UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2007
or
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number 0-22334
LodgeNet Entertainment Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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46-0371161
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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3900 West Innovation Street, Sioux Falls, South Dakota 57107
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(Address of Principal Executive Offices) (ZIP code)
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(605) 988-1000
(Registrants 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
þ
No
o
.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer (as defined in Exchange Act Rule 12b-2).
Large accelerated filer
o
Accelerated filer
þ
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
þ
.
At November 6, 2007, there were 22,951,025 shares outstanding of the Registrants common stock,
$0.01 par value.
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LodgeNet
Entertainment Corporation
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Form 10-Q
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LodgeNet Entertainment Corporation and Subsidiaries
Index
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As used herein (unless the context otherwise requires) LodgeNet and/or the Registrant, as well
as the terms we, us and our refer to LodgeNet Entertainment Corporation and its consolidated
subsidiary.
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LodgeNet , any other LodgeNet related marks used herein, On Command, and StayOnline are
service marks or registered trademarks of LodgeNet Entertainment Corporation; all other trademarks
or service marks used herein are the property of their respective owners.
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September 30, 2007
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Page 2
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LodgeNet
Entertainment Corporation
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Form 10-Q
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Part I Financial Information
Item 1 Financial Statements
LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollar amounts in thousands, except share data)
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September 30,
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December 31,
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2007
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2006
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Assets
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Current assets:
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Cash and cash equivalents
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$
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32,150
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$
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22,795
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Restricted cash
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1,006
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Accounts receivable, net
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71,614
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32,959
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Other current assets
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11,265
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10,728
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Total current assets
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115,029
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67,488
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Property and equipment, net
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336,480
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185,770
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Debt issuance costs, net
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11,829
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5,704
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Intangible assets, net
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131,488
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690
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Goodwill
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104,088
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Other assets
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10,459
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3,557
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Total assets
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$
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709,373
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$
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263,209
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Liabilities and Stockholders Deficiency
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Current liabilities:
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Accounts payable
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$
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53,239
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$
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19,165
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Current maturities of long-term debt
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7,402
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2,536
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Accrued expenses
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23,951
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18,193
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Deferred revenue
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12,427
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8,076
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Total current liabilities
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97,019
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47,970
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Long-term debt
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618,712
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267,633
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Other long-term liabilities
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11,701
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5,728
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Total liabilities
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727,432
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321,331
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Commitments and contingencies
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Stockholders deficiency:
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Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued or outstanding
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Common stock, $.01 par value, 50,000,000 shares authorized;
22,928,325 and 19,084,734 shares outstanding at September 30,
2007 and December 31, 2006, respectively
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229
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191
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Additional paid-in capital
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329,403
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242,383
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Accumulated deficit
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(347,936
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)
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(302,466
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)
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Accumulated other comprehensive income
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245
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1,770
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Total stockholders deficiency
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(18,059
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)
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(58,122
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)
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Total liabilities and stockholders deficiency
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$
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709,373
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$
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263,209
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The accompanying notes are an integral part of these consolidated financial statements.
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September 30, 2007
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Page 3
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LodgeNet
Entertainment Corporation
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Form 10-Q
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LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollar amounts in thousands, except share data)
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2007
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2006
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2007
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2006
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Revenues:
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Guest Pay
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$
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131,387
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$
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73,861
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$
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325,936
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$
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211,218
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Other
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11,222
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2,649
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26,896
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7,356
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Total revenues
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142,609
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76,510
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352,832
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218,574
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Costs and Expenses:
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Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately
below):
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Guest Pay
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68,213
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34,743
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163,223
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96,439
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Other
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7,719
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1,293
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18,115
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3,472
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Operating expenses:
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Guest Pay operations
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15,430
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8,902
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39,262
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26,752
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Selling, general and administrative
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16,117
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7,069
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40,181
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21,089
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Depreciation and amortization
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34,130
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16,099
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83,818
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49,882
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Restructuring expense
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2,296
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|
|
|
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5,034
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Other operating expense (income), net
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132
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(763
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)
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(198
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)
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Total costs and operating expenses
|
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144,037
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68,106
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|
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348,870
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197,436
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|
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|
|
|
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|
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|
|
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Income (loss) from operations
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(1,428
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)
|
|
|
8,404
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|
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3,962
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21,138
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Other Income and Expenses:
|
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|
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|
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Interest expense
|
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|
(11,741
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)
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(6,402
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)
|
|
|
(29,527
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)
|
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|
(19,483
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)
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Loss on early retirement of debt
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(25
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)
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|
|
(52
|
)
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(22,195
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)
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(181
|
)
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Minority interest in income of subsidiary
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|
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165
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|
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Other income
|
|
|
725
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|
|
|
234
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|
|
1,289
|
|
|
|
794
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|
|
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|
|
|
|
|
|
|
|
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|
|
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Income (loss) before income taxes
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|
(12,469
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)
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|
|
2,184
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|
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|
(46,306
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)
|
|
|
2,268
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|
Provision for income taxes
|
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|
1,058
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|
|
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|
836
|
|
|
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(305
|
)
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
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Net income (loss)
|
|
$
|
(11,411
|
)
|
|
$
|
2,184
|
|
|
$
|
(45,470
|
)
|
|
$
|
1,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Net income (loss) per common share (basic)
|
|
$
|
(0.50
|
)
|
|
$
|
0.12
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|
|
$
|
(2.12
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net income (loss) per common share (diluted)
|
|
$
|
(0.50
|
)
|
|
$
|
0.12
|
|
|
$
|
(2.12
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted average shares outstanding (basic)
|
|
|
22,742,001
|
|
|
|
18,377,629
|
|
|
|
21,417,266
|
|
|
|
18,250,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Weighted average shares outstanding (diluted)
|
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|
22,742,001
|
|
|
|
18,743,251
|
|
|
|
21,417,266
|
|
|
|
18,611,981
|
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|
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|
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The accompanying notes are an integral part of these consolidated financial statements.
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September 30, 2007
|
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Page 4
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LodgeNet
Entertainment Corporation
|
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Form 10-Q
|
LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)
|
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|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(45,470
|
)
|
|
$
|
1,963
|
|
Adjustments to reconcile net loss to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
83,818
|
|
|
|
49,882
|
|
Investment gain
|
|
|
|
|
|
|
(238
|
)
|
Loss on early retirement of debt
|
|
|
3,583
|
|
|
|
181
|
|
Share-based compensation
|
|
|
1,296
|
|
|
|
1,297
|
|
Other
|
|
|
(215
|
)
|
|
|
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,890
|
)
|
|
|
(3,193
|
)
|
Other current assets
|
|
|
(2,792
|
)
|
|
|
(1,919
|
)
|
Accounts payable
|
|
|
7,970
|
|
|
|
5,239
|
|
Accrued expenses and deferred revenue
|
|
|
1,018
|
|
|
|
9,152
|
|
Other
|
|
|
(905
|
)
|
|
|
(2,297
|
)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
42,413
|
|
|
|
60,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
|
(60,591
|
)
|
|
|
(36,825
|
)
|
Acquisition of On Command Corporation, net of cash acquired
|
|
|
(335,364
|
)
|
|
|
|
|
Acquisition of StayOnline, Inc.
|
|
|
(14,311
|
)
|
|
|
|
|
Acquisition of THN (20% minority interest)
|
|
|
(5,000
|
)
|
|
|
|
|
Other investing activities
|
|
|
638
|
|
|
|
238
|
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(414,628
|
)
|
|
|
(36,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
625,000
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(269,677
|
)
|
|
|
(16,125
|
)
|
Payment of capital lease obligations
|
|
|
(1,419
|
)
|
|
|
(1,049
|
)
|
Debt issuance costs
|
|
|
(12,738
|
)
|
|
|
|
|
Contribution from minority interest holder to subsidiary
|
|
|
300
|
|
|
|
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
23,290
|
|
|
|
|
|
Exercise of stock options
|
|
|
16,468
|
|
|
|
3,945
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities
|
|
|
381,224
|
|
|
|
(13,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
346
|
|
|
|
114
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
9,355
|
|
|
|
10,365
|
|
Cash and cash equivalents at beginning of period
|
|
|
22,795
|
|
|
|
20,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
32,150
|
|
|
$
|
31,107
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 5
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
LodgeNet Entertainment Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 Basis of Presentation
The accompanying consolidated financial statements as of September 30, 2007, and for the three and
nine month periods ended September 30, 2007 and 2006, have been prepared by us, 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 of normal recurring adjustments, which, in our opinion, are necessary for a
fair statement of such financial statements.
Certain information and footnote disclosures, normally included in annual 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 we believe 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 our Annual Report on Form 10-K for 2006, as filed with the
Commission. The results of operations for the three and nine month periods ended September 30,
2007 and 2006 are not necessarily indicative of the results of operations for the full year due to
inherent seasonality within the business, among other factors.
On February 1, 2007, we, through our wholly-owned subsidiary, LodgeNet StayOnline, Inc., acquired
substantially all of the operating assets of StayOnline, Inc. (StayOnline) for approximately
$15.6 million in cash. Our financial statements include the results of StayOnline since February
1, 2007.
On April 4, 2007, we completed the acquisition of Ascent Entertainment Group, Inc. (Ascent) for
approximately $387.9 million including transaction costs. Ascent owns 100% of the capital stock of
On Command Corporation (On Command). On Command is now a subsidiary of LodgeNet and is included
in our results of operations since April 4, 2007. See Note 2 Business Combinations for further
information regarding the effect of the On Command acquisition on our balance sheet and results of
operations.
On July 1, 2007, we acquired the 20% minority interest in Hotelevision, Inc. dba The Hotel Networks
(THN) for $5.0 million. We had acquired 80% ownership as part of the On Command acquisition on
April 4, 2007.
The consolidated financial statements include the accounts of LodgeNet Entertainment Corporation
and its wholly-owned subsidiaries and joint ventures. All significant inter-company accounts and
transactions have been eliminated in consolidation. We manage our operations as one reportable
segment.
Note 2 Business Combinations
In February 2007, LodgeNet Entertainment Corporation, through our wholly-owned subsidiary, LodgeNet
StayOnline, Inc., acquired substantially all of the operating assets of StayOnline, a leading
provider of high-speed Internet access solutions focused on the lodging industry. The purchase
price of the acquisition was $15.6 million in cash. In accordance with SFAS 141, Business
Combinations, the purchase consideration was allocated, based on their respective fair values at
the date of acquisition, $3.4 million to the assets acquired, $2.4 million to the liabilities
assumed, $4.9 million to identifiable intangible assets, and $9.6 million to goodwill. The fair
values were determined using an independent appraisal firm. Of the $4.9 million of acquired
intangible assets, $1.5 million was assigned to software technology with an estimated economic life
of 5 years and $3.4 million was assigned to hotel contracts and customer relationships with an
estimated economic life of 10 years. StayOnlines acquired customer list included a room base of
more than 135,000 high-speed Internet access (HSIA) rooms.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 6
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
On April 4, 2007, pursuant to the Stock Purchase Agreement, dated December 13, 2006, among
LodgeNet, Liberty Satellite & Technology, Inc. (Liberty Satellite) and Liberty Satellites parent
company, Liberty Media Corporation, LodgeNet acquired 100% of the capital stock of Ascent
Entertainment Group, Inc. (Ascent), which was a wholly owned subsidiary of Liberty Satellite.
Ascent owns 100% of the capital stock of On Command Corporation (On Command). LodgeNet paid
approximately $332.1 million in cash and issued 2.05 million shares of its common stock as the
purchase price. The share consideration was valued at $23.35 per share by the parties at the time
of the execution of the Stock Purchase Agreement on December 13, 2006. Based on the consummation
date of December 13, 2006, the fair value of the common stock issued, in accordance with EITF 99-12
guidelines, was $50.1 million as determined by averaging the closing stock price for the period
beginning two days before and ending two days after the date that the terms of the acquisition were
agreed upon and publicly announced. We also incurred other acquisition related costs of
approximately $5.5 million.
In connection with the acquisition of On Command, on April 4, 2007, LodgeNet completed the sale of
one million shares of its common stock to PAR Investment Partners, L.P. in exchange for
$23.35 million in cash. The proceeds from this transaction were used to fund a portion of the
acquisition purchase price.
