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, 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 July 31, 2000, there were 12,184,199 shares outstanding of the
Registrant's common stock, $0.01 par value.
THIS REPORT CONTAINS A TOTAL OF 20 PAGES
LODGENET ENTERTAINMENT CORPORATION
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1-- Financial Statements:
Consolidated Balance Sheets (Unaudited) as of December 31, 1999 and June 30, 2000 ............... 3
Consolidated Statements of Operations (Unaudited) for
the Three and Six Months Ended June 30, 1999 and 2000.......................................... 4
Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended June 30, 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..................................... 16
PART II. OTHER INFORMATION
Item 1-- Legal Proceedings.............................................................................. 18
Item 2-- Changes in Securities and Use of Proceeds...................................................... 18
Item 3-- Defaults Upon Senior Securities................................................................ 18
Item 4-- Submission of Matters to a Vote of Security Holders............................................ 18
Item 5-- Other Information.............................................................................. 19
Item 6-- Exhibits and Reports on Form 8-K............................................................... 19
SIGNATURES.............................................................................................. 20
- ----------
As used herein (unless the context otherwise requires) "LodgeNet", "the
Company" and/or "the Registrant" means LodgeNet Entertainment Corporation and
its majority-owned subsidiaries.
June 30, 2000 Page 2
PART I -- FINANCIAL INFORMATIOn
ITEM 1 -- FINANCIAL STATEMENTS
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollar amounts in thousands)
December 31, June 30,
1999 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 1,644 $ 2,425
Marketable securities 25,952 9,232
Accounts receivable, net 29,620 25,243
Note receivable 7,060 --
Prepaid expenses and other 2,413 2,842
--------- ---------
Total current assets 66,689 39,742
Property and equipment, net 204,334 205,414
Investments in and advances to unconsolidated affiliates 11,434 10,258
Debt issuance costs, net 8,710 7,915
Other assets, net 14,108 13,185
--------- ---------
$ 305,275 $ 276,514
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,610 $ 15,222
Current maturities of long-term debt 5,915 5,867
Accrued expenses 10,643 10,924
Deferred revenue 2,536 2,584
--------- ---------
Total current liabilities 33,704 34,597
Long-term debt 277,075 276,819
--------- ---------
Total liabilities 310,779 311,416
--------- ---------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value, 20,000,000 shares authorized; 11,970,852 and
12,172,600 shares outstanding at December 31,
1999 and June 30, 2000, respectively 120 122
Additional paid-in capital 124,021 125,842
Accumulated deficit (146,967) (161,188)
Accumulated other comprehensive income 17,322 322
--------- ---------
Total stockholders' deficit (5,504) (34,902)
--------- ---------
$ 305,275 $ 276,514
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
June 30, 2000 Page 3
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
Revenues:
Guest Pay $ 41,479 $ 45,623 $ 80,448 $ 91,022
Other 2,790 2,506 5,786 4,840
------------ ------------ ------------ ------------
Total revenues 44,269 48,129 86,234 95,862
------------ ------------ ------------ ------------
Direct costs:
Guest Pay 16,840 18,482 32,691 37,246
Other 2,165 1,681 4,562 3,273
------------ ------------ ------------ ------------
Total direct costs 19,005 20,163 37,253 40,519
------------ ------------ ------------ ------------
Gross profit 25,264 27,966 48,981 55,343
------------ ------------ ------------ ------------
Operating expenses:
Guest Pay operations 6,032 6,755 11,899 13,803
Selling, general and administrative 4,218 4,683 8,559 9,455
Depreciation and amortization 14,880 16,119 29,305 32,541
------------ ------------ ------------ ------------
Total operating expenses 25,130 27,557 49,763 55,799
------------ ------------ ------------ ------------
Operating income (loss) 134 409 (782) (456)
Equity in losses of unconsolidated affiliates (18,373) -- (22,217) --
Interest expense (6,874) (6,896) (13,477) (13,855)
Interest income 387 43 780 267
------------ ------------ ------------ ------------
Loss before income taxes (24,726) (6,444) (35,696) (14,044)
Provision for income taxes (100) (95) (157) (177)
------------ ------------ ------------ ------------
Net loss $ (24,826) $ (6,539) $ (35,853) $ (14,221)
============ ============ ============ ============
Per common share (basic and diluted):
Net loss $ (2.08) $ (.54) $ (3.00) $ (1.17)
============ ============ ============ ============
Weighted average shares outstanding 11,942,387 12,156,623 11,942,387 12,106,933
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
June 30, 2000 Page 4
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Six Months Ended June 30,
-------------------------
1999 2000
-------- --------
Operating activities:
Net loss $(35,853) $(14,221)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 29,305 32,541
Equity in losses of unconsolidated affiliates 22,217 --
Change in operating assets and liabilities:
