##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2011
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 0-22334
 LodgeNet Interactive Corporation
  Delaware
    
    46-0371161(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 3900 West Innovation Street, Sioux Falls, South Dakota 57107
 (605) 988-1000  (Registrants telephone number,
  (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



LodgeNet Interactive Corporation and Subsidiaries
 Index
 PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010 (Audited)
    
    
    3Consolidated Statements of Operations (Unaudited) for
the Three Months Ended March 31, 2011 and 2010
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 2011 and 2010
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    20Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 4  Controls and Procedures
    
    
    41Part II. Other InformationItem 1  Legal Proceedings
    
    
    43Item 1A  Risk Factors
    
    
    43Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3  Defaults Upon Senior Securities
    
    
    43Item 5  Other Information
    
    
    43Item 6  Exhibits
    
    
    43Signatures
    
    
    44EX-31.1EX-31.2EX-32
    Page 2




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##### Table of Contents



Part I  Financial Information
 
 Item 1  Financial Statements
 LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Balance Sheets
  (Unaudited)
    
    
    (Audited)March 31,
    
    
    December 31,2011
    
    
    2010AssetsCurrent assets:Cash
    
    $
    16,074
    
    
    $
    8,381Accounts receivable, net
    
    
    50,527
    
    
    
    49,332Other current assets
    
    
    12,779
    
    
    
    12,728Total current assets
    
    
    79,380
    
    
    
    70,441Property and equipment, net
    
    
    143,544
    
    
    
    156,917Debt issuance costs, net
    
    
    5,587
    
    
    
    3,681Intangible assets, net
    
    
    97,033
    
    
    
    99,005Goodwill
    
    
    100,081
    
    
    
    100,081Other assets
    
    
    13,592
    
    
    
    13,881Total assets
    
    $
    439,217
    
    
    $
    444,006Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    65,064
    
    
    $
    60,303Current maturities of long-term debt
    
    
    10,612
    
    
    
    4,807Accrued expenses
    
    
    19,673
    
    
    
    22,327Fair value of derivative instruments
    
    
    5,246
    
    
    
    10,353Deferred revenue
    
    
    20,101
    
    
    
    23,168Total current liabilities
    
    
    120,696
    
    
    
    120,958Long-term debt
    
    
    359,970
    
    
    
    368,832Other long-term liabilities
    
    
    10,010
    
    
    
    8,565Total liabilities
    
    
    490,676
    
    
    
    498,355Commitments and contingenciesStockholders deficiency:Preferred stock, $.01 par value, 5,000,000 shares authorized;
Series B cumulative perpetual convertible, 10%, 57,500 issued and
outstanding at March 31, 2011 and December 31, 2010, respectively
(liquidation preference of $1,000 per share or $57,500,000 total)
    
    
    1
    
    
    
    1Common stock, $.01 par value, 50,000,000 shares authorized;
25,152,080 and 25,088,539 shares outstanding at March 31, 2011
and December 31, 2010, respectively
    
    
    252
    
    
    
    251Additional paid-in capital
    
    
    387,942
    
    
    
    388,961Accumulated deficit
    
    
    (438,804
    )
    
    
    (437,896
    )Accumulated other comprehensive loss
    
    
    (850
    )
    
    
    (5,666
    )Total stockholders deficiency
    
    
    (51,459
    )
    
    
    (54,349
    )Total liabilities and stockholders deficiency
    
    $
    439,217
    
    
    $
    444,006
  Page 3




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LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Operations

(Unaudited)
  Three Months EndedMarch 31,2011
    
    
    2010Revenues:Hospitality and Advertising Services
    
    $
    105,835
    
    
    $
    115,499Healthcare
    
    
    1,894
    
    
    
    2,553Total revenues
    
    
    107,729
    
    
    
    118,052Direct costs and operating expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately below):Hospitality and Advertising Services
    
    
    59,361
    
    
    
    65,261Healthcare
    
    
    922
    
    
    
    1,346Operating expenses:System operations
    
    
    10,069
    
    
    
    10,515Selling, general and administrative
    
    
    9,689
    
    
    
    12,115Depreciation and amortization
    
    
    19,641
    
    
    
    22,173Restructuring charge
    
    
    1,160
    
    
    
    3Other operating (income) expense
    
    
    (14
    )
    
    
    5Total direct costs and operating expenses
    
    
    100,828
    
    
    
    111,418Income from operations
    
    
    6,901
    
    
    
    6,634Other income and (expenses):Interest expense
    
    
    (7,671
    )
    
    
    (8,682
    )Loss on early retirement of debt
    
    
    (158
    )
    
    
    (493
    )Other income
    
    
    317
    
    
    
    223Loss before income taxes
    
    
    (611
    )
    
    
    (2,318
    )Provision for income taxes
    
    
    (297
    )
    
    
    (184
    )Net loss
    
    
    (908
    )
    
    
    (2,502
    )Preferred stock dividends
    
    
    (1,438
    )
    
