##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q [X]
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
 For the quarterly period ended June 30, 2004 or [  ]
    
    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 Entertainment 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 
 
    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ]. Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [  ]. At August 2, 2004, there were 17,195,426 shares outstanding of the
Registrants common stock, $0.01 par value.




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LodgeNet Entertainment Corporation
    
    Form 10-Q
  
 LodgeNet Entertainment Corporation and Subsidiaries Index PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets (Unaudited) as of June 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations (Unaudited) for
the Three Months and Six Months Ended June 30, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended June 30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    11Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4  Controls and Procedures
    
    
    25Part II. Other InformationItem 1  Legal Proceedings
    
    
    26Item 2  Changes in Securities and Use of Proceeds
    
    
    26Item 3  Defaults Upon Senior Securities
    
    
    26Item 4  Submission of Matters to a Vote of Security Holders
    
    
    26Item 5  Other Information
    
    
    27Item 6  Exhibits and Reports on Form 8-K
    
    
    27Signatures
    
    
    28Rule 13a-14(a) CertificationsSection 1350 Certifications
     June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Part I  Financial Information 
 Item 1  Financial Statements LodgeNet Entertainment Corporation and Subsidiaries 
 Consolidated Balance Sheets (Unaudited)
  June 30,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,901
    
    
    $
    2,772Accounts receivable, net
    
    
    29,932
    
    
    
    28,150Prepaid expenses and other
    
    
    1,964
    
    
    
    3,233Total current assets
    
    
    34,797
    
    
    
    34,155Property and equipment, net
    
    
    217,962
    
    
    
    227,037Debt issuance costs, net
    
    
    10,972
    
    
    
    11,036Intangible assets, net
    
    
    6,446
    
    
    
    8,270Other assets
    
    
    2,689
    
    
    
    2,770$
    272,866
    
    
    $
    283,268Liabilities and Stockholders Equity (Deficiency)Current liabilities:Accounts payable
    
    $
    17,670
    
    
    $
    15,012Current maturities of long-term debt
    
    
    8,571
    
    
    
    8,638Accrued expenses
    
    
    12,083
    
    
    
    12,697Deferred revenue
    
    
    4,225
    
    
    
    3,918Total current liabilities
    
    
    42,549
    
    
    
    40,265Long-term debt
    
    
    351,585
    
    
    
    359,610Other long-term liability
    
    
    3,999
    
    
    
    3,999Derivative instruments
    
    
    8,049
    
    
    
    8,396Total liabilities
    
    
    406,182
    
    
    
    412,270Commitments and contingenciesStockholders equity (deficiency):Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued or outstandingCommon stock, $.01 par value, 50,000,000 shares authorized;
13,245,226 and 12,722,267 shares outstanding at June 30,
2004 and December 31, 2003, respectively
    
    
    132
    
    
    
    127Additional paid-in capital
    
    
    159,602
    
    
    
    155,163Accumulated deficit
    
    
    (287,789
    )
    
    
    (276,567
    )Accumulated other comprehensive loss
    
    
    (5,261
    )
    
    
    (7,725
    )Total stockholders equity (deficiency)
    
    
    (133,316
    )
    
    
    (129,002
    )$
    272,866
    
    
    $
    283,268
 The accompanying notes are an integral part of these consolidated financial statements. June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiaries 
 Consolidated Statements of Operations (Unaudited)
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenues:Guest Pay
    
    $
    64,218
    
    
    $
    60,950
    
    
    $
    126,541
    
    
    $
    118,817Other
    
    
    2,063
    
    
    
    1,454
    
    
    
    3,571
    
    
    
    3,233Total revenues
    
    
    66,281
    
    
    
    62,404
    
    
    
    130,112
    
    
    
    122,050Direct costs:Guest Pay
    
    
    28,344
    
    
    
    27,302
    
    
    
    55,851
    
    
    
    53,046Other
    
    
    720
    
    
    
    629
    
    
    
    1,462
    
    
    
    1,481Total direct costs (exclusive
of other operating expenses
shown separately below)
    
    
    29,064
    
    
    
    27,931
    
    
    
    57,313
    
    
    
    54,527Gross profit (exclusive of other
operating expenses shown separately
below)
    
    
    37,217
    
    
    
    34,473
    
    
    
    72,799
    
    
    
    67,523Operating expenses:Guest Pay operations
    
    
    8,339
    
    
    
    7,803
    
    
    
    16,477
    
    
    
    15,426Selling, general and administrative
    
    
    6,179
    
    
    
    4,881
    
    
    
    11,884
    
    
    
    10,296Depreciation and amortization
    
    
    19,462
    
    
    
    19,733
    
    
    
    39,130
    
    
    
    39,710Total operating expenses
    
    
    33,980
    
    
    
    32,417
    
    
    
    67,491
    
    
    
    65,432Operating income
    
    
    3,237
    
    
    
    2,056
    
    
    
    5,308
    
    
    
    2,091Loss on early retirement of debt
    
    
    
    
    
    
    (7,061
    )
    
    
    
    
    
    
    (7,061
    )Interest expense
    
    
    (8,148
    )
    
    
    (8,627
    )
    
    
    (16,371
    )
    
    
    (17,016
    )Other income (expense), net
    
    
    45
    
    
    
    492
    
    
    
    98
    
    
    
    556Loss before income taxes
    
    
    (4,866
    )
    
    
    (13,140
    )
    
    
    (10,965
    )
    
    
    (21,430
    )Provision for income taxes
    
    
    (140
    )
    
    
    (116
    )
    
    
    (257
    )
    
    
    (245
    )Net loss
    
    $
    (5,006
    )
    
    $
    (13,256
    )
    
    $
    (11,222
    )
    
    $
    (21,675
    )Net loss per common share (basic and
diluted)
    
    $
    (0.38
    )
    
    $
    (1.07
    )
    
    $
    (0.86
    )
    
    $
    (1.74
    )Weighted average shares outstanding
    
    
    13,208,314
    
    
    
    12,431,214
    
    
    
    13,094,147
    
    
    
    12,431,182
 The accompanying notes are an integral part of these consolidated financial statements. June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiaries 
 Consolidated Statements of Cash Flows (Unaudited)
  Six Months Ended June 30,2004
    
    2003Operating activities:Net loss
    
    $
    (11,222
    )
    
    $
    (21,675
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    39,130
    
    
    
    39,710Loss on early retirement of debt, less cash portion
    
    
    
    
    
    
    2,477Change in operating assets and liabilities:Accounts receivable
    
    
    (1,833
    )
    
    
    (665
    )Prepaid expenses and other
    
    
    149
    
    
    
    416Accounts payable
    
    
    2,675
    
    
    
    6,699Accrued expenses and deferred revenue
    
    
    (784
    )
    
    
    (1,378
    )Other
    
    
    56
    
    
    
    177Net cash provided by operating activities
    
    
    28,171
    
    
    
    25,761Investing activities:Property and equipment additions
    
    
    (26,654
    )
    
    
    (28,056
    )Note receivable repayments (advances)
    
    
    567
    
    
    
    (1,000
    )Proceeds from affiliates, net
    
    
    
    
    
    
    7Net cash used for investing activities
    
    
    (26,087
    )
    
    
    (29,049
    )Financing activities:Proceeds from long-term debt
    
    
    
    
    
    
    200,000Repayment of long-term debt
    
    
    (750
    )
    
    
    (119,521
    )Payment of capital lease obligations
    
    
    (572
    )
    
    
    (487
    )Borrowings under revolving credit facility
    
    
    10,000
    
    
    
    9,000Repayments of revolving credit facility
    
    
    (17,000
    )
    
    
    (43,000
    )Restricted cash
    
    
    
    
    
    
    (32,653
    )Debt issuance costs
    
    
    (838
    )
    
    
    (7,740
    )Proceeds from sale of interest rate swap
    
    
    3,052
    
    
    
    Exercise of stock options
    
    
    4,185
    
    
    
    2Net cash (used for) provided by financing activities
    
    
    (1,923
    )
    
    
    5,601Effect of exchange rates on cash
    
    
    (32
    )
    
    
    262Increase in cash and cash equivalents
    
    
    129
    
    
    
    2,575Cash and cash equivalents at beginning of period
    
    
    2,772
    
    
    
    1,107Cash and cash equivalents at end of period
    
    $
    2,901
    
    
    $
    3,682
 The accompanying notes are an integral part of these consolidated financial statements. June 30, 2004
    
