Basis of Presentation
The accompanying consolidated financial statements as of March 31, 2000, and for
the three month periods ended March 31, 1999 and 2000, 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 1999, as filed with the Commission. The results of operations for the
three month period ended March 31, 2000 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
intercompany 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, March 31,
1999 2000
------------ ---------
<S> <C> <C>
Land, building and equipment $ 55,899 $ 57,746
Free-to-guest equipment 18,111 18,384
Guest pay systems:
Installed 292,939 303,478
System components 22,551 24,193
Software costs 9,998 10,521
--------- ---------
Total 399,498 414,322
Less - depreciation and amortization (195,164) (207,959)
========= =========
Property and equipment, net $ 204,334 $ 206,363
========= =========
</TABLE>
Page 6
<PAGE>
Note 3 -- Comprehensive Income
The Company follows SFAS No. 130, "Reporting Comprehensive Income," which
provides standards for reporting and disclosure of comprehensive income and its
components. Comprehensive income reflects the changes in equity during a period
from transactions and other events and circumstances from non-owner sources. For
the Company, comprehensive income represents net loss adjusted for foreign
currency translation adjustments and unrealized gains/losses on marketable
securities available for sale. Comprehensive loss was $21,305 and $10,832 for
the quarters ended March 31, 2000 and 1999, respectively.
Note 4 -- Effect of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued 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 years beginning after June 15, 2000.
Accordingly, the Company plans to adopt the requirements of SFAS No. 133
effective January 1, 2001. SFAS No. 133 could increase volatility in earnings
and other comprehensive income.
Note 5 -- Reclassifications
Certain items in the 1999 financial statements have been reclassified to conform
to 2000 classifications. Such reclassifications had no effect on previously
reported net loss or stockholders' equity.
Page 7
<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 broadband, interactive services provider which specializes in the
delivery of interactive television and Internet access services to the lodging
industry throughout the United States, Canada and select international markets.
These services include on-demand movies, Nintendo(R) video games,
Internet-enhanced television, high-speed Internet access, and other interactive
television services designed to serve the needs of the lodging industry and the
traveling public.
GUEST PAY INTERACTIVE SERVICES. Guest Pay interactive services are purchased by
guests on a per-view, hourly, or daily basis and include on-demand movies,
network-based Nintendo video games, Internet enhanced television, and high-speed
Internet access services. 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 interactive services.
The Company's Guest Pay interactive revenues depend on a number of factors,
including the number of rooms equipped with the Company's systems, hotel
occupancy rates and guest demographics, and the popularity, pricing, and
availability of programming. The primary direct costs of providing Guest Pay
interactive 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 other
interactive services, (iv) Internet connectivity costs, and (v) 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.
Page 8
<PAGE>
The Company installed its systems in the following number of rooms, net of
de-installations, during the three months and twelve months ended March 31,
2000:
<TABLE>
<CAPTION>
Periods Ended
March 31, 2000
-----------------------
Three Twelve
Months Months
-------- -------
<S> <C> <C>
Guest Pay interactive rooms 19,027 65,042
Nintendo video game rooms 24,289 102,305
Internet services rooms 2,976 12,352
</TABLE>
The room installations for the twelve months ended March 31, 2000 represent
increases of 10.6% for Guest Pay interactive rooms and 18.6% for Nintendo video
game rooms over the room bases at March 31, 1999.
The Company's base of installed rooms was comprised as follows at March 31:
<TABLE>
<CAPTION>
1999 2000
------------------------ ------------------------
Rooms % Rooms %
------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Guest Pay interactive rooms:
Scheduled 12,867 2.1 -- --
On-demand 602,809 97.9 680,718 100.0
------------ -------- ------------ --------
615,676 100.0 680,718 100.0
Nintendo video game rooms 549,576 651,881
Internet services rooms 776 13,128
</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
March 31:
<TABLE>
<CAPTION>
1999 2000
------------ -----------
<S> <C> <C>
Total Rooms Served 719,670 777,745
============ ===========
</TABLE>
FREE-TO-GUEST AND OTHER SERVICES. In addition to Guest Pay interactive 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 and pays
a monthly fee per room which varies depending on incentive programs in effect
from time to time.
To meet the needs of its hotel customers related to the Company's service
offerings, the Company provides a variety of other services to its hotel
customers including the sales of televisions, system equipment, and service
parts and labor. Results from these other services and free-to-guest services
delivered to rooms not receiving Guest Pay interactive services are included in
the "other" components of revenues and direct costs in the statements of
operations.
