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 SEPTEMBER 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)
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(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 October 31, 2000, there were 12,211,374 shares outstanding of the
Registrant's common stock, $0.01 par value.
LODGENET ENTERTAINMENT CORPORATION
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Item 1 -- Financial Statements:
Consolidated Balance Sheets (Unaudited) as of December 31, 1999 and September 30, 2000............ 3
Consolidated Statements of Operations (Unaudited) for
the Three and Nine Months Ended September 30, 1999 and 2000.................................... 4
Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended September 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..................................... 17
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.............................................................................. 18
Item 6-- Exhibits and Reports on Form 8-K............................................................... 18
SIGNATURES.............................................................................................. 19
- --------------------
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
PART I -- FINANCIAL INFORMATIOn
ITEM 1 -- FINANCIAL STATEMENTS
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollar amounts in thousands)
December 31, September 30,
1999 2000
------------------ ------------------
Assets
Current assets:
Cash and cash equivalents $ 1,644 $ 2,244
Marketable securities 25,952 4,584
Accounts receivable, net 29,620 29,395
Note receivable 7,060 --
Prepaid expenses and other 2,413 2,301
------------------ ------------------
Total current assets 66,689 38,524
Property and equipment, net 204,334 202,131
Investments in and advances to unconsolidated affiliates 11,434 10,164
Debt issuance costs, net 8,710 7,518
Other assets, net 14,108 12,725
------------------ ------------------
$ 305,275 $ 271,062
================== ==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 14,610 $ 13,615
Current maturities of long-term debt 5,915 17,768
Accrued expenses 10,643 14,327
Deferred revenue 2,536 2,645
------------------ ------------------
Total current liabilities 33,704 48,355
Long-term debt 277,075 263,579
------------------ ------------------
Total liabilities 310,779 311,934
------------------ ------------------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.01 par value, 20,000,000 shares authorized; 11,970,852 and
12,211,174 shares outstanding at December 31,
1999 and September 30, 2000, respectively 120 122
Additional paid-in capital 124,021 128,809
Accumulated deficit (146,967) (165,332)
Accumulated other comprehensive income (loss) 17,322 (4,471)
------------------ ------------------
Total stockholders' deficit (5,504) (40,872)
------------------ ------------------
$ 305,275 $ 271,062
================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
Page 3
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollar amounts, except per share amounts, in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------- ----------------------------------
1999 2000 1999 2000
--------------- -------------- --------------- ---------------
Revenues:
Guest Pay $ 46,508 $ 50,232 $ 126,956 $ 141,253
Other 3,132 2,662 8,918 7,503
--------------- -------------- --------------- ---------------
Total revenues 49,640 52,894 135,874 148,756
--------------- -------------- --------------- ---------------
Direct costs:
Guest Pay 19,415 20,509 52,106 57,755
Other 2,474 925 7,036 4,198
--------------- -------------- --------------- ---------------
Total direct costs 21,889 21,434 59,142 61,953
--------------- -------------- --------------- ---------------
Gross profit 27,751 31,460 76,732 86,803
--------------- -------------- --------------- ---------------
Operating expenses:
Guest Pay operations 6,447 7,120 18,345 20,923
Selling, general and administrative 4,291 5,020 12,850 14,475
Depreciation and amortization 15,235 16,497 44,541 49,038
--------------- -------------- --------------- ---------------
Total operating expenses 25,973 28,637 75,736 84,436
--------------- -------------- --------------- ---------------
Operating income 1,778 2,823 996 2,367
Equity in losses of unconsolidated affiliates -- -- (22,217) --
Gain on sale of investment 7,095 -- 7,095 --
Interest expense (6,882) (6,990) (20,360) (20,845)
Interest income 424 92 1,205 359
--------------- -------------- --------------- ---------------
Income (loss) before income taxes 2,415 (4,075) (33,281) (18,119)
Provision for income taxes (106) (69) (263) (246)
--------------- -------------- --------------- ---------------
Net Income (loss) $ 2,309 $ (4,144) $ (33,544) $ (18,365)
=============== ============== =============== ===============
Basic earnings per common share $ .19 $ (.34) $ (2.81) $ (1.51)
Average basic common shares outstanding 11,944,691 12,191,981 11,943,163 12,135,067
Diluted earnings per common share $ .19 $ (.34) $ (2.81) $ (1.51)
Average diluted common shares outstanding 12,426,986 12,191,981 11,943,163 12,135,067
The accompanying notes are an integral part of these consolidated
financial statements.
