##### 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 March 31, 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 
 (Address of Principal Executive Offices)
    
    (ZIP code)
 (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 May 3, 2004, there were 13,173,851 shares outstanding of the
Registrants common stock, $0.01 par value.




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LodgeNet Entertainment Corporation
    
    From 10-Q







LodgeNet Entertainment Corporation and Subsidiaries

Index

PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets (Unaudited) as of March 31, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations (Unaudited) for
the Three Months Ended March 31, 2004 and 2003
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 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
    
    
    22Item 4  Controls and Procedures
    
    
    22Part II. Other InformationItem 1  Legal Proceedings
    
    
    23Item 2  Changes in Securities and Use of Proceeds
    
    
    23Item 3  Defaults Upon Senior Securities
    
    
    23Item 4  Submission of Matters to a Vote of Security Holders
    
    
    23Item 5  Other Information
    
    
    23Item 6  Exhibits and Reports on Form 8-K
    
    
    23Signatures
    
    
    25Rule 13a-14(a)/15(d)-14(a) CertificationsSection 1350 Certifications






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As used herein (unless the context otherwise requires) LodgeNet, the
Company and/or the Registrant means LodgeNet Entertainment Corporation and
its majority-owned subsidiaries.



March 31, 2004
    
    Page 2




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 10-Q
 
 Part I  Financial Information 
 Item 1  Financial Statements LodgeNet Entertainment Corporation and Subsidiaries 
 Consolidated Balance Sheets (Unaudited)
  March 31,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,971
    
    
    $
    2,772Accounts receivable, net
    
    
    28,610
    
    
    
    28,150Prepaid expenses and other
    
    
    3,383
    
    
    
    3,233Total current assets
    
    
    37,964
    
    
    
    34,155Property and equipment, net
    
    
    221,966
    
    
    
    227,037Debt issuance costs, net
    
    
    10,954
    
    
    
    11,036Intangible assets, net
    
    
    7,354
    
    
    
    8,270Other assets
    
    
    2,658
    
    
    
    2,770$
    280,896
    
    
    $
    283,268Liabilities and Stockholders Equity (Deficiency)Current liabilities:Accounts payable
    
    $
    17,311
    
    
    $
    15,012Current maturities of long-term debt
    
    
    8,591
    
    
    
    8,638Accrued expenses
    
    
    16,685
    
    
    
    12,697Deferred revenue
    
    
    4,256
    
    
    
    3,918Total current liabilities
    
    
    46,843
    
    
    
    40,265Long-term debt
    
    
    352,018
    
    
    
    359,610Other long-term liability
    
    
    3,999
    
    
    
    3,999Derivative instruments
    
    
    10,538
    
    
    
    8,396Total liabilities
    
    
    413,398
    
    
    
    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;
13,108,530 and 12,722,267 shares outstanding at March 31,
2004 and December 31, 2003, respectively
    
    
    131
    
    
    
    127Additional paid-in capital
    
    
    157,803
    
    
    
    155,163Accumulated deficit
    
    
    (282,783
    )
    
    
    (276,567
    )Accumulated other comprehensive loss
    
    
    (7,653
    )
    
    
    (7,725
    )Total stockholders equity (deficiency)
    
    
    (132,502
    )
    
    
    (129,002
    )$
    280,896
    
    
    $
    283,268
 The accompanying notes are an integral part of these consolidated financial statements.




March 31, 2004
    
    Page 3




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 10-Q
 LodgeNet Entertainment Corporation and Subsidiaries 
 Consolidated Statements of Operations (Unaudited)
  Three Months Ended March 31,2004
    
    2003Revenues:Guest Pay
    
    $
    62,323
    
    
    $
    57,867Other
    
    
    1,508
    
    
    
    1,779Total revenues
    
    
    63,831
    
    
    
    59,646Direct costs:Guest Pay
    
    
    27,507
    
    
    
    25,744Other
    
    
    742
    
    
    
    852Total direct costs (exclusive of other operating
expenses shown separately below)
    
    
    28,249
    
    
    
    26,596Gross profit (exclusive of other operating expenses
shown separately below)
    
    
    35,582
    
    
    
    33,050Operating expenses:Guest Pay operations
    
    
    8,138
    
    
    
    7,623Selling, general and administrative
    
    
    5,705
    
    
    
    5,415Depreciation and amortization
    
    
    19,668
    
    
    
    19,977Total operating expenses
    
    
    33,511
    
    
    
    33,015Operating income
    
    
    2,071
    
    
    
    35Interest expense
    
    
    (8,223
    )
    
    
    (8,389
    )Other income
    
    
    53
    
    
    
    64Loss before income taxes
    
    
    (6,099
    )
    
    
    (8,290
    )Provision for income taxes
    
    
    (117
    )
    
    
    (129
    )Net loss
    
    $
    (6,216
    )
    
    $
    (8,419
    )Net loss per common share (basic and diluted)
    
    $
    (0.48
    )
    
    $
    (0.68
    )Weighted average shares outstanding (basic and diluted)
    
    
    12,979,981
    
    
    
    12,431,149
 The accompanying notes are an integral part of these consolidated financial statements.