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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 June 30, 2004, and for
the three and six month periods ended June 30, 2004 and 2003, have been
prepared by LodgeNet Entertainment Corporation (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the Commission). The information furnished in the accompanying consolidated
financial statements reflects all adjustments, consisting of normal recurring
adjustments, which, in the opinion of management, are necessary for a fair
presentation of such financial statements. Certain information and footnote disclosures, normally included in 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 the Company believes that the
disclosures are adequate to make the information presented herein not
misleading, it is recommended that these unaudited consolidated financial
statements be read in conjunction with the more detailed information contained
in the Companys Annual Report on Form 10-K for 2003, as filed with the
Commission. The results of operations for the three and six month periods ended
June 30, 2004 and 2003 are not necessarily indicative of the results of
operations for the full year due to inherent seasonality within the business,
among other factors. The consolidated financial statements include the accounts of LodgeNet
Entertainment Corporation and its wholly-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation. Note 2  Property and Equipment, Net Property and equipment was comprised as follows (in thousands): June 30,
    
    December 31,2004
    
    2003Land, building and equipment
    
    $
    79,796
    
    
    $
    76,519Free-to-guest equipment
    
    
    31,946
    
    
    
    30,990Guest Pay systems:Installed system costs
    
    
    432,372
    
    
    
    428,757Customer acquisition costs
    
    
    48,628
    
    
    
    47,095System components
    
    
    28,271
    
    
    
    27,674Software costs
    
    
    19,728
    
    
    
    19,217Total
    
    
    640,741
    
    
    
    630,252Less  depreciation and amortization
    
    
    (422,779
    )
    
    
    (403,215
    )Property and equipment, net
    
    $
    217,962
    
    
    $
    227,037
 Note 3  Loss Per Share Computation The Company follows SFAS No. 128, Earnings Per Share, 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. June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 The loss per common share for the three months ended June 30, 2004 and 2003,
and the six months ended June 30, 2004 and 2003 is based on 13,208,314 and
12,431,214, 13,094,147 and 12,431,182 weighted average shares outstanding
during the respective periods. Potential common shares were not included in the
computation of diluted earnings per share because their inclusion would be
anti-dilutive. As of June 30, 2004 and 2003, the number of potential common
shares was approximately 4,520,000 and 5,023,000, respectively. Such potential
dilutive common shares consist of stock options, restricted stock, and
warrants. Note 4  Stock-Based Compensation The Company measures compensation costs associated with its stock option plans
using the intrinsic value method. Accordingly, compensation costs for stock
options are measured as the excess, if any, of the quoted market price of the
Companys stock at the date of grant over the amount an employee must pay to
acquire the stock. Had compensation costs been determined based on the fair
value methodology at the date of grant for awards, net loss and loss per share
would have changed to the pro forma amounts as follows for the periods ended
June 30 (in thousands of dollars, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (5,006
    )
    
    $
    (13,256
    )
    
    $
    (11,222
    )
    
    $
    (21,675
    )Add: stock based employee
compensation expense determined
under fair value method, net of
related tax effects
    
    
    (1,485
    )
    
    
    (871
    )
    
    
    (1,688
    )
    
    
    (950
    )Less: stock based employee
compensation expense included in
reported net loss
    
    
    (30
    )
    
    
    
    
    
    
    (88
    )
    
    
    Net loss, pro forma
    
    $
    (6,461
    )
    
    $
    (14,127
    )
    
    $
    (12,822
    )
    
    $
    (22,625
    )Loss per share (basic and diluted)As reported
    
    $
    (0.38
    )
    
    $
    (1.07
    )
    
    $
    (0.86
    )
    
    $
    (1.74
    )Pro forma
    
    
    (0.49
    )
    
    
    (1.14
    )
    
    
    (0.98
    )
    
    
    (1.82
    )
 In January 2004, the Company awarded 22,500 shares of restricted stock to
executive officers of the Company. The shares vest over four years from the
date of grant with 50% vested at the end of year three and 50% at the end of
year four. The fair value of the restricted shares on the date of grant is
amortized ratably over the vesting period. As result of this transaction, the
Company recorded $60,000 as compensation expense during the six months ended
June 30, 2004. Note 5  Accrued Expenses Accrued expenses were comprised as follows (in thousands of dollars): June 30,
    
    December 31,2004
    
    2003Accrued taxes
    
    $
    3,199
    
    
    $
    3,160Accrued compensation
    
    
    3,314
    
    
    
    4,049Accrued interest
    
    
    1,930
    
    
    
    1,559Other
    
    
    3,640
    
    
    
    3,929$
    12,083
    
    
    $
    12,697
 June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Note 6  Long-term Debt and Credit Facilities Long-term debt was comprised as follows (in thousands): June 30,
    
    December 31,2004
    
    2003Bank Credit Facility:Bank term loan
    
    $
    145,875
    
    
    $
    146,625Revolving credit facility
    
    
    
    
    
    
    7,0009.50% senior notes
    
    
    200,000
    
    
    
    200,00011.50% senior notes
    
    
    12,000
    
    
    
    12,000Less unamortized discount
    
    
    (43
    )
    
    
    (82
    )Capital leases
    
    
    2,324
    
    
    
    2,705360,156
    
    
    
    368,248Less current maturities
    
    
    (8,571
    )
    