In accordance with SFAS 141, Business Combinations, the purchase consideration of $387.9 million
was preliminarily allocated, based on their respective fair values at the date of acquisition, to
the assets acquired and liabilities assumed, including identifiable intangible assets. The fair
values were determined using an independent appraisal firm. Such allocation resulted in goodwill
of approximately $91.2 million. These allocations are preliminary and are subject to possible
adjustments. The purchase consideration was allocated as follows (in thousands of dollars):
|
|
|
|
|
Cash
|
|
$
|
671
|
|
Receivables
|
|
|
30,496
|
|
Other current assets
|
|
|
3,084
|
|
Property and equipment
|
|
|
160,883
|
|
Intangible assets
|
|
|
132,192
|
|
Goodwill
|
|
|
91,228
|
|
Other assets
|
|
|
5,567
|
|
Accounts payable
|
|
|
(21,955
|
)
|
Accrued liabilities
|
|
|
(12,194
|
)
|
Other long-term liabilities
|
|
|
(1,093
|
)
|
Minority Interest
|
|
|
(1,030
|
)
|
|
|
|
|
Total purchase consideration
|
|
$
|
387,849
|
|
|
|
|
|
During the third quarter additional valuations were made primarily impacting property and equipment
and intangible assets increasing goodwill by approximately $9.1 million. These valuation changes
were a result of accurate, more detailed financial information becoming available, finalization of
our post merger integration plan and our continued analysis of the purchase price allocation.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 7
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
Of the $132.4 million of acquired intangible assets, including the acquired 20% interest in THN,
$116.8 million was assigned to hotel contracts and customer relationships with an estimated
economic life of 20 years, $5.4 million was assigned to content agreements and relationships,
primarily related to studio programming agreements, with an estimated economic life of 4 years,
$5.3 million was assigned to tradenames with an estimated economic life of 15 years and $4.9
million was assigned to patents with an estimated economic life of 5 years. The economic life
attributed to our acquired hotel contracts and customer relationships intangible asset is based on
historically low attrition rates coupled with the long contract terms, which typically are for five
to seven years. The acquired hotel contracts included a room base of more than 830,000 interactive
rooms, which also included approximately 12,000 HSIA rooms. The purchased intangibles are being
amortized over their current estimated economic lives and are on an accelerated basis. Estimated
amortization expenses effecting operating results for the three months remaining in 2007 and the
years ending December 31, as follows (dollar amounts in millions): 2007 $2.6; 2008 $9.8; 2009
$8.8; 2010 $7.6; 2011 $6.7 and 2012 $6.4.
On July 1, 2007, we acquired the 20% minority interest in Hotelevision, Inc. dba The Hotel Networks
(THN) for $5.0 million. We had acquired 80% ownership as part of the On Command acquisition on
April 4, 2007. The acquisition of the 20% interest in THN resulted in goodwill of approximately
$3.3 million and elimination of the minority interest. We also recorded an additional $200,000 of
acquired intangibles. The purchase consideration was allocated as follows (in thousands of
dollars):
|
|
|
|
|
Property and equipment
|
|
$
|
372
|
|
Intangible assets
|
|
|
200
|
|
Goodwill
|
|
|
3,264
|
|
Other long-term liabilities
|
|
|
300
|
|
Minority interest
|
|
|
864
|
|
|
|
|
|
Total purchase consideration
|
|
$
|
5,000
|
|
|
|
|
|
The following table presents LodgeNets unaudited pro forma condensed statements of operations,
inclusive of StayOnline and On Command for the three and nine months ended September 30, 2007 and
2006 as if the acquisitions were completed as of January 1, 2007 and 2006, respectively (dollar
amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Pro Forma
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LodgeNet Entertainment
|
|
$
|
78,569
|
|
|
$
|
76,510
|
|
|
$
|
224,808
|
|
|
$
|
218,574
|
|
On Command
|
|
|
58,434
|
|
|
|
60,695
|
|
|
|
175,478
|
|
|
|
177,362
|
|
StayOnline
|
|
|
5,606
|
|
|
|
3,416
|
|
|
|
14,981
|
|
|
|
8,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
142,609
|
|
|
$
|
140,621
|
|
|
$
|
415,267
|
|
|
$
|
404,116
|
|
Net loss
|
|
$
|
(11,411
|
)
|
|
$
|
(9,317
|
)
|
|
$
|
(59,290
|
)
|
|
$
|
(36,473
|
)
|
Net loss per share
|
|
$
|
(0.50
|
)
|
|
$
|
(0.43
|
)
|
|
$
|
(2.64
|
)
|
|
$
|
(1.71
|
)
|
The unaudited pro forma results are presented for comparative purposes only and are not indicative
of operating results that would have been recorded if the acquisition had been consummated at the
beginning of the period, nor is it indicative of future operating results. It is our intention to
integrate the three businesses and continue to manage our operations as one reportable segment.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 8
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
Note 3 Property and Equipment, Net
Property and equipment was comprised as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Land, building and equipment
|
|
$
|
102,978
|
|
|
$
|
85,642
|
|
Guest Pay systems:
|
|
|
|
|
|
|
|
|
Installed system costs
|
|
|
635,355
|
|
|
|
473,930
|
|
Customer acquisition costs
|
|
|
54,493
|
|
|
|
53,156
|
|
System components
|
|
|
29,481
|
|
|
|
26,464
|
|
Software costs
|
|
|
34,734
|
|
|
|
22,520
|
|
|
|
|
|
|
|
|
Total
|
|
|
857,041
|
|
|
|
661,712
|
|
Less depreciation and amortization
|
|
|
(520,561
|
)
|
|
|
(475,942
|
)
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
336,480
|
|
|
$
|
185,770
|
|
|
|
|
|
|
|
|
Note 4 Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the fair value of net assets acquired. In the first
nine months of 2007, we recorded $9.6 million, $91.2 million and $3.3 million of goodwill in
connection with the acquisitions of StayOnline, Inc., On Command, and minority interest of THN,
respectively. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill
and other intangible assets with indefinite lives are not amortized; rather, they are tested for
impairment at least annually.
In February 2007, we recorded $4.9 million of other intangibles in connection with the acquisition
of StayOnline, Inc. (see Note 2). Of the $4.9 million of acquired intangible assets, $1.5 million
was assigned to software technology with an estimated economic life of 5 years and $3.4 million was
assigned to hotel contracts and customer relationships with an estimated economic life of 10 years.
Estimated amortization expense effecting operating results for the three months remaining in 2007
and the years ending December 31, is as follows: 2007 $197,000; 2008 $765,000; 2009 $726,000;
2010 $634,000; 2011 $499,000 and 2012 $343,000.
In connection with the acquisition of On Command in April 2007 and the minority interest of THN in
July 2007 (see Note 2) we recorded $132.4 million of other intangibles. Of the $132.4 million of
acquired intangible assets, $116.8 million was assigned to hotel contracts and customer
relationships with an estimated economic life of 20 years, $5.4 million was assigned to content
agreements and relationships, primarily related to studio programming agreements, with an estimated
economic life of 4 years, $5.3 million was assigned to tradenames with an estimated economic life
of 15 years and $4.9 million was assigned to patents with an estimated economic life of 5 years.
The economic life attributed to our acquired hotel contracts and customer relationships intangible
asset is based on historically low attrition rates coupled with the long contract terms, five to
seven years, within our service industry. The acquired hotel contracts included a room base of
more than 830,000 interactive rooms, which also included approximately 12,000 HSIA rooms. The
intangibles are being amortized over their current estimated economic lives and are on an
accelerated basis. Estimated amortization expenses effecting operating results for the three
months remaining in 2007 and the years ending December 31, as follows (dollar amounts in millions):
2007 $2.6; 2008 $9.8; 2009 $8.8; 2010 $7.6; 2011 $6.7 and 2012 $6.4.
We have other intangible assets consisting of certain acquired technology, patents, trademarks,
customer relationships and licensee fees. We account for these assets on an ongoing basis in
accordance with SFAS No. 142. These intangible assets have been deemed to have definite useful
lives and are amortized over their current estimated useful lives ranging from three to ten years.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 9
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
We have the following intangible assets (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
|
December 31, 2006
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired contracts and relationships
|
|
$
|
125,570
|
|
|
$
|
(4,472
|
)
|
|
$
|
|
|
|
$
|
|
|
Other acquired intangibles
|
|
|
7,624
|
|
|
|
(6,375
|
)
|
|
|
16,503
|
|
|
|
(15,813
|
)
|
Tradenames
|
|
|
5,292
|
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
Acquired patents
|
|
|
5,039
|
|
|
|
(950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
143,525
|
|
|
$
|
(12,037
|
)
|
|
$
|
16,503
|
|
|
$
|
(15,813
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded consolidated amortization expense of $6,504,000 and $1,020,000, respectively, for the
nine months ended September 30, 2007 and 2006. We estimate total amortization expense for the
three months remaining in 2007 and the years ending December 31, as follows (dollar amounts in
millions): 2007 $2.8; 2008 $10.6; 2009 $9.5; 2010 $8.2; 2011 $7.2 and 2012 $6.7.
Actual amounts may change from such estimated amounts due to additional intangible asset
acquisitions, potential impairment, accelerated amortization, or other events.
Note 5 Earnings Per Share Computation
We follow SFAS No. 128, Earnings Per Share (EPS), which requires the computation and disclosure
of two EPS amounts, basic and diluted. Basic EPS is computed based only on the weighted average
number of common shares actually outstanding during the period. Diluted EPS is computed based on
the weighted average number of common shares outstanding plus all potentially dilutive common
shares outstanding during the period. Potential common shares that have an anti-dilutive effect
are excluded from diluted earnings per share.
The following table reflects the calculation of weighted average basic and fully diluted shares for
the periods ended September 30. Potential common shares with exercise prices greater than the
average market price of our common stock during the three and nine months ended September 30, 2006
were excluded from the diluted earnings per share calculation, as their inclusion would have been
anti-dilutive. For the three months and nine months ended September 30, 2007, potential dilutive
common shares were not included in the computation of diluted earnings per share as we were in a
loss position and their inclusion would have been anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Average shares outstanding basic
|
|
|
22,742,001
|
|
|
|
18,377,629
|
|
|
|
21,417,266
|
|
|
|
18,250,620
|
|
Dilutive effect of stock options, non-vested shares and warrants
|
|
|
|
|
|
|
365,622
|
|
|
|
|
|
|
|
361,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding diluted
|
|
|
22,742,001
|
|
|
|
18,743,251
|
|
|
|
21,417,266
|
|
|
|
18,611,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive securities excluded from calculation
|
|
|
|
|
|
|
2,225,255
|
|
|
|
|
|
|
|
2,225,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2007 and 2006, the number of potential dilutive common shares was approximately
1,400,131 and 4,117,380, respectively. Such potential dilutive common shares consist of stock
options, restricted stock and warrants.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 10
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
Note 6 Accrued Expenses
Accrued expenses were comprised as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Accrued taxes
|
|
$
|
7,139
|
|
|
$
|
4,088
|
|
Accrued compensation
|
|
|
9,782
|
|
|
|
6,842
|
|
Accrued interest
|
|
|
349
|
|
|
|
946
|
|
Accrued programming related
|
|
|
1,889
|
|
|
|
1,748
|
|
Other
|
|
|
4,792
|
|
|
|
4,569
|
|
|
|
|
|
|
|
|
|
|
$
|
23,951
|
|
|
$
|
18,193
|
|
|
|
|
|
|
|
|
Note 7 Long-term Debt and Credit Facilities
Long-term debt was comprised as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Bank Credit Facility:
|
|
|
|
|
|
|
|
|
Bank term loan
|
|
$
|
623,438
|
|
|
$
|
68,125
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
9.50% senior notes
|
|
|
10
|
|
|
|
200,000
|
|
Capital leases
|
|
|
2,666
|
|
|
|
2,044
|
|
|
|
|
|
|
|
|
|
|
|
626,114
|
|
|
|
270,169
|
|
Less current maturities
|
|
|
(7,402
|
)
|
|
|
(2,536
|
)
|
|
|
|
|
|
|
|
|
|
$
|
618,712
|
|
|
$
|
267,633
|
|
|
|
|
|
|
|
|
Bank Credit Facility
¾
In August 2001, we entered into a $225.0 million bank Credit Facility,
comprised of a $150.0 million term loan and a $75.0 million revolving credit facility that could be
increased to $100.0 million, subject to certain limitations. The term loan was scheduled to mature
in August 2008 and required quarterly repayments of $375,000, which began in December 2001. The
term loan interest was at our option of (1) the banks base rate plus a margin of 1.50% or (2)
LIBOR plus a margin of 2.25%. The revolving credit facility was scheduled to mature in August 2007
and the associated interest rate was calculated at our option of (1) the banks base rate plus a
margin of 1.00% to 2.00%, or (2) LIBOR plus a margin of 2.25% to 3.25%. Loans under the Credit
Facility were collateralized by a first priority interest in all of our assets. On April 4, 2007,
the remaining balance of $67.8 million under the $225.0 million bank Credit Facility was paid in
full.