    
    (1,437
    )Net loss attributable to common stockholders
    
    $
    (2,346
    )
    
    $
    (3,939
    )Net loss per common share (basic and diluted)
    
    $
    (0.09
    )
    
    $
    (0.17
    )Weighted average shares outstanding (basic and diluted)
    
    
    25,037,122
    
    
    
    22,746,527
  Page 4




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LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows

(Unaudited)
  Three Months Ended March 31,2011
    
    
    2010Operating activities:Net loss
    
    $
    (908
    )
    
    $
    (2,502
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    19,641
    
    
    
    22,173Unrealized (gain) loss on derivative instruments
    
    
    (745
    )
    
    
    659Loss on early retirement of debt
    
    
    158
    
    
    
    493Share-based compensation and restricted stock
    
    
    414
    
    
    
    312Other, net
    
    
    122
    
    
    
    40Change in operating assets and liabilities:Accounts receivable, net
    
    
    (2,667
    )
    
    
    (1,350
    )Other current assets
    
    
    459
    
    
    
    170Accounts payable
    
    
    4,709
    
    
    
    10,222Accrued expenses and deferred revenue
    
    
    (2,127
    )
    
    
    (1,521
    )Other
    
    
    178
    
    
    
    (598
    )Net cash provided by operating activities
    
    
    19,234
    
    
    
    28,098Investing activities:Property and equipment additions
    
    
    (4,645
    )
    
    
    (4,525
    )Net cash used for investing activities
    
    
    (4,645
    )
    
    
    (4,525
    )Financing activities:Repayment of long-term debt
    
    
    (3,025
    )
    
    
    (45,274
    )Payment of capital lease obligations
    
    
    (214
    )
    
    
    (287
    )Borrowings on revolving credit facility
    
    
    25,000
    
    
    
    Repayments of revolving credit facility
    
    
    (25,000
    )
    
    
    Debt issuance costs
    
    
    (2,410
    )
    
    
    Proceeds from investment in long-term debt
    
    
    177
    
    
    
    2,643Proceeds
from issuance of common stock, net of offering costs
    
    
    
    
    
    
    13,692Payment of dividends to preferred shareholders
    
    
    (1,438
    )
    
    
    (1,437
    )Exercise of stock options
    
    
    5
    
    
    
    3Net cash used for financing activities
    
    
    (6,905
    )
    
    
    (30,660
    )Effect of exchange rates on cash
    
    
    9
    
    
    
    4Increase (decrease) in cash
    
    
    7,693
    
    
    
    (7,083
    )Cash at beginning of period
    
    
    8,381
    
    
    
    17,011Cash at end of period
    
    $
    16,074
    
    
    $
    9,928
  Page 5




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LodgeNet Interactive Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements (Unaudited)
 Note 1  Basis of Presentation
    Note 2  Property and Equipment, Net
  March 31,
    
    
    December 31,2011
    
    
    2010Land, building and equipment
    
    $
    112,373
    
    
    $
    115,031Hotel systems
    
    
    717,948
    
    
    
    726,638Total
    
    
    830,321
    
    
    
    841,669Less  depreciation and amortization
    
    
    (686,777
    )
    
    
    (684,752
    )Property and equipment, net
    
    $
    143,544
    
    
    $
    156,917
 Note 3  Goodwill and Other Intangible Assets
  Page 6




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AdvertisingHospitality
    
    
    Services
    
    
    TotalBalance as of December 31, 2010Goodwill
    
    $
    92,614
    
    
    $
    18,679
    
    
    $
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )92,614
    
    
    
    7,467
    
    
    
    100,081Activity during the period
    
    
    
    
    
    
    
    
    
    
    Balance as of March 31, 2011Goodwill
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )$
    92,614
    
    
    $
    7,467
    
    
    $
    100,081
  Page 7




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March 31, 2011
    
    
    December 31, 2010Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and relationships
    
    $
    120,315
    
    
    $
    (25,526
    )
    
    $
    120,315
    
    
    $
    (23,950
    )Other acquired intangibles
    
    
    13,972
    
    
    
    (12,929
    )
    
    
    13,956
    
    
    
    (12,769
    )Tradenames
    
    
    3,125
    
    
    
    (2,223
    )
    
    
    3,124
    
    
    
    (2,107
    )Acquired patents
    
    
    5,195
    
    
    
    (4,896
    )
    
    
    5,175
    
    
    
    (4,739
    )$
    142,607
    
    
    $
    (45,574
    )
    
    $
    142,570
    
    
    $
    (43,565
    )
  Note 4  Earnings Per Share Computation
  Page 8




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Three Months EndedMarch 31,2011
    
    
    2010Basic EPS:Net loss
    
    $
    (908
    )
    
    $
    (2,502
    )Preferred stock dividends
    
    
    (1,438
    )
    
    
    (1,437
    )$
    (2,346
    )
    
    $
    (3,939
    )Loss allocated to participating securities (1)
    
    
    
    
    
