##### 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 June 30, 2005
 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
Entertainment Corporation
  Delaware
    
    46-0371161(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 3900 West Innovation Street, Sioux Falls, South Dakota 57107
 
  (605) 988-1000
 
  
  þ o
 þ o




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LodgeNet Entertainment Corporation
    
    Form 10-Q
  
 LodgeNet Entertainment Corporation and Subsidiary
 Index
 PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets (Unaudited) as of June 30, 2005 and December 31, 2004
    
    
    3Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4  Controls and Procedures
    
    
    31Part II. Other InformationItem 1  Legal Proceedings
    
    
    32Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3  Defaults Upon Senior Securities
    
    
    32Item 4  Submission of Matters to a Vote of Security Holders
    
    
    32Item 5  Other Information
    
    
    33Item 6  Exhibits
    
    
    33Signatures
    
    
    34Amended and Restated BylawsCertification of Chief Financial OfficerCertification of Chief Executive OfficerSection 1350 Certifications
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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 Subsidiary
 
 Consolidated Balance Sheets (Unaudited)
 June 30,
    
    December 31,2005
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    23,744
    
    
    $
    24,995Accounts receivable, net
    
    
    29,022
    
    
    
    28,031Prepaid expenses and other
    
    
    2,454
    
    
    
    1,959Total current assets
    
    
    55,220
    
    
    
    54,985Property and equipment, net
    
    
    207,500
    
    
    
    212,659Debt issuance costs, net
    
    
    8,360
    
    
    
    9,330Intangible assets, net
    
    
    3,303
    
    
    
    4,628Other assets
    
    
    1,076
    
    
    
    1,434Total assets
    
    $
    275,459
    
    
    $
    283,036Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    19,282
    
    
    $
    16,807Current maturities of long-term debt
    
    
    2,848
    
    
    
    2,543Accrued expenses
    
    
    13,005
    
    
    
    12,738Deferred revenue
    
    
    5,227
    
    
    
    4,364Total current liabilities
    
    
    40,362
    
    
    
    36,452Long-term debt
    
    
    300,401
    
    
    
    309,748Other long-term liability
    
    
    3,154
    
    
    
    3,154Derivative instruments
    
    
    3,733
    
    
    
    5,800Total liabilities
    
    
    347,650
    
    
    
    355,154Commitments and contingenciesStockholders 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;
17,961,973 and 17,625,364 shares outstanding at June 30,
2005 and December 31, 2004, respectively
    
    
    179
    
    
    
    176Additional paid-in capital
    
    
    230,444
    
    
    
    226,986Accumulated deficit
    
    
    (302,607
    )
    
    
    (297,348
    )Accumulated other comprehensive loss
    
    
    (207
    )
    
    
    (1,932
    )Total stockholders deficiency
    
    
    (72,191
    )
    
    
    (72,118
    )Total liabilities and stockholders deficiency
    
    $
    275,459
    
    
    $
    283,036
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Consolidated Statements of Operations (Unaudited)
 Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Revenues:Guest Pay
    
    $
    66,282
    
    
    $
    64,218
    
    
    $
    130,434
    
    
    $
    126,541Other
    
    
    1,833
    
    
    
    2,063
    
    
    
    3,670
    
    
    
    3,571Total revenues
    
    
    68,115
    
    
    
    66,281
    
    
    
    134,104
    
    
    
    130,112Costs and Expenses:Direct costs (exclusive of operating
expenses and
depreciation and amortization shown separately
below) :Guest Pay
    
    
    28,352
    
    
    
    28,344
    
    
    
    56,696
    
    
    
    55,851Other
    
    
    731
    
    
    
    720
    
    
    
    1,647
    
    
    
    1,462Operating expenses:Guest Pay operations
    
    
    8,827
    
    
    
    8,339
    
    
    
    17,449
    
    
    
    16,477Selling, general and administrative
    
    
    6,239
    
    
    