March 31, 2004
    
    Page 4




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 10-Q
 LodgeNet Entertainment Corporation and Subsidiaries 
 Consolidated Statements of Cash Flows (Unaudited)
  Three Months Ended March 31,2004
    
    2003Operating activities:Net loss
    
    $
    (6,216
    )
    
    $
    (8,419
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    19,668
    
    
    
    19,977Change in operating assets and liabilities:Accounts receivable
    
    
    (474
    )
    
    
    (975
    )Prepaid expenses and other
    
    
    (707
    )
    
    
    (83
    )Accounts payable
    
    
    2,304
    
    
    
    4,863Accrued expenses and deferred revenue
    
    
    3,605
    
    
    
    2,115Other
    
    
    100
    
    
    
    91Net cash provided by operating activities
    
    
    18,280
    
    
    
    17,569Investing activities:Property and equipment additions
    
    
    (13,201
    )
    
    
    (16,180
    )Note receivable repayments (advances)
    
    
    567
    
    
    
    (1,000
    )Net cash used for investing activities
    
    
    (12,634
    )
    
    
    (17,180
    )Financing activities:Repayment of long-term debt
    
    
    (375
    )
    
    
    (1,176
    )Payment of capital lease obligations
    
    
    (279
    )
    
    
    (234
    )Borrowings under revolving credit facility
    
    
    4,000
    
    
    
    1,000Repayments of revolving credit facility
    
    
    (11,000
    )
    
    
    Debt issuance costs
    
    
    (367
    )
    
    
    Proceeds from sale of interest rate swap
    
    
    3,052
    
    
    
    Exercise of stock options
    
    
    2,515
    
    
    
    Net cash used for financing activities
    
    
    (2,454
    )
    
    
    (410
    )Effect of exchange rates on cash
    
    
    7
    
    
    
    102Increase in cash and cash equivalents
    
    
    3,199
    
    
    
    81Cash and cash equivalents at beginning of period
    
    
    2,772
    
    
    
    1,107Cash and cash equivalents at end of period
    
    $
    5,971
    
    
    $
    1,188
 The accompanying notes are an integral part of these consolidated financial statements.




March 31, 2004
    
    Page 5




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 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 March 31, 2004, and
for the three month periods ended March 31, 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-month periods ended March
31, 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): March 31,
    
    December 31,2004
    
    2003Land, building and equipment
    
    $
    76,510
    
    
    $
    76,519Free-to-guest equipment
    
    
    31,443
    
    
    
    30,990Guest Pay systems:Installed system costs
    
    
    431,292
    
    
    
    428,757Customer acquisition costs
    
    
    47,710
    
    
    
    47,095System components
    
    
    28,678
    
    
    
    27,674Software costs
    
    
    19,467
    
    
    
    19,217Total
    
    
    635,100
    
    
    
    630,252Less  depreciation and amortization
    
    
    (413,134
    )
    
    
    (403,215
    )Property and equipment, net
    
    $
    221,966
    
    
    $
    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.




March 31, 2004
    
    Page 6




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##### Table of Contents





LodgeNet Entertainment Corporation
    
    From 10-Q


The loss per common share for the three months ended March 31, 2004 and 2003,
is based on 12,979,981 and 12,431,149 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 March 31, 2004 and 2003, the number of potential common
shares was approximately 4,570,000 and 4,946,000, 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
March 31 (in thousands of dollars, except per share amounts):

Three Months EndedMarch 31,2004
    
    2003Net loss, as reported
    
    $
    (6,216
    )
    
    $
    (8,419
    )Add: stock based employee compensation expense
determined under fair value method, net of
related tax effects
    
    
    (83
    )
    
    
    (79
    )Less: stock based employee compensation expense
included in reported net loss
    
    
    (57
    )Net loss, pro forma
    
    $
    (6,242
    )
    
    $
    (8,498
    )Loss per share (basic and diluted)As reported
    
    $
    (0.48
    )
    
    $
    (0.68
    )Pro forma
    
    
    (0.48
    )
    
    
    (0.68
    )


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 $30,000 as compensation expense during the period ended March
31, 2004.

Note 5  Accrued Expenses

Accrued expenses were comprised as follows (in thousands of dollars):

March 31,
    
    December 31,2004
    
    2003Accrued taxes
    
    $
    3,169
    
    
    $
    3,160Accrued compensation
    
    
    3,668
    
    
    
    4,049Accrued interest
    
    
    6,204
    
    
    
    1,559Other
    
    
    3,644
    
    
    
    3,929$
    16,685
    
    
    $
    12,697




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 10-Q
 Note 6  Long-term Debt and Credit Facilities Long-term debt was comprised as follows (in thousands): March 31,
    
    December 31,2004
    
    2003Bank Credit Facility:Bank term loan
    
    $
    146,250
    
    
    $
    146,625Revolving credit facility
    
    
    
    
    
    
    7,0009.50% senior notes
    
    
    200,000
    
    
    
    200,00011.50% senior notes
    
    
    12,000
    
    
    
    12,000Less unamortized discount
    
    
    (61
    )
    
    
    (82
    )Capital leases
    
    
    2,420
    
    
    
    2,705360,609
    
    
    
    368,248Less current maturities
    
    
    (8,591
    )
    
    
    (8,638
    )$
    352,018
    
    
    $
    359,610
 Bank Credit Facility On August 29, 2001, the Company entered into a $225
million bank credit facility, comprised of a $150 million term loan and a $75
million revolving credit facility that may be increased to $100 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 March 31, 2004 was 4.61%.
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 March 31,
2004, there were no amounts outstanding under the revolving credit facility.
Loans under the credit facility are collateralized by a first priority security
interest in all of the Companys assets. The facility provides for the issuance of letters of credit up to $10 million,
subject to customary terms and conditions. As of March 31, 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 March 31, 2004, the
Companys maximum consolidated leverage ratio and minimum consolidated interest
coverage