On April 4, 2007, we entered into a $675.0 million bank Credit Facility comprised of a $625.0
million term loan, which matures in April 2014 and a $50.0 million revolving credit facility that
matures in April 2013. The term loan requires a quarterly repayment of $1,562,500 beginning
September 30, 2007. The term loan bears interest at our option of (1) the banks base rate plus a
margin of 1.00% or (2) LIBOR plus a margin of 2.00%. The agreement provides that when the
consolidated leverage ratio is below 3.25 times, the term loan bears interest at our option of (1)
the banks base rate plus a margin of 0.75% or (2) LIBOR plus a margin of 1.75%. The term loan is
secured by substantially all of the assets of the Company. The agreement establishes financial
covenants including a maximum consolidated leverage ratio of 5.00 times and a minimum consolidated
interest coverage ratio of 2.25 times. The Credit Facility agreement also stipulates that the
company will hedge 50% of the outstanding term loan into a fixed interest rate for a period not
less than two years. The company has entered into fixed rate swap agreements for 70% of the
outstanding term loan at an average interest rate of 5.05%. The term loan all-in interest rate as
of September 30, 2007 was 7.20%. Proceeds from the Credit Facility were used to repay the
outstanding balance under the pre-existing Credit Facility, to fund the acquisition of On Command,
to fund the
tender offer for the 9.50% Senior Notes and for general corporate purposes. As of September 30,
2007, we were in compliance with all financial covenants of our bank Credit Facility.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 11
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
The facility provides for the issuance of letters of credit up to $10.0 million, subject to
customary terms and conditions. As of September 30, 2007, we had outstanding letters of credit
totaling $0.8 million, which reduce amounts available under the revolver.
9.50% Senior Notes
¾
In September 2003, we issued $200.0 million of unsecured 9.50% Senior
Subordinated Notes (the Notes), due September 15, 2013. The Notes were unsecured, subordinated
in right of payment to all existing and future senior debt of LodgeNet and ranked
pari passu
in
right of payment with any future senior subordinated indebtedness of LodgeNet. The Notes required
semi-annual interest payments and contained covenants which restricted our ability to incur
additional indebtedness, create liens, pay dividends or make certain distributions with respect to
our common stock, redeem capital stock, issue or sell stock of subsidiaries in certain
circumstances, effect certain business combinations and effect certain transactions with affiliates
or stockholders.
On March 26, 2007, the company made an offer to the holders of the 9.50% Senior Notes to purchase
all of the outstanding Notes validly tendered pursuant to the Tender Offer at a price per $1,000
principal amount of Notes, equal to the accrued and unpaid interest, principal and a consent
payment of $30 per $1,000 principal amount of Notes. The tender expired on April 23, 2007 at which
time 199,990 notes, representing principal of $199,990,000, were tendered out of the total 200,000
Notes outstanding. In total, the company paid $18.0 million, plus accrued interest to tender for
the Notes.
Capital Leases
As of September 30, 2007, we have total capital lease obligations of $2,666,000.
Equipment acquired under capital lease arrangements during the nine months ended September 30, 2007
totaled $965,000. Equipment acquired consists primarily of vehicles used in our field service
operations.
As of September 30, 2007, long-term debt has the following scheduled maturities for the three
months remaining in 2007 and the full years ending December 31, 2008 and after (in thousands of
dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
Thereafter
|
|
Long-term debt
|
|
$
|
1,563
|
|
|
$
|
6,250
|
|
|
$
|
6,250
|
|
|
$
|
6,250
|
|
|
$
|
6,250
|
|
|
$
|
596,885
|
|
Capital leases
|
|
|
391
|
|
|
|
1,188
|
|
|
|
822
|
|
|
|
520
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,954
|
|
|
|
7,438
|
|
|
|
7,072
|
|
|
|
6,770
|
|
|
|
6,361
|
|
|
|
596,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amount representing
interest on capital leases
|
|
|
(57
|
)
|
|
|
(165
|
)
|
|
|
(93
|
)
|
|
|
(42
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,897
|
|
|
$
|
7,273
|
|
|
$
|
6,979
|
|
|
$
|
6,728
|
|
|
$
|
6,352
|
|
|
$
|
596,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not utilize special purpose entities or off-balance sheet financial arrangements.
Note 8
¾
Comprehensive Income (Loss)
Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income, provides
standards for reporting and disclosure of comprehensive income (loss) and its components.
Comprehensive income (loss) reflects the changes in equity during a period from transactions and
other events and circumstances. Comprehensive income (loss) was as follows for the periods ended
September 30 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net income (loss)
|
|
$
|
(11,411
|
)
|
|
$
|
2,184
|
|
|
$
|
(45,470
|
)
|
|
$
|
1,963
|
|
Foreign currency translation adjustment
|
|
|
1,875
|
|
|
|
74
|
|
|
|
4,370
|
|
|
|
500
|
|
Unrealized gain (loss) on derivative instruments
|
|
|
(10,310
|
)
|
|
|
|
|
|
|
(5,895
|
)
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
(19,846
|
)
|
|
$
|
2,258
|
|
|
$
|
(46,995
|
)
|
|
$
|
2,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 12
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
Components of accumulated other comprehensive income (loss) as shown on our consolidated balance
sheets were as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Unrealized loss on derivative instruments
|
|
$
|
(5,895
|
)
|
|
$
|
|
|
Foreign currency translation adjustment
|
|
|
6,140
|
|
|
|
1,770
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
245
|
|
|
$
|
1,770
|
|
|
|
|
|
|
|
|
Note 9
¾
Statements of Cash Flows
Cash equivalents are comprised of demand deposits and temporary investments in highly liquid
securities having original maturities of 90 days or less at the date of purchase. Cash paid for
interest was $30,124,000 and $14,652,000, respectively, for the nine months ended September 30,
2007 and 2006. The increase was driven by the increase in average outstanding long-term debt,
which increased to $484.5 million during the first nine months of 2007 from $281.0 million in the
first nine months of 2006. Cash paid for taxes was $454,000 and $202,000 for the nine months ended
September 30, 2007 and 2006, respectively.
Note 10
¾
Effect of Recently Issued Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 157,
Fair Value Measurements
(SFAS No. 157). This standard clarifies the
principle that fair value should be based on the assumptions that market participants would use
when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. This standard is effective for
financial statements issued for fiscal years beginning after November 15, 2007. We are currently
evaluating the impact of this statement. We believe the adoption of SFAS No. 157 will not have a
material impact on our consolidated financial position or results of operations.
In February 2007, the FASB issued FASB Statement No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.
(SFAS No.
159). This standard permits an entity to choose to measure many financial instruments and certain
other items at fair value. This standard is effective for financial statements issued for fiscal
years beginning after November 15, 2007. We believe the adoption of SFAS No. 159 will not have a
material impact on our consolidated financial position or results of operations.
Note 11 Share-Based Compensation
We account for our stock option and incentive plans under the recognition and measurement
provisions of FASB Statement No. 123(R),
Share-Based Payment
(Statement 123(R)), which requires
the measurement and recognition of compensation expense for all stock-based awards based on
estimated fair values, net of estimated forfeitures. We adopted Statement 123(R), effective
January 1, 2006, using the modified prospective transition method. We have also applied the
supplemental implementation guidance of SEC Staff Accounting Bulletin No. 107 (SAB 107) in our
adoption of Statement 123(R). Share-based compensation expense recognized in the three months and
nine months ended September 30, 2007 and 2006 under Statement 123(R) includes: (a) compensation
cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006 and
(b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on
the grant-date fair value estimated in accordance with the provisions of Statement 123(R).
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 13
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
The following amounts were recognized in our consolidated statement of operations for share-based
compensation plans for the period ended September 30 (dollar amounts in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Compensation cost (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
149
|
|
|
$
|
141
|
|
|
$
|
357
|
|
|
$
|
556
|
|
Non-vested shares
|
|
|
293
|
|
|
|
229
|
|
|
|
939
|
|
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share based compensation expense
|
|
$
|
442
|
|
|
$
|
370
|
|
|
$
|
1,296
|
|
|
$
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense per common share (basic and diluted):
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from stock option exercises for the nine months ended September 30, 2007 and 2006 was
$16,468,000 and $3,945,000, respectively. Statement 123(R) requires that the tax benefit realized
as a result of tax deductibility of employee share-based awards be presented as a component of cash
flows from financing activities in the consolidated statement of cash flows. Due to our net
operating loss position, we did not recognize a tax benefit from options exercised under the
share-based payment arrangements. Cash flow from operating activities for the nine months ended
September 30, 2007 and 2006, included non-cash compensation expense related to stock options of
$357,000 and $556,000, respectively, and included non-cash compensation expense related to
non-vested shares (restricted stock) of $939,000 and $741,000, respectively. In the third quarter
of 2007, we did not issue any share-based awards.
Note 12 Loss on Early Retirement of Debt
In April 2007, we paid off our $225.0 million bank Credit Facility and redeemed 199,990 notes,
representing principal of $199,990,000, of our 9.50% Senior Notes due June 15, 2013. As a result
of this payoff and early redemption, we recognized a $22.2 million loss representing call and
tender premiums and related expenses and the write off unamortized debt issuance costs, net of a
deferred gain from the termination of an interest rate swap arrangement where the 9.50% Senior
Notes had been the underlying debt.
Note 13
¾
Accounting for Derivative Instruments and Hedging Activities
In April 2007, we entered into two interest rate swap agreements with notional values of $312.5
million at a rate of 5.09% and $125.0 million, at a rate of 4.97%, both of which expire in June
2011. The interest rate swap agreements effectively change the underlying debt from a variable
interest rate to a fixed interest rate for the term of the swap agreements. We are required by our
Credit Facility to have a minimum of 50% of our term loan balance covered under interest rate swap
arrangements. The swap agreements have been designated as, and meet the criteria for, cash flow
hedges and are not considered speculative in nature. As of September 30, 2007, the aggregate fair
value of these interest rate swaps is a net loss of approximately $5.9 million.
Note 14 Restructuring
We account for our restructuring activities in accordance with Statement of Financial Accounting
Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities.
As a result of
our post acquisition activities, we incurred restructuring costs of $2.3 million and $5.0 million,
respectively, during the three months and nine months ended September 30, 2007. StayOnline
restructuring expenses of $315,000 were related to employee severance agreements and the
consolidation of warehouse and call center operations. On Command restructuring expenses of $4.7
million consisted of $4.0 million in employee severance and $699,000 of other restructuring costs.
Employee severance costs relate to the consolidation of administrative, sales, engineering,
marketing, programming and technical operations departments. At September 30, 2007, we had a
restructuring accrual for severance in the amount of approximately $2.2 million.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 14
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
We estimate there will be additional employee severance costs of approximately $1.5 to $2.5 million
charged to restructuring over the next twelve months as the remaining duplicate general and
administrative functions are phased out. In addition, we are proceeding with a plan to
relocate several functions performed at a leased facility in Denver to Sioux Falls including
warehousing, purchasing and system assembly. We estimate the costs, including on-going lease
payments, related to this integration effort to be approximately $2.0 to $3.0 million.
Restructuring liabilities along with charges to expense and cash payments were as follow (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/07
|
|
Charges to
|
|
Cash
|
|
9/30/07
|
|
|
Balance
|
|
Expense
|
|
Payment
|
|
Balance
|
Severance and other benefit related costs
|
|
$
|
2,011
|
|
|
$
|
1,841
|
|
|
$
|
(1,632
|
)
|
|
$
|
2,220
|
|
Note 15 Tax Provisions
The company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109,
on January 1, 2007
.
The company recognized no material
adjustments as a result of the implementation of this policy. During the third quarter we reduced
the unrecognized tax benefits in the amount of $1.4 million in the provision for income taxes,
leaving no unrecognized tax benefits at September 30, 2007. The reversal was made as the statute
of limitations expired.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 15
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
Item 2 Managements Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with our Consolidated Financial Statements,
including the notes thereto, appearing elsewhere herein.