    6,179
    
    
    
    12,311
    
    
    
    11,884Depreciation and amortization
    
    
    17,888
    
    
    
    19,462
    
    
    
    35,880
    
    
    
    39,130Total costs and operating expenses
    
    
    62,037
    
    
    
    63,044
    
    
    
    123,983
    
    
    
    124,804Income from operations
    
    
    6,078
    
    
    
    3,237
    
    
    
    10,121
    
    
    
    5,308Other Income and Expenses:Write-off of debt issuance costs
    
    
    (143
    )
    
    
    
    
    
    
    (143
    )
    
    
    Interest expense
    
    
    (7,425
    )
    
    
    (8,148
    )
    
    
    (14,879
    )
    
    
    (16,371
    )Other (expense) income
    
    
    (51
    )
    
    
    45
    
    
    
    (126
    )
    
    
    98Loss before income taxes
    
    
    (1,541
    )
    
    
    (4,866
    )
    
    
    (5,027
    )
    
    
    (10,965
    )Provision for income taxes
    
    
    (114
    )
    
    
    (140
    )
    
    
    (232
    )
    
    
    (257
    )Net loss
    
    $
    (1,655
    )
    
    $
    (5,006
    )
    
    $
    (5,259
    )
    
    $
    (11,222
    )Net loss per common share (basic and diluted)
    
    $
    (0.09
    )
    
    $
    (0.38
    )
    
    $
    (0.30
    )
    
    $
    (0.86
    )Weighted average shares outstanding (basic and
diluted)
    
    
    17,937,777
    
    
    
    13,208,314
    
    
    
    17,809,537
    
    
    
    13,094,147
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Consolidated Statements of Cash Flows (Unaudited)
 Six Months Ended June 30,2005
    
    2004Operating activities:Net loss
    
    $
    (5,259
    )
    
    $
    (11,222
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    35,880
    
    
    
    39,130Write-off of debt issuance costs
    
    
    143
    
    
    
    Non-cash stock compensation
    
    
    115
    
    
    
    88Change in operating assets and liabilities:Accounts receivable
    
    
    (1,020
    )
    
    
    (1,833
    )Prepaid expenses and other
    
    
    (384
    )
    
    
    149Accounts payable
    
    
    2,484
    
    
    
    2,675Accrued expenses and deferred revenue
    
    
    1,016
    
    
    
    (784
    )Other
    
    
    265
    
    
    
    56Net cash provided by operating activities
    
    
    33,240

    
    
    
    28,259Investing activities:Property and equipment additions
    
    
    (28,104
    )
    
    
    (26,654
    )Note receivable repayments
    
    
    
    
    
    
    567Net cash used for investing activities
    
    
    (28,104
    )
    
    
    (26,087
    )Financing activities:Repayment of long-term debt
    
    
    (9,750
    )
    
    
    (750
    )Proceeds from equipment financing
    
    
    1,022
    
    
    
    Payment of capital lease obligations
    
    
    (686
    )
    
    
    (572
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    10,000Repayments of revolving credit facility
    
    
    
    
    
    
    (17,000
    )Payment of debt issuance costs
    
    
    
    
    
    
    (838
    )Proceeds from sale of interest rate swap
    
    
    
    
    
    
    3,052Proceeds from exercise of stock options
    
    
    3,052
    
    
    
    4,097Net cash used for financing activities
    
    
    (6,362
    )
    
    
    (2,011
    )Effect of exchange rates on cash
    
    
    (25
    )
    
    
    (32
    )Increase (decrease) in cash and cash equivalents
    
    
    (1,251
    )
    
    
    129Cash and cash equivalents at beginning of period
    
    
    24,995
    
    
    
    2,772Cash and cash equivalents at end of period
    
    $
    23,744
    
    
    $
    2,901
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Notes to Consolidated Financial Statements (Unaudited)
       Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net loss, as reported
    
    $
    (1,655
    )
    