    
    Net loss available to common stockholders
    
    $
    (2,346
    )
    
    $
    (3,939
    )Weighted average shares outstanding for basic
earnings per common share
    
    
    25,037,122
    
    
    
    22,746,527Basic earnings per share
    
    $
    (0.09
    )
    
    $
    (0.17
    )Diluted EPS:Net loss
    
    $
    (908
    )
    
    $
    (2,502
    )Preferred stock dividends
    
    
    (1,438
    )
    
    
    (1,437
    )$
    (2,346
    )
    
    $
    (3,939
    )Loss allocated to participating securities (1)
    
    
    
    
    
    
    Net loss available to common stockholders
    
    $
    (2,346
    )
    
    $
    (3,939
    )Weighted average shares outstanding for basic
earnings per common share
    
    
    25,037,122
    
    
    
    22,746,527Dilutive effect of potential shares (2)
    
    
    N/A
    
    
    
    N/AWeighted average shares outstanding for
diluted
earnings per common share
    
    
    25,037,122
    
    
    
    22,746,527Diluted earnings per share
    
    $
    (0.09
    )
    
    $
    (0.17
    )Potential dilutive common shares (2)
    
    
    17,251,792
    
    
    
    17,208,201
 
 (1)
    
    For the three months ended March 31, 2011 and 2010, participating securities, which do not
participate in losses, were not included in the calculations of earnings per share, as we were
in a loss position and their inclusion would have been anti-dilutive.(2)
    
    For the three months ended March 31, 2011 and 2010, potential dilutive common shares, which
include stock options, unvested restricted stock, warrants and the conversion of preferred
stock, 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. Page 9




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Note 5  Accrued Expenses
  March 31,
    
    
    December 31,2011
    
    
    2010Property, sales and other taxes
    
    $
    6,410
    
    
    $
    6,411Compensation
    
    
    5,011
    
    
    
    4,639Interest
    
    
    655
    
    
    
    208Programming related
    
    
    1,467
    
    
    
    1,782Restructuring and reorganization
    
    
    519
    
    
    
    172Preferred stock dividends
    
    
    1,438
    
    
    
    1,438Purchase commitments
    
    
    1,763
    
    
    
    3,414Other
    
    
    2,410
    
    
    
    4,263$
    19,673
    
    
    $
    22,327Note 6  Long-term Debt and Credit FacilitiesLong-term debt was comprised as follows (dollar amounts in thousands):March 31,
    
    
    December 31,2011
    
    
    2010Bank Credit Facility:Term loan
    
    $
    369,662
    
    
    $
    372,511Revolving loan commitment
    
    
    
    
    
    
    Capital leases
    
    
    920
    
    
    
    1,128370,582
    
    
    
    373,639Less current maturities
    
    
    (10,612
    )
    
    
    (4,807
    )$
    359,970
    
    
    $
    368,832
 Bank Credit Facility
   Page 10




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Capital Leases
 Page 11




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2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015Long-term debt
    
    $
    7,500
    
    
    $
    10,000
    
    
    $
    15,000
    
    
    $
    337,162
    
    
    $
    Capital leases
    
    
    531
    
    
    
    348
    
    
    
    70
    
    
    
    30
    
    
    
    18,031
    
    
    
    10,348
    
    
    
    15,070
    
    
    
    337,192
    
    
    
    1Less amount representing
interest on capital leases
    
    
    (35
    )
    
    
    (19
    )
    
    
    (4
    )
    
    
    (2
    )
    
    
    $
    7,996
    
    
    $
    10,329
    
    
    $
    15,066
    
    
    $
    337,190
    
    
    $
    1
  Note 7   Comprehensive Income
  Three Months EndedMarch 31,2011
    
    
    2010Net loss
    
    $
    (908
    )
    
    $
    (2,502
    )Other comprehensive income:Foreign currency translation adjustment
    
    
    454
    
    
    
    595Changes due to cash flow hedging:Amortization of unrealized loss on
interest rate swaps
    
    
    448
    
    
    
    Change in fair value on interest rate swaps
    
    
    3,914
    
    
    
    3,097Other comprehensive income
    
    
    4,816
    
    
    
    3,692Total comprehensive income
    
    $
    3,908
    
    
    $
    1,190
  March 31,
    
    
    December 31,2011
    
    
    2010Unrealized loss on interest rate swap agreements
    
    $
    (4,480
    )
    
    $
    (8,842
    )Foreign currency translation adjustment
    
    
    3,630
    
    
    
    3,176Accumulated other comprehensive loss
    
    $
    (850
    )
    
    $
    (5,666
    )
 Note 8  Statements of Cash Flows
  Page 12




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Note 9  Share-Based Compensation
   Three Months EndedMarch 31,2011
    
    
    2010Compensation cost:Stock options
    
    $
    314
    
    
    $
    312Restricted stock
    
    
    100
    
    
    