Accounts receivable 394 4,342
Prepaid expenses and other 1,158 (432)
Accounts payable (1,159) 621
Accrued expenses and other 2,746 330
Other 1,726 (130)
-------- --------
Net cash provided by operating activities 20,534 23,051
-------- --------
Investing activities:
Property and equipment additions (25,680) (31,684)
Proceeds from sale of investment -- 7,200
Proceeds from (investment in) unconsolidated affiliates (846) 1,174
-------- --------
Net cash used for investing activities (26,526) (23,310)
-------- --------
Financing activities:
Proceeds from long-term debt 75,000 --
Repayment of long-term debt (19) (19)
Repayment of capital lease obligations (303) (253)
Borrowings under revolving credit facility 15,500 7,000
Repayments of revolving credit facility (82,000) (7,500)
Debt issuance costs (3,501) --
Stock option activity -- 1,823
-------- --------
Net cash provided by financing activities 4,677 1,051
-------- --------
Effect of exchange rates on cash 44 (11)
-------- --------
Increase (decrease) in cash and cash equivalents (1,271) 781
Cash and cash equivalents at beginning of period 5,240 1,644
-------- --------
Cash and cash equivalents at end of period $ 3,969 $ 2,425
======== ========
Supplemental cash flow information:
Cash paid for interest $ 12,668 $ 13,532
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
June 30, 2000 Page 5
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 -- Basis of Presentation
The accompanying consolidated financial statements as of June 30, 2000, and for
the three and six month periods ended June 30, 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 and six month period ended June 30, 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):
December 31, June 30,
1999 2000
--------------- ----------------
Land, building and equipment $ 55,899 $ 59,987
Free-to-guest equipment 18,111 18,793
Guest pay systems:
Installed 292,939 311,200
System components 22,551 23,571
Software costs 9,998 11,145
--------------- ----------------
Total 399,498 424,696
Less - depreciation and amortization (195,164) (219,282)
--------------- ----------------
Property and equipment, net $ 204,334 $ 205,414
=============== ================
June 30, 2000 Page 6
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 $24,514,000 and $9,916,000
for the quarters ended June 30, 1999 and 2000, respectively, and $35,346,000 and
$31,221,000 for the six months ended June 30, 1999 and 2000, 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.
June 30, 2000 Page 7
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. 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.
June 30, 2000 Page 8
The Company installed its systems in the following number of rooms, net of
de-installations, during the three months and twelve months ended June 30, 2000:
Periods Ended
June 30, 2000
---------------------------
Three Twelve
Months Months
------------ -----------
Guest Pay interactive rooms 16,217 63,649
Nintendo video game rooms 16,630 92,178
Internet services rooms 3,092 12,953
The room installations for the twelve months ended June 30, 2000 represent
increases of 10.1% for Guest Pay interactive rooms and 16.0% for Nintendo video
game rooms over the room bases at June 30, 1999.
The Company's base of installed rooms was comprised as follows at June 30:
1999 2000
------------------------ ------------------------
Rooms % Rooms %
------------ -------- ------------ --------
Guest Pay interactive rooms:
Scheduled 9,997 1.6 -- --
On-demand 623,289 98.4 696,935 100.0
------------ -------- ------------ --------
633,286 100.0 696,935 100.0
Nintendo video game rooms 576,333 668,511
Internet services rooms 3,267 16,220
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:
1999 2000
------------ -----------
Total Rooms Served 735,726 784,042
============ ===========
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.
June 30, 2000 Page 9
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUE ANALYSIS
The Company's total revenue for the second quarter of 2000 increased 8.7%, or
$3.9 million, in comparison to the second quarter of 1999. The following table
sets forth the components of revenue (in thousands) for the quarter ending June
30:
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Revenue: Amount Revenue Amount Revenue
------------ ----------- ----------- -----------
Guest Pay $ 41,479 93.7 $ 45,623 94.8
Other 2,790 6.3 2,506 5.2
------------ ----------- ----------- -----------
$ 44,269 100.0 $ 48,129 100.0
============ =========== =========== ===========
GUEST PAY INTERACTIVE SERVICES. Guest Pay interactive revenue increased 10.0%,
or $4.1 million, in the second quarter of 2000 in comparison to the same quarter
of 1999. This increase was attributable to a 10.5% increase in the average
number of installed Guest Pay rooms and a .4% decrease 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 June 30:
1999 2000
----------- -----------
Average monthly revenue per room:
Movie revenue $ 18.51 $ 17.86
Other interactive service revenue 3.73 4.28
----------- -----------
Total per Guest Pay room $ 22.24 $ 22.14
=========== ===========
Average movie revenue per room decreased 3.5% primarily due to a relatively less
popular selection of major motion pictures available during the second quarter
of 2000. This factor was partially offset by higher average movie prices.