    $
    (5,006
    )
    
    $
    (5,259
    )
    
    $
    (11,222
    )Add: stock based employee
compensation expense determined
under fair value method, net of
related tax effects
    
    
    (536
    )
    
    
    (1,485
    )
    
    
    (1,252
    )
    
    
    (1,688
    )Less: stock based employee
compensation expense included in
reported net loss
    
    
    58
    
    
    
    30
    
    
    
    115
    
    
    
    88Net loss, pro forma
    
    $
    (2,133
    )
    
    $
    (6,461
    )
    
    $
    (6,396
    )
    
    $
    (12,822
    )Loss per share (basic and diluted)As reported
    
    $
    (0.09
    )
    
    $
    (0.38
    )
    
    $
    (0.30
    )
    
    $
    (0.86
    )Pro forma
    
    
    (0.12
    )
    
    
    (0.49
    )
    
    
    (0.36
    )
    
    
    (0.98
    )
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    June 30,
    
    December 31,2005
    
    2004Land, building and equipment
    
    $
    81,596
    
    
    $
    80,956Free-to-guest equipment
    
    
    33,568
    
    
    
    32,753Guest Pay systems:Installed system costs
    
    
    446,746
    
    
    
    450,495Customer acquisition costs
    
    
    52,603

    
    
    
    50,869System components
    
    
    23,988
    
    
    
    25,466Software costs
    
    
    21,138
    
    
    
    20,393Total
    
    
    659,639
    
    
    
    660,932Less  depreciation and amortization
    
    
    (452,139
    )
    
    
    (448,273
    )Property and equipment, net
    
    $
    207,500
    
    
    $
    212,659
     June 30, 2005
    
    December 31, 2004Carrying
    
    Accumulated
    
    Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationAssets subject to
amortization:Acquired technology
    
    $
    14,291
    
    
    $
    13,468
    
    
    $
    14,291
    
    
    $
    12,786Acquired intangibles
    
    
    5,774
    
    
    
    3,368
    
    
    
    5,774
    
    
    
    2,791Other
    
    
    496
    
    
    
    422
    
    
    
    512
    
    
    
    372$
    20,561
    
    
    $
    17,258
    
    
    $
    20,577
    
    
    $
    15,949
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LodgeNet Entertainment Corporation
    
    Form 10-Q
      June 30,
    
    December 31,2005
    
    2004Accrued taxes
    
    $
    3,941
    
    
    $
    3,413Accrued compensation
    
    
    3,714
    
    
    
    4,869Accrued interest
    
    
    1,223
    
    
    
    970Other
    
    
    4,127
    
    
    
    3,486$
    13,005
    
    
    $
    12,738
    June 30,
    
    December 31,2005
    
    2004Bank Credit Facility:Bank term loan
    
    $
    100,375
    
    
    $
    110,125Revolving credit facility
    
    
    
    
    
    
    9.50% senior notes
    
    
    200,000
    
    
    
    200,000Capital leases
    
    
    2,874
    
    
    
    2,166303,249
    
    
    
    312,291Less current maturities
    
    
    (2,848
    )
    
    
    (2,543
    )$
    300,401
    
    
    $
    309,748
 Bank Credit Facility
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    9.50% Senior Notes pari
passu
  Capital Leases
  2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterLong-term debt
    
    $
    750
    
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    96,625
    
    
    $
    
    
    
    $
    200,000Capital leases
    
    
    786
    
    
    
    1,297
    
    
    
    763
    
    
    
    239
    
    
    
    40
    
    
    
    1,536
    
    
    
    2,797
    
    
    
    2,263
    
    
    
    96,864
    
    
    
    40
    
    
    
    200,000Less amount
representing
interest on
capital leases
    
    
    (89
    )
    
    
    (109
    )
    
    
    (42
    )
    
    
    (10
    )
    
    
    (1
    )
    