    
    (8,638
    )$
    351,585
    
    
    $
    359,610
 Bank Credit Facility On August 29, 2001, the Company 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 may be increased to $100.0
million, subject to certain limitations. The term loan matures in August 2008
and quarterly repayments began in December 2001. The term loan bears interest
at the Companys option of (1) the banks base rate plus a margin of 2.75% or
(2) LIBOR plus a margin originally established at 4.00%. In January 2004, the
Company and the holders of the term loan amended the LIBOR pricing to be LIBOR
plus a margin of 3.50%. In April 2004, the Company and the holders of the term
loan executed another amendment to establish the LIBOR pricing at LIBOR plus a
margin of 2.75%. The term loan interest rate as of June 30, 2004 was 5.06%.
The revolving credit facility matures in August 2007 and loans bear interest at
the Companys option of (1) the banks base rate plus a margin of from 1.00% to
1.75%, or (2) LIBOR plus a margin of from 2.25% to 3.00%. As of June 30, 2004,
there were no amounts outstanding under the revolving credit facility. Loans
under the credit facility are collateralized by a first priority interest in
all of the Companys assets. On June 16, 2004, the Company and the holders of the term loan amended the
credit agreement. The amendment allowed for the use of proceeds from the
Companys equity offering (see Note 10) for repayment of the 11.50% senior
notes provided the Company also use proceeds to prepay a portion of the term
loan. On July 6, 2004, the Company closed on its equity offering and repaid
$35.0 million of the term loan with a portion of the proceeds. The facility provides for the issuance of letters of credit up to $10.0
million, subject to customary terms and conditions. As of June 30, 2004, the
Company had outstanding letters of credit totaling $1.5 million. The facility includes terms and conditions which require compliance with a
material adverse effect covenant as well as the maintenance of certain
financial ratios and place limitations on capital expenditures, additional
indebtedness, liens, investments, guarantees, asset sales and certain payments
or distributions in respect of the common stock. As of June 30, 2004, the
Company was in compliance with all covenants, terms and conditions of the bank
credit facility. The Companys maximum consolidated leverage ratio was 4.14
compared to the maximum allowable of 4.75, the maximum consolidated senior
secured leverage ratio was 1.70 compared to the maximum allowable of 2.50 and
the minimum consolidated interest coverage ratio was 2.54 compared to the
minimum allowable of 2.25. 9.50% Senior Notes- In June 2003, the Company issued $200.0 million of
unsecured 9.50% Senior Subordinated Notes (the 9.50% Notes), due June 15,
2013. The 9.50% Notes are unsecured, are subordinated in right of payment to
all existing and future senior debt of the Company and rank pari passuin right
of payment with any future senior subordinated indebtedness of the Company.
The 9.50% Notes require semi-annual interest payments and contain covenants
which restrict the ability of the Company to incur additional indebtedness,
create liens, pay dividends or make certain distributions with respect to its
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. As of June 30, 2004, the Company was in compliance with all
covenants, terms, and conditions of the 9.50% Notes. June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 The 9.50% Notes are redeemable at the option of the Company, in whole or in
part, on or after June 15, 2008, initially at 104.75% of their principal amount
(plus accrued and unpaid interest), declining ratably to 100% of their
principal amount (plus accrued and unpaid interest) on or after June 15, 2011.
At any time prior to June 15, 2006, the Company may redeem up to 35% of the
aggregate principal amount at 109.50% of the principal amount (plus accrued and
unpaid interest) with the cash proceeds of certain equity offerings. 11.50% Senior Notes During 1995, the Company issued $30.0 million principal
amount of unsecured 11.50% senior notes (the 11.50% Notes). The 11.50% Notes
are unsecured, rank pari passuin right of payment with future unsubordinated
unsecured indebtedness and rank senior in right of payment to all subordinated
indebtedness of the Company. Annual principal payments of $6.0 million
commenced in July 2001 and continue through July 2005. The 11.50% Notes
require semi-annual interest payments and contain certain covenants including
limitations on indebtedness, liens, guarantees, asset sales and certain
payments or distributions with respect to capital stock. As of June 30, 2004,
the Company was in compliance with all covenants, terms, and conditions of the
11.50% Notes. On July 15, 2004, the principal amount outstanding with accrued
interest was repaid with proceeds from the Companys equity offering (see Note
10). In 1995, the Company issued a total of 480,000 warrants to purchase common
stock of the Company in connection with the issuance of the 11.50% Notes. Each
warrant entitles the holder to purchase one share of common stock at an
exercise price of $7.00 per share. The value of the warrants, $1.68 million,
was recorded as additional paid-in capital and shown as a discount on the
11.50% Notes. On January 23, 2004, John Hancock, a holder of the 11.50% Notes,
exercised 240,000 warrants as provided for by the 11.50% Notes which resulted
in the Company issuing 150,256 shares of common stock. Capital Leases As of June 30, 2004, the Company has total capital lease
obligations of $2,324,000. Equipment acquired under capital lease
arrangements totaled $785,000 during the year ended December 31, 2003, and
$239,000 during the six months ended June 30, 2004. Long-term debt has the following scheduled principal maturities for the twelve
months ended June 30 (in thousands of dollars): 2005  $8,571; 2006  $8,277;
2007  $1,885; 2008  $1,548; 2009  $139,875; and thereafter $200,000. The Company does not utilize special purpose entities or off-balance sheet
financial arrangements. Note 7  Accounting for Derivative Instruments and Hedging Activities In August 2003, the Company entered into a $50.0 million interest rate swap
agreement, expiring in June 2013, to effectively change the underlying debt
from a fixed interest rate to a variable interest rate. In March 2004, the
Company terminated the swap arrangement and received proceeds of $3.1 million
of which $2.6 million was recorded as a deferred gain. The deferred gain is
classified within derivative instruments on the Companys consolidated balance
sheet and will be recognized ratably over the remaining term of the swap
agreement. In addition, the Company has existing interest rate swap agreements on $100.0
million of long-term debt, of which $50.0 million expires in December 2005 and
$50.0 million expires in March 2006, to effectively change the underlying debt
from a variable interest rate to a fixed interest rate for the term of the swap
agreements. The two swap arrangements carry interest rates of 6.61% and 5.78%,
respectively, plus LIBOR. The swap agreements have been designated as, and
meet the criteria for, cash flow hedges. The Company is required by its bank
credit facility to have a minimum of 50% of its term loan balance covered under
interest rate swap arrangements and cannot exceed $150.0 million in swap
agreements. The Company does not utilize these instruments for speculative or
trading purposes. Net amounts paid or received are reflected as adjustments to
interest expense. June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Note 8  Comprehensive Loss Statement of Financial Accounting Standard No. 130, Reporting Comprehensive
Income, provides standards for reporting and disclosure of comprehensive loss
and its components. Comprehensive loss reflects the changes in equity during a
period from transactions and other events and circumstances. For the Company,
comprehensive loss was as follows for the periods ended June 30 (in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (5,006
    )
    
    $
    (13,256
    )
    
    $
    (11,222
    )
    
    $
    (21,675
    )Foreign currency translation adjustment
    
    
    (309
    )
    
    
    1,169
    
    
    
    (411
    )
    
    
    2,034Unrealized gain (loss) on derivative
instruments
    
    
    2,701
    
    
    
    (201
    )
    
    
    2,875
    
    
    
    (58
    )Comprehensive loss
    
    $
    (2,614
    )
    
    $
    (12,288
    )
    
    $
    (8,758
    )
    
    $
    (19,699
    )
 Components of accumulated other comprehensive loss as shown on the Companys
consolidated balance sheets were as follows (in thousands): June 30,
    
    December 31,2004
    
    2003Unrealized loss on derivative instruments
    
    $
    (5,521
    )
    
    $
    (8,396
    )Foreign currency translation adjustment
    
    
    260
    
    
    
    671Accumulated other comprehensive loss
    
    $
    (5,261
    )
    
    $
    (7,725
    )
 Note 9  Other Related Party Transactions The Company had $574,000, principal amount, in outstanding advances to a former
officer as of March 31, 2004. In June 2004, the Company received from the
former officer, free and clear title to real property valued at $574,000 as
full payment for the principal amount outstanding on the promissory note. Note 10  Subsequent Event  Common Stock Offering On July 6, 2004, the Company closed on a public offering of common stock
registered pursuant to its shelf registration statement filed with the
Securities and Exchange Commission in April 2004. In connection with the
offering, the Company issued 3.95 million shares at a price of $16.50 per
share. In addition, on August 4, 2004, the Company issued 392,500 shares with
the underwriters exercise of their over-allotment option. The net proceeds
from the offering (including over-allotment) were $66.0 million after deducting
underwriting and offering expenses of approximately $5.0 million. The Company
used the net proceeds to repay $35.0 million of its bank credit facility term
loan and the remaining $12.0 million of its 11.50% Notes. The remaining
proceeds of approximately $18.6 million were retained as cash for use in
general corporate purposes. The reduction in debt changed the Companys
consolidated total leverage ratio from 4.1 to 3.6. In connection with the debt
repayment, the Company will incur a loss on the early retirement of debt of
approximately $809,000 in the third quarter of 2004. Additionally, the Company
will incur in the third quarter $583,000 in interest expense resulting from a
make-whole provision related to the early retirement of the 11.50% Notes. June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read
in conjunction with the accompanying consolidated financial statements and the
notes thereto. Special Note Regarding Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements. When used in this Quarterly Report, the words
expects, intends, anticipates, estimates, believes, no assurance
and similar expressions and statements which are made in the future tense, are
intended to identify such forward-looking statements. Such forward-looking
statements within the meaning of the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended, are subject to risks,
uncertainties, and other factors that could cause the Companys 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, such factors include, among others, the following: the effects of
economic conditions, including in particular the economic condition of the
lodging industry, competition, programming availability and quality,
technological developments, developmental difficulties and delays,
relationships with clients and property owners, the availability of capital to
finance growth, the impact of government regulations, international crises,
acts of terrorism, public health issues, and other factors detailed, from time
to time, in the Companys filings with the Securities and Exchange Commission.
These forward-looking statements speak only as of the date of this Quarterly
Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Companys expectations with
regard thereto or any change in events, conditions or circumstances on which
any such statement is based. Executive Overview LodgeNet Entertainment Corporation is one of the worlds largest and leading
providers of interactive television systems and broadband services to hotels,
resorts and casinos throughout the United States and Canada as well as select
international markets. It is estimated that more than 260 million guests a year
have access to a wide variety of LodgeNets interactive television services
which are designed to make their stay more enjoyable, productive and
convenient. As of June 30, 2004, the Company provided television services to
approximately 5,900 hotel properties serving more than one million rooms. For the first half of 2004, the Company continued to execute on its operating
plans and delivered increased revenue, higher gross margins and positive cash
flow (defined as cash provided by operating activities exceeding cash used for
investing) as compared to the first half of 2003, and a debt reduction of $8.1
million from the end of 2003. Additionally, the Company expanded its digital
room base to 47% (approximately 442,000 rooms) while reducing its cost of
installation for both new rooms and converted rooms. Guest Pay Interactive Services.The Companys 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. The Companys
services include on-demand movies, video games, music and music videos,
Internet on television (which does not require a laptop), and television
on-demand programming. The Companys total guest generated revenue depends on a number of factors,
including:  
    
    The number of rooms equipped with the Companys system.The
Company can increase revenue over time by increasing the number of
rooms served by its interactive systems. The Companys ability to
expand its room based is dependent on a number of factors,
including the attractiveness of the Companys technology and
service and support to hotels currently operating without an
interactive television system, and the number of newly constructed
hotel properties and hotels with expiring contracts currently
served by one of the Companys
competitors. June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    
    
    The variety of services offered at the hotel.Rooms equipped with
the Companys digital system generate higher revenue than rooms
equipped with the Companys tape-based system, primarily because
they offer a greater variety of services and content choices. The
Company plans to continue to grow the revenue it generates per
average room by the installation of its digital system in all newly
contracted rooms and by converting selected tape-based rooms to the
Companys digital system in exchange for long-term contract
extensions.
    