Special Note Regarding Forward-Looking Statements
Certain statements in this report or document incorporated herein by reference constitute
forward-looking statements. When used in this report, the words intends, expects,
anticipates, estimates, believes, goal, no assurance and similar expressions, and
statements which are made in the future tense or refer to future events or developments, including,
without limitation, those related to estimated free cash flow, debt ratios and synergies, are
intended to identify such forward-looking statements. Such forward-looking statements are subject
to risks, uncertainties, and other factors that could cause the actual results, 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 Item 1A of our most recent Annual Report on Form 10-K for the year ended December 31,
2006 and filed on March 14, 2007, in any prospectus supplement or any report or document
incorporated herein by reference, such factors include, among others, the following:
|
Ø
|
|
the effects of economic conditions, including in particular the economic condition of
the lodging industry, which can be particularly affected by international crisis, acts or
threats of terrorism and public health issues;
|
|
|
Ø
|
|
competition from providers of similar services and from alternative sources;
|
|
|
Ø
|
|
changes in demand for our products and services, programming costs, availability,
timeliness, and quality;
|
|
|
Ø
|
|
technological developments by competitors;
|
|
|
Ø
|
|
developmental costs, difficulties, and delays;
|
|
|
Ø
|
|
relationships with clients and property owners;
|
|
|
Ø
|
|
the availability of capital to finance growth;
|
|
|
Ø
|
|
the impact of government regulations;
|
|
|
Ø
|
|
potential effects of litigation;
|
|
|
Ø
|
|
risks of expansion into new markets;
|
|
|
Ø
|
|
risks related to the security of our data systems; and
|
|
|
Ø
|
|
other factors detailed, from time to time, in our filings with the SEC.
|
With respect to any proposed or completed acquisition, we are subject to risks that integration
costs will exceed expectations, that synergies we anticipate will not be realized, or will take
longer than anticipated to realize, that our management and management systems will encounter
difficulties in dealing with a bigger, more diversified enterprise, and that the financial results
we expect from the acquisition will not be realized.
LodgeNet is a leading provider of media and connectivity services designed to meet the unique needs
of hospitality, healthcare and other visitor and guest-based businesses. LodgeNet serves more than
1.9 million hotel rooms representing 9,300 hotel properties worldwide in addition to healthcare
facilities throughout the United States. LodgeNets services include on demand movies, games,
television programming, music and information, along with subscription sports programming and
high-speed Internet access. LodgeNet Entertainment Corporation owns and operates businesses under
the industry leading brands: LodgeNet, LodgeNetRX, On Command, StayOnline, Spectradyne, and The
Hotel Networks.
During the third quarter, we made significant progress in the integration of On Command and
StayOnline into our business and organization. The combination of the three companies provides an
enhanced level of scale, resources, competencies, and operating efficiencies that will enable us to
remain the leader in developing new and innovative interactive solutions for our customers. With
these acquisitions, we believe we have created a more strategic platform from which we will be able
to drive cash flow growth from our core operations and diversify revenue growth from a broad array
of new and innovative solutions. The StayOnline acquisition greatly enhances our
solutions and capabilities in the area of Internet based technology and On Command expands our
customer base into which we can sell these enhanced solutions.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 16
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
The acquisitions of On Command and StayOnline continue to impact our financial results. During the
third quarter, total revenue increased $66.1 million, of which $63.1 million was attributable to On
Command and StayOnline. Guest Pay revenue, including high-speed Internet access (HSIA) service
revenues increased $57.5 million to $131.4 million or 77.9%. On a per-room basis, monthly Guest Pay
revenue was $23.70 compared to $24.55 for the third quarter of 2006. The decline was driven by the
addition of the On Command room base, which generates lower revenue per room for both movie revenue
and basic cable programming.
Other revenue increased $8.6 million to $11.2 million during the third quarter of 2007 versus $2.6
million in the third quarter of 2006. The increase is attributed to our diversification initiatives
and includes higher HSIA equipment sales, higher Healthcare related revenue, revenue from the sale
interactive television system equipment to hotels and travel centers, revenues from the sale of
guest connectivity centers, revenues from the sale and installation of DirecTV satellite systems
and the addition of advertising revenue. The advertising revenue was generated primarily by The
Hotel Networks, a subsidiary acquired as part of the On Command acquisition.
For the third quarter of 2007, total operating costs and expenses increased $75.9 million,
primarily due to the acquisition of On Command. Our Guest Pay direct costs increased to $68.2
million as compared to $34.7 million for the third quarter of 2006. Guest Pay operations expenses
increased to $15.4 million in the third quarter of 2007 as compared to $8.9 million in the third
quarter of 2006. SG&A expenses were $16.1 million in the third quarter of 2007, compared to $7.1 in
the prior year quarter. The integration of our On Command and StayOnline acquisitions accounted
for $6.3 million of the increase. SG&A as a percentage of revenue was 11.3% in the current quarter
compared to 9.2% in the third quarter of 2006. Depreciation and amortization expenses increased to
$34.1 million in the current year quarter versus $16.1 million in the third quarter of 2006. The
increase was attributable to our acquired companies, which included $15.5 million of depreciation
related to acquired fixed assets and $3.1 million related to the amortization of acquired
intangibles.
Guest Pay Interactive Services.
Our primary source of revenue is providing in-room, interactive
television services to the lodging industry, for which the hotel guest pays on a per-view, hourly
or daily basis. Our products include on-demand movies, network-based video games, music and music
videos, high-speed Internet access and service fees and television on-demand programming.
Our total guest generated revenue depends on a number of factors, including:
|
|
The number of rooms on our network.
We can increase revenue over time by increasing the
number of rooms served by our interactive systems. With the acquisition of On Command, we
have expanded our room base to over 1.9 million rooms. Our ability to continue expanding our
room base is dependent on a number of factors, including the attractiveness of our technology,
service and support to hotels currently operating without an interactive television system and
newly constructed hotel properties.
|
|
|
|
The variety of services offered at the hotel.
Rooms equipped with our digital system
generate higher revenue than rooms equipped with our tape-based system primarily because they
offer a greater variety of services and content choices. We plan to continue to grow the
revenue we generate per average room by the installation of our digital system in all newly
contracted rooms and by converting selected tape-based rooms to our digital system in exchange
for long-term contract extensions.
|
|
|
|
The popularity, timeliness and amount of content offered at the hotel.
Our revenues vary
to a certain degree with the number, timeliness and popularity of movie content available for
viewing. Historically, a decrease in the availability of popular movie content has adversely
impacted revenue. Although not completely within our control, we seek to program and promote
the most popular available movie content and other content to maximize revenue and gross
profit.
|
|
|
|
The price of the service purchased by the hotel guest.
Generally, we control the prices
charged for our products and services and manage pricing in an effort to maximize revenue and
overall gross profit. We establish pricing based on such things as the demographics of the
property served, the popularity of the content and overall economic conditions. Our
technology enables us to measure popularity of our content and make decisions to best position
such content and optimize revenue from such content.
|
|
|
|
The occupancy rate at the property.
Our revenue also varies depending on hotel occupancy
rates, which are subject to a number of factors, including seasonality, general economic
conditions and world events, such as terrorist threats or public health issues. Occupancy
rates are typically higher during the second and third quarters due to seasonal travel
patterns. We target higher occupancy properties in diverse demographic and geographic
locations in an effort to mitigate occupancy-related risks.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 17
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
The primary direct costs of providing Guest Pay interactive services are:
|
Ø
|
|
license fees paid to major motion picture studios, which are based on a percent of
guest-generated revenue, for non-exclusive distribution rights of recently released major
motion pictures;
|
|
|
Ø
|
|
commissions paid to our hotel customers, which are also based on a percent of
guest-generated revenue;
|
|
|
Ø
|
|
fixed monthly programming charges paid primarily to DIRECTV for satellite-delivered
basic and premium television programming;
|
|
|
Ø
|
|
HSIA customer support costs;
|
|
|
Ø
|
|
Internet connectivity costs;
|
|
|
Ø
|
|
license fees, which are based on a percent of guest-generated revenue, for television on
demand, music, music video, video games and sports programming; and
|
|
|
Ø
|
|
one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences.
|
Other Products and Services.
Our revenue from other services continued to expand and was $11.2
million in the third quarter of 2007, an increase of $8.6 million compared to the prior year
quarter. The increase in revenue is attributed to HSIA equipment sales, interactive system sales
and advertising revenue. Components of our other revenue sources are as follows:
High Speed Internet Access System Sales, Service and Support.
We generate revenue through the sale
and installation of high-speed Internet access equipment. In addition, we provide ongoing
maintenance, service and call center support services to hotel properties that have been installed
by us and also to hotel properties that have been installed by other providers. In some cases, we
provide the hotel property with the portal to access the Internet. We receive monthly service fees
from such hotel properties for our maintenance services and Internet access. In the third quarter
of 2007, we generated $6.1 million of HSIA related revenue compared to $1.1 million in 2006. As a
result of the acquisitions of StayOnline and On Command, we increased our HSIA room base from
approximately 37,000 rooms in the third quarter of last year to approximately 216,000 rooms as of
September 30, 2007. We expect that the expertise acquired from StayOnline, together with access to
our significantly larger room base, will result in significant growth in our HSIA business in 2008.
Healthcare System Sales and Support.
We provide our interactive television infrastructure and
content to the healthcare industry. We generate revenue from the sale and installation of system
equipment and long-term agreements with the healthcare facility to provide software maintenance,
programming and system maintenance. In the third quarter of 2007, we continued to focus on
developing our healthcare business and had 25 facilities under contract as of September 30, 2007.
Revenue comes from the initial sale of system hardware, software licensing, and implementation
services, and we additionally earn recurring revenues, under long-term contracts, by providing
entertainment content, software maintenance and technical field service. We had 19 interactive
systems installed as of September 30, 2007. For the remainder of 2007, we have four healthcare
facilities under installation.
System Sales and Support to Travel Centers.
We also market and sell our interactive systems to
IdleAire
Technologies Corp. We generate revenue from three sources: 1) the sale of the interactive system,
which includes equipment and a non-exclusive, non-transferable right to use the initial software
package, 2) extended service and maintenance agreements, which include future software upgrades as
they become available, and 3) entertainment programming.
Other.
Revenue generated from other sources includes the following:
|
Ø
|
|
revenue generated from the sale of our interactive television systems to hotels, along
with recurring support for interactive content, software maintenance and technical field
service for a fixed fee;
|
|
|
Ø
|
|
revenue from the sale of miscellaneous system equipment such as television remotes and
service parts and labor;
|
|
|
Ø
|
|
revenue from the sale of equipment to our international licensees;
|
|
|
Ø
|
|
revenue from the installation of master antenna wiring and related infrastructure;
|
|
|
Ø
|
|
revenue from the sale of guest connectivity centers;
|
|
|
Ø
|
|
revenue from the sale and installation of DirecTV satellite systems; and
|
|
|
Ø
|
|
revenue generated from delivery of satellite basic and premium television programming
for which the hotel pays us a fixed monthly charge per room.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 18
|
|
|
|
|
|
LodgeNet
Entertainment Corporation
|
|
Form 10-Q
|
Key Metrics:
Special Note Regarding the Use of Non-GAAP Financial Information
To supplement our consolidated financial statements presented in accordance with accounting
principles generally accepted in the United States (GAAP), we use net free cash flow, a non-GAAP
measure that is derived from results based on GAAP. The presentation of this additional information
is not meant to be considered superior to, in isolation of, or as a substitute for, results
prepared in accordance with GAAP.
We define net free cash flow, a non-GAAP measure, as cash provided by operating activities less
cash used for certain investing activities and excluding consideration paid for acquisitions. Net
free cash flow is a key liquidity measure but should not be construed as an alternative to cash
flows from operating activities or as a measure of our profitability or performance. We provide
information about net free cash flow because we believe it is a useful way for us, and our
investors, to measure our ability to satisfy cash needs, including interest payments on our debt,
taxes and capital expenditures. GAAP requires us to provide information about cash flow generated
from operations. However, GAAP cash flow from operations is reduced by the amount of interest and
tax payments and also takes into account changes in net current liabilities (e.g., changes in
working capital) that do not impact net income. Because changes in working capital can reverse in
subsequent periods, and because we want to provide information about cash available to satisfy
interest and income tax expense (by showing our cash flows before deducting interest and income tax
expense), we are also presenting net free cash flow information. Our definition of net free cash
flow does not take into account our working capital requirements, debt service requirements or
other commitments. Accordingly, net free cash flow is not necessarily indicative of amounts of cash
that may be available to us for discretionary purposes. Our method of computing net free cash flow
may not be comparable to other similarly titled measures of other companies.