    Total share-based compensation expense
    
    $
    414
    
    
    $
    312
  Stock Options
  Restricted Stock
  Note 10  Restructuring
  Page 13




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Cost of closingSeverance and
    
    
    redundantother benefit
    
    
    acquiredrelated costs
    
    
    facilities
    
    
    TotalDecember 31, 2010 balance
    
    $
    35
    
    
    $
    137
    
    
    $
    172Charges to expense
    
    
    1,094
    
    
    
    66
    
    
    
    1,160Cash payments
    
    
    (699
    )
    
    
    (114
    )
    
    
    (813
    )March 31, 2011 balance
    
    $
    430
    
    
    $
    89
    
    
    $
    519
 Note 11  Fair Value Measurements
     Financial Assets and Financial Liabilities 
 March 31, 2011
    
    December 31, 2010Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueInterest rate swaps -
liability position
    
    $
    5,246
    
    
    $
    5,246
    
    
    $
    10,353
    
    
    $
    10,353Long-term debt
    
    $
    370,582
    
    
    $
    355,796
    
    
    $
    373,639
    
    
    $
    349,426
   Page 14




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Quoted Prices
    
    Significantin Active
    
    Other
    
    SignificantTotal
    
    Markets for
    
    Observable
    
    UnobservableFair Value
    
    Identical Asset
    
    Inputs
    
    InputsMeasurement
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Year Ended December 31, 2010:Interest rate swaps  liability position
    
    $
    10,353
    
    
    $
    
    
    
    $
    10,353
    
    
    $
    Three Months Ended March 31, 2011:Interest rate swaps  liability position
    
    $
    5,246
    
    
    $
    
    
    
    $
    5,246
    
    
    $
    
  Nonfinancial Assets and Nonfinancial Liabilities 
 Note 12  Segment Information
    Page 15




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Three Months EndedMarch 31,2011
    
    
    2010Total revenues:Hospitality
    
    $
    103,301
    
    
    $
    113,159Advertising Services
    
    
    2,534
    
    
    
    2,340Healthcare
    
    
    1,894
    
    
    
    2,553Total
    
    $
    107,729
    
    
    $
    118,052Operating profit:Hospitality
    
    $
    31,139
    
    
    $
    34,494Advertising Services
    
    
    540
    
    
    
    (222
    )Healthcare
    
    
    443
    
    
    
    345Operating profit
    
    
    32,122
    
    
    
    34,617Corporate
    
    
    (4,434
    )
    
    
    (5,802
    )Depreciation and amortization
    
    
    (19,641
    )
    
    
    (22,173
    )Restructuring charge
    
    
    (1,160
    )
    
    
    (3
    )Other operating income (expense)
    
    
    14
    
    
    
    (5
    )Interest expense
    
    
    (7,671
    )
    
    
    (8,682
    )Loss on early retirement of debt
    
    
    (158
    )
    
    
    (493
    )Other income
    
    
    317
    
    
    
    223Loss before income taxes
    
    $
    (611
    )
    
    $
    (2,318
    )
 Note 13  Derivative Information
    Page 16




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Contractual/
    
    
    
    Estimated FairNotional
    
    Balance Sheet
    
    ValueAmount
    
    Location
    
    Asset
    
    (Liability)Year ended December 31, 2010:Interest rate swaps
    
    $
    437,500
    
    
    Current liabilities
    
    $
    
    
    
    $
    (10,353
    )Three months ended March 31, 2011:Interest rate swaps
    
    $
    437,500
    
    
    Current liabilities
    
    $
    
    
    
    $
    (5,246
    )
   Effective PortionIncome StatementLocation ofAmount of
    
    Swap Interest
    
    Swap InterestGain (Loss)
    
    Reclassified From
    
    Reclassified FromRecognized
    
    Accumulated
    
    Accumulated
    
    Ineffective Portionin Other
    
    Other
    
    Other
    
    IncomeType of Cash
    
    Comprehensive
    
    Comprehensive
    
    Comprehensive
    
    Statement
    
    AmountFlow Hedge
    
    Income
    
    Income
    
    Income
    
    Location
    
    RecognizedThree Months Ended March 31, 2010:Interest rate swaps
    
    $
    (2,815
    )
    
    Interest expense
    
    $
    5,253
    
    
    Interest expense
    
    $
    659Three Months Ended March 31, 2011:Interest rate swaps
    
    $
    (89
    )
    
    Interest expense
    
    $
    4,672
    
    
    Interest expense
    
    $
    (745
    )
 Note 14  Perpetual Preferred Stock
   Page 17




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Note 15  Common Stock Offering
  Note 16  Legal Proceedings
   Note 17  Effect of Recently Issued Accounting Standards
   Page 18