    
    $
    1,447
    
    
    $
    2,688
    
    
    $
    2,221
    
    
    $
    96,854
    
    
    $
    39
    
    
    $
    200,000
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net loss
    
    $
    (1,655
    )
    
    $
    (5,006
    )
    
    $
    (5,259
    )
    
    $
    (11,222
    )Foreign currency translation adjustment
    
    
    (106
    )
    
    
    (309
    )
    
    
    (201
    )
    
    
    (411
    )Unrealized gain on derivative instruments
    
    
    672
    
    
    
    2,701
    
    
    
    1,926
    
    
    
    2,875Comprehensive loss
    
    $
    (1,089
    )
    
    $
    (2,614
    )
    
    $
    (3,534
    )
    
    $
    (8,758
    )
  June 30,
    
    December 31,2005
    
    2004Unrealized loss on derivative instruments
    
    $
    (1,486
    )
    
    $
    (3,412
    )Foreign currency translation adjustment
    
    
    1,279
    
    
    
    1,480Accumulated other comprehensive loss
    
    $
    (207
    )
    
    $
    (1,932
    )
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   Page 11




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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 our
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, demand for our products and services, 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,
risks related to the security of our data systems, and 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 Quarterly 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 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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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
      Guest Pay Interactive Services.
  
    
    The number of rooms equipped with our system.We can increase revenue over time by increasing the number of rooms
served by our interactive systems. Our ability to expand our room base is dependent on a number of factors, including
the attractiveness of our technology, service and support to hotels currently operating without an interactive
television system, newly constructed hotel properties and hotels with expiring contracts currently served by our
competitors.
    
    The variety of services offered at the hotel.Rooms equipped with our digital system generate higher revenue than
rooms equipped with our tape-based system primarily because they offer a greater variety of services and content
choices. We plan to continue to grow the revenue we generate per average room by the installation of our digital
system in all newly contracted rooms and by converting selected tape-based rooms to our digital system in exchange for
long-term contract extensions.
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
    
    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 content available for viewing. Historically, a
decrease in the availability of popular content has from time-to-time adversely impacted
revenue. Although not completely within our control, we seek to program and promote the most
popular available content and other content to maximize revenue and profit.
    
    The price of the service purchased by the hotel guest.Generally,
we control the prices charged for our products and services and
manage pricing in an effort to maximize overall profit. We
establish pricing based on such things as the demographics of the
property served, the popularity of the content and general
economic conditions. Our technology enables us to measure
popularity of the content offered through our systems and make
decisions to best position such content and optimize revenue from
such content.
    
    The occupancy rate at the property.Our revenue also varies
depending on hotel occupancy rates, which are subject to a number
of factors, including seasonality, general economic conditions and
world events, such as terrorist threats or public health issues.
Occupancy rates are typically higher during the second and third
quarters due to seasonal travel patterns. We target higher
occupancy properties in diverse demographic and geographic
locations in an effort to mitigate occupancy-related risks.
   Ø
    
    license fees paid to major motion picture studios, which are based on a percent of
guest-generated revenue, for non-exclusive distribution rights of recently released major
motion pictures;Ø
    
    commissions paid to our hotel customers, which are also based on a percent of
guest-generated revenue;Ø
    
    fixed monthly programming charges paid primarily to DIRECTV for satellite-delivered
basic and premium television programming;Ø
    
    fixed Internet connectivity costs;Ø
    
    license fees, which are based on a percent of guest-generated revenue, for television on
demand, music, music video and video games; andØ
    
    one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences.
 Other Services. .
  Key Metrics:
 Rooms Served
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LodgeNet Entertainment Corporation
    
    Form 10-Q
  June 30,2005
    
    2004New Guest Pay interactive rooms for the
three months ended (1)
    
    
    9,483
    
    
    
    8,738New Guest Pay interactive rooms for the
six months ended (1)
    
    
    20,709
    
    
    
    18,355Total Guest Pay interactive rooms (2)
    