Rooms Served
One of the metrics we monitor is the growth, net of de-installations, of our interactive television
network. Over the last five years, de-installation activity averaged approximately 3% of our total
installed room base. As lower revenue tape-based systems come up for contract renewal the overall
economics may not support upgrading the site to our digital system. In these situations, many
properties decide to switch to their local cable provider or we may elect to remove a certain
number of these sites from our interactive room base. We expect this trend to continue as we focus
on the quality of rooms installed and upgraded with greater returns when investing our capital
dollars. We installed our systems in the following number of net new rooms and had the following
total rooms installed as of September 30:
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2007
|
|
2006
|
Total rooms served (1)
|
|
|
1,954,116
|
|
|
|
1,051,046
|
|
Total Guest Pay interactive rooms (2)
|
|
|
1,852,124
|
|
|
|
1,003,602
|
|
Total HSIA rooms (3)
|
|
|
215,581
|
|
|
|
36,665
|
|
Net new Guest Pay interactive rooms for the three months ended (4)
|
|
|
7,673
|
|
|
|
(3,011
|
)
|
Net new Guest Pay interactive rooms for the nine months ended (4)
|
|
|
21,632
|
|
|
|
1,673
|
|
|
|
|
(1)
|
|
Total rooms served include guest pay interactive rooms, rooms served by international licensees, properties receiving only basic and premium television services and properties receiving only HSIA services. The increase from 2006 is due to the addition of the On Command room base of approximately 830,000 rooms.
|
|
(2)
|
|
Guest Pay interactive rooms are equipped with our interactive television systems.
|
|
(3)
|
|
Represents rooms receiving high-speed Internet service included in total rooms served.
|
|
(4)
|
|
Amounts shown are net of de-installations during the period. The gross number of new rooms installed was 17,790 and 18,295 for the three months ended September 30, 2007 and 2006, respectively, and 56,077 and 48,164 for the nine months ended September 30, 2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 19
|
|
|
|
|
|
LodgeNet Entertainment Corporation
|
|
Form 10-Q
|
Digital Room Growth
We continue to expand our digital base as we install our digital system in all newly contracted
rooms as well as converting select tape-based served rooms to the digital system in exchange for
long-term contract extensions. Rooms equipped with our digital system typically generate higher
revenue since the range of services is greater than rooms equipped with our tape-based systems. We
expect to have approximately 80% of our room base installed with a digital system by the end of
2007.
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
2007
|
|
2006
|
Net new digital rooms for the three months ended
|
|
|
31,743
|
|
|
|
24,240
|
|
Net new digital rooms for the nine months ended
|
|
|
91,995
|
|
|
|
81,708
|
|
Net new HDTV rooms for the three months ended (1)
|
|
|
12,552
|
|
|
|
5,351
|
|
Net new HDTV rooms for the nine months ended (1)
|
|
|
31,858
|
|
|
|
11,325
|
|
Total HDTV rooms installed (2)
|
|
|
63,502
|
|
|
|
13,880
|
|
Total digital rooms installed
|
|
|
1,443,303
|
|
|
|
710,793
|
|
Digital rooms as a percent of total Guest Pay interactive rooms
|
|
|
77.9
|
%
|
|
|
70.8
|
%
|
|
|
|
(1)
|
|
HDTV rooms are equipped with high-definition capabilities and are included in total digital
rooms.
|
|
(2)
|
|
HDTV rooms are included in the total digital rooms installed.
|
Capital Investment Per Room
The average investment per-room associated with a digital installation can fluctuate due to
engineering efforts, component costs, product segmentation, cost of assembly and installation,
average property size, certain fixed costs, hotel capital contributions and the expanding number of
high-definition installations, which have a higher cost per room. The following table sets forth
our average installation and conversion investment cost per room during the periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Years Ended
|
|
|
September 30,
|
|
September 30,
|
|
December 31,
|
|
December 31,
|
|
December 31,
|
|
|
2007
|
|
2006
|
|
2006
|
|
2005
|
|
2004
|
Average cost per
room
new installation
|
|
$
|
399
|
|
|
$
|
356
|
|
|
$
|
354
|
|
|
$
|
340
|
|
|
$
|
364
|
|
Average cost per
room
conversion
|
|
$
|
310
|
|
|
$
|
235
|
|
|
$
|
252
|
|
|
$
|
262
|
|
|
$
|
284
|
|
The increase in the average cost per new and converted rooms from 2006 to 2007 is primarily driven
by the change in average room size of the property and the increase in high definition
installations, which have a higher cost per room. The incremental cost for a high-definition
installation ranges from approximately $50 to $100 per room depending upon the average room size,
the mix of high-definition services and the amount of hotel capital contributions.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 20
|
|
|
|
|
|
LodgeNet Entertainment Corporation
|
|
Form 10-Q
|
Revenue Per Room
Guest Pay revenue can fluctuate based on several factors including the popularity of movie content,
mix of movies purchased and the availability of alternative programming. The following table sets
forth the components of our Guest Pay revenue per room for the three and nine months ended
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Average monthly revenue per room:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Movie revenue
|
|
$
|
17.43
|
|
|
$
|
18.56
|
|
|
$
|
17.00
|
|
|
$
|
17.56
|
|
Other interactive service revenue
|
|
|
6.27
|
|
|
|
5.99
|
|
|
|
5.96
|
|
|
|
5.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per Guest Pay room
|
|
$
|
23.70
|
|
|
$
|
24.55
|
|
|
$
|
22.96
|
|
|
$
|
23.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain contracts within our acquired customer base included discounts for satellite-delivered
television programming which negatively impacted other interactive service revenue. These
discounts will be eliminated as the sites are upgraded with high-definition television
capabilities.
Direct Costs
Guest Pay direct costs (exclusive of operating expenses and depreciation and amortization discussed
separately below) for interactive services include movie license fees, license fees for other
interactive services, the commission retained by the hotel, and programming and other related
costs. The following table sets forth our Guest Pay direct expenses per room and as a percent of
revenue during the three and nine months ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Guest Pay direct costs per room
|
|
$
|
12.31
|
|
|
$
|
11.55
|
|
|
$
|
11.66
|
|
|
$
|
10.67
|
|
Guest Pay direct costs as a percent of total revenue
|
|
|
51.9
|
%
|
|
|
47.0
|
%
|
|
|
50.1
|
%
|
|
|
45.7
|
%
|
Guest Pay direct costs increased to 51.9% in the third quarter of 2007 from 47.0% in the third
quarter of 2006. The increase was primarily due to higher programming costs related to our
acquired businesses.
Operating Expenses
We continue to monitor and manage the operating expenses per room in order to increase the level of
cash flow our business generates. Guest Pay operations expenses consist of costs directly related
to the operation and maintenance of systems at hotel sites. Selling, general and administrative
expense (SG&A) primarily includes administrative payroll costs, stock based compensation,
engineering development costs and legal, professional and compliance costs. The On Command and
StayOnline acquisitions accounted for a $6.3 million increase in SG&A expenses. We also incurred
approximately $2.5 million of expenses related to the integration of the two acquisitions.
Net Income (Loss)
We focus on improving profitability by increasing room and revenue growth coupled with managing
direct costs, overhead expenses, installation costs resulting in decreases in depreciation and
amortization expenses, and interest costs. As a result of our acquisitions and the refinancing
activities, the results for the nine months ended September 30, 2007, included a $22.2 million loss
on early retirement of debt, $31.4 million related to the depreciation of acquired fixed assets,
$5.0 million of restructuring expense and $5.8 million of amortization of intangible assets
associated with our acquisitions. As a result of our acquisitions and the refinancing activities,
the third quarter 2007 results included $15.5 million related to the depreciation of acquired fixed
assets, $2.3 million of restructuring expense and $3.1 million of amortization of intangible assets
associated with our acquisitions. These results are not indicative of our ability to generate net
income in the future. The following table sets forth our net income (loss) for the three and nine
months ended September 30 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
Net income (loss)
|
|
$
|
(11,411
|
)
|
|
$
|
2,184
|
|
|
$
|
(45,470
|
)
|
|
$
|
1,963
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 21
|
|
|
|
|
|
LodgeNet Entertainment Corporation
|
|
Form 10-Q
|
Free Cash Flow
One of our goals is to generate net free cash flow. In addition to increasing revenue and
controlling expenses, we can manage our actions related to this goal by reducing the per-room
installation cost of a digital room and by varying the number of rooms we install with the digital
system in any given period. The free cash flow generated for the quarter and year-to-date was
greatly influenced by our acquisition of On Command and StayOnline as well as our refinancing
activities. These results may not be indicative of our ability to generate net free cash flow in
the future. We expect to see a reduction in the costs associated with acquisition related
activities and to begin to see significant synergy benefits starting in 2008. Consequently, we
expect to be able to generate net free cash flow in the future.
Levels of net free cash flow are set forth in the following table in thousands of dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cash provided by operating activities (1)
|
|
$
|
28,298
|
|
|
$
|
23,896
|
|
|
$
|
42,413
|
|
|
$
|
60,520
|
|
Property and equipment additions
|
|
|
(21,748
|
)
|
|
|
(11,668
|
)
|
|
|
(59,953
|
)
|
|
|
(36,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,550
|
|
|
|
12,228
|
|
|
|
(17,540
|
)
|
|
|
23,933
|
|
Cash used for acquisition activities (2)
|
|
|
(5,071
|
)
|
|
|
(120
|
)
|
|
|
(354,675
|
)
|
|
|
(453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,479
|
|
|
$
|
12,108
|
|
|
$
|
(372,215
|
)
|
|
$
|
23,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Cash used for operating activities for the nine months ended September 30, 2007 included $9.2
million of acquisition related working capital, $2.8 million for restructuring and integration
activities and $18.6 million for the redemption of our 9.5% Senior Notes.
|
|
(2)
|
|
Cash used for acquisition activities related to the acquisitions of On Command, THN and
StayOnline.
|
Liquidity and Capital Resources
During the first nine months of 2007, cash provided by operating activities was $42.4 million while
cash used for investing activities for property and equipment additions, including growth related
capital, was $59.9 million, and cash used for business acquisition-related activities was $354.7
million. For the first nine months of 2006, cash provided by operating activities was $60.1 million
while cash used for investing activities, including growth-related capital investments, was $36.6
million, resulting in a net change of $23.5 million. Cash as of September 30, 2007 was $32.2
million versus $22.8 million as of December 31, 2006.
We believe that our cash on hand, operating cash flow and borrowing available under the Credit
Facility will be sufficient for the foreseeable future to fund our future growth and financing
obligations. As of September 30, 2007, working capital was $18.0 million, compared to $19.5
million at December 31, 2006.
In order to continue to operate and expand our business, we must remain in compliance with
covenants imposed by our Credit Facility. As of September 30, 2007, we were in compliance with all
covenants, terms and conditions related to our Credit Facility. We are not aware of any events that
qualify under the material adverse effect clause of the Credit Facility. The total amount of
long-term debt outstanding, including that portion of debt classified as current, as of September
30, 2007 was $626.1 million versus $270.2 million as of December 31, 2006. The increase in
long-term debt is a result of our acquisition activity during the first nine months of 2007.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 22
|
|
|
|
|
|
LodgeNet Entertainment Corporation
|
|
Form 10-Q
|
Our leverage and interest coverage ratios were as follows for the periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Actual consolidated total leverage ratio (1) (3)
|
|
|
4.30
|
|
|
|
2.93
|
|
Maximum per covenant
|
|
|
5.00
|
|
|
|
3.75
|
|
|
|
|
|
|
|
|
|
|
Actual consolidated interest coverage ratio (2) (3)
|
|
|
4.07
|
|
|
|
3.67
|
|
Minimum per covenant
|
|
|
2.25
|
|
|
|
2.75
|
|
|
|
|
(1)
|
|
Our maximum consolidated leverage ratio is a function of total indebtedness divided by
operating income exclusive of depreciation and amortization and other miscellaneous
non-recurring items as defined by the covenant.
|
|
(2)
|
|
Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and other miscellaneous non-recurring items divided by
interest expense as defined by the covenant.
|
|
(3)
|
|
Maximum consolidated total leverage ratio and minimum consolidated interest coverage ratios
are not based on generally accepted accounting principles and are not presented as alternative
measures of operating performance or liquidity. They are presented here to demonstrate
compliance with the covenants in our Credit Facility, as noncompliance with such covenants
could have a material adverse effect on us.
|
We do not utilize special purpose entities or off balance sheet financial arrangements.