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Page 19




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Item 2  Managements 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 documents 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, are
intended to identify such forward-looking statements. Such forward-looking statements are subject
to risks, uncertainties and other factors which 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 elsewhere in this Report and in Item 1A of our most recent Annual Report on
Form 10-K for the year ended December 31, 2010 and filed on March 14, 2011, in any prospectus
supplement or any report or document incorporated herein by reference, such factors include, among
others, the following:
 Ø
    
    the effects of general economic and financial conditions;Ø
    
    the economic condition of the hospitality industry, which can be particularly affected
by general economic and financial conditions, as well as by factors such as high gas
prices, levels of unemployment, consumer confidence, acts or threats of terrorism and
public health issues;Ø
    
    decreases in hotel occupancy, whether related to economic conditions or other causes;Ø
    
    competition from providers of similar services and from alternative sources;Ø
    
    changes in demand for our products and services;Ø
    
    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 impact of covenants contained in our credit agreement, compliance with which could
adversely affect capital available to finance growth, and the violation of which would
constitute an event of default;Ø
    
    changes to government laws and regulations and industry compliance standards;Ø
    
    potential effects of litigation;Ø
    
    risks of expansion into new markets and territories;Ø
    
    risks related to the security of our data systems; andØ
    
    other factors detailed, from time to time, in our filings with the Securities and Exchange Commission.
 These forward-looking statements speak only as of the date of this report. We expressly disclaim
any obligation or undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is based.
 Executive Overview
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Hospitality and Advertising Services Businesses
  Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and
music videos and television on-demand programming).
  
    
    The number of rooms on our network.We can increase revenue over time by increasing the
number of rooms served by our interactive television systems. Our ability to expand our room
base is dependent on a number of factors, including newly constructed hotel properties and the
attractiveness of our technology, service and support to hotels currently operating without an
interactive television system.
    
    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 for the properties we serve 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.
    
    The buy rate of hotel guests.This is impacted by a number of issues, some of which are
not under our control. Specific issues impacting buy rate include:
 
    
    The number of rooms equipped with our high-definition (HD) systems.We can increase
revenue by increasing the number of HD rooms served. Our ability to expand our HD room
base is dependent on a number of factors, including availability of capital resources from
the hotels and us to invest in HD televisions and equipment. We are focused on
accelerating the installation of our HD systems as hotels increase their purchase of HD
televisions, since the revenue generated from the digital quality experience within our
installed HD rooms is more than 60% higher than our analog rooms.
    
    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, and whether the content is presented in digital or analog format.
Historically, a decrease in the availability of popular movie content has adversely
impacted revenue, and the availability of high definition content has increased 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 profitability.
    
    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 profitability. We establish pricing based on such things as the demographics
of the property served, the popularity of the content and overall general economic
conditions. Our technology enables us to measure the popularity of our content and make
decisions to best position such content and optimize revenue from such content.
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##### Table of Contents




    
    The availability of alternative programming. We compete directly for customers with a
variety of other interactive service providers, including other interactive television
service providers, cable television companies, direct broadcast satellite companies,
television networks and programmers, Internet service providers and portals, technology
consulting and service firms, companies offering web sites which provide on-demand movies,
movie downloads, rental companies providing DVDs which can be viewed in properly equipped
hotel rooms or on other portable viewing devices and hotels which offer in-room laptops with
Internet access or other types of Internet access systems. We also compete, in varying
degrees, with other leisure-time activities, such as movie theaters, the Internet, radio,
print media, personal computers and other alternative sources of entertainment and
information.
    
    Consumer sentiment.The willingness of guests to purchase our entertainment services is
also impacted by the general economic environment and its impact on consumer sentiment.
Historically, such impacts were not generally material to our revenue results; however,
since the last half of 2008, economic conditions have had a significant, negative impact on
our revenue levels. As economic conditions improve in the future, guest purchase activity
may or may not increase to the same levels previously experienced by the Company.
  
    
    license fees paid to major motion picture studios, which are variable and based on a
percent of guest-generated revenue, for non-exclusive distribution rights of recently released
major motion pictures;
    
    commissions paid to our hotel customers, which are also variable and based on a percent of
guest-generated revenue;
    
    license fees, which are based on a percent of guest-generated revenue, for television
on-demand, music, music videos, video games and sports programming; and
    
    fixed monthly Internet connectivity costs.
 Hotel Services (includes revenue from hotels for services such as television channels and recurring
broadband Internet service and support to the hotels).
 
    
    Cable Television Programming.We offer a wide variety of satellite-delivered cable
television programming paid for by the hotel and provided to guests at no charge. The cable
television programming is delivered via satellite, pursuant to an agreement with DIRECTV®, and
is distributed over the internal hotel network, and typically includes premium channels such
as HBO and Showtime, which broadcast major motion pictures and specialty programming, as well
as non-premium channels, such as CNN and ESPN. With the launch of the high-definition
configuration of our interactive television system, we also began offering high-definition
cable television programming to the extent available from broadcast sources and DIRECTV.
    