    
    995,507
    
    
    
    942,998Total rooms served (3)
    
    
    1,051,010
    
    
    
    1,006,421
 
 (1)
    
    Amounts shown are net of rooms de-installed during the period.(2)
    
    Guest Pay interactive rooms are equipped with our interactive television system, which
includes both digital and tape-based systems(3)
    
    Total rooms served include guest pay interactive rooms, rooms served by international
licensees, and properties receiving only basic and premium television services. Digital Room Growth
  June 30,2005
    
    2004Digital room installations for the three months ended
    
    
    31,848
    
    
    
    26,834Digital room installations for the six months ended
    
    
    63,836
    
    
    
    56,823Total Digital rooms installed
    
    
    572,815
    
    
    
    442,249Digital rooms as a percent of total Guest Pay
interactive rooms
    
    
    57.5
    %
    
    
    46.9
    %
 Cost of Installation
  Three Months Ended
    
    Years EndedJune 30,
    
    June 30,
    
    December 31,
    
    December 31,
    
    December 31,2005
    
    2004
    
    2004
    
    2003
    

    2002Average cost per room 
new installation
    
    $
    335
    
    
    $
    373
    
    
    $
    364
    
    
    $
    405
    
    
    $
    438Average cost per room 
conversion
    
    $
    265
    
    
    $
    296
    
    
    $
    284
    
    
    $
    337
    
    
    $
    358
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LodgeNet Entertainment Corporation
    
    Form 10-Q
  Direct Costs
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Direct Costs
    
    $
    9.82
    
    
    $
    10.34
    
    
    $
    9.89
    
    
    $
    10.25Direct Costs as a percent of total revenue
    
    
    42.7
    %
    
    
    43.8
    %
    
    
    43.5
    %
    
    
    44.0
    %
 Operating Expense Per Room
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Guest Pay operating expenses
    
    $
    2.98
    
    
    $
    2.97
    
    
    $
    2.96
    
    
    $
    2.95SG&A expense
    
    
    2.11
    
    
    
    2.20
    
    
    
    2.09
    
    
    
    2.12Depreciation and amortization (D&A)
    
    
    6.04
    
    
    
    6.92
    
    
    
    6.08
    
    
    
    7.00$
    11.13
    
    
    $
    12.09
    
    
    $
    11.13
    
    
    $
    12.07Guest Pay operations as a percent
of total revenue
    
    
    13.0
    %
    
    
    12.6
    %
    
    
    13.0
    %
    
    
    12.7
    %SG&A as a percent of total revenue
    
    
    9.2
    %
    
    
    9.3
    %
    
    
    9.2
    %
    
    
    9.1
    %D&A as a percent of total revenue
    
    
    26.3
    %
    
    
    29.4
    %
    
    
    26.8
    %
    
    
    30.1
    %
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Cash Flow
   Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Cash provided by operating activities
    
    $
    15,027
    
    
    $
    9,979
    
    
    $
    33,240
    
    
    $
    28,259Cash used for investing activities
    
    
    (15,551
    )
    
    
    (13,453
    )
    
    
    (28,104
    )
    
    
    (26,087
    )Difference
    
    $
    (524
    )
    
    $
    (3,474
    )
    
    $
    5,136
    
    
    $
    2,172
 Liquidity and Capital Resources
     Page 17




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   2005
    
    2004Actual consolidated total leverage ratio (1) (4)
    
    
    3.31
    
    
    
    4.14Maximum per covenant
    
    
    4.25
    
    
    
    4.75Actual senior secured leverage ratio (2) (4)
    
    
    1.13
    
    
    
    1.70Maximum per covenant
    
    
    2.25
    
    
    
    2.50Actual consolidated interest coverage ratio (3) (4)
    
    
    2.93
    
    
    
    2.54Minimum per covenant
    
    
    2.50
    
    
    
    2.25
 
 (1)
    