Certain of our future debt covenant ratios will change as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1 2008
|
|
Q3 2008
|
|
Q1 2009
|
|
Q3 2009
|
Maximum consolidated total leverage ratio
|
|
|
4.75
|
|
|
|
4.50
|
|
|
|
4.25
|
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum consolidated interest coverage
ratio
|
|
|
2.50
|
|
|
|
2.50
|
|
|
|
2.75
|
|
|
|
2.75
|
|
In August 2001, we entered into a $225.0 million bank Credit Facility, comprised of a $150.0
million term loan and a $75.0 million revolving credit facility that could be increased to $100.0
million, subject to certain limitations. The term loan was scheduled to mature in August 2008 and
required quarterly repayments of $375,000 which began in December 2001. The term loan interest was
established at our option of (1) the banks base rate plus a margin of 1.50% or (2) LIBOR plus a
margin of 2.25%. The revolving credit facility was scheduled to mature in August 2007 and the
associated interest rate was calculated at our option of (1) the banks base rate plus a margin of
1.00% to 2.00%, or (2) LIBOR plus a margin of 2.25% to 3.25%. Loans under the Credit Facility were
collateralized by a first priority interest in all of our assets. On April 4, 2007, the remaining
balance of $67.8 million under the $225.0 million bank Credit Facility was repaid in full.
On April 4, 2007, we entered into a $675.0 million bank Credit Facility comprised of a $625.0
million term loan, which matures in April 2014 and a $50.0 million revolving credit facility that
matures in April 2013. The term loan requires a quarterly repayment of $1,562,500 beginning
September 30, 2007. The term loan bears interest at our option of (1) the banks base rate plus a
margin of 1.00% or (2) LIBOR plus a margin of 2.00%. The agreement provides that when the
consolidated leverage ratio is below 3.25 times, the term loan bears interest at our option of (1)
the banks base rate plus a margin of 0.75% or (2) LIBOR plus a margin of 1.75%. The term loan is
secured by substantially all of the assets of the Company. The agreement establishes financial
covenants including a maximum consolidated leverage ratio of 5.00 times and a minimum consolidated
interest coverage ratio of 2.25 times. The Credit Facility agreement also stipulates that the
company will hedge 50% of the outstanding term loan into a fixed interest rate for a period not
less than two years. The company has entered into fixed rate swap agreements for 70% of the
outstanding term loan at an average interest rate of 5.05%. The term loan all-in interest rate as
of September 30, 2007 was
|
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|
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|
|
|
|
September 30, 2007
|
|
Page 23
|
|
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|
|
|
LodgeNet Entertainment Corporation
|
|
Form 10-Q
|
7.20%. Proceeds from the Credit Facility were used to repay the outstanding balance
under the pre-existing Credit Facility, to fund the acquisition of On Command, to fund the tender
offer for the 9.50% Senior Notes and for general corporate purposes. As of September 30, 2007, we
were in compliance with all financial covenants of our bank Credit Facility.
The facility provides for the issuance of letters of credit up to $10.0 million, subject to
customary terms and conditions. As of September 30, 2007, we had outstanding letters of credit
totaling $0.8 million.
9.50% Senior Notes
¾
In September 2003, we issued $200.0 million of unsecured 9.50% Senior
Subordinated Notes (the Notes), due June 15, 2013. The Notes were unsecured, subordinated in
right of payment to all existing and future senior debt of LodgeNet and ranked
pari passu
in right
of payment with any future senior subordinated indebtedness of LodgeNet. The Notes required
semi-annual interest payments and contained covenants which restricted our ability to incur
additional indebtedness, create liens, pay dividends or make certain distributions with respect to
our common stock, redeem capital stock, issue or sell stock of subsidiaries in certain
circumstances, effect certain business combinations and effect certain transactions with affiliates
or stockholders.
On March 26, 2007, the company made an offer to the holders of the 9.50% Senior Notes to purchase
all of the outstanding Notes validly tendered pursuant to the Tender Offer at a price per $1,000
principal amount of Notes, equal to the accrued and unpaid interest, principal and a consent
payment of $30 per $1,000 principal amount of Notes. The tender expired on April 23, 2007 at which
time 199,990 notes, representing principal of $199,990,000, were tendered out of the total 200,000
Notes outstanding. In total, the company paid $18.0 million, plus accrued interest to tender for
the Notes.
Obligations and Commitments as of September 30, 2007 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
|
Less than
|
|
|
2 3
|
|
|
4 5
|
|
|
Over
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
Contractual obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt(s)
|
|
$
|
626,114
|
|
|
$
|
7,387
|
|
|
$
|
13,845
|
|
|
$
|
12,684
|
|
|
$
|
592,198
|
|
Interest on bank term loan (1)
|
|
|
287,010
|
|
|
|
45,453
|
|
|
|
89,289
|
|
|
|
87,465
|
|
|
|
64,809
|
|
Interest on derivative instruments
|
|
|
(4,162
|
)
|
|
|
(642
|
)
|
|
|
(1,280
|
)
|
|
|
(1,280
|
)
|
|
|
(960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired intangible asset (2)
|
|
|
2,500
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease payments
|
|
|
14,917
|
|
|
|
5,377
|
|
|
|
8,639
|
|
|
|
901
|
|
|
|
|
|
Purchase obligations (3)
|
|
|
18,431
|
|
|
|
18,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nintendo minimum royalty (4)
|
|
|
23,800
|
|
|
|
4,200
|
|
|
|
8,400
|
|
|
|
8,400
|
|
|
|
2,800
|
|
Programming related minimum
royalties and commissions (5)
|
|
|
8,808
|
|
|
|
2,715
|
|
|
|
5,007
|
|
|
|
1,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
977,418
|
|
|
$
|
85,420
|
|
|
$
|
123,900
|
|
|
$
|
109,256
|
|
|
$
|
658,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of commitment expiration per period
|
|
|
|
|
|
|
|
Less than
|
|
|
2 3
|
|
|
4 5
|
|
|
Over
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
Other commercial commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
$
|
810
|
|
|
$
|
810
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Interest payments are estimates based on current LIBOR and scheduled amortization.
|
|
(2)
|
|
In July 2002, we acquired from Hilton Hotels Corporation the right to provide Internet on
television access and television on-demand programming services to participating hotels and
the right to independently pursue and further develop interactive television content
throughout our entire room base.
|
|
(3)
|
|
Consists of open purchase orders primarily for the procurement of system components.
|
|
(4)
|
|
Nintendo video games pursuant to a non-exclusive license agreement with Nintendo, which
expires in May 2013. Under the terms of the agreement, we pay a monthly royalty equal to a
percent of revenue generated from the sale of Nintendo video game services, subject to a
monthly minimum.
|
|
(5)
|
|
In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content.
|
Seasonality
Our quarterly operating results are subject to fluctuation depending upon hotel occupancy rates and
other factors. Our hotel customers typically experience higher occupancy rates during the second
and third quarters due to seasonal travel patterns and, accordingly, we historically have higher
revenue in those quarters. However, quarterly revenue can be affected by the availability of
popular content during those quarters. We have no control over when new content is released or how
popular it will be.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 24
|
|
|
|
|
|
LodgeNet Entertainment Corporation
|
|
Form 10-Q
|
Discussion and Analysis of Results of Operations
Three Months Ended September 30, 2007 and 2006
Revenue Analysis.
Total revenue for the third quarter of 2007 was $142.6 million, an increase of
$66.1 million or 86.4%, compared to the third quarter of 2006. The growth was primarily driven by
the integration of our On Command and StayOnline acquisitions, which contributed $63.1 million to
revenue. The following table sets forth the components of our revenue (in thousands) for the
quarter ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
of Total
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guest Pay
|
|
$
|
131,387
|
|
|
|
92.1
|
%
|
|
$
|
73,861
|
|
|
|
96.5
|
%
|
Other
|
|
|
11,222
|
|
|
|
7.9
|
%
|
|
|
2,649
|
|
|
|
3.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
142,609
|
|
|
|
100.0
|
%
|
|
$
|
76,510
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guest Pay revenue, including high-speed Internet access (HSIA) service revenues increased $57.5
million or 77.9% to $131.4 million. Revenue generated by the Guest Pay services of On Command
contributed $54.8 million. The following table sets forth information with respect to revenue per
Guest Pay room for the quarter ended September 30:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Average monthly revenue per room:
|
|
|
|
|
|
|
|
|
Movie revenue
|
|
$
|
17.43
|
|
|
$
|
18.56
|
|
Other interactive service revenue
|
|
|
6.27
|
|
|
|
5.99
|
|
|
|
|
|
|
|
|
Total per Guest Pay room
|
|
$
|
23.70
|
|
|
$
|
24.55
|
|
|
|
|
|
|
|
|
The decline was driven by the addition of the On Command room base, which generates lower revenue
per room for both movie revenue and basic cable programming.
Other revenue was $11.2 million during the third quarter of 2007 versus $2.6 million in the third
quarter of 2006. The increase is attributed to higher HSIA equipment sales, interactive television
system equipment sales to hotels and travel centers and the addition of advertising revenue. The
advertising revenue was generated primarily by The Hotel Networks, a subsidiary acquired as part of
the On Command acquisition.
Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
Direct costs related to Guest Pay services include movie license fees, license
fees for other interactive services, commission paid to the hotel and HSIA customer support
expenses. Guest Pay direct costs increased $33.5 million, to $68.2 million primarily due to the
incremental costs attributed to the On Command products and services.
Direct costs related to other revenue include costs related to system sales, FTG only programming
fees, and international royalties. Direct costs related to other revenue increased $6.4 million as
a result of increased equipment sales and other acquired lines of business.
Total direct costs increased $39.9 million to $75.9 million in the third quarter of 2007. Total
direct costs increased to 53.2% of revenue, as a result of the acquisitions, for the third quarter
of 2007 as compared to 47.1% in the third quarter of 2006. In addition, a portion of the increase
was driven by lower margin HSIA equipment sales and service and higher programming costs from our
acquired businesses.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 25
|
|
|
|
|
|
LodgeNet Entertainment Corporation
|
|
Form 10-Q
|
In addition to the information provided above, the following table sets forth the primary change
drivers of direct costs for the quarter ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
Change
|
Direct costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
|
|
|
53.2
|
%
|
|
|
47.1
|
%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change drivers:
|
|
|
|
|
|
|
|
|
|
|
|
|
HSIA related
|
|
|
|
|
|
|
|
|
|
|
2.7
|
%
|
Programming-related costs
|
|
|
|
|
|
|
|
|
|
|
2.2
|
%
|
Other direct costs
|
|
|
|
|
|
|
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses.
The following table sets forth information in regards to operating expenses
for the quarter ended September 30 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
of Total
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guest Pay operations
|
|
$
|
15,430
|
|
|
|
10.8
|
%
|
|
$
|
8,902
|
|
|
|
11.6
|
%
|
Selling, general and
administrative
|
|
|
16,117
|
|
|
|
11.3
|
%
|
|
|
7,069
|
|
|
|
9.2
|
%
|
Depreciation and amortization
|
|
|
31,020
|
|
|
|
21.8
|
%
|
|
|
16,099
|
|
|
|
21.0
|
%
|
Amortization of acquired
intangibles
|
|
|
3,110
|
|
|
|
2.2
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Restructuring expense
|
|
|
2,296
|
|
|
|
1.6
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Other operating income, net
|
|
|
132
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
68,105
|
|
|
|
47.8
|
%
|
|
$
|
32,070
|
|
|
|
41.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guest Pay operations expenses increased to $15.4 million in the third quarter of 2007 as compared
to $8.9 million in the third quarter of 2006. Guest Pay operations expenses include $637,000 of
integration related costs. Guest Pay operations expenses as a percentage of revenue were 10.8%
this year as compared to 11.6% in the third quarter of 2006. Per average installed room, Guest Pay
operations expenses decreased to $2.78 per room per month compared to $2.96 in the prior year
quarter.
Selling, general and administrative (SG&A) expenses increased $9.0 million to $16.1 million in the
current quarter. The On Command and StayOnline SG&A accounted for $6.3 million of the increase. We
also incurred approximately $1.9 million of expenses related to the integration of the two
acquisitions. As a percentage of revenue, SG&A expenses were 11.3% in the current quarter compared
to 9.2% in the third quarter of 2006.
Depreciation and amortization expenses increased to $31.0 million in the current year quarter
versus $16.1 million in the third quarter of 2006. The increase was attributable to the $15.5
million of depreciation related to fixed assets of acquired companies. Depreciation and
amortization expenses per average Guest Pay room increased to $5.59 in the third quarter of 2007
compared to $5.35 in the prior year quarter. As a percentage of revenue, depreciation and
amortization expenses increased to 21.8% in the third quarter of 2007 from 21.0% in the third
quarter of 2006.