    Broadband Internet Service and Support.We also design, install and operate wired and
wireless broadband Internet systems at hotel properties. These systems control access to the
Internet, provide bandwidth management tools and allow hotels to charge guests or provide the
access as a guest amenity. Post-installation, we generate recurring revenue through the
ongoing maintenance, service and call center support services to hotel properties installed by
us and also to hotel properties installed by other providers, or through a revenue-share model
in which hotel guests pay for broadband Internet and we pay a commission to our hotel
customers. While this is a highly competitive area, we believe we have important advantages
as a result of our proactive monitoring interface with hotel systems to improve up time,
existing hotel customer relationships and our nationwide field service network.
 System Sales and Related Services.
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Advertising Services
 Key Metrics:
 Rooms Served
  March 31,2011
    
    2010Total rooms served (1)
    
    
    1,797,336
    
    
    
    1,911,842Total Guest Entertainment rooms (2)
    
    
    1,649,296
    
    
    
    1,764,363Total HD rooms (3)
    
    
    273,309
    
    
    
    239,984Percent of Total Guest Entertainment rooms
    
    
    16.6
    %
    
    
    13.6
    %Total Cable Television Programming (FTG) rooms (4)
    
    
    1,013,551
    
    
    
    1,083,837Percent of Total Guest Entertainment rooms
    
    
    61.5
    %
    
    
    61.4
    %Total Broadband Internet rooms (5)
    
    
    171,713
    
    
    
    200,139Percent of Total rooms served
    
    
    9.6
    %
    
    
    10.5
    %
 
 (1)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees.(2)
    
    Guest Entertainment rooms, of which 88.2% are digital, receive one or more Guest
Entertainment services, such as movies, video games, music or other interactive and
advertising services.(3)
    
    HD rooms are equipped with high-definition capabilities.(4)
    
    Cable television programming (FTG) rooms receive basic or premium cable television
programming.(5)
    
    Represents rooms receiving high-speed Internet service. Page 24




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High Definition Room Growth
  March 31,2011
    
    2010Net new HDTV rooms for the three months ended
    
    
    2,859
    
    
    
    8,396
  Capital Investment Per Installed Room
  Three Months Ended
    
    Years EndedMarch 31,
    
    March 31,
    
    December 31,
    
    December 31,2011
    
    2010
    
    2010
    
    2009Average cost per HD room  new
installation
    
    $
    192
    
    
    $
    271
    
    
    $
    200
    
    
    $
    339Average cost per HD room  conversion
    
    $
    177
    
    
    $
    204
    
    
    $
    167
    
    
    $
    241
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Average Revenue Per Room
  Three Months EndedMarch 31,2011
    
    
    2010Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    11.79
    
    
    $
    12.99Non-Guest EntertainmentHotel Services
    
    
    6.93
    
    
    
    6.48System Sales and Related Services
    
    
    1.94
    
    
    
    1.80Advertising Services
    
    
    0.51
    
    
    
    0.449.38
    
    
    
    8.72Total Hospitality and Advertising Services revenue per room
    
    $
    21.17
    
    
    $
    21.71
  Average Direct Costs Per Room
  Three Months EndedMarch 31,2011
    
    
    2010Average monthly direct costs per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    4.59
    
    
    $
    5.20Hotel Services
    
    
    5.76
    
    
    
    5.59System Sales and Related Services
    
    
    1.26
    
    
    
    1.21Advertising Services
    
    
    0.26
    
    
    
    0.27Total
Hospitality and Advertising Services direct costs per room
    
    $
    11.87
    
    
    $
    12.27
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##### Table of Contents



Healthcare Business
  
    
    revenue generated from the sale of the interactive system hardware, software license and
installation services;
    
    revenue from the sale and installation of DIRECTV satellite equipment and related
programming;
    
    revenue from recurring support agreements for interactive content, software maintenance and
technical field service support, including service agreements covering cable plant, DIRECTV
satellite equipment and interactive systems; and
    
    revenue generated from cable plant design, modification and installation, as well as
television installation services.
  2011
    
    2010
    
    Change
    
    % ChangeSystems installed
    
    
    58
    
    
    
    50
    
    
    
    8
    
    
    
    16.0
    %Beds installed
    
    
    12,659
    
    
    
    10,327
    
    
    
    2,332
    
    
    
    22.6
    %
 General Operations
 Total Operating Expenses
  Three Months EndedMarch 31,2011
    
    
    2010Systems operations expenses
    
    $
    2.01
    
    
    $
    1.98SG&A expenses
    
    
    1.94
    
    
    
    2.28Depreciation and amortization (D&A)
    
    
    3.93
    
    
    
    4.17Restructuring charge
    
    
    0.24
    
    
    
    $
    8.12
    
    
    $
    8.43Systems operations as a percent of total revenue
    
    
    9.3
    %
    
    
    8.9
    %SG&A as a percent of total revenue
    
    
    9.0
    %
    
    
    10.3
    %D&A as a percent of total revenue
    
    
    18.2
    %
    
    
    18.8
    %Total operating expenses as a percent of total revenue
    
    
    37.6
    %
    
    
    38.0
    %
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Special Note Regarding the Use of Non-GAAP Financial Information
   Free Cash Flow
   Three Months EndedMarch 31,2011
    
