SEC Company Response from LODGENET ENTERTAINMENT CORP (CIK 0000911002) — Aug 29, 2005
LODGENET ENTERTAINMENT CORP (CIK 0000911002)
Date: Aug. 29, 2005 · CIK: 0000911002 · Accession: 0000950134-05-016851
AI Filing Summary & Sentiment
Referenced dates: August 19, 2005
Letter
Division of Corporation Finance United States Securities and Exchange Commission LodgeNet Entertainment Corporation Form 10-K for the fiscal year ended December 31, 2004 Filed March 16, 2005 File No. 0-22334
Dear Mr. Spirgel:
We represent LodgeNet Entertainment Corporation, a Delaware Corporation (“LodgeNet” or the “Company”) and have been authorized by them to respond to the Staff’s letter, dated August 19, 2005, and the two itemized comments contained therein (the “Staff Comment Letter”). We have set forth each of the comments from the Staff’s Comment Letter, followed by the Company’s response.
Comment from SEC — Critical Accounting Policies, page 37
1.
We have the following additional comments with respect to your response to prior comment 1:
In the pay-per-view revenue arrangement, you stated in your response that the Company retains ownership of the hardware and the proprietary software and revenue is derived primarily from the hotel guest purchasing the service. However, on page 37 of your Form 10-K, you disclosed as follows: “Revenue from the sale of system equipment and the service parts and labor is recognized when the equipment is delivered (emphasis added) or the service has been provided. 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.” Apart from the pay-per-view revenues, it is not
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 2
clear to us if you recognize revenues from the sale of the related equipment upon delivery/service activation or over the life of the hotel agreement. Clarify for us your revenue recognition policy with respect to the underlying hardware equipped with proprietary software and tell us your consideration of EITF 00-03. Please advise or revise.
With respect to the sale of high-speed Internet equipment to hotels, you stated in your response that “at the end of the initial contract period, usually three years, the customer has the contractual right to take possession of the hardware.” Since the customer does not have the right to take possession of the hardware until the end of the contract period, it does not seem appropriate to recognize equipment revenue from the “sale and installation of your interactive system when the equipment is installed...” as you disclosed on page 37 of your filing. Tell us your basis in the accounting literature for your revenue recognition policy with respect to the sale of high-speed Internet equipment. Additionally, tell us your consideration of paragraph 7 of EITF 01-8. Please advise or revise.
Response to Comment One
We have summarized our revenue recognition policies below and, in addition, have provided you with our revised disclosure for our public filings. Our primary revenue sources are derived from guest pay services and free-to-guest services. Our revenue recognition related to these two sources are as follows:
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. Equipment for these services is not sold to the hotel and ownership remains with us. 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.
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 3
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. Equipment for these services is not sold to the hotel and ownership remains with us. 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.
To provide additional clarification specific to your inquiry, the revenue recognition related to the sales of high speed Internet equipment and equipment sold under the hotel systems sales model, which are not primary revenue sources for the Company, are as follows:
High Speed Internet Access System Sales – Under this business model, we sell an integrated solution to the customer that utilizes hardware and software from multiple vendors, none of which is proprietary to us. The revenue is recognized when the equipment is delivered and installed. The delivery and installation of the equipment are concurrent. In addition, this equipment has stand-alone value to the customer. The software used within these systems can be supplied and maintained 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.
We have taken into consideration EITF 00-03 and determined that it is not applicable to us for the following reasons. We do not “host” our proprietary software application via the Internet nor via a dedicated line and the customer may not take possession of our proprietary software. The “possession” discussion in our July 8, 2005 letter to the Staff applied only to the non-proprietary Internet software provided by an unrelated third-party vendor. We are not in the business of selling proprietary hardware or software with our Internet product offering. Also, as a clarification to our July 8, 2005 letter, we used the phrase “take possession of the hardware” in the context of taking possession of hardware for purposes of the high-speed Internet maintenance and service aspects. Our high-speed Internet service arrangements are typically three-years and the customer can
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 4
take over the complete service aspect upon expiration of the three-year term. This is unrelated to the sale of the equipment, for which both the title and possession transfer immediately upon delivery and installation. As set forth above, our accounting treatment is applied in accordance with GAAP and applicable standards.