    The popularity of content offered at the hotel.The Companys
revenues vary to a certain degree with the number and popularity of
major motion pictures available for viewing. Historically, a
decrease in the availability of popular major motion pictures has
from time-to-time adversely impacted revenue. Although not
completely within the Companys control, the Company seeks to
program and promote the available major motion pictures and other
content to maximize revenue and gross profit.
    
    The price of the service purchased by the hotel guest.The Company
controls the prices charged for its products and services and
manages pricing in an effort to maximize revenue and overall gross
profit. The Company establishes pricing based on such things as
the demographics of the property served and the popularity of the
content.
    
    The occupancy rate at the property.The Companys 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. The Company targets higher occupancy properties in
diverse demographic and geographic locations in an effort to
mitigate occupancy-related risks. Key Metrics: Rooms Served One of the metrics the Company monitors is the growth, net of de-installations,
of its Guest Pay interactive room base. De-installation activity has not had a
material effect on the Companys growth and historically averages approximately
2% of total installed rooms per year. The Company installed its systems in the
following number of net new rooms and had the following total rooms installed
as of June 30: June 30,2004
    
    2003Net new Guest Pay interactive rooms for the three months (1)
    
    
    8,738
    
    
    
    9,997Net new Guest Pay interactive rooms for the six months
ended (1)
    
    
    18,355
    
    
    
    23,425Total Guest Pay interactive rooms (2)
    
    
    942,998
    
    
    
    899,773Total rooms served (3)
    
    
    1,006,421
    
    
    
    971,503
  (1)
    
    All Guest Pay interactive rooms installations in 2004 and 2003 received
the Companys digital interactive television system.(2)
    
    Guest Pay interactive rooms are equipped with the Companys interactive
television system. The high-speed, two-way digital communications design
of the Companys system architecture enables the Company to provide
interactive features such as on-demand movies, network-based video games,
music services, Internet on television, and television programming.(3)
    
    Total rooms served, representing rooms receiving one or more of the
Companys services, including rooms served by international licensees and
properties receiving only basic and premium television programming. June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Digital Room Growth The Company continues to expand its digital base as it installs its digital
system in all newly contracted rooms as well as converting select tape-based
served rooms to the digital system in exchange for contract extensions. The
Companys goal is to have approximately 75% of its room base installed with a
digital system by the end of 2006. June 30,2004
    
    2003Net digital room installations for the three months ended
(1)
    
    
    26,834
    
    
    
    26,093Net digital room installations for the six months ended (1)
    
    
    56,823
    
    
    
    58,588Total digital rooms installed
    
    
    442,249
    
    
    
    323,685Digital rooms as a percent of total Guest Pay interactive
rooms
    
    
    47
    %
    
    
    36
    %
  (1)
    
    Digital room installations include both newly contracted rooms and rooms
that have been converted from a tape-based system to a digital system in
exchange for a long-term contract extension. Cost of Installation In addition to the continued expansion of the Companys digital base, the
Company will continue monitoring capital expenditures per new or converted
room. The following table sets forth the Companys average installation and
conversion cost per room during the quarters ended: June 30,
    
    March 31,
    
    December 31,
    
    September 30,
    
    June 30,2004
    
    2004
    
    2003
    
    2003
    
    2003Average cost per room 
new installation
    
    $
    373
    
    
    $
    382
    
    
    $
    391
    
    
    $
    396
    
    
    $
    408Average cost per room 
conversion
    
    $
    296
    
    
    $
    305
    
    
    $
    332
    
    
    $
    330
    
    
    $
    352
 Cash Flow One of the Companys goals is to generate cash from operations in excess of all
investing activities and reduce its reliance on external financing to grow its
business. Accordingly, the Company views the level of cash provided by
operating activities as an important measure of its ability to finance growth
from internally generated funds. In addition to increasing revenue and
controlling expenses, the Company intends to manage its actions related to this
goal by reducing the per-room installation cost of a digital room and by
varying the number of rooms it installs with the digital system in any given
period. The Companys cash flow from operations, net of investing activities, for the
three and six months ended is set forth in the following table (dollar amounts
in thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Cash provided by operating activities
    
    $
    9,891
    
    
    $
    8,192
    
    
    $
    28,171
    
    
    $
    25,761Cash used for investing activities
    
    
    (13,453
    )
    
    
    (11,869
    )
    
    
    (26,087
    )
    
    
    (29,049
    )Difference
    
    $
    (3,562
    )
    
    $
    (3,677
    )
    
    $
    2,084
    
    
    $
    (3,288
    )
 June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Operating Expense Per Room SG&A
expenses increased in the current quarter compared to the second quarter of 2003
as a result of a one-time insurance settlement received last year for
reimbursement of legal expenses as well as the Companys focus in second quarter 2003
to reduce its
operating expenses on a short-term basis to protect the financial performance
of its business as a response to the uncertainties surrounding the Iraqi
conflict. The Company will continue to manage operating and SG&A expenses
in order to balance the Companys growth objective with economic conditions.
The following table sets forth
the Companys operating expenses and SG&A as a percent of revenue during the
periods ended June 30: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Guest Pay operating expenses
    
    $
    2.97
    
    
    $
    2.91
    
    
    $
    2.95
    
    
    $
    2.90SG&A expense
    
    
    2.20
    
    
    
    1.82
    
    
    
    2.12
    
    
    
    1.93$
    5.17
    
    
    $
    4.73
    
    
    $
    5.07
    
    
    $
    4.83Guest Pay operating expenses as a percent
of total revenue
    
    
    12.6
    %
    
    
    12.5
    %
    
    
    12.7
    %
    
    
    12.6
    %SG&A as a percent of total revenue
    
    
    9.3
    %
    
    
    7.8
    %
    
    
    9.1
    %
    
    
    8.4
    %
 Liquidity and Capital Resources The Company historically has required substantial amounts of capital to fund
operations, expand the Companys business and service existing indebtedness.
During 2003, cash flow from operations was sufficient to cover all long-term
debt service and all but $5.1 million of its investing activities. For the
first six months of 2004, cash flow from operations exceeded all long-term debt
service as well as all capital investments, including growth capital by $2.1
million. Capital expenditures for the first six months of 2004 were $26.7
million as compared to $28.1 million for the same period of 2003. The decline
from 2003 was driven by reductions in the Companys cost per digital room and a
slight reduction in number of digital rooms installed. During the first half
of 2004, the Company installed approximately 56,800 digital rooms versus 58,600
digital rooms in the first half of 2003. Net cash provided by operating
activities was $28.2 million as compared to $25.8 million in the same period of
2003. This resulted in cash flow net of investing of $2.1 million for the first
half of 2004 versus a negative $3.3 million in the prior year. On July 6, 2004, the Company closed on a public offering of common stock
registered pursuant to its shelf registration statement filed with the
Securities and Exchange Commission in April 2004. In connection with the
offering, the Company issued 3.95 million shares at a price of $16.50 per
share. In addition, on August 4, 2004, the Company issued 392,500 shares with
the underwriters exercise of their over-allotment option. The net proceeds
from the offering (including over-allotment) were $66.0 million after deducting
underwriting and offering expenses of approximately $5.0 million. The Company
used the net proceeds to repay $35.0 million of its bank credit facility term
loan and the remaining $12.0 million of its 11.50% senior notes. The remaining
proceeds of approximately $18.6 million were retained as cash for use in
general corporate purposes. Selected Balance Sheet Data as of June 30, 2004 Adjusted for Common Stock Offering (in
thousands): Actual
    
    Adjusted
    
    ChangeCash and cash equivalents
    
    $
    2,901
    
    
    $
    21,454
    
    
    $
    18,553Total assets
    
    $
    272,866
    
    
    $
    290,457
    
    
    $
    17,591Total debt
    
    $
    360,156
    
    
    $
    313,199
    
    
    $
    (46,957
    )Total stockholders equity (deficiency)
    
    $
    (133,316
    )
    
    $
    (68,520
    )
    