Page 4
LODGENET ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollar amounts in thousands)
Nine Months Ended September 30,
--------------------------------------
1999 2000
----------------- ----------------
Operating activities:
Net loss $ (33,544) $ (18,365)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 44,541 49,038
Gain on sale of investment (7,095) --
Equity in losses of unconsolidated affiliates 22,217 --
Change in operating assets and liabilities:
Accounts receivable (1,089) 164
Prepaid expenses and other 1,853 109
Accounts payable 1,311 (973)
Accrued expenses and other 4,765 3,798
Other 2,074 (130)
----------------- ----------------
Net cash provided by operating activities 35,033 33,641
----------------- ----------------
Investing activities:
Property and equipment additions (37,871) (44,092)
Proceeds from sale of investment -- 7,200
Proceeds from (investment in) unconsolidated affiliates (3,364) 1,270
----------------- ----------------
Net cash used for investing activities (41,235) (35,622)
----------------- ----------------
Financing activities:
Proceeds from long-term debt 80,500 --
Repayment of long-term debt (5,529) (29)
Payment on license rights liability (4,954) (5,294)
Repayment of capital lease obligations (430) (371)
Borrowings under revolving credit facility 19,000 11,000
Repayments of revolving credit facility (82,000) (7,500)
Debt issuance costs (3,559) --
Stock option activity -- 2,322
Other -- 2,468
----------------- ----------------
Net cash provided by financing activities 3,028 2,596
----------------- ----------------
Effect of exchange rates on cash 38 (15)
----------------- ----------------
Increase (decrease) in cash and cash equivalents (3,136) 600
Cash and cash equivalents at beginning of period 5,240 1,644
----------------- ----------------
Cash and cash equivalents at end of period $ 2,104 $ 2,244
================= ================
Supplemental cash flow information:
Cash paid for interest $ 17,165 $ 17,926
================= ================
The accompanying notes are an integral part of these consolidated
financial statements.
Page 5
LODGENET ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 -- Basis of Presentation
The accompanying consolidated financial statements as of September 30, 2000,
and for the three and nine month periods ended September 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 nine month period
ended September 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, September 30,
1999 2000
--------------- -----------------
Land, building and equipment $ 55,899 $ 61,385
Free-to-guest equipment 18,111 19,217
Guest pay systems:
Installed 292,939 317,931
System components 22,551 23,891
Software costs 9,998 12,039
--------------- -----------------
Total 399,498 434,463
Less - depreciation and amortization (195,164) (232,332)
--------------- -----------------
Property and equipment, net $ 204,334 $ 202,131
=============== =================
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, in 2000, unrealized losses
from the 234,332 shares of CMGI, Inc. common stock that were received in
conjunction with the sale of an affiliate in the fourth quarter of 1999.
Comprehensive loss was $2,375,000 and $8,937,000 for the quarters ended
September 30, 1999 and 2000, respectively, and $32,971,000 and $40,158,000
for the nine months ended September 30, 1999 and 2000, respectively.
Note 4 -- Effect of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". SFAS 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 137 which amended SFAS 133 to
delay its effective date to fiscal years beginning after June 15, 2000.
Accordingly, the Company plans to adopt the requirements of SFAS 133
effective January 1, 2001. SFAS 133 could increase volatility in earnings and
other comprehensive income.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation and disclosures of
revenue in the financial statements effective for all transactions beginning
January 1, 2000. The Company does not believe that the adoption of SAB 101 in
the fourth quarter of 2000 will have a material effect on the Company's
financial results.
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.
Note 6 -- Subsequent Event
Subsequent to September 30, 2000, the Company entered into an agreement with
Hilton Hotels Corporation ("Hilton") to provide LodgeNet's interactive
television services into Hilton's owned, leased and joint venture hotels in
the United States. Under terms of the agreement, Hilton was issued a warrant
granting it the right to purchase up to 2.1 million shares of LodgeNet common
stock over the next seven years at a price of $20.44 per share. Additionally,
the Company and Hilton have formed a broadband, interactive new media
company, InnMedia LLC, to offer hotel guests new and innovative interactive
television content such as high speed Internet access through the television
as well as customized hotel and guest information.