Hotel System Sales and Support – We have recently begun offering to hotels a new business model whereby we sell our Guest Pay system to a hotel. Under this business model, we market and sell our interactive systems to hotels, along with recurring support for interactive content, software maintenance and technical field service, for a fee. Revenue from the sale and installation of the interactive system package, including the operating software, is deferred and recognized over the term of the contract, generally five years, due to the 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.
To address your final question in comment one and summarize our application of accounting standards, we have also considered paragraph 7 of EITF 01-8 and determined that the lease concept illustrated in this EITF is not applicable to any of our business models because we are not providing the “right of use” but, rather, transfer title under the arrangement. In summary, we effectively transfer title and possession immediately under our Internet equipment sales model and recognize revenue upon delivery and installation. Under the hotel system sales model, title also transfers but the revenue is deferred due to the inseparability of the multiple elements (equipment and operating software). To-date, revenue generated from these two sources has been minimal. As we stated in our July 8, 2005 letter, we believe our business models and related arrangements fall under SAB 104 and EITF 00-21.
As noted above, we have determined that the revenue recognition disclosure in our 2004 Form 10-K should be expanded to provide more specific explanations for each of our revenue sources. We have incorporated the disclosure below into our most recent filing on Form 10-Q (See page 28, of Form 10-Q filed on August 9, 2005, copy attached) and will also include it in our future filings. Our revised disclosure is as follows:
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 5
a.
Guest Pay Services. Our primary source of revenue is from providing in-room, interactive television services to the lodging industry, for 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.
b.
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 provided 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.
c.
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 has stand-alone value to the customer. The software used within these systems is not proprietary and can 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.
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 6
d.
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 are 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.
e.
Healthcare System Sales and Support. We provide our interactive television infrastructure and content to the healthcare industry. Revenue from the sale and installation of our interactive system is recognized ratably over a one-year period after the equipment is installed. Under the contract terms for the first year, the system hardware and software maintenance elements are not separable because we are providing the maintenance service with no additional fee during the first year. The package price of the interactive system and software 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, reverts to a fixed monthly fee, which we recognize 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 provides and utilize the equipment and software installed by us.
f.
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.
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 7
g.
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.
Comment from SEC — Note 15 – Income Taxes, page F-21
2.
We note the s
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LEONARD, STREET AND DEINARD
150 South Fifth Street
Minneapolis, Minnesota 55402
August 29, 2005
Mr. Larry Spirgel
Assistant Director
Division of Corporation Finance
United States Securities and Exchange Commission
Washington, DC 20549
Re:
LodgeNet Entertainment Corporation
Form 10-K for the fiscal year ended December 31, 2004
Filed March 16, 2005
File No. 0-22334
Dear Mr. Spirgel:
We represent LodgeNet Entertainment Corporation, a Delaware Corporation (“LodgeNet” or the
“Company”) and have been authorized by them to respond to the Staff’s letter, dated August 19,
2005, and the two itemized comments contained therein (the “Staff Comment Letter”). We have set
forth each of the comments from the Staff’s Comment Letter, followed by the Company’s response.
Comment from SEC — Critical Accounting Policies, page 37
1.
We have the following additional comments with respect to your response to prior
comment 1:
In the pay-per-view revenue arrangement, you stated in your response that the
Company retains ownership of the hardware and the proprietary software and revenue
is derived primarily from the hotel guest purchasing the service. However, on page
37 of your Form 10-K, you disclosed as follows: “Revenue from the sale of system
equipment and the service parts and labor is recognized when the equipment is
delivered (emphasis added) or the service has been provided. 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.” Apart from the pay-per-view revenues, it is not
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 2
clear to us if you recognize revenues from the sale of the related equipment upon
delivery/service activation or over the life of the hotel agreement. Clarify for
us your revenue recognition policy with respect to the underlying hardware equipped
with proprietary software and tell us your consideration of EITF 00-03. Please
advise or revise.
With respect to the sale of high-speed Internet equipment to hotels, you stated in
your response that “at the end of the initial contract period, usually three years,
the customer has the contractual right to take possession of the hardware.” Since
the customer does not have the right to take possession of the hardware until the
end of the contract period, it does not seem appropriate to recognize equipment
revenue from the “sale and installation of your interactive system when the
equipment is installed...” as you disclosed on page 37 of your filing. Tell us your
basis in the accounting literature for your revenue recognition policy with respect
to the sale of high-speed Internet equipment. Additionally, tell us your
consideration of paragraph 7 of EITF 01-8. Please advise or revise.