Average other interactive service revenue per room increased 14.7% 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 $284,000
or 10.2% due to lower revenue from free-to-guest services and decreased sales of
televisions, partially offset by higher sales of equipment to international
licensees.
June 30, 2000 Page 10
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:
1999 2000
----------- ------------
Direct costs:
Guest Pay $ 16,840 $ 18,482
Other 2,165 1,681
----------- ------------
$ 19,005 $ 20,163
=========== ============
Gross profit margin:
Guest Pay 59.4% 59.5%
Other 22.4% 32.9%
Composite 57.1% 58.1%
Guest Pay interactive direct costs increased 9.8%, or $1.6 million, in the
second 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 decreased from 40.6% in the second quarter of 1999 to
40.5% in the current quarter. The resulting increase in gross profit margin from
59.4% to 59.5% was due to lower movie royalty costs partially offset by 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 $484,000 or 22.4% in the
second quarter of 2000 from the year earlier quarter. As a percentage of related
revenue, such costs decreased to 67.1% from 77.6%. The resulting increase in
gross profit margin from 22.4% to 32.9% was due to decreased revenue in the
current quarter from free-to-guest services and television sales, which
generally earn a lower margin than revenue from other sources of other revenue.
The Company's overall gross profit increased 10.7%, or $2.7 million, to $28.0
million on an 8.7% increase in revenue. The Company's overall gross profit
margin increased to 58.1% from 57.1% due to a shift in sales from other revenue
to the more profitable Guest Pay interactive services (93.7% in the second
quarter of 1999 to 94.8% in the current quarter) 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 June 30 (dollar amounts in
thousands):
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Amount Revenues Amount Revenues
------------ ----------- ----------- -----------
Operating expenses:
Guest Pay operations $ 6,032 13.7 $ 6,755 14.1
Selling, general and administrative 4,218 9.5 4,683 9.7
Depreciation and amortization 14,880 33.6 16,119 33.5
------------ ----------- ----------- -----------
Total operating expenses $ 25,130 56.8 $ 27,557 57.3
============ =========== =========== ===========
Guest Pay operations expenses consist of costs directly related to the operation
of systems at hotel sites. Guest Pay operations expenses increased 12.0%, or
$723,000 in the second quarter of 2000 compared to the year earlier quarter.
This increase was due to a 10.5% increase in average installed Guest Pay
interactive rooms and costs related to the
June 30, 2000 Page 11
development and roll-out of new Internet services. Per average installed room,
Guest Pay operations expenses were $3.28 per month in the second quarter of 2000
compared to $3.23 per month in the second quarter of 1999.
Selling, general and administrative expenses increased 11.0%, or $465,000 in the
second quarter of 2000 compared to the year earlier quarter. As a percentage of
revenue, SG&A increased slightly to 9.7% in the current quarter from 9.5% in the
year earlier quarter.
Depreciation and amortization expenses increased 8.3% to $16.1 million in the
second quarter of 2000 from $14.9 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. As a percentage of revenue, depreciation
and amortization expenses decreased slightly to 33.5% in the current quarter
from 33.6% in the second quarter of 1999.
OPERATING INCOME. As a result of the factors described above, operating income
increased to $409,000 in the current quarter from $134,000 in the same quarter
of 1999.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. During the second quarter of
1999, the Company recorded losses of $18.4 million related to its investment in
Global Interactive Communications Corporation ("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 ($10.3 million as of June 30, 2000). Based
on management's estimates and analysis as of June 30, 2000, no write-downs were
considered necessary for the second quarter of 2000.
INTEREST EXPENSE. Interest expense was $6.9 million in the second quarter of
2000 and 1999. Total debt increased from $276.3 million at June 30, 1999 to
$282.7 million at June 30, 2000. Average principal amount of long-term debt
outstanding during the quarter ended June 30, 2000 was approximately $279
million (at an average interest rate of approximately 9.9%) as compared to an
average principal amount outstanding of approximately $269 million (at an
average interest rate of approximately 10.2%) during the comparable period of
1999.