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.
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 September
30, 2000:
Periods Ended
September 30, 2000
---------------------------
Three Twelve
Months Months
------------ -----------
Guest Pay interactive rooms 12,042 59,477
Nintendo video game rooms 13,296 83,666
Internet services rooms 4,034 12,791
The room installations for the twelve months ended September 30, 2000
represent increases of 9.2% for Guest Pay interactive rooms and 14.0% for
Nintendo video game rooms over the room bases at September 30, 1999.
The Company's base of installed rooms was comprised as follows at September
30:
1999 2000
------------------------ ------------------------
Rooms % Rooms %
------------ -------- ------------ --------
Guest Pay interactive rooms:
Scheduled 6,784 1.0 -- --
On-demand 642,716 99.0 708,977 100.0
------------ -------- ------------ --------
649,500 100.0 708,977 100.0
Nintendo video game rooms 598,141 681,807
Internet services rooms 7,463 20,254
Total rooms served, representing rooms receiving one or more of the Company's
services, including rooms served by international licensees, were as follows
at September 30:
1999 2000
------------ -----------
Total Rooms Served 750,287 793,858
============ ===========
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, for which 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
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUE ANALYSIS
The Company's total revenue for the third quarter of 2000 increased 6.6%, or
$3.3 million, in comparison to the third quarter of 1999. The following table
sets forth the components of revenue (in thousands) for the quarter ending
September 30:
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Revenue: Amount Revenue Amount Revenue
------------ ----------- ----------- -----------
Guest Pay $ 46,508 93.7 $ 50,232 95.0
Other 3,132 6.3 2,662 5.0
------------ ----------- ----------- -----------
$ 49,640 100.0 $ 52,894 100.0
============ =========== =========== ===========
GUEST PAY INTERACTIVE SERVICES. Guest Pay interactive revenue increased 8.0%, or
$3.7 million, in the third quarter of 2000 in comparison to the same quarter of
1999. This increase was attributable to a 9.5% increase in the average number of
installed Guest Pay rooms and a 1.4% 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 September 30:
1999 2000
----------- ------------
Average monthly revenue per room:
Movie revenue $ 19.71 $ 19.03
Other interactive service revenue 4.53 4.87
----------- ------------
Total per Guest Pay room $ 24.24 $ 23.90
=========== ============
Average movie revenue per room decreased 3.5% due to a decline in the buy
rate per occupied room resulting from a relatively less popular selection of
major motion pictures available early in the third quarter of 2000 and an
impact from the summer Olympics. This factor was partially offset by higher
average movie prices. Average other interactive service revenue per room
increased 7.5%, primarily 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 $470,000 or 15.0% due to lower revenue from free-to-guest services
and decreased sales of televisions, partially offset by other income related
to a one-time $370,000 incentive payment from a vendor.
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 September 30:
1999 2000
----------- ------------
Direct costs:
Guest Pay $ 19,415 $ 20,509
Other 2,474 925
----------- ------------
$ 21,889 $ 21,434
=========== ============
Gross profit margin:
Guest Pay 58.3% 59.2%
Other 21.0% 65.3%
Composite 55.9% 59.5%
Guest Pay interactive direct costs increased 5.6%, or $1.1 million, in the
third 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 41.7% in the third quarter of
1999 to 40.8% in the current quarter. The resulting increase in gross profit
margin from 58.3% to 59.2% was primarily due to lower movie and video game
license fees as a percentage of related revenue, and lower hotel commissions
resulting from the lower movie revenue per room which caused certain hotels
to earn commissions at lower rates. These factors were 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 $1.5 million, or 62.6%
in the third quarter of 2000 from the year earlier quarter. As a percentage
of related revenue, such costs decreased to 34.7% from 79.0%. The resulting
increase in gross profit margin from 21.0% to 65.3% was due to (i) 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, (ii) the benefit of a one-time $430,000 incentive credit
earned from a vendor, and (iii) other income as described above.
Due to the factors described above, the Company's overall gross profit
increased 13.4%, or $3.7 million, to $31.5 million on a 6.6% increase in
revenue. The Company's overall gross profit margin increased to 59.5% from
55.9%.