    $
    64,796
 Depending on the rate of growth of its business and other factors, the Company
expects to incur capital expenditures
of $56.0 to $58.0 million in 2004. Based on expected capital expenditures, the
Company estimates it will install in the range of 49,000 to 51,000 net new
rooms and convert in the range of 53,000 to 55,000 existing rooms from
tape-based to digital systems in exchange for long-term contract extensions. June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 The Company believes that its cash on hand from the equity offering proceeds,
operating cash flow and borrowing available under the Credit Facility maturing
in 2007 will be sufficient for the foreseeable future to fund the Companys
future growth, financing obligations, and its negative working capital. As of
June 30, 2004, working capital was negative $7.8 million, compared to negative
$6.4 million at June 30, 2003. If adverse economic conditions occurred and
persisted for an extended period of time, resulting in lower than anticipated
operating cash flows, the Company anticipates that it could cover any short
fall through any combination of cash on hand, additional borrowings available
under its current Credit Facility of $52.6 million, a reduction in capital
spending and/or a reduction in operating expenses. The borrowings available
under the Companys Credit Facility increased to $75.0 million after the $47.0
million in debt repayment from equity offering proceeds in July 2004. If the
Company were to reduce its projected capital spending significantly, the
Companys growth rate would be less than historical levels. The Companys principal sources of liquidity are its cash on hand, operating
cash flow and its Credit Facility. In order to continue to operate and expand
its business, the Company must remain in compliance with covenants imposed by
its Credit Facility and Senior Notes. As of June 30, 2004, the Company was in
compliance with all covenants, terms and conditions related to its Credit
Facility and Senior Notes. Given the Companys current business plan for
projected capital investment during the balance of 2004, the Company believes
it will remain in compliance with all covenants, terms and conditions related
to its Credit Facility and Senior Notes. The Company is 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 June 30, 2004 was $360.2 million
versus $368.2 million as of December 31, 2003. The Companys leverage and interest coverage ratios were as follows for the
periods ended June 30: 2004
    
    2003Actual consolidated total leverage ratio (1)(4)
    
    
    4.14
    
    
    
    4.54Maximum per covenant
    
    
    4.75
    
    
    
    5.00Actual senior secured leverage ratio (2)(4)
    
    
    1.70
    
    
    
    1.85Maximum per covenant
    
    
    2.50
    
    
    
    2.50Actual consolidated interest coverage ratio (3)(4)
    
    
    2.54
    
    
    
    2.46Minimum per covenant
    
    
    2.25
    
    
    
    2.25
  (1)
    
    The Companys 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)
    
    The Companys maximum senior secured leverage ratio is a function of
total indebtedness less total unsecured indebtedness, divided by operating
income exclusive of depreciation and amortization and other miscellaneous
non-recurring items as defined by the covenant.(3)
    
    The Companys 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.(4)
    
    Maximum consolidated leverage, maximum senior secured leverage ratio, and
minimum consolidated interest coverage ratios are not statistics based on
generally accepted accounting principles. The statistics are presented
here to demonstrate compliance with lenders covenants, as noncompliance
with such covenants could have a material adverse effect on the Company,
and the statistics are not presented as alternative measures of operating
performance or liquidity. June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
   With the use of proceeds from the equity offering, the Company reduced its
consolidated debt to $313.2 million. The Companys leverage and interest
coverage ratios would be as follows had the equity offering closed and
subsequent debt repayment been made on June 30, 2004: Proforma consolidated total leverage ratio
    
    
    3.60Maximum per covenant
    
    
    4.75Proforma senior secured leverage ratio
    
    
    1.30Maximum per covenant
    
    
    2.50Proforma consolidated interest coverage ratio
    
    
    2.50Minimum per covenant
    
    
    2.25
 The Companys future debt covenant ratios are outlined below: Q3 2004
    
    Q1 2005
    
    Q4 2005Maximum consolidated total leverage ratio
    
    
    4.50
    
    
    
    4.25
    
    
    
    4.00Maximum senior secured leverage ratio
    
    
    2.50
    
    
    
    2.25
    
    
    
    2.25Minimum consolidated interest coverage
ratio
    
    
    2.25
    
    
    
    2.50
    
    
    
    2.50
 In January 2004, the Company and the holders of the term loan portion of the
existing Credit Facility amended the LIBOR pricing to be LIBOR plus a margin of
3.50%, down from LIBOR plus a margin of 4.0% previously. In April 2004, the
Company and the holders of the term loan executed another amendment to
establish the LIBOR pricing at LIBOR plus a margin of 2.75%. As a result of
the amendments and debt reduction from the equity offering proceeds, the
Companys annualized interest savings are approximately $3.1 million. The Company does not utilize special purpose entities or off-balance sheet
financial arrangements. In the event of significant international crises, acts of terrorism, public
health issues, or catastrophic events, the Company believes that the general
economy and the lodging industry could be negatively affected. If such a
crisis is protracted or the effects on the lodging industry are severe, the
effect on the Companys financial performance could result in the Company being
in violation of one or more of its bank or note covenants. This could require
the Company to renegotiate its covenants, significantly reduce its growth plans
and/or curtail expenditures for operating expenses. While the Company believes
it could renegotiate its covenants, there is no assurance that this could be
accomplished, nor can it determine at this time the financial cost of such a
renegotiation or that refinancing, if required, would be available on terms
favorable to the Company. The foregoing statements regarding capital expenditures and cash requirements
are forward-looking statements and
there can be no assurance actual results will not vary from expected results.
The Companys actual cash flow and cash requirements will vary (and such
variations could be material) depending upon the number of new contracts for
services entered into by the Company, the cost of installations, demand for the
Companys services, competitive June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 factors, hotel occupancy rates, general
economic factors and other factors including, without limitation, those set
forth above under the Special Note Regarding Forward-Looking Statements and
elsewhere herein.
Obligations and Commitments as of June 30, 2004 (dollar amounts in thousands): Payments due by periodLess than
    
    1  3
    
    4  5
    
    OverTotal
    
    1 year
    
    years
    
    years
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    360,156
    
    
    $
    8,571
    
    
    $
    10,162
    
    
    $
    141,423
    
    
    $
    200,000Interest on fixed rate debt
    
    
    181,880
    
    
    
    20,035
    
    
    
    38,345
    
    
    
    38,000
    
    
    
    85,500Other long-term obligations (1)
    
    
    8,228
    
    
    
    2,008
    
    
    
    3,367
    
    
    
    2,825
    
    
    
    28Purchase obligations
    
    
    3,158
    
    
    
    3,158
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    553,422
    
    
    $
    33,772
    
    
    $
    51,874
    
    
    $
    182,248
    
    
    $
    285,528
 Amount of commitment expiration per periodLess than
    
    1  3
    
    4  5
    
    OverTotal
    
    1 year
    
    years
    
    years
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    
    
    
    $
    
    
    
    $
    
  (1)
    
    Other long-term obligations include future minimum operating lease
payments and payments to Hilton Hotels Corporation for the acquired rights
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. Seasonality The Companys quarterly operating results are subject to fluctuation depending
upon hotel occupancy rates and other factors. Typically, occupancy rates are
higher during the second and third calendar quarters due to seasonal travel
patterns. Dependence on Performance of Lodging Industry The Companys business is closely connected to the performance of the hotel
industry where occupancy rates may fluctuate resulting from various factors.
Reduction in hotel occupancy resulting from business, economic, significant
international crises, acts of terrorism,public health issues, or catastrophic
events could adversely impact the Companys results of operations. While the average occupancy rate for the Companys served hotels is typically
higher than the average of the entire lodging industry, the Companys business
is clearly linked to the continued effects of changes in occupancy levels. For
the first six months of 2004, occupancy rates were 130 basis points higher than
experienced in the first six months of 2003. If hotel occupancy rates were to
decline significantly below current levels, the Companys revenues would be
adversely affected. The Company plans to reassess its operating and capital expenditure plans
periodically to respond to changes in occupancy. Additionally, the Companys
room base is geographically diversified, with more than two-thirds of
properties served being in highway or suburban locations. Less than 5% of the
room base is concentrated in each of the top ten urban areas of the United
States. By serving a wide variety of geographically dispersed properties, the
Company mitigates reliance on any one geographic sector. June 30, 2004
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Three Months Ended June 30, 2004 and 2003 Revenue Analysis. The Companys total revenue for the second quarter of 2004
increased 6.2%, or $3.9 million, in comparison to the second quarter of 2003.
The following table sets forth the components of revenue (in thousands) for the
quarter ended June 30: 2004
    
    2003Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesRevenues:Guest Pay
    
    $
    64,218
    
    
    
    96.9
    
    
    $
    60,950
    
    
    
    97.7Other
    
    
    2,063
    
    
    
    3.1
    
    
    
    1,454
    
    
    
    2.3$
    66,281
    
    
    
    100.0
    
    
    $
    62,404
    
    
    