    
    2010Cash provided by operating activities
    
    $
    19,234
    
    
    $
    28,098Property and equipment additions
    
    
    (4,645
    )
    
    
    (4,525
    )$
    14,589
    
    
    $
    23,573
 Liquidity and Capital Resources
   Page 28




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2011
    
    2010Actual consolidated leverage ratio (1) (3)
    
    
    3.46
    
    
    
    3.59Maximum per covenant
    
    
    4.00
    
    
    
    3.75Actual consolidated interest coverage ratio (2) (3)
    
    
    2.76
    
    
    
    3.22Minimum per covenant
    
    
    2.25
    
    
    
    3.00
 
 (1)
    
    Our maximum consolidated leverage ratio is the total amount of all indebtedness of the
Company, determined on a consolidated basis in accordance with GAAP, divided by operating
income exclusive of depreciation and amortization and adjusted (plus or minus) for certain
other miscellaneous cash items, non-cash items and non-recurring items, as defined by the
terms of the bank Credit Facility and the Amendment.(2)
    
    Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous
cash items, non-cash items and non-recurring items divided by interest expense and preferred
dividends, as defined by the terms of the bank Credit Facility and the Amendment.(3)
    
    Maximum consolidated leverage ratio and minimum consolidated interest coverage ratios are
defined terms of the bank Credit Facility and the Amendment, and are presented here to
demonstrate compliance with the covenants in the Amendment, as noncompliance with such
covenants could have a material adverse effect on us.  Q3 2013Q4 2012
    
    to maturityMaximum consolidated leverage ratio
    
    
    3.75
    
    
    
    3.50Minimum consolidated interest coverage ratio
    
    
    2.25
    
    
    
    2.25
    Page 30




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Payments due by periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    370,582
    
    
    $
    10,612
    
    
    $
    22,791
    
    
    $
    337,179
    
    
    $
    Interest on bank term loan (1)
    
    
    74,955
    
    
    
    25,626
    
    
    
    49,069
    
    
    
    260
    
    
    
    Interest on derivative instruments (net)
    
    
    5,249
    
    
    
    5,249
    
    
    
    
    
    
    
    
    
    
    
    Operating lease payments
    
    
    3,010
    
    
    
    1,161
    
    
    
    1,339
    
    
    
    435
    
    
    
    75Purchase obligations (2)
    
    
    11,135
    
    
    
    5,662
    
    
    
    3,573
    
    
    
    1,820
    
    
    
    80Minimum royalties and commissions (3)
    
    
    1,202
    
    
    
    998
    
    
    
    204
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    466,133
    
    
    $
    49,308
    
    
    $
    76,976
    
    
    $
    339,694
    
    
    $
    155Amount of commitment expiration per periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    395
    
    
    $
    395
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled debt amortization.(2)
    
    Consists of open purchase orders and commitments.(3)
    
    In connection with our programming-related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. Page 31




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Seasonality
  Page 32




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Discussion and Analysis of Results of Operations
Three Months Ended March 31, 2011 and 2010
 Revenue Analysis.
 2011
    
    
    2010Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    58,922
    
    
    
    54.6
    %
    
    $
    69,082
    
    
    
    58.5
    %Hotel Services
    
    
    34,679
    
    
    
    32.2
    %
    
    
    34,486
    
    
    
    29.2
    %System Sales and Related Services
    
    
    9,700
    
    
    
    9.0
    %
    
    
    9,591
    
    
    
    8.1
    %Advertising Services
    
    
    2,534
    
    
    
    2.4
    %
    
    
    2,340
    
    
    
    2.0
    %Total Hospitality and Advertising Services
    
    
    105,835
    
    
    
    98.2
    %
    
    
    115,499
    
    
    
    97.8
    %Healthcare
    
    
    1,894
    
    
    
    1.8
    %
    
    
    2,553
    
    
    
    2.2
    %$
    107,729
    
    
    
    100.0
    %
    
    $
    118,052
    
    
    
    100.0
    %
  2011
    
    
    2010Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    11.79
    
    
    $
    12.99Hotel Services
    
    
    6.93
    
    
    
    6.48System Sales and Related Services
    
    
    1.94
    
    
    
    1.80Advertising Services
    
    
    0.51
    
    
    
    0.44Total Hospitality and Advertising Services revenue per room
    
    $
    21.17
    
    
    $
    21.71
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Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 Page 34




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Operating Expenses.
 2011
    
    
    2010Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    10,069
    
    
    
    9.3
    %
    
    $
    10,515
    
    
    
    8.9
    %Selling, general and administrative
    
    
    9,689
    
    
    
    9.0
    %
    
    
    12,115
    
    
    
    10.3
    %Depreciation and amortization
    
    
    19,641
    
    
    
    18.2
    %
    
    
    22,173
    
    
    
    18.8
    %Restructuring charge
    
    
    1,160
    
    
    
    1.1
    %
    
    
    3
    
    
    
    0.0
    %Other operating (income) expense
    
    
    (14
    )
    
    
    0.0
    %
    
    
    5
    
    
    
    0.0
    %Total operating expenses
    
    $
    40,545
    
    
    
    37.6
    %
    
    $
    44,811
    
    
    
    38.0
    %
     Operating Income.
 Page 35




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Interest Expense.
 Loss on Early Retirement of Debt .
 Taxes.
 Net Loss.
 Page 36




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Critical Accounting Policies
  Revenue Recognition 
 
    
    Guest Entertainment 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 videos, Internet on television and television on-demand. We
recognize revenue from the sale of these guest entertainment 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.
    