    Our maximum consolidated leverage ratio is a function of total indebtedness divided by
operating income exclusive of depreciation and amortization and other miscellaneous
non-recurring items as defined by the covenant.(2)
    
    Our 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)
    
    Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and other miscellaneous non-recurring items divided by
interest expense as defined by the covenant.(4)
    
    Maximum consolidated total leverage ratio, maximum senior secured leverage ratio, and minimum
consolidated interest coverage ratios are not based on generally accepted accounting
principles and are not presented as alternative measures of operating performance or
liquidity. They are presented here to demonstrate compliance with the covenants in our Credit
Facility, as noncompliance with such covenants could have a material adverse effect on us.   Q4 2005
    
    Q1 2006
    
    Q4 2006Maximum consolidated total leverage ratio
    
    
    4.00
    
    
    
    3.75
    
    
    
    3.50Maximum senior secured leverage ratio
    
    
    2.25
    
    
    
    2.25
    
    
    
    2.25Minimum consolidated interest coverage
ratio
    
    
    2.50
    
    
    
    2.75
    
    
    
    2.75
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   pari passu
     Page 19




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Payments due by periodLess than
    
    2  3
    
    4  5
    
    OverTotal
    
    1 year
    
    years
    
    years
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    303,249
    
    
    $
    2,848
    
    
    $
    4,401
    
    
    $
    96,000
    
    
    $
    200,000Interest on fixed rate debt
    
    
    152,000
    
    
    
    19,000
    
    
    
    38,000
    
    
    
    38,000
    
    
    
    57,000Interest on bank term loan and
derivative instruments
    
    
    19,485
    
    
    
    7,368
    
    
    
    11,200
    
    
    
    917
    
    
    
    Other long-term obligationsOther long-term liability (1)
    
    
    5,000
    
    
    
    1,250
    
    
    
    3,750
    
    
    
    
    
    
    
    Operating lease payments
    
    
    1,951
    
    
    
    631
    
    
    
    944
    
    
    
    369
    
    
    
    7Purchase obligations
    
    
    2,796
    
    
    
    2,796
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    484,481
    
    
    $
    33,893
    
    
    $
    58,295
    
    
    $
    135,286
    
    
    $
    257,007
 Amount of commitment expiration per periodLess than
    
    2  3
    
    4  5
    
    OverTotal
    
    1 year
    
    years
    
    years
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    2,522
    
    
    $
    2,522
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Other long-term liability represents the undiscounted 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
  Dependence on Performance of Lodging Industry
    Page 20




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LodgeNet Entertainment Corporation
    
    Form 10-Q
  Page 21




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
 Three Months Ended June 30, 2005 and 2004
 Revenue Analysis
 2005
    
    2004Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesRevenues:Guest Pay
    
    $
    66,282
    
    
    
    97.3
    
    
    $
    64,218
    
    
    
    96.9Other
    
    
    1,833
    
    
    
    2.7
    
    
    
    2,063
    
    
    
    3.1$
    68,115
    
    
    
    100.0
    
    
    $
    66,281
    
    
    
    100.0
  2005
    
    2004Average monthly revenue per room:Movie revenue
    
    $
    16.89
    
    
    $
    17.28Other interactive service revenue
    
    
    5.49
    
    
    
    5.56Total per Guest Pay room
    
    $
    22.38
    
    
    $
    22.84
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
  2005
    
    2004
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    42.7
    %
    
    
    43.8
    %
    
    
    -1.1
    %Change drivers:Internet related
    
    
    
    
    
    
    
    
    
    
    -0.9Programming costs (mix shift)
    
    
    
    
    
    
    
    
    
    
    0.1Hotel incentive commissions
    
    
    
    
    
    
    
    
    
    
    -0.3-1.1
    %
 Operating Expenses.
 2005
    
    2004Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    8,827
    
    
    
    13.0
    
    
    $
    8,339
    
    
    