INTEREST INCOME. Interest income, primarily earned from loans to unconsolidated
affiliates, decreased to $43,000 in the second quarter of 2000 from $387,000
during the same period of 1999.
NET LOSS. For the reasons previously described, the Company's net loss decreased
to $6.5 million in the second quarter of 2000 from a net loss of $24.8 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 10.1% to $16.5
million in the second quarter of 2000 as compared to $15.0 million in the second
quarter of 1999. EBITDA as a percentage of total revenues was 34.3% in the
current quarter as compared to 33.9% 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.
June 30, 2000 Page 12
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 AND 2000
REVENUE ANALYSIS
The Company's total revenue for the six months ended June 30, 2000 increased
11.2%, or $9.6 million, in comparison to the six months ended June 30, 1999. The
following table sets forth the components of revenue (in thousands) for the six
months ending June 30:
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Revenue: Amount Revenue Amount Revenue
------------ ----------- ----------- -----------
Guest Pay $ 80,448 93.3 $ 91,022 95.0
Other 5,786 6.7 4,840 5.0
------------ ----------- ----------- -----------
$ 86,234 100.0 $ 95,862 100.0
============ =========== =========== ===========
GUEST PAY INTERACTIVE SERVICES. Guest Pay interactive revenue increased 13.1%,
or $10.6 million, in the first half of 2000 in comparison to the same period of
1999. This increase was attributable to a 10.7% increase in the average number
of installed Guest Pay rooms and a 2.2% 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 six months ending June 30:
1999 2000
----------- -----------
Average monthly revenue per room:
Movie revenue $ 18.28 $ 18.29
Other interactive service revenue 3.61 4.09
----------- -----------
Total per Guest Pay room $ 21.89 $ 22.38
=========== ===========
Average movie revenue per room was relatively consistent during the periods.
Higher average movie prices were achieved during the first half of 2000, which
were offset by lower buy rates resulting from a relatively less popular
selection of major motion pictures available during the first six months of
2000. Average other interactive service revenue per room increased 13.3% 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 $946,000
or 16.3% due to lower revenue from free-to-guest services and decreased sales of
televisions, partially offset by higher sales of equipment to international
licensees.
June 30, 2000 Page 13
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 six months
ending June 30:
1999 2000
----------- ------------
Direct costs:
Guest Pay $ 32,691 $ 37,246
Other 4,562 3,273
----------- ------------
$ 37,253 $ 40,519
=========== ============
Gross profit margin:
Guest Pay 59.4% 59.1%
Other 21.2% 32.4%
Composite 56.8% 57.7%
Guest Pay interactive direct costs increased 13.9%, or $4.6 million, in the
first half of 2000 as compared to the first half of 1999. 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 40.6% during the first six months of 1999 to 40.9%
during the same period of 2000. The resulting decrease in gross profit margin
from 59.4% to 59.1% was due to a slight shift in the composition of Guest Pay
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 $1.3 million or 28.3% in
the first half of 2000 from the year earlier period. As a percentage of related
revenue, such costs decreased to 67.6% from 78.8%. The resulting increase in
gross profit margin from 21.2% to 32.4% was due to decreased revenue from
free-to-guest services and television sales, which generally earn a lower margin
than revenue from other sources of other revenue.
The Company's overall gross profit increased 13.0%, or $6.4 million, to $55.3
million on an 11.2% increase in revenue. The Company's overall gross profit
margin increased to 57.7% from 56.8% due to a shift in sales from other revenue
to the more profitable Guest Pay interactive services (93.3% in the first six
months of 1999 to 95.0% in the current period) 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 six months ending June 30 (dollar amounts
in thousands):
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Amount Revenues Amount Revenues
------------ ----------- ----------- -----------
Operating expenses:
Guest Pay operations $ 11,899 13.8 $ 13,803 14.4
Selling, general and administrative 8,559 9.9 9,455 9.9
Depreciation and amortization 29,305 34.0 32,541 33.9
------------ ----------- ----------- -----------
Total operating expenses $ 49,763 57.7 $ 55,799 58.2
============ =========== =========== ===========
Guest Pay operations expenses consist of costs directly related to the operation
of systems at hotel sites. Guest Pay operations expenses increased 16.0%, or
$1.9 million in the first six months of 2000 compared to the year earlier
period. This increase was due to (i) a 10.7% increase in average installed Guest
Pay interactive rooms in the first half of 2000 as compared to the year earlier
period, (ii) certain non-recurring costs incurred during the first quarter of
2000 related to the implementation and transition to new internal-use software
to support various operating activities, and (iii)
June 30, 2000 Page 14
costs related to the development and roll-out of new Internet services. Per
average installed room, Guest Pay operations expenses were $3.39 per month in
the first six months of 2000 compared to $3.24 per month in the same period of
1999.