Response to Comment One
We have summarized our revenue recognition policies below and, in addition, have provided
you with our revised disclosure for our public filings. Our primary revenue sources are
derived from guest pay services and free-to-guest services. Our revenue recognition
related to these two sources are as follows:
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. Equipment for
these services is not sold to the hotel and ownership remains with us. 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.
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 3
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.
Equipment for these services is not sold to the hotel and ownership remains with us. 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.
To provide additional clarification specific to your inquiry, the revenue recognition
related to the sales of high speed Internet equipment and equipment sold under the hotel
systems sales model, which are not primary revenue sources for the Company, are as follows:
High Speed Internet Access System Sales – Under this business model, we sell an integrated
solution to the customer that utilizes hardware and software from multiple vendors, none of
which is proprietary to us. The revenue is recognized when the equipment is delivered and
installed. The delivery and installation of the equipment are concurrent. In addition,
this equipment has stand-alone value to the customer. The software used within these
systems can be supplied and maintained 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.
We have taken into consideration EITF 00-03 and determined that it is not applicable to us
for the following reasons. We do not “host” our proprietary software application via the
Internet nor via a dedicated line and the customer may not take possession of our
proprietary software. The “possession” discussion in our July 8, 2005 letter to the Staff
applied only to the non-proprietary Internet software provided by an unrelated third-party
vendor. We are not in the business of selling proprietary hardware or software with our
Internet product offering. Also, as a clarification to our July 8, 2005 letter, we used the
phrase “take possession of the hardware” in the context of taking possession of hardware
for purposes of the high-speed Internet maintenance and service aspects. Our high-speed
Internet service arrangements are typically three-years and the customer can
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 4
take over the complete service aspect upon expiration of the three-year term. This is
unrelated to the sale of the equipment, for which both the title and possession transfer
immediately upon delivery and installation. As set forth above, our accounting treatment
is applied in accordance with GAAP and applicable standards.
Hotel System Sales and Support – We have recently begun offering to hotels a new business
model whereby we sell our Guest Pay system to a hotel. Under this business model, we market
and sell our interactive systems to hotels, along with recurring support for interactive
content, software maintenance and technical field service, for a fee. Revenue from the
sale and installation of the interactive system package, including the operating software,
is deferred and recognized over the term of the contract, generally five years, due to the
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.
To address your final question in comment one and summarize our application of accounting
standards, we have also considered paragraph 7 of EITF 01-8 and determined that the lease
concept illustrated in this EITF is not applicable to any of our business models because we
are not providing the “right of use” but, rather, transfer title under the arrangement. In
summary, we effectively transfer title and possession immediately under our Internet
equipment sales model and recognize revenue upon delivery and installation. Under the
hotel system sales model, title also transfers but the revenue is deferred due to the
inseparability of the multiple elements (equipment and operating software). To-date,
revenue generated from these two sources has been minimal. As we stated in our July 8,
2005 letter, we believe our business models and related arrangements fall under SAB 104 and
EITF 00-21.
As noted above, we have determined that the revenue recognition disclosure in our 2004 Form
10-K should be expanded to provide more specific explanations for each of our revenue
sources. We have incorporated the disclosure below into our most recent filing on Form
10-Q (See page 28, of Form 10-Q filed on August 9, 2005, copy attached) and will also
include it in our future filings. Our revised disclosure is as follows:
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 5
a.
Guest Pay Services. Our primary source of revenue is from providing in-room,
interactive television services to the lodging industry, for 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.
b.
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 provided 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.
c.
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 has stand-alone value to the customer. The software used within these
systems is not proprietary and can 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.
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 6
d.
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 are
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.
e.
Healthcare System Sales and Support. We provide our interactive television
infrastructure and content to the healthcare industry. Revenue from the sale and
installation of our interactive system is recognized ratably over a one-year period
after the equipment is installed. Under the contract terms for the first year, the
system hardware and software maintenance elements are not separable because we are
providing the maintenance service with no additional fee during the first year. The
package price of the interactive system and software 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, reverts to a fixed monthly fee, which we recognize 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 provides and utilize the equipment
and software installed by us.
f.
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.
Table of Contents
Mr. Larry Spirgel
United States Securities and Exchange Commission
August 29, 2005
Page 7
g.
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.
Comment from SEC — Note 15 – Income Taxes, page F-21
2.
We note the s