Page 9
<PAGE>
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
REVENUE ANALYSIS
The Company's total revenue for the first quarter of 2000 increased 13.7%, or
$5.8 million, in comparison to the first quarter of 1999. The following table
sets forth the components of revenue (in thousands) for the quarter ending March
31:
<TABLE>
<CAPTION>
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Revenue: Amount Revenue Amount Revenue
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Guest Pay $ 38,969 92.9 $ 45,399 95.1
Other 2,996 7.1 2,334 4.9
============ =========== =========== ===========
$ 41,965 100.0 $ 47,733 100.0
============ =========== =========== ===========
</TABLE>
GUEST PAY INTERACTIVE SERVICES. Guest Pay interactive revenue increased 16.5%,
or $6.4 million, in the first quarter of 2000 in comparison to the same quarter
of 1999. This increase was attributable to a 10.9% increase in the average
number of installed Guest Pay rooms and a 5.1% increase in average monthly
revenue per room. The following table sets forth information in regard to
average monthly revenue per Guest Pay room for the quarter ending March 31:
<TABLE>
<CAPTION>
1999 2000
----------- ------------
<S> <C> <C>
Average monthly revenue per room:
Movie revenue $ 18.05 $ 18.74
Other interactive service revenue 3.49 3.89
----------- ------------
Total per Guest Pay room $ 21.54 $ 22.63
=========== ============
</TABLE>
Average movie revenue per room increased 3.8% primarily due to higher average
movie prices. Average other interactive service revenue per room increased 11.5%
due to increased revenue from Internet access services and cable television
programming services.
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. Other revenue decreased $662,000
or 22.1% due to lower revenue from free-to-guest services and decreased sales of
televisions, system equipment and service parts.
Page 10
<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 March 31:
<TABLE>
<CAPTION>
1999 2000
----------- ------------
<S> <C> <C>
Direct costs:
Guest Pay $ 15,850 $ 18,764
Other 2,398 1,592
=========== ============
$ 18,248 $ 20,356
=========== ============
Gross profit margin:
Guest Pay 59.3% 58.7%
Other 20.0% 31.8%
Composite 56.5% 57.4%
</TABLE>
Guest Pay interactive direct costs increased 18.4%, or $2.9 million, in the
first quarter of 2000 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 related revenue,
Guest Pay direct costs increased from 40.7% in the first quarter of 1999 to
41.3% in the current quarter. The resulting decrease in gross profit margin from
59.3% to 58.7% was due to slightly higher video game royalty costs and a slight
shift in the composition of revenue from the more profitable revenue source of
movies to the less profitable revenue source of cable television programming.
Direct costs associated with other revenue decreased $806,000 or 33.6% in the
first quarter of 2000 from the year earlier quarter. As a percentage of related
revenue, such costs decreased to 68.2% in the current quarter versus 80.0% in
the first quarter of 1999. This decrease was due to lower sales of televisions
and system equipment, which generally earn a lower margin than revenue from
other sources of other revenue.
The Company's overall gross profit increased 15.4%, or $3.7 million, to $27.4
million in the first quarter of 2000 on a 13.7% increase in revenues from the
first quarter of 1999. The Company's overall gross profit margin increased to
57.4% in the current quarter from 56.5% in the year earlier quarter due to a
shift in sales from other revenue to the more profitable Guest Pay interactive
services (92.9% in the first quarter of 1999 to 95.1% in the first quarter of
2000) and the increase in gross margin from other revenue as described above.
OPERATING EXPENSES. The following table sets forth information in regard to the
Company's operating expenses for the quarter ending March 31 (dollar amounts in
thousands):
<TABLE>
<CAPTION>
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Amount Revenues Amount Revenues
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating expenses:
Guest Pay operations $ 5,867 14.0 $ 7,048 14.8
Selling, general and administrative 4,341 10.3 4,772 10.0
Depreciation and amortization 14,425 34.4 16,422 34.4
------------ ----------- ----------- -----------
Total operating expenses $ 24,633 58.7 $ 28,242 59.2
============ =========== =========== ===========
</TABLE>
Guest Pay operations expenses consist of costs directly related to the operation
of systems at hotel sites. Guest Pay operations expenses increased 20.1%, or
$1.2 million in the first quarter of 2000 compared to the year earlier quarter.
This increase was due to (i) a 10.9% increase in average installed Guest Pay
interactive rooms in the first quarter of 2000 as compared to the year earlier
quarter, (ii) certain non-recurring costs related to the implementation and
transition
Page 11
<PAGE>
to new internal-use software to support various operating activities, and (iii)
costs related to the development and roll-out of new Internet services. Per
average installed room, Guest Pay operations expenses were $3.51 per month in
the first quarter of 2000 as compared to $3.24 per month in the first quarter of
1999.
Selling, general and administrative expenses increased 9.9%, or $431,000 in the
first quarter of 2000 compared to the year earlier quarter. This increase was
due in part to costs related to the recent implementation of several major
software applications to support various operating, administrative and
Internet-related activities. As a percentage of revenue, such expenses decreased
to 10.0% in the current quarter from 10.3% in the year earlier quarter.