As a result of our post acquisition activities, we incurred restructuring costs of $2.3 million in
the third quarter of 2007. On Command restructuring expenses of $2.3 million consisted of $1.8
million in employee severance and $455,000 of other restructuring costs. Employee severance costs
related to the consolidation of administrative, sales, engineering, marketing, programming and
technical operations departments. At September 30, 2007, we had a restructuring accrual for
severance in the amount of approximately $2.2 million.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
Page 26
|
|
|
|
|
|
LodgeNet Entertainment Corporation
|
|
Form 10-Q
|
Operating Loss.
As a result of the factors described above, operating loss was $1.4 million in the
third quarter of 2007 compared to operating income of $8.4 million in the third quarter of 2006.
Interest Expense.
Interest expense was $11.7 million in the current quarter versus $6.4 million in
the third quarter of 2006. The increase was driven by the increase in average outstanding long-term
debt, which increased to $627.4 million during the third quarter of 2007 from $277.0 million in the
third quarter of 2006. As a result of our April 2007 refinancing, the average interest rate was
7.5% this quarter as compared to 9.24% during the third quarter of 2006.
Other (Expense) Income.
In the third quarter of 2007, we recorded $317,000 of interest income and
$408,000 of other income primarily related to the reversal of a tax provision. In the third
quarter of 2006, we recorded $234,000 of interest.
Taxes.
During the third quarter of 2007, we incurred state franchise taxes of $325,000 and
reversed a $1.4 million tax provision. The reversal was made as the statute of limitations
expired. For the third quarter of 2006, we incurred state franchise taxes of $104,000 which was
offset by the $104,000 refund received for overpayments of 2005 Canada income tax.
Net Loss.
As a result of the factors described above, net loss was $11.4 million for the third
quarter of 2007 compared to a net income of $2.2 million in the prior year quarter.
|
|
|
|
|
|
|
|
|
|
September 30, 2007
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Page 27
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LodgeNet Entertainment Corporation
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Form 10-Q
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Discussion and Analysis of Results of Operations
Nine Months Ended September 30, 2007 and 2006
Revenue Analysis.
Total revenue for the first nine months of 2007 was $352.8 million, an increase
of $134.3 million or 61.4%, compared to the first nine months of 2006. The growth was primarily
driven by the integration of our On Command and StayOnline acquisitions, which contributed $128.0
million to revenue. The following table sets forth the components of our revenue (in thousands)
for the nine months ended September 30:
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2007
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2006
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Percent
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Percent
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of Total
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of Total
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Amount
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Revenues
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Amount
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Revenues
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Revenues:
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Guest Pay
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$
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325,936
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92.4
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%
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$
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211,218
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96.6
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%
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Other
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26,896
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7.6
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%
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7,356
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3.4
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%
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$
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352,832
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100.0
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%
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$
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218,574
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100.0
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%
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Guest Pay revenue, including high-speed Internet access (HSIA) service revenues, was $325.9
million, an increase of $114.7 million or 54.3%. Revenue generated by the Guest Pay services of On
Command contributed $107.1 million. The following table sets forth information with respect to
revenue per Guest Pay room for the nine months ended September 30:
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2007
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2006
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Average monthly revenue per room:
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Movie revenue
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$
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17.00
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$
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17.56
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Other interactive service revenue
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5.96
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5.80
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Total per Guest Pay room
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$
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22.96
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$
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23.36
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The decline was driven by the addition of the On Command room base, which generates lower revenue
per room for both movie revenue and basic cable programming.
Other revenue increased $19.5 million to $26.9 million during the first nine months of 2007 versus
$7.4 million in the first nine months of 2006. The increase is attributed to higher HSIA equipment
sales, interactive television system equipment sales to hotels and travel centers and the addition
of advertising revenue. The advertising revenue was generated primarily by The Hotel Networks, a
subsidiary of the company acquired with the On Command acquisition.
Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
Direct costs related to Guest Pay services include movie license fees, license
fees for other interactive services, commission paid to the hotel and HSIA customer support
expenses. Guest Pay direct costs increased $66.8 million primarily due to the incremental costs
attributable to the On Command products and services.
Direct costs related to other revenue include costs related to system sales, FTG only programming
fees, and international royalties. Direct costs related to other revenue increased $14.6 million
as a result of the increased equipment sales and other acquired lines of business.
Total direct costs increased $81.4 million to $181.3 million in the first nine months of 2007.
Total direct costs were 51.4% of revenue for the first nine months of 2007 as compared to 45.7% in
the first nine months of 2006. The increase was driven by lower margin HSIA equipment sales and
service and higher programming costs from our acquired businesses.
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September 30, 2007
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Page 28
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LodgeNet Entertainment Corporation
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Form 10-Q
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In addition to the information provided above, the following table sets forth the primary change
drivers of direct costs for the nine months ended September 30:
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2007
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2006
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Change
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Direct costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
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51.4
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%
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45.7
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%
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5.7
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%
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Change drivers:
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HSIA related
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2.8
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%
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Programming-related costs
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1.9
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%
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Other direct costs
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1.0
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%
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5.7
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%
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Operating Expenses.
The following table sets forth information in regards to operating expenses
for the nine months ended September 30 (in thousands of dollars):
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2007
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2006
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Percent
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Percent
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of Total
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of Total
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Amount
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Revenues
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Amount
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Revenues
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Operating expenses:
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Guest Pay operations
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$
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39,262
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11.1
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%
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$
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26,752
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12.2
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%
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Selling, general and administrative
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40,181
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11.4
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%
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21,089
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9.6
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%
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Depreciation and amortization
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77,993
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22.1
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%
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49,882
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22.8
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%
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Amortization of acquired intangibles
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5,825
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1.7
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%
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0.0
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%
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Restructuring expense
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5,034
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1.4
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%
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0.0
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%
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Other operating income, net
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(763
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(0.2
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)%
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(198
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(0.1
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)%
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Total operating expenses
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$
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167,532
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47.5
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%
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$
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97,525
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44.6
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%
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Guest Pay operations expenses increased to $39.3 million in the first nine months of 2007 as
compared to $26.8 million in the first nine months of 2006. Guest Pay operations expenses include
$637,000 of integration related costs. Guest Pay operations expenses as a percentage of revenue
were 11.1% this year as compared to 12.2% in the first nine months of 2006. Per average installed
room, Guest Pay operations expenses decreased to $2.75 per month in the first nine months of 2007
compared to $2.96 per month in the year earlier period.
Selling, general and administrative (SG&A) expenses increased $19.1 million to $40.2 million in the
first nine months of 2007. The On Command and StayOnline SG&A accounted for $14.6 million of the
increase. We also incurred approximately $2.1 million of expenses related to the integration of
the two acquisitions. As a percentage of revenue, SG&A expenses were 11.4% in the first nine
months of 2007 compared to 9.6% in the first nine months of 2006.
Depreciation and amortization expenses increased to $78.0 million in the first nine months of 2007
versus $49.9 million in the first nine months of 2006. The increase was attributable to the $31.4
million of depreciation related to fixed assets of acquired companies. Depreciation and
amortization expenses per average Guest Pay room increased to $5.64 in the first nine months of
2007 compared to $5.52 in the prior year first nine months. As a percentage of revenue,
depreciation and amortization expenses decreased to 22.1% in the first nine months of 2007 from
22.8% in the first nine months of 2006.
As a result of our post acquisition activities, we incurred restructuring costs of $5.0 million
during the first nine months of 2007. StayOnline restructuring expenses of $315,000 were related
to employee severance agreements and the consolidation of warehouse and call center operations. On
Command restructuring expenses of $4.7 million consisted of $4.0 million in employee severance and
$699,000 of other
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September 30, 2007
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Page 29
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LodgeNet Entertainment Corporation
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Form 10-Q
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restructuring
costs. Employee severance costs related to the consolidation of administrative, sales, engineering, marketing, programming
and technical operations departments. At September 30, 2007, we had a restructuring accrual for
severance in the amount of approximately $2.2 million.
Other operating income of $763,000 includes $793,000 of recoveries related to early contract
terminations. In 2006, other operating income of $198,000 included insurance proceeds received for
business interruption losses due to hurricane Katrina.
Operating Income.
As a result of the factors described above, operating income was $4.0 million in
the first nine months of 2007 compared to operating income of $21.1 million in the first nine
months of 2006.
Interest Expense.
Interest expense was $29.5 million in the first nine months of 2007 versus $19.5
million in the first nine months of 2006. The increase was driven by the increase in average
outstanding long-term debt, which increased to $484.5 million during the first nine months of 2007
from $281.0 million in the first nine months of 2006.
Loss on Early Retirement of Debt.
During the second quarter of 2007, we paid off our $225.0
million bank Credit Facility and redeemed 199,990 notes, representing principal of $199,990,000, of
our 9.50% Senior Notes due June 15, 2013. As a result of this payoff and early redemption, we
recognized a $22.2 million loss representing call and tender premiums and related expenses and the
write off unamortized debt issuance costs, net of a deferred gain from the termination of an
interest rate swap arrangement where the 9.50% Senior Notes had been the underlying debt.
Other (Expense) Income.
In the first nine months of 2007, we recorded $877,000 of interest income
and $412,000 of other income. In the first nine months of 2006, we recorded $556,000 of interest
income and a $238,000 recovery related to the settlement of the Chapter 7 liquidation of Gamet
Technology, Inc
Taxes.
During the first nine months of 2007, we incurred state franchise taxes of $547,000 and
reversed a $1.4 million tax provision. The reversal was made as the statute of limitations
expired. For the first nine months of 2006, we incurred state franchise taxes of $319,000 and
recorded a $90,000 provision for federal alternative minimum tax, which was offset by a $104,000
refund received for overpayments of 2005 Canada income tax.
Net Loss (Income).
As a result of the factors described above, net loss was $45.5 million for the
first nine months of 2007 compared to a net income of $2.0 million in the prior year first nine
months.
Critical Accounting Policies
Managements discussion and analysis of financial condition and results of operations are based
upon our financial statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. Our primary cost drivers are predetermined
rates, such as hotel commissions, license fees paid for major motion pictures and other content, or
one-time fixed fees for independent films. However, the preparation of financial statements
requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of revenues and expenses during the reporting period. We base
our estimates on historical experience and on various other assumptions that we believe to be
reasonable based upon the available information. The following critical policies relate to the
more significant judgments and estimates used in the preparation of the financial statements:
Revenue Recognition
We recognize revenue from various sources as follows:
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Guest Pay Services.
Our primary source of revenue is from providing in-room, interactive
television services to the lodging industry, which the hotel guest typically purchases on a
per-view, hourly or daily basis. These services include on-demand movies, on-demand games,
music and music video, Internet on television and television on-demand. We recognize revenue
from the sale of these Guest Pay services in the period in which such services are sold to the
hotel guest and when collection is reasonably assured. Persuasive evidence of a purchase
exists through a guest buy transaction recorded on our system. No future performance
obligations exist with respect to these types of services once they have been provided to the
hotel guest. The prices related to our products or services are fixed or determinable prior
to delivery of the products or services.
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September 30, 2007
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Page 30
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LodgeNet Entertainment Corporation
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Form 10-Q
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Free-to-Guest Services.
We generate revenue from the sale of basic and premium television programming to
individual hotels. In contrast to Guest Pay Services, where the hotel guest is charged
directly for the service, we charge the hotel for our Free-to-Guest Services. We recognize
revenue from the sale of Free-to-Guest Services in the period in which such services are sold
and when collection is reasonably assured. We establish the prices charged to each hotel and
no future performance obligations exist on programming that has been provided to the hotel.
Persuasive evidence of an arrangement exists through our long-term contract with each hotel.
We also have advance billings from one month to three months for certain free-to-guest
programming services where the revenue is deferred and recognized in the periods that services
are provided.
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High Speed Internet Access System Sales.
We provide high-speed Internet access through the
sale and installation of equipment. Revenue from the sale and installation of this equipment
is recognized when the equipment is installed. The delivery and installation of the equipment
are concurrent. In addition, this equipment, which can be acquired from other manufacturers
or retailers, has stand-alone value to the customer. The software used within these systems
can also be supplied by other vendors unrelated to us. Equipment prices are fixed and
determinable prior to delivery and are based on objective and reliable sales evidence from a
stand-alone basis.
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High Speed Internet Access Service and Support.
We provide ongoing maintenance, service
and call center support services to hotel properties that have been installed by us and also
to hotel properties that have been installed by other providers. In addition, we provide, in
some cases, the hotel property with the portal to access the Internet. We receive monthly
service fees from such hotel properties for our maintenance services and Internet access. We
recognize the service fee ratably over the term of the contract. The prices for these
services are fixed and determinable prior to delivery of the service. The fair value of these
services is known due to objective and reliable evidence from contracts and stand-alone sales.