    100.0
 Guest Pay interactive revenue increased 5.4%, or $3.3 million, in the second
quarter of 2004 in comparison to the same quarter of 2003. This increase was
attributable to a 5.0% increase in the average number of installed Guest Pay
interactive rooms and the continued deployment of digital systems (118,000
additional digital rooms deployed compared to the second quarter of 2003). On
a per room basis, revenue increased 0.4% to $22.84 per month in the second
quarter of 2004 from $22.75 per month in the second quarter of 2003. The
following table sets forth information in regard to average monthly revenue per
Guest Pay room for the quarter ended June 30: 2004
    
    2003Average monthly revenue per room:Movie revenue
    
    $
    17.28
    
    
    $
    17.73Other interactive service revenue
    
    
    5.56
    
    
    
    5.02Total per Guest Pay room
    
    $
    22.84
    
    
    $
    22.75
 Average movie revenue per room decreased from $17.73 to $17.28. The Company
believes this reduction is primarily due to less popular movie content available in its window this quarter as
compared to the second quarter of 2003, partially offset by a 180 basis point
increase in occupancy levels. Other interactive service revenue increased 10.7%, driven by the continued
expansion of interactive TV services available through the digital system and
price changes associated with basic cable services. Other revenue includes revenue from free-to-guest services provided to hotels
not receiving Guest Pay services, sales of system equipment and service parts
and labor, and other revenue. Other revenue increased $600,000, or 41.9%, in
comparison to the second quarter of 2003. The increase is a result of reseller
commissions received from programming services and an increase in equipment
sales to international licensees partially offset by lower revenue from
free-to-guest services. June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Gross Profit (exclusive of other operating expenses discussed separately
below).Gross profit totaled $37.2 million for the second quarter ended June
30, 2004, an increase of 8.0% over the second quarter of 2003. The following
table sets forth the components of gross profit (in thousands) and gross profit
margin for the quarter ended June 30: 2004
    
    2003Gross profit:Guest Pay
    
    $
    35,874
    
    
    $
    33,648Other
    
    
    1,343
    
    
    
    825$
    37,217
    
    
    $
    34,473Gross profit margin:Guest Pay
    
    
    55.9
    %
    
    
    55.2
    %Other
    
    
    65.1
    %
    
    
    56.7
    %Total
    
    
    56.2
    %
    
    
    55.2
    %
 Gross profit on Guest Pay interactive services increased 6.6%, or $2.2 million
on a 5.4% increase in related revenue. Guest Pay direct costs, which generally
fluctuate directly with revenue, include movie license fees, license fees for
other interactive services, and the commission retained by the hotel. Guest
Pay direct costs that are fixed include Internet connectivity fees and one-time
programming license fees, which are independent of changes to revenue or
occupancy. As a percentage of revenue, the increase to Guest Pay gross profit
margin from 55.2% to 55.9% was due to decreased programming costs partially
offset by hotel commissions. The decrease in programming costs was driven by
lower royalties as a percent of revenue for content related to movies and
games. Gross profit on other services increased $518,000, or 62.8%, in the second
quarter of 2004 from the prior year quarter and the gross profit margin
increased to 65.1% from 56.7%. The increase in gross profit margin was
attributable to reseller commissions described above offset by increased sales
of equipment to international licensees that have lower margin. As a percentage of revenue, the Companys overall gross profit margin was 56.2%
compared to 55.2% in the prior year quarter. In addition to the information
provided above, the following table sets forth the primary change drivers of
composite gross profit margin for the quarter ended June 30 2004
    
    2003
    
    ChangeGross profit margin
    
    
    56.2
    %
    
    
    55.2
    %
    
    
    1.0
    %Change drivers:Programming costs
    
    
    
    
    
    
    
    
    
    
    1.3Hotel commissions
    
    
    
    
    
    
    
    
    
    
    -0.31.0
    %
 June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Operating Expenses.The following table sets forth information in regard to
the Companys operating expenses for the quarter ended June 30 (dollar amounts
in thousands): 2004
    
    2003Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    8,339
    
    
    
    12.6
    
    
    $
    7,803
    
    
    
    12.5Selling, general and administrative
    
    
    6,179
    
    
    
    9.3
    
    
    
    4,881
    
    
    
    7.8Depreciation and amortization
    
    
    19,462
    
    
    
    29.4
    
    
    
    19,733
    
    
    
    31.6Total operating expenses
    
    $
    33,980
    
    
    
    51.3
    
    
    $
    32,417
    
    
    
    51.9
 Guest Pay operations expenses consist of costs directly related to the
operation and maintenance of systems at hotel sites. Guest Pay operations
expenses increased by $536,000, or 6.9%, in 2004 from the prior year quarter.
The increase was primarily due to the 5.0% increase in average rooms served by
the Company. As a percentage of revenue, Guest Pay operations expenses
increased slightly to 12.6% in the second quarter of 2004 compared to 12.5% in
the year earlier period. Per average installed room, Guest Pay operations
expenses increased to $2.97 per month in the second quarter of 2004 from $2.91
per month in the prior year quarter, which represents a 2.1% increase. Selling, general and administrative expenses were $6.2 million, an increase of
$1.3 million compared to $4.9 million in the second quarter of 2003. As a
percentage of revenue, SG&A increased to 9.3% in the current quarter compared
to 7.8% for second quarter 2003. The increase was driven by professional and
compliance costs, labor and compensation related expenses, marketing expenses
and engineering development costs. In addition, contributing to the difference was a one-time
insurance settlement received last year for reimbursement of legal expenses as
well as the Companys focus in second quarter 2003 to reduce its operating expenses on a short-term
basis to protect the financial performance of its business as a response to the
uncertainties surrounding the Iraqi conflict. Per average Guest Pay room, SG&A
expenses increased to $2.20 in the second quarter of 2004 from $1.82 in the
prior year quarter. Depreciation and amortization expenses decreased to $19.5 million in the
current year quarter versus $19.7 million in the second quarter of 2003. The
decrease was primarily due to higher-cost assets becoming fully depreciated
while the cost basis of new assets being added to the base was lower. As a
percentage of revenue, depreciation and amortization decreased to 29.4% in the
second quarter of 2004 versus 31.6% in the second quarter of 2003. Operating Income.As a result of the factors described above, the Company
generated operating income of $3.2 million in the second quarter of 2004
compared to $2.1 million in the second quarter of 2003. Loss on Early Retirement of Debt.As a result of the early retirement of the
10.25% Senior Notes in the second quarter of 2003, the Company incurred a $7.1
million loss on the write off of related debt issuance costs and payment of
call and tender premiums, and transaction expenses. Interest Expense.Interest expense decreased $479,000, or 5.6%, to $8.1
million during the second quarter of 2004. Average principal amount of
long-term debt outstanding during the quarter ended June 30, 2004 was
approximately $360.5 million (at an average interest rate of approximately
9.0%) as compared to an average principal amount outstanding of approximately
$358.0 million (at an average interest rate of approximately 9.6%) during the
comparable period of 2003. Taxes.For the second quarter of 2004, the Company incurred franchise tax of
$140,000 versus $116,000 during the second quarter of 2003. Net Loss.For the reasons previously described, the Companys net loss
decreased to $5.0 million in the second quarter of 2004 from a net loss of
$13.3 million in the prior year quarter. June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Six Months Ended June 30, 2004 and 2003 Revenue Analysis. The Companys total revenue for the first six months of 2004
increased 6.6%, or $8.1 million, in comparison to the same period of 2003. The
following table sets forth the components of revenue (in thousands) for the six
months ended June 30: 2004
    
    2003Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesRevenues:Guest Pay
    
    $
    126,541
    
    
    
    97.3
    
    
    $
    118,817
    
    
    
    97.4Other
    
    
    3,571
    
    
    
    2.7
    
    
    
    3,233
    
    
    
    2.6$
    130,112
    
    
    
    100.0
    
    
    $
    122,050
    
    
    
    100.0
 Guest Pay interactive revenue increased 6.5%, or $7.7 million, in the first
half of 2004 in comparison to the same period of 2003. This increase was
attributable to a 5.1% increase in the average number of installed Guest Pay
interactive rooms and the continued deployment of digital systems (118,000
additional digital rooms deployed since June 30, 2003). On a per room basis,
revenue increased 1.3% to $22.62 per month in the first half of 2004 from
$22.32 per month in the first half of 2003. The following table sets forth
information in regard to average monthly revenue per Guest Pay room for the
first six months ended June 30: 2004
    
    2003Average monthly revenue per room:Movie revenue
    
    $
    17.16
    
    
    $
    17.42Other interactive service revenue
    
    
    5.46
    
    
    