    12.6Selling, general and administrative
    
    
    6,239
    
    
    
    9.2
    
    
    
    6,179
    
    
    
    9.3Depreciation and amortization
    
    
    17,888
    
    
    
    26.3
    
    
    
    19,462
    
    
    
    29.4Total operating expenses
    
    $
    32,954
    
    
    
    48.4
    
    
    $
    33,980
    
    
    
    51.3
   Page 23




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Operating Income.
 Interest Expense.
 Other (Expense) Income.
 Taxes.
 Net Loss.
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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, 2005 and 2004
 Revenue Analysis
 2005
    
    2004Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesRevenues:Guest Pay
    
    $
    130,434
    
    
    
    97.3
    
    
    $
    126,541
    
    
    
    97.3Other
    
    
    3,670
    
    
    
    2.7
    
    
    
    3,571
    
    
    
    2.7$
    134,104
    
    
    
    100.0
    
    
    $
    130,112
    
    
    
    100.0
  2005
    
    2004Average monthly revenue per room:Movie revenue
    
    $
    16.66
    
    
    $
    17.16Other interactive service revenue
    
    
    5.46
    
    
    
    5.46Total per Guest Pay room
    
    $
    22.12
    
    
    $
    22.62
   Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  2005
    
    2004
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    43.5
    %
    
    
    44.0
    %
    
    
    -0.5
    %Change drivers:Internet related
    
    
    
    
    
    
    
    
    
    
    -0.7Programming costs (mix shift)
    
    
    
    
    
    
    
    
    
    
    0.4Hotel incentive commissions
    
    
    
    
    
    
    
    
    
    
    -0.2-0.5
    %
 Operating Expenses.
 2005
    
    2004Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    17,449
    
    
    
    13.0
    
    
    $
    16,477
    
    
    
    12.7Selling, general and administrative
    
    
    12,311
    
    
    
    9.2
    
    
    
    11,884
    
    
    
    9.1Depreciation and amortization
    
    
    35,880
    
    
    
    26.7
    
    
    
    39,130
    
    
    
    30.1Total operating expenses
    
    $
    65,640
    
    
    
    48.9
    
    
    $
    67,491
    
    
    
    51.9
    Operating Income.
 Page 26




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Interest Expense.
 Other (Expense) Income.
 Taxes.
 Net Loss.
 Page 27




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Critical Accounting Policies
  Revenue recognition:
 
    
    Guest Pay Services.Our primary source of revenue is from
providing in-room, interactive television services to the lodging
industry, for which the hotel guest typically purchases on a
per-view, hourly or daily basis. These services include on-demand
movies, on-demand games, music and music video, Internet on
television and television on-demand. We recognize revenue from the
sale of these Guest Pay services in the period the related
services are sold and when collection is reasonably assured. No
future performance obligations exist on a service that has 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.
    
    Free-to-Guest Services.We generate revenue from the sale of
basic and premium television programming to individual hotels. We
recognize revenue from the sale of free-to-guest services in the
period the related services are sold and when collection is
reasonably assured. We establish the prices charged to each hotel
and no future performance obligations exist on programming that
has been provided to the hotel. Persuasive evidence of an
arrangement exists through our long-term contract with each hotel.
We also have advance billings from one month to three months for
certain free-to-guest programming services where the revenue is
deferred and recognized in the periods that services are provided.
    
    High Speed Internet Access System Sales.We provide high-speed
Internet access through the sale and installation of equipment.
Revenue from the sale and installation of this equipment is
recognized when the equipment is installed. The delivery and
installation of the equipment are concurrent. In addition, this
equipment has stand-alone value to the customer. The software
used within these systems is not proprietary and can be supplied
by other vendors unrelated to us. Equipment prices are fixed and
determinable prior to delivery and are based on objective and
reliable sales evidence from a stand-alone basis.
    