Depreciation and amortization expenses increased 13.8% to $16.4 million in the
first quarter of 2000 from $14.4 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. Additionally, increases in
administrative and facility related assets have contributed to the increased
depreciation and amortization. As a percentage of revenue, depreciation and
amortization expenses were 34.4% in the first quarter of 2000 and 1999.
OPERATING LOSS. The Company's operating loss, as a result of the factors
previously described, decreased to $865,000 in the current quarter from $916,000
in the same quarter of 1999.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. During the first quarter of 1999,
the Company recorded losses of $2.2 million related to its investment in Across
Media Networks, LLC ("AMN") and $1.6 million related to its investment in Global
Interactive Communications Corporation ("GICC"). The Company sold its interest
in AMN during the third quarter of 1999. With respect to GICC, beginning with
the third quarter of 1999, the Company began using the cost method of accounting
for this investment to reflect its temporary condition resulting from the
commencement of a plan by GICC management to sell its assets. The Company
periodically reviews its remaining investment in GICC for realization and
recognizes write-downs if estimated proceeds from GICC's asset sales are not
expected to exceed the Company's recorded investment balance ($11.5 million as
of March 31, 2000). Based on management's estimates and analysis as of March 31,
2000, no write-downs were considered necessary for the first quarter of 2000.
INTEREST EXPENSE. Interest expense increased to $7.0 million in the current
quarter from $6.6 million in the comparable quarter of 1999 due to increases in
long-term debt to fund the Company's continuing expansion of its business. Total
debt increased from $266.5 million at March 31, 1999 to $283.4 million at March
31, 2000. Average principal amount of long-term debt outstanding during the
quarter ended March 31, 2000 was approximately $284 million (at an average
interest rate of approximately 9.8%) as compared to an average principal amount
outstanding of approximately $267 million (at an average interest rate of
approximately 10.5%) during the comparable period of 1999.
INTEREST INCOME. Interest income, primarily earned from loans to unconsolidated
affiliates, decreased to $224,000 in the first quarter of 2000 from $393,000
during the same period of 1999.
NET LOSS. For the reasons previously described, the Company's net loss decreased
to $7.7 million in the first quarter of 2000 from a net loss of $11.0 million in
the same quarter of the prior year.
EBITDA. As a result of increasing revenues from Guest Pay interactive services,
and the other factors previously described, EBITDA (defined as "earnings before
interest, income taxes, depreciation and amortization") increased 15.2% to $15.6
million in the first quarter of 2000 as compared to $13.5 million in the first
quarter of 1999. EBITDA as a percentage of total revenues was 32.6% in the
current quarter as compared to 32.2% in the same quarter of 1999. 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 12
<PAGE>
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, prior to 1999, its 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 1999, capital expenditures were $51.2 million and net cash
provided by operating activities was $40.8 million. During the first quarter of
2000, capital expenditures were $17.6 million as compared to $13.2 million in
the first quarter of 1999, and net cash provided by operating activities was
$14.7 million as compared to $11.9 million in the same period of 1999.
Depending on the rate of growth of its business and other factors, the Company
expects to incur capital expenditures between approximately $40 to $50 million
during the remaining nine months of 2000. In addition, the Company's cash
requirements during 2000 are expected to include the final $5.85 million payment
to On Command Corporation ("OCC") in connection with the settlement of the
litigation between the Company and OCC pursuant to the terms of the multiple
cross licenses. 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.
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 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.
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 March 31, 2000, the Company had debt totaling $283.4 million. The
Company has 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 $261.4 million and variable rate debt of $22.0 million at March 31,
2000. 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 $24.6 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 $220,000, assuming other variables remain
constant.
Page 13
<PAGE>
FOREIGN CURRENCY TRANSACTIONS. A 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
and liabilities 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 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. Accordingly, the Company's consolidated assets will
fluctuate depending on the weakening or strengthening of the U.S. dollar against
the Canadian dollar. No significant foreign currency fluctuations occurred in
the first quarter of 2000 to materially impact consolidated results of
operations or financial condition.
Page 14
<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
Not applicable.
ITEM 5 -- OTHER INFORMATION
Not applicable.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS:
None.
b. REPORTS ON FORM 8-K:
The Company filed no Reports on Form 8-K during the quarter
ended March 31, 2000.
Page 15
<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: May 10, 2000 /s/ SCOTT C. PETERSEN
----------------------------------
Scott C. Petersen
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 10, 2000 /s/ JEFFREY T. WEISNER
----------------------------------
Jeffrey T. Weisner
Senior Vice President, Chief Financial
Officer
(Principal Financial Officer)
Date: May 10, 2000 /s/ RONALD W. PIERCE
----------------------------------
Ronald W. Pierce
Vice President, Corporate Controller
(Principal Accounting Officer)
Page 16
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