OPERATING EXPENSES. The following table sets forth information in regard to
the Company's operating expenses for the quarter ending September 30 (dollar
amounts in thousands):
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Amount Revenues Amount Revenues
------------ ----------- ----------- -----------
Operating expenses:
Guest Pay operations $ 6,447 13.0 $ 7,120 13.5
Selling, general and administrative 4,291 8.6 5,020 9.5
Depreciation and amortization 15,235 30.7 16,497 31.2
------------ ----------- ----------- -----------
Total operating expenses $ 25,973 52.3 $ 28,637 54.1
============ =========== =========== ===========
Guest Pay operations expenses consist of costs directly related to the
operation of systems at hotel sites. Guest Pay operations expenses increased
10.4%, or $673,000 in the third quarter of 2000 compared to the year earlier
quarter. This increase was primarily due to the 9.5% increase in average
installed Guest Pay interactive rooms and costs related
Page 11
to the development and rollout of new Internet services. Per average
installed room, Guest Pay operations expenses were $3.39 per month in the
third quarter of 2000 compared to $3.36 per month in the third quarter of
1999.
Selling, general and administrative expenses increased 17.0%, or $729,000 in
the third quarter of 2000 compared to the year earlier quarter. This increase
is due to increased payroll related expenses and professional fees for
business development activities. As a percentage of revenue, SG&A increased
to 9.5% in the current quarter from 8.6% in the year earlier quarter.
Depreciation and amortization expenses increased 8.3% to $16.5 million in the
third quarter of 2000 from $15.2 million in the year earlier quarter. This
increase is primarily attributable to the 9.5% increase in average installed
Guest Pay interactive rooms since the year-earlier quarter. As a percentage
of revenue, depreciation and amortization expenses increased slightly to
31.2% in the current quarter from 30.7% in the third quarter of 1999.
OPERATING INCOME. As a result of the factors described above, operating
income increased 58.8% to $2.8 million in the current quarter from $1.8
million in the same quarter of 1999.
GAIN ON SALE OF INVESTMENT. During the third quarter of 1999, the Company
sold its interest in Across Media Networks, Inc. ("AMN"), a creator and
distributor of digitally produced on-screen content for television and the
Internet. The transaction resulted in the recognition of a $7.1 million gain.
INTEREST EXPENSE. Interest expense was $7.0 million in the third quarter of
2000 and $6.9 million in the third quarter of 1999. Total debt increased from
$274.8 million at September 30, 1999 to $281.3 million at September 30, 2000.
Average principal amount of long-term debt outstanding during the quarter
ended September 30, 2000 was approximately $282 million (at an average
interest rate of approximately 9.9%) as compared to an average principal
amount outstanding of approximately $276 million (at an average interest rate
of approximately 10.0%) during the comparable period of 1999.
INTEREST INCOME. Interest income, primarily earned from loans to
unconsolidated affiliates, decreased to $92,000 in the third quarter of 2000
from $424,000 during the same period of 1999.
NET INCOME (LOSS). For the reasons previously described, the Company's net
loss was $4.1 million in the third quarter of 2000 compared to net income of
$2.3 million in the same quarter of the prior year. Excluding the gain on
sale of AMN during the third quarter of 1999, the net loss decreased from
$4.8 million to $4.1 million, representing a 14.6% improvement.
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 13.6% to $19.3 million in the third quarter of 2000 as compared to
$17.0 million in the third quarter of 1999 (excluding the gain on sale of
investment). EBITDA as a percentage of total revenues was 36.5% in the
current quarter as compared to 34.3% 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
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
REVENUE ANALYSIS
The Company's total revenue for the nine months ended September 30, 2000
increased 9.5%, or $12.9 million, in comparison to the nine months ended
September 30, 1999. The following table sets forth the components of revenue
(in thousands) for the nine months ending September 30:
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Revenue: Amount Revenue Amount Revenue
------------ ----------- ----------- -----------
Guest Pay $126,956 93.4 $141,253 95.0
Other 8,918 6.6 7,503 5.0
------------ ----------- ----------- -----------
$135,874 100.0 $148,756 100.0
============ =========== =========== ===========
GUEST PAY INTERACTIVE SERVICES. Guest Pay interactive revenue increased
11.3%, or $14.3 million, in the first nine months of 2000 in comparison to
the same period of 1999. This increase was attributable to a 10.3% increase
in the average number of installed Guest Pay rooms and a .9% 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 nine months
ending September 30:
1999 2000
----------- ------------
Average monthly revenue per room:
Movie revenue $ 18.77 $ 18.55
Other interactive service revenue 3.93 4.35
----------- ------------
Total per Guest Pay room $ 22.70 $ 22.90
=========== ============
Average movie revenue per room was 1.2% lower during the nine months ended
September 30, 2000 from the prior year period due to lower buy rates per
occupied room, partially offset by higher average movie prices. Average other
interactive service revenue per room increased 10.7% due to increased revenue
from Internet access services, Nintendo video games, 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 $1.4 million or 15.9% due to lower revenue from free-to-guest
services and decreased sales of televisions, partially offset by higher
revenue from international licensee activities.