Under the service agreement, which includes maintenance and Internet access, we recognize
revenue ratably over the term of the maintenance and service contract, typically three years.
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Healthcare System Sales and Support.
We provide our interactive television infrastructure
and content to the healthcare industry. We generate revenue from two sources: 1) the sale and
installation of system equipment and 2) support agreements with the facility to provide
software maintenance, programming and system maintenance for one year. Historically, revenue
from the sale and installation of our interactive system is recognized ratably over the
one-year maintenance period after the equipment is installed. The contracted system hardware,
installation and maintenance elements are not separable during this start-up phase due to
insufficient vendor specific objective evidence (VSOE). The package price of the interactive
system and related maintenance is fixed and determinable prior to delivery. Upon completion
of the initial year, the support arrangement, which includes interactive content, software
maintenance, and system services, is renewable and is recognized ratably over the term of the
related contract. The hospital is under no obligation to contract with us for the support
arrangement. They may contract with other providers and utilize the equipment and software
installed by us. Management expects VSOE to be established in the fourth quarter of 2007
based on market history and 100% renewal activity for maintenance services. Once VSOE has
been established, the entire selling price of the interactive system will be recognized upon
installation.
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System Sales and Support to Travel Centers.
We also market and sell our interactive systems
to travel centers. We generate revenue from three sources: 1) the sale of the interactive
system, which includes equipment, operating software and a one-year parts and labor warranty
2) optional extended service and maintenance agreements, which include future software
upgrades as they become available and 3) programming. The interactive system price includes a
non-exclusive, non-transferable right to use the initial software package. Currently, revenue
from the sale of our interactive system and the extended service and maintenance agreement is
recognized ratably over the three-year maintenance period, which includes the original
one-year warranty and the two-year extension, after the equipment is delivered. The
contracted interactive system and extended service and maintenance elements are not separable
during this start-up phase due to insufficient vendor specific objective evidence (VSOE). The
prices of the interactive system and extended service and maintenance agreement are fixed and
determinable prior to delivery. Management expects VSOE to be established after at least
eighteen months of market history and meaningful renewal activity for maintenance services.
Once VSOE has been established, the entire selling price of the interactive system will be
recognized
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September 30, 2007
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Page 31
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LodgeNet Entertainment Corporation
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Form 10-Q
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upon delivery.
Programming revenue from this arrangement is recognized on a recurring basis over the term of
the related contract.
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Hotel System Sales and Support.
We also market and sell our Guest Pay interactive systems
to hotels, along with recurring support for interactive content, software maintenance and
technical field service for a fixed fee. Revenue from the sale and installation of the
interactive system, including the operating software, is deferred and recognized over the term
of the contract, generally five years, due to inseparable proprietary software elements. The
multiple elements are not separable because the proprietary software is required to operate
the system and we do not license or sell the software separately under this business model.
The interactive system prices are fixed and determinable prior to delivery. Revenue from this
arrangement, which includes equipment, operating software, interactive content, and
maintenance services, is recognized ratably over the term of the related contract.
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Master Antenna Television (MATV) Services.
We generate revenues from the installation of
master antenna wiring and related infrastructure. Revenues are recognized upon completion of
the MATV installation and the prices of the services are fixed and determinable prior to
delivery. MATV equipment and services are not proprietary and can be supplied by other
vendors.
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Satellite System Sales.
We also generate revenues from the sale and installation of DirecTV
satellite systems. Revenues are recognized upon installation of the satellite system and the
prices for these services are fixed and determinable prior to delivery. DirecTV equipment and
installation services are not proprietary and can be supplied by other vendors other than us.
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Other.
We also generate revenue from the sale of miscellaneous system equipment such as
television remotes and service parts and labor. These sales are not made under multiple
element arrangements and we recognize the revenue when the equipment is delivered or service
(repair or installation) has been performed. No future performance obligation exists on an
equipment sale or on a repair service that has been provided.
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Allowance for Doubtful Accounts.
We determine the estimate of the allowance for doubtful accounts
considering several factors, including: (1) historical experience, (2) aging of the accounts
receivable, (3) bad debt recoveries, and (4) contract terms between the hotel and us. In
accordance with our hotel contracts, monies collected by the hotel for interactive television
services are held in trust on our behalf. Collectibility is reasonably assured as supported by our
credit check process and nominal write-off history. If the financial condition of a hotel chain or
group of hotels were to deteriorate and reduce the ability to remit our monies, we may be required
to increase our allowance by recording additional bad debt expense.
Allowance for Excess or Obsolete System Components.
We regularly evaluate component levels to
ascertain build requirements based on our backlog and service requirements based on our current
installed base. When a certain system component becomes obsolete due to technological changes and
it is determined that the component cannot be utilized within our current installed base, we record
a provision for excess and obsolete component inventory based on estimated forecasts of product
demand and service requirements. We make every effort to ensure the accuracy of our forecasts of
service requirements and future production; however any significant unanticipated changes in demand
or technological advances could have an impact on the value of system components and reported
operating results.
Long-Lived Assets.
We review the carrying value of long-lived assets such as property and
equipment and intangible assets whenever events or circumstances indicate that the carrying value
of an asset may not be recoverable from the estimated future cash flows expected to result from its
use and eventual disposition. In cases where undiscounted expected future cash flows are less than
the carrying value, an impairment loss is recognized to reduce the carrying value of the asset to
its estimated fair value.
Property and Equipment.
Our property and equipment is stated at cost, net of accumulated
depreciation and amortization. Installed Guest Pay and free-to-guest systems consist of equipment
and related costs of installation, including certain payroll costs, sales commissions and customer
acquisition costs. Maintenance costs, which do not significantly extend the useful lives of the
respective assets, and repair costs are charged to Guest Pay operations as incurred. We begin
depreciating Guest Pay and free-to-guest systems when such systems are installed and activated.
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September 30, 2007
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Page 32
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LodgeNet Entertainment Corporation
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Form 10-Q
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Depreciation of other equipment begins when such equipment is placed in service. We attribute no
salvage value to equipment, and depreciation and amortization are computed using the straight-line
method over the following useful lives:
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Years
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Buildings
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30
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Guest Pay systems:
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Installed system costs
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2 7
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Customer acquisition costs
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5 7
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System components
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5 7
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Software costs
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3 5
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Other equipment
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3 10
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Allowance for System Removal.
We de-install properties through the course of normal operations due
to a number of factors, including: poor revenue performance, hotel bankruptcy or collection issues,
hotel closings, and change in service provider. We regularly evaluate our backlog of properties
scheduled for de-installation and record a provision for estimated system removal costs. The costs
incurred as a result of de-installation include the labor to de-install the system as well as
unamortized installation costs. Over the last five years, de-installation activity averaged
approximately 3% of our installed room base.
Goodwill and Other Intangibles Assets.
We account for goodwill and other intangible assets under
Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets
.
Under SFAS 142, purchased goodwill and other intangible assets with indefinite lives, are not
amortized; rather, they are tested for impairment at least annually
.
These impairment tests require
the projection and discounting of cash flows, estimates of future operating performance of the
reporting unit being valued and estimates of the fair value of the intangible assets being tested.
SFAS 142 requires a two-step impairment test for goodwill. The first step is to compare the
carrying amount of the reporting units net assets to the fair value of the reporting unit. If the
fair value exceeds the carrying value, no further evaluation is required and no impairment loss is
recognized. If the carrying amount exceeds the fair value, then the third step must be completed,
which involves allocating the fair value of the reporting unit to each asset and liability, with
the excess being implied goodwill. An impairment loss occurs if the amount of the recorded goodwill
exceeds the implied goodwill. We would be required to record such impairment losses. Changes in
interest rates and market conditions, among other factors, may have an impact on these estimates.
These estimates will likely change over time. There can be no assurance that goodwill or
indefinite-lived intangibles impairment will not occur in the future.
Intangible assets, other than goodwill, with definite lives will continue to be amortized over
their useful lives. We periodically evaluate the reasonableness of the useful lives of these
intangible assets.
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Years
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Hotel contracts and relationships
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10 20
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Tradenames
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15
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Acquired technologies and patents
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5
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Content agreements and relationships
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4
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September 30, 2007
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Page 33
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LodgeNet Entertainment Corporation
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Form 10-Q
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Recent Accounting Developments
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 157,
Fair Value Measurements
(SFAS No. 157). This standard clarifies the
principle that fair value should be based on the assumptions that market participants would use
when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. This standard is effective for
financial statements issued for fiscal years beginning after November 15, 2007. We are currently
evaluating the impact of this statement. We believe the adoption of SFAS No. 157 will not have a
material impact on our consolidated financial position or results of operations.
In February 2007, the FASB issued FASB Statement No. 159,
The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115.
(SFAS No.
159). This standard permits an entity to choose to measure many financial instruments and certain
other items at fair value. This standard is effective for financial statements issued for fiscal
years beginning after November 15, 2007. We believe the adoption of SFAS No. 159 will not have a
material impact on our consolidated financial position or results of operations.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including potential losses resulting from adverse changes
in interest rates and foreign currency exchange rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes.
Interest.
At September 30, 2007, we had debt totaling $626.1 million with an all-in weighted
average interest rate of 7.20%. We have two interest rate swap agreements with notional values of
$312.5 million at a rate of 5.09% and $125.0 million, at a rate of 4.97%, both of which expire in
June 2011, that 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, we had fixed rate debt of $440.2 million and variable rate debt of $185.9 million at
September 30, 2007. For fixed rate debt, interest rate fluctuations affect the fair market value
but do not impact earnings or cash flows, if effective. Conversely, for variable rate debt,
interest rate fluctuations 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 to interest rates would decrease
the unrealized fair market value of the fixed rate debt by an estimated $72.5 million. The impact
on earnings and cash flow for the next year resulting from a one percentage point increase to
interest rates would be approximately $1.9 million, assuming other variables remain constant.
Foreign Currency Transactions.
A portion of our revenues is derived from the sale of Guest Pay
services in Canada and Mexico. The results of operations and financial position of our operations
in Canada and Mexico are measured in their local currencies and translated into U.S. dollars. The
effects of foreign currency fluctuations in Canada and Mexico are somewhat mitigated by the fact
that expenses and liabilities are generally incurred in the local currency. The reported income of
our Canadian and Mexican subsidiaries will be higher or lower depending on a weakening or
strengthening of the U.S. dollar against the local currency. Additionally, a portion of our assets
are based in Canada and Mexico and are translated into U.S. dollars at foreign currency exchange
rates in effect as of the end of each period. Accordingly, our consolidated assets will fluctuate
depending on the weakening or strengthening of the U.S. dollar against the local currency.
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Based on their evaluation as of the end of the
period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer have concluded that the disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure that
information required to be disclosed by us in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. Additionally, our disclosure
controls and procedures were also effective in ensuring that information required to be disclosed
in our Exchange Act reports is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial
Officer to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting.
There was no change in our internal control
over financial reporting that occurred during the third quarter of 2007 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
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September 30, 2007
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Page 34
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LodgeNet Entertainment Corporation
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Form 10-Q
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Part II Other Information
Item 1 Legal Proceedings
We are subject to litigation arising in the ordinary course of business. On July 16, 2007, the
Company was advised that Advanced Satellite Systems, LLC, a Delaware limited liability company
based in Utah, filed an action for patent infringement in the U.S. District Court in Salt Lake
City, Utah. The suit alleges that the Company infringes a patent issued in October of 2006 entitled
Method and System Asymmetric Satellite Communications For Local Area Networks. The complaint does
not specify an amount in controversy. The Company believes that it does not infringe the patent in
question, has a number of other substantive defenses, and intends to vigorously defend the action.
Item 1A
Risk Factors
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits
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31.1
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Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer
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31.2
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Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer
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32
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Section 1350 Certifications
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September 30, 2007
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Page 35
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LodgeNet Entertainment Corporation
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Form 10-Q
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LodgeNet Entertainment Corporation and Subsidiaries
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.
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LodgeNet Entertainment Corporation
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(Registrant)
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Date: November 7, 2007
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/ s / Scott C. Petersen
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Scott C. Petersen
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President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
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Date: November 7, 2007
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/ s / Gary H. Ritondaro
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Gary H. Ritondaro
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Senior Vice President, Chief Financial Officer
(Principal Financial & Accounting Officer)
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September 30, 2007
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Page 36
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Lodgenet Interactive Corp. (MM) (NASDAQ:LNET)
過去 株価チャート
から 6 2024 まで 7 2024
Lodgenet Interactive Corp. (MM) (NASDAQ:LNET)
過去 株価チャート
から 7 2023 まで 7 2024