    Cable Television Programming Services.We generate revenue from the sale of basic and
premium cable television programming to individual hotels. In contrast to Guest Entertainment
services, where the hotel guest is charged directly for the service, we charge the hotel for
our cable television programming services. We recognize revenue from the sale of cable
television programming 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 which 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 basic and premium programming
services where the revenue is deferred and recognized in the periods which services are
provided.
    
    Broadband Service and Support.We provide ongoing maintenance, service and call center
support services to hotel properties installed by us and also to hotel properties 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 standalone 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.
    
    Broadband System Sales.We provide broadband 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 standalone 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
standalone basis.
 Page 37




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##### Table of Contents




    
    Hotel System Sales and Support.We also market and sell our guest entertainment
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.
    
    Other Cable Television Programming Systems and Equipment Sales and Services.We generate
revenues from the sale and installation of cable television programming systems (i.e. DIRECTV
satellite systems); from the installation of master antenna (MATV) equipment, including
wiring, at the hotel; and from the sale of miscellaneous system equipment or services, such as
in-room terminals, television remotes or other media devices, along with service parts and
labor. Prices for the equipment or services are fixed and determinable prior to delivery.
The equipment is not proprietary and can be supplied by other vendors. 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 which has been provided.
    
    Advertising and Media Services.We generate revenue from the sale of advertising-based
media services within our hospitality media and connectivity businesses through our
wholly-owned subsidiary, The Hotel Networks, and server-based channels within our interactive
room base. Advertising-based media services include traditional television advertising,
video-on-demand or interactive advertising, programming carriage services and channel access
services. The Hotel Networks delivers targeted advertising to hotel rooms on, or sells
programming providers access to, 10 satellite-delivered channels, known as the SuperBlock,
which include MSNBC, CNBC, FOX News and The Weather Channel. In addition to the satellite
platform, we generate revenue from server-based channels and other interactive and
location-based applications which can be delivered by our interactive television platform.
Advertising revenue is recognized, net of agency commissions, when advertisements are
broadcast or ratably over a contracted advertising period and when collection is reasonably
assured. We establish the prices charged to each advertiser and no future performance
obligations exist on advertising which has been broadcast. Persuasive evidence of an
arrangement exists through our contracts with each advertiser.
    
    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. The package price of
the interactive system and related maintenance is fixed and determinable prior to delivery.
The entire selling price of the interactive system is recognized upon installation, and is
calculated using the estimated selling price on a standalone basis. The support arrangement,
which includes interactive content, software maintenance and system services, is renewable
upon completion of the initial year 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. We attained 100% renewal activity for maintenance services, therefore
establishing VSOE of the fair value of maintenance services.
 Page 38




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##### Table of Contents



Allowance for Doubtful Accounts.
 Allowance for Excess or Obsolete System Components.
 Long-Lived Assets.
 Property and Equipment.
 YearsBuildings
    
    
    30Hotel systems
    
    
    1
1/2  7Other equipment
    
    
    3  10
 Intangible Assets.
 YearsHotel contracts and relationships
    
    
    10  20Tradenames
    
    
    7Acquired technologies, rights and patents
    
    
    2  10Content agreements and relationships
    
    
    4
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Allowance for System Removal.
 Goodwill Impairment.
     Recent Accounting Developments
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Item 3  Quantitative and Qualitative Disclosures About Market Risk
   Carrying
    
    
    FairAmount
    
    
    ValueBank Credit Facility:Term loan
    
    $
    369,662
    
    
    $
    354,876Capital leases
    
    
    920
    
    
    
    920$
    370,582
    
    
    $
    355,796
   Economic Condition and Consumer Confidence.
 
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
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Changes in Internal Control over Financial Reporting
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Part II  Other Information
 
 Item 1  Legal Proceedings
   
 Item 1ARisk Factors
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  
 Item 5  Other Information
  
 Item 6  Exhibits
 31.1
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer31.2
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer32
    
    Section 1350 Certifications
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Signatures
  LodgeNet Interactive Corporation

(Registrant)Date: May 6, 2011
    
    / s / Scott C. Petersen

Scott C. PetersenPresident, Chief Executive Officer andChairman of the Board of Directors(Principal Executive Officer)Date: May 6, 2011
    
    / s / Frank P. Elsenbast

Frank P. ElsenbastSenior Vice President, Chief Financial Officer(Principal Financial & Accounting Officer)
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