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 nine
months ending September 30:
1999 2000
----------- ------------
Direct costs:
Guest Pay $ 52,106 $ 57,755
Other 7,036 4,198
----------- ------------
$ 59,142 $ 61,953
=========== ============
Gross profit margin:
Guest Pay 59.0% 59.1%
Other 21.1% 44.1%
Composite 56.5% 58.4%
Guest Pay interactive direct costs increased 10.8%, or $5.6 million, in the
first nine months of 2000 as compared to the first nine months 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 decreased slightly, from 41.0% during
the first nine months of 1999 to 40.9% during the same period of 2000. The
resulting slight increase in gross profit margin from 59.0% to 59.1% was
primarily due to lower movie and video game license fees as a percentage of
related revenue, 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 $2.8 million or 40.3% in
the first nine months of 2000 from the year earlier period. As a percentage
of related revenue, such costs decreased to 55.9% from 78.9%. The resulting
increase in gross profit margin from 21.1% to 44.1% 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 13.1%, or $10.1 million, to
$86.8 million on a 9.5% increase in revenue. The Company's overall gross
profit margin increased to 58.4% from 56.5% due to a shift in sales from
other revenue to the more profitable Guest Pay interactive services (93.4% in
the first nine 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 nine months ending September 30
(dollar amounts in thousands):
1999 2000
--------------------------- ---------------------------
Percent Percent
of Total of Total
Amount Revenues Amount Revenues
------------ ----------- ----------- -----------
Operating expenses:
Guest Pay operations $ 18,345 13.5 $ 20,923 14.1
Selling, general and administrative 12,850 9.5 14,475 9.7
Depreciation and amortization 44,541 32.8 49,038 33.0
------------ ----------- ----------- -----------
Total operating expenses $ 75,736 55.8 $ 84,436 56.8
============ =========== =========== ===========
Guest Pay operations expenses consist of costs directly related to the
operation of systems at hotel sites. Guest Pay operations expenses increased
14.1%, or $2.6 million in the first nine months of 2000 compared to the year
earlier period. This increase was due to (i) a 10.3% increase in average
installed Guest Pay interactive rooms in the first nine months of 2000 as
compared to the year earlier period, (ii) certain non-recurring costs
incurred during the first quarter
Page 14
of 2000 related to the implementation and transition 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 $3.39 per month in the first nine
months of 2000 compared to $3.28 per month in the same period of 1999.
Selling, general and administrative expenses increased 12.6%, or $1.6 million
in the first nine months of 2000 compared to the year earlier period. This
increase is due to increased payroll related expenses and professional fees
for business development activities. As a percentage of revenue, SG&A was
9.7% during the first nine months of 2000 compared to 9.5% during the first
nine months of 1999.
Depreciation and amortization expenses increased 10.1% to $49.0 million in
the first nine months of 2000 from $44.5 million in the year earlier period.
This increase is primarily attributable to the 10.3% increase in average
installed Guest Pay interactive rooms since the year-earlier period. As a
percentage of revenue, depreciation and amortization expenses increased
slightly to 33.0% in the current period from 32.8% in the first nine months
of 1999.
OPERATING INCOME. As a result of the factors described above, operating
income increased 138% to $2.4 million in the current nine month period from
$996,000 in the first nine months of 1999.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. During the first six months of
1999 losses totaling $22.2 million were recorded, under the equity method of
accounting for an investment, 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 ($10.2 million as of September 30,
2000). Based on management's estimates and analysis as of September 30, 2000,
no write-downs were considered necessary during the first nine months of 2000.
GAIN ON SALE OF INVESTMENT. During the third quarter of 1999, the Company
sold its interest in AMN resulting in the recognition of a $7.1 million gain.