    4.90Total per Guest Pay room
    
    $
    22.62
    
    
    $
    22.32
 Average movie revenue per room decreased from $17.42 to $17.16. The Company
believes the decrease in average movie revenue per room is primarily due to
less popular movie content available in its window this year
as compared to 2003, partially offset by a 130 basis
point increase in occupancy levels. Other interactive service revenue increased 11.4%, driven by expanding revenue
from TV services available with the digital system and price changes associated
with basic cable services. Other revenue includes revenue from free-to-guest services provided to hotels
not receiving Guest Pay services, sales of system equipment and service parts
and labor, and other revenue. Other revenue increased $338,000, or 10.5%, in
comparison to the first half of 2003. The increase is a result of reseller
commissions received from programming services offset by decreases in equipment
sales to international licensees and lower revenue from free-to-guest services. June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Gross Profit (exclusive of other operating expenses discussed separately
below).Gross profit totaled $72.8 million for the first six months ended June
30, 2004, an increase of 7.8% over the first half of 2003. The following table
sets forth the components of gross profit (in thousands) and gross profit
margin for the six months ended June 30: 2004
    
    2003Gross profit:Guest Pay
    
    $
    70,690
    
    
    $
    65,771Other
    
    
    2,109
    
    
    
    1,752$
    72,799
    
    
    $
    67,523Gross profit margin:Guest Pay
    
    
    55.9
    %
    
    
    55.4
    %Other
    
    
    59.1
    %
    
    
    54.2
    %Total
    
    
    56.0
    %
    
    
    55.3
    %
 Gross profit on Guest Pay interactive services increased 7.5%, or $4.9 million
on a 6.5% increase in related revenue. Guest Pay direct costs, which generally
fluctuate directly with revenue, include movie license fees, license fees for
other interactive services, and the commission retained by the hotel. Guest
Pay direct costs that are fixed include Internet connectivity fees and one-time
programming license fees, which are independent of changes to revenue or
occupancy. As a percentage of revenue, the increase to Guest Pay gross profit
margin from 55.4% to 55.9% was due to decreased programming costs, offset by
Internet connectivity costs and hotel commissions. The decrease in programming
costs was driven by lower royalties as a percent of revenue for content related
to movies and games. Gross profit on other services increased $357,000, or 20.4%, in the first half
of 2004 from the prior year six months and the gross profit margin increased
from 54.2% to 59.1%. The increase in gross profit margin was primarily
attributable to reseller commissions received from programming services. As a percentage of revenue, the Companys overall gross profit margin was 56.0%
compared to 55.3% in the first six months of 2003. In addition to the
information provided above, the following table sets forth the primary change
drivers of composite gross profit margin for the six months ended June 30: 2004
    
    2003
    
    ChangeGross profit margin
    
    
    56.0
    %
    
    
    55.3
    %
    
    
    0.7
    %Change drivers:Programming costs
    
    
    
    
    
    
    
    
    
    
    1.1TV Internet
    
    
    
    
    
    
    
    
    
    
    -0.1Hotel commissions
    
    
    
    
    
    
    
    
    
    
    -0.30.7
    %
 June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Operating Expenses.The following table sets forth information in regard to
the Companys operating expenses for the first six months ended June 30 (dollar
amounts in thousands): 2004
    
    2003Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    16,477
    
    
    
    12.7
    
    
    $
    15,426
    
    
    
    12.6Selling, general and administrative
    
    
    11,884
    
    
    
    9.1
    
    
    
    10,296
    
    
    
    8.4Depreciation and amortization
    
    
    39,130
    
    
    
    30.1
    
    
    
    39,710
    
    
    
    32.5Total operating expenses
    
    $
    67,491
    
    
    
    51.9
    
    
    $
    65,432
    
    
    
    53.6
 Guest Pay operations expenses consist of costs directly related to the
operation and maintenance of systems at hotel sites. Guest Pay operations
expenses increased by $1.1 million, or 6.8%, in 2004 from the prior year first
six months. The increase was primarily due to the 5.1% increase in average
rooms served by the Company. As a percentage of revenue, Guest Pay operations
expenses increased to 12.7% in the first six months of 2004 compared to 12.6%
in the year earlier period. Per average installed room, Guest Pay operations
expenses increased to $2.95 per month in the first six months of 2004 from
$2.90 per month in the prior year first six months, which represents a 1.7%
increase. Selling, general and administrative expenses were $11.9 million, an increase of
$1.6 million compared to $10.3 million in the first six months of 2003. The
increase was driven by professional and compliance costs, labor and
compensation related expenses, marketing expenses and engineering development
costs. In addition, contributing to the difference was a one-time
insurance settlement received last year for reimbursement of legal expenses. As
a percentage of revenue, SG&A increased to 9.1% in the current six months
compared to 8.4% for first six months 2003. Per average Guest Pay room, SG&A
expenses increased to $2.12 in the first half of 2004 from $1.93 in the prior
year first six months. Depreciation and amortization expenses decreased $580,000 or 1.5% to $39.1
million in the current year first six months versus $39.7 million in the first
six months of 2003. The decrease was primarily due to assets becoming fully
depreciated while the cost basis of new assets being added to the base was
lower. As a percentage of revenue, depreciation and amortization decreased to
30.1% in the first half of 2004 versus 32.5% in the first half of 2003. Operating Income.As a result of the factors described above, the Company
generated operating income of $5.3 million in the first six months of 2004
compared to $2.1 million in the first six months of 2003. Loss on Early Retirement of Debt.As a result of the early retirement of the
10.25% Senior Notes in the second quarter of 2003, the Company incurred a $7.1
million loss on the write off of related debt issuance costs and payment of
call and tender premiums, and transaction expenses. Interest Expense.Interest expense decreased $645,000, or 3.8%, to $16.4
million during the first six months of 2004. Average principal amount of
long-term debt outstanding during the first six months ended June 30, 2004 was
approximately $364.3 million (at an average interest rate of approximately
9.0%) as compared to an average principal amount outstanding of approximately
$356.5 million (at an average interest rate of approximately 9.6%) during the
comparable period of 2003. Taxes.For the first six months of 2004, the Company incurred franchise tax of
$257,000 versus $245,000 during the first half of 2003. Net Loss.For the reasons previously described, the Companys net loss
decreased to $11.2 million in the first half of 2004 from a net loss of $21.7
million in the prior year first six months. June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Critical Accounting Policies Managements discussion and analysis of financial condition and results of
operations are based upon the Companys financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. The Companys primary cost drivers are fact-based
with predetermined rates, such as hotel commissions, license fees paid for
major motion pictures, or one-time flat fees for independent films. However,
the preparation of financial statements requires the Company 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. The
Company bases its estimates on historical experience and on various other
assumptions that the Company believes 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.The Company recognizes revenue from the sale of
interactive television services in the period the related services are provided
to the hotel or guest. No future performance obligations exist on a service
that has been provided. The prices related to the Companys products or
services are fixed prior to delivery of the products or services. Revenue from
the sale of system equipment and service parts and labor is recognized when the
equipment is delivered or the service has been provided. The Company also has
advance billings for certain free-to-guest programming services where the
revenue is deferred and recognized in the periods that services are provided. Allowance for doubtful accounts.The Company determines the estimate of the
allowance for doubtful accounts considering several factors, including: (1)
historical experience, (2) aging of the accounts receivable, and (3) contract
terms between the hotel and the Company. In accordance with the Companys hotel
contracts, monies collected by hotels for interactive television services are
held in trust on behalf of the Company. Collectibility is reasonably assured as
supported by the Companys nominal write-off history. For the six months ended
June 30, 2004 and 2003, charges to the allowance for doubtful account for
related interactive television services were $221,000 and $180,000,
respectively. If the financial condition of a hotel chain or group of hotels
were to deteriorate and reduce the ability to remit the Companys monies, the
Company may be required to increase its allowance by recording additional bad
debt expense. Allowance for excess or obsolete system components.The Company regularly
evaluates component levels to ascertain build requirements based on its backlog
and service requirements based on its 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 its current installed
base, the Company records a provision for excess and obsolete component
inventory based on estimated forecasts of product demand and service
requirements. The Company makes every effort to ensure the accuracy of its
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. Property and equipment.The Companys property and equipment is stated at
cost, net of accumulated depreciation and amortization. Installed Guest Pay
and free-to-guest systems consist of equipment, 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. The Company begins depreciating Guest Pay and free-to-guest systems
when such systems are installed and activated. Depreciation of other equipment
begins when such equipment is placed in service. The Company attributes no
salvage value to equipment, and depreciation and amortization are computed
using the straight-line method over the following useful lives: YearsBuildings
    