Selling, general and administrative expenses increased 10.5%, or $896,000 in the
first half of 2000 compared to the year earlier period. As a percentage of
revenue, SG&A was consistent at 9.9% during the first six months of 1999 and
2000.
Depreciation and amortization expenses increased 11.0% to $32.5 million in the
first six months of 2000 from $29.3 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. As a percentage of revenue, depreciation
and amortization expenses decreased slightly to 33.9% in the current period from
34.0% in the first half of 1999.
OPERATING LOSS. As a result of the factors described above, operating loss
decreased to $456,000 in the current six month period from $782,000 in the first
six months of 1999.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. During the first half of 1999,
losses totaling $22.2 million were recorded related to the Company's investments
in Across Media Networks, LLC ("AMN") and 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 ($10.3 million as of June 30, 2000). Based
on management's estimates and analysis as of June 30, 2000, no write-downs were
considered necessary during the first half of 2000.
INTEREST EXPENSE. Interest expense increased from $13.5 million in the first
half of 1999 to $13.9 million in the current period. Total debt increased from
$276.3 million at June 30, 1999 to $282.7 million at June 30, 2000. Average
principal amount of long-term debt outstanding during the six months ended June
30, 2000 was approximately $282 million (at an average interest rate of
approximately 9.8%) as compared to an average principal amount outstanding of
approximately $268 million (at an average interest rate of approximately 10.1%)
during the comparable period of 1999.
INTEREST INCOME. Interest income, primarily earned from loans to unconsolidated
affiliates, decreased to $267,000 in the first half of 2000 from $780,000 during
the same period of 1999.
NET LOSS. For the reasons previously described, the Company's net loss decreased
to $14.2 million in the first six months of 2000 from a net loss of $35.9
million in the same period 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 12.5% to $32.1
million in the first six months of 2000 as compared to $28.5 million in the
first half of 1999. EBITDA as a percentage of total revenues was 33.5% in the
current period as compared to 33.1% in the same period 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.
June 30, 2000 Page 15
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 six months
of 2000, capital expenditures were $31.7 million as compared to $25.7 million in
the first six months of 1999, and net cash provided by operating activities was
$23.1 million as compared to $20.5 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 $25 to $30 million
during the remaining six months of 2000. In addition, the Company's cash
requirements during the third quarter of 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 five-year 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 June 30, 2000, the Company had debt totaling $282.7 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 $261.7 million and variable rate debt of $21.0 million at June 30,
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 $210,000, assuming other variables remain
constant.
June 30, 2000 Page 16
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 second quarter of 2000 to materially impact consolidated results of
operations or financial condition.
June 30, 2000 Page 17
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 10, 2000 for the following purposes:
1. Election of two directors to serve for a three-year term
expiring in 2003;
2. Approval of an amendment ("Plan Amendment") to the Company's
1993 Stock Option Plan, as amended;
3. Ratification of the appointment of independent public
accountants; and
4. Action on such other matters as may properly come before the
Meeting.
a. The directors who were elected at the Meeting are as follows:
R. Douglas Bradbury
Richard R. Hylland
b. The results of voting at the Meeting were as follows:
Election of Directors -
For Against Withheld Abstentions
R. Douglas Bradbury 9,899,424 - - 431,581 - -
Richard R. Hylland 9,899,283 - - 431,721 - -
Plan Amendment -
For Against No Voting Authority
7,411,725 517,846 - -
Ratification of Public Accountants -
For Against Abstain
10,325,246 1,775 3,984
June 30, 2000 Page 18
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 June 30, 2000.
June 30, 2000 Page 19
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 11, 2000 /s/ SCOTT C. PETERSEN
-------------------------------------
Scott C. Petersen
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2000 /s/ JEFFREY T. WEISNER
-------------------------------------
Jeffrey T. Weisner
Senior Vice President, Chief Financial
Officer
(Principal Financial Officer)
Date: August 11, 2000 /s/ RONALD W. PIERCE
-------------------------------------
Ronald W. Pierce
Vice President, Corporate Controller
(Principal Accounting Officer)
June 30, 2000 Page 20