INTEREST EXPENSE. Interest expense increased from $20.4 million in the first
nine months of 1999 to $20.8 million in the current period. Total debt
increased from $274.8 million at September 30, 1999 to $281.3 million at
September 30, 2000. Average principal amount of long-term debt outstanding
during the nine months ended September 30, 2000 was approximately $282
million (at an average interest rate of approximately 9.9%) as compared to an
average principal amount outstanding of approximately $270 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 $359,000 in the first nine months of
2000 from $1.2 million during the same period of 1999.
NET LOSS. For the reasons previously described, the Company's net loss
decreased to $18.4 million in the first nine months of 2000 from a net loss
of $33.5 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")
excluding the gain on sale of investment and equity in losses of
unconsolidated affiliates increased 12.9% to $51.4 million in the first nine
months of 2000 as compared to $45.5 million in the first nine months of 1999.
EBITDA as a percentage of total revenues was 34.6% in the current period as
compared to 33.5% in the same period of 1999.
Page 15
RECENT ACCOUNTING DEVELOPMENTS
See note 4 in the notes to consolidated financial statements.
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 nine months of 2000, capital expenditures were $44.1
million, as compared to $37.9 million in the first nine months of 1999, and
net cash provided by operating activities was $33.6 million, as compared to
$35.0 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 $12 to $15 million during the remaining three months of
2000 and $75 to $85 million in 2001, as contemplated under its current
five-year business plan. The Company's cash requirements for 2001 are
expected to include $21.5 million of payments for principal maturities of
long-term debt. In addition, the Company has committed up to $5 million of
financing to InnMedia LLC (see note 6 in the notes to consolidated financial
statements), of which the Company has funded $1 million in the fourth quarter
of 2000.
The Company believes that its operating cash flows and borrowings available
under its $75 million revolving credit facility will be sufficient to fund
the Company's future growth and financing obligations, as contemplated under
its current five-year business plan, for 12 to 15 months, depending on the
rate of growth of its business and other factors. The Company may increase
the revolving credit facility to $100 million, subject to certain conditions.
The Company believes that it has various sources of financing available in
addition to the revolving credit facility, including additional amounts of
long-term indebtedness. However, if the Company's plans or assumptions
change, if its assumptions prove to be inaccurate or if the Company
experiences unanticipated costs or competitive pressures, the Company may be
required to seek additional capital sooner than currently anticipated. There
can be no assurance that the Company will be able to obtain financing, or, if
such financing is available, that the Company will be able to obtain it on
acceptable terms. Failure to obtain additional financing, if needed, could
result in the delay or abandonment of some or all of the Company's expansion
plans.
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.
Page 16
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 September 30, 2000, the Company had debt totaling $281.3
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 $256.3 million and variable rate debt of $25.0
million at September 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 $24.1 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 $250,000, assuming other variables remain constant.
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 third quarter of 2000 to
materially impact consolidated results of operations or financial condition.
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
There were no matters submitted to a vote of security holders during
the quarter ended September 30, 2000.
ITEM 5 -- OTHER INFORMATION
Not applicable.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
10.32 Master Services Agreement between Hilton Hotels
Corporation and LodgeNet Entertainment Corporation
dated October 9, 2000.*
10.33 Warrant To Purchase Common Stock Of LodgeNet
Entertainment Corporation dated October 9, 2000.
10.34 InnMedia LLC Operating Agreement effective as of
October 9, 2000.
B. REPORTS ON FORM 8-K:
The Company filed no Reports on Form 8-K during the quarter
ended September 30, 2000. On October 18, 2000, the Company filed a Form 8-K
reporting on the Company's recent agreement with Hilton Hotels Corporation.
- ---------------------------
* Confidential treatment has been requested from the Commission for selected
portions of this exhibit. The confidential portions of this exhibit have been
redacted and filed separately with the Commission.
Page 18
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: November 13, 2000 /s/ Scott C. Petersen
--------------------------------------
Scott C. Petersen
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2000 /s/ Jeffrey T. Weisner
--------------------------------------
Jeffrey T. Weisner
Senior Vice President, Chief Financial
Officer (Principal Financial Officer)
Date: November 13, 2000 /s/ Ronald W. Pierce
--------------------------------------
Ronald W. Pierce
Vice President, Corporate Controller
(Principal Accounting Officer)
Page 19