    High Speed Internet Access Service and Support.We provide ongoing
maintenance, service and call center support services to
properties that have been installed by us and also to properties
that have been installed by other providers. In addition, we
provide the property with the portal to access the Internet. We
receive monthly service fees from such subscribers for our
maintenance services and Internet access. The prices for these
services are fixed and determinable prior to delivery of the
service. The fair value of these services are known due to
objective and reliable evidence from contracts and stand alone
sales. Under the service agreement, which includes maintenance
and Internet access, we recognize revenue ratably over the term of
the maintenance and service contract, typically three-years.
    
    Healthcare System Sales and Support.We provide our interactive
television infrastructure and content to the healthcare industry.
Under relationships with healthcare services providers and our own
direct sales efforts, we sell our interactive system and provide
recurring support for interactive content, software maintenance
and technical field service for a fixed fee. Revenue from the
sale and installation of our interactive system is recognized when
the equipment is installed or the service has been provided. The
interactive system prices are fixed and determinable prior to
delivery. Under the support arrangement, the fixed fee is
deferred and recognized ratably over the term of the related
contract.
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
    
    Other.We also generate revenue from the sale of miscellaneous
system equipment such as television remotes and service parts and
labor. These sales are not sold under multiple element
arrangements and we recognize the revenue when the equipment is
delivered or the service has been performed. No future
performance obligation exists on an equipment sale or on a repair
service that has been provided.
 Allowance for doubtful accounts.
 Allowance for excess or obsolete system components.
 Property and equipment.
 YearsBuildings
    

    30Guest Pay systems:Installed system costs
    
    2  7Customer acquisition costs
    
    5  7System components
    
    5  7Software costs
    
    3  5Other equipment
    
    3  10
 Allowance for system removal.
 Recent Accounting Developments
  Page 29




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    
 Item 3  Quantitative and Qualitative Disclosures About Market Risk
  Interest.
 Foreign Currency Transactions.
 Page 30




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting.
 Page 31




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Part II  Other Information
 
 Item 1  Legal Proceedings
   
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
 a.
    
    The Annual Meeting of Stockholders of the Company (the Meeting) was held on
May 11, 2005, for the following purposes.
 1.
    
    Election of two directors to each serve three year terms
expiring in 2008; and2.
    
    Ratification of the appointment of PricewaterhouseCoopers LLP
as the Companys independent registered public accounting firm for the fiscal
year ending December 31, 2005.
 b.
    
    The directors elected at the meeting were R.F. Leyendecker and Vicki I. Pacherac.
    
    The appointment of PricewaterhouseCoopers LLP was ratifiedd.
    
    The results of voting at the Meeting were as follows:
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##### Table of Contents



LodgeNet Entertainment Corporation

    
    Form 10-Q
 
 Election of Director
    
    For
    
    Against
    
    Withheld
    
    AbstentionsR. F. Leyendecker
    
    
    15,519,613
    
    
    
    
    
    
    
    128,743
    
    
    
    Vicki I. Pachera
    
    
    15,615,693
    
    
    
    
    
    
    
    45,683
    
    
    
    Ratification
of Independent Registered Public Accounting Firm For
    
    Against
    
    Withheld
    
    Abstentions15,615,910
    
    
    
    
    
    
    
    768
    
    
    
    
 
 Item 5  Other Information
  
 Item 6  Exhibits
 3.2
    
    Amended and Restated Bylaws of LodgeNet Entertainment Corporation31.1
    
    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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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 LodgeNet Entertainment Corporation and Subsidiary
 
 Signatures
  LodgeNet Entertainment Corporation(Registrant)Date: August 8, 2005
    
    
    
    / s / Scott C. PetersenScott C. PetersenPresident, Chief Executive Officer andChairman of the Board of Directors(Principal Executive Officer)Date: August 8, 2005
    
    
    
    / s / Gary H. RitondaroGary H. RitondaroSenior Vice President, Chief Financial Officer(Principal Financial & Accounting Officer)
 Page 34