    30Guest Pay systems:Installed system costs
    
    2 - 7Customer acquisition costs
    
    5 - 7System components
    
    5 - 7Software costs
    
    3 - 5Other equipment
    
    3 - 10
 June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Item 3  Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to various market risks, including potential losses
resulting from adverse changes in interest rates and foreign currency exchange
rates. The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes. Interest.At June 30, 2004, the Company had debt totaling $360.2 million. The
Company has interest rate swap arrangements covering debt with a notional
amount of $100.0 million to effectively change the underlying debt from a
variable interest rate to a fixed interest rate for the term of the swap
agreements. After giving effect to the interest rate swap arrangements, the
Company had fixed rate debt of $314.3 million and variable rate debt of $45.9
million at June 30, 2004. For fixed rate debt, interest rate changes affect
the fair market value but do not impact earnings or cash flows. Conversely,
for variable rate debt, interest rate changes generally do not affect the fair
market value but do impact future earnings and cash flows, assuming other
factors are held constant. Assuming other variables remain constant (such as
debt levels), a one percentage point increase in interest rates would decrease
the unrealized fair market value of the fixed rate debt by an estimated $30.3
million. The impact on earnings and cash flow for the next year resulting from
a one percentage point increase in interest rates would be approximately
negative $459,000 assuming other variables remain constant. Foreign Currency Transactions.A portion of the Companys revenues are derived
from the sale of Guest Pay services in Canada. The results of operations and
financial position of the Companys operations in Canada are measured in
Canadian dollars and translated into U.S. dollars. The effects of foreign
currency fluctuations in Canada are somewhat mitigated by the fact that
expenses and liabilities are generally incurred in Canadian dollars. The
reported income of the Companys Canadian subsidiary will be higher or lower
depending on a weakening or strengthening of the U.S. dollar against the
Canadian dollar. In addition, a portion of the Companys assets are based in
Canada and are translated into U.S. dollars at foreign currency exchange rates
in effect as of the end of each period. Accordingly, the Companys
consolidated assets will fluctuate depending on the weakening or strengthening
of the U.S. dollar against the Canadian dollar. No significant foreign
currency fluctuations occurred in the first half of 2004 to materially impact
consolidated results of operations or financial condition. 
 Item 4  Controls and Procedures With the participation of management, the Companys chief executive officer and
chief financial officer evaluated the Companys disclosure controls and
procedures as of June 30, 2004. Based upon this evaluation, the chief executive
officer and chief financial officer concluded that the Companys disclosure
controls and procedures are effective in ensuring that material information
required to be disclosed is included in the reports that it files with the
Securities and Exchange Commission. There were no changes in the Companys internal controls or, to the knowledge
of management of the Company, other factors that could significantly affect
internal controls subsequent to the date of the Companys most recent
evaluation of its disclosure controls and procedures utilized to compile
information in this filing. June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Part II  Other Information 
 Item 1  Legal Proceedings The Company is subject to litigation arising in the ordinary course of
business. As of the date hereof, the Company believes the resolution of such
litigation will not have a material adverse effect upon the Companys financial
condition or results of operations. In connection with the Companys effort to support the development of
technology, which could utilize the Companys interactive system, the Company
advanced $1.0 million to Gamet Technology, Inc. pursuant to a written
promissory note (the Note) during the first quarter of 2003. The Note was
personally guaranteed by Steve and Margaret Urie, the principal owners of Gamet
and collateralized by the unconditional assignment of rights to receive
quarterly payments due to the principal owner pursuant to a long-term note held
by the principal owner in connection with the sale of a prior business. The
Note was due and payable on April 18, 2003. On July 2, 2003, the Company filed
a lawsuit in U.S. District Court, Southern Division, in South Dakota, against
Gamet and against the Uries, demanding payment of the Note. On August 12,
2003, the defendants submitted an answer denying liability on the Note. Gamet
also asserted counterclaims against LodgeNet alleging that LodgeNets failure
to procure private financing for PointOne Technologies, L.L.C., a joint venture
between LodgeNet and Gamet, caused Gamet to suffer damages in an undetermined
amount. On December 29, 2003, the Uries and various companies owned or
controlled by the Uries, including Gamet, filed for Chapter 11 reorganization
in the U.S. Bankruptcy Court of the District of Nevada. It is expected that
the various bankruptcy cases will be consolidated for court management and
trustee administration purposes into one case. As a result of the bankruptcy
filings, LodgeNets claims against the Uries and Gamet are stayed. Based on
the Companys current expectation and analysis, collection on the Note is
expected to begin in 2005 and to be completed by 2008. 
 Item 2  Changes in Securities and Use of Proceeds Not applicable. 
 Item 3  Defaults Upon Senior Securities Not applicable. 
 Item 4  Submission of Matters to a Vote of Security Holders  a.
    
    The Annual Meeting of Stockholders of the Company (Meeting)
was held on May 15, 2004, for the following purposes:  1.
    
    Election of two directors to each serve
three-year terms expiring in 2007;2.
    
    Ratification of the appointment of
PricewaterhouseCoopers LLP as the Companys independent
accountants for the fiscal year ending December 31, 2004; and3.
    
    Action on such other matters as may properly come
before the Meeting.  b.
    
    The directors elected at the meeting were Scott C. Petersen
and Scott H. Shlecter.c.
    
    The appointment of PricewaterhouseCoopers LLP was ratified.d.
    
    The results of voting at the Meeting were as follows: June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   Election of Directors --
    
    For
    
    Against
    
    Withheld
    
    AbstentionsScott C. Petersen
    
    
    11,844,216
    
    
    
    
    
    54,494
    
    
    Scott H. Shlecter
    
    
    11,850,927
    
    
    
    
    
    47,783
    
    
    Ratification of Independent Accountants --
    
    For
    
    Against
    
    Withheld
    
    Abstentions11,869,499
    
    
    27,852
    
    
    
    
    
    1,358
 
 Item 5  Other Information Not applicable. 
 Item 6  Exhibits and Reports on Form 8-K  a.
    
    Exhibits:  31.
    
    Rule 13a-14(a)/15(d)-14(a) Certifications.32.
    
    Section 1350 Certifications.  b.
    
    Reports onForm 8-K: On May 5, 2004, the Company filed a Report on Form 8-K to furnish under Item 9
a copy of a PowerPoint slide presentation presented to the Stockholders
following the conclusion of the Companys Annual Meeting of Stockholders held
at the Companys offices in Sioux Falls, South Dakota on May 5, 2004. On May 19, 2004, the Company filed a Report on Form 8-K to furnish under Item 9
a copy of a PowerPoint slide presentation presented on May 19, 2004, to the
Bear Stearns Credit Conference in New York, New York and a copy of a press
release concerning information announced during the Companys presentation at
the Bear Stearns Global Credit Conference, including (i) that LodgeNet will
offer on-demand access to select Disney Channel programming as part of the
services it provides to the United States hospitality industry and (ii) updated
guidance for the second quarter and full-year of 2004. On June 16, 2004, the Company filed a Report on Form 8-K to furnish under Item
9 a copy of a Press Release dated June 15, 2004, announcing the Companys plans
to publicly offer 3.95 million shares of its common stock in a take-down
offering made from a shelf registration statement that became effective April
16, 2004 with UBS Securities LLC as the book-running manager and Bear, Stearns
& Co. Inc. and CIBC World Markets Corp. as co-lead managers, and announcing
updated guidance for the second quarter and full-year 2004. On June 30, 2004, the Company filed a Report on Form 8-K to furnish under Item
5 a copy of the underwriting agreement providing for the offering of 3.95
million shares of common stock at $16.50 per share, before underwriting
discounts and commissions and granting underwriters an option to purchase up to
592,500 additional shares solely to cover over-allotments. On July 23, 2004, the Company filed a Report on Form 8-K to furnish under item
12 a copy of a press release regarding its financial results for the fiscal
quarter ended June 30, 2004 and certain other information and a copy of a
PowerPoint presentation posted on the Companys web site as part of an earnings
teleconference held on July 22, 2004. June 30, 2004
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 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. LodgeNet Entertainment Corporation(Registrant)Date: August 6, 2004
    
    / s / Scott C. PetersenScott C. PetersenPresident, Chief Executive Officer andChairman of the Board of Directors(Principal Executive Officer)Date: August 6, 2004
    
    / s / Gary H. RitondaroGary H. RitondaroSenior Vice President, Chief Financial Officer(Principal Financial & Accounting Officer)
 June 30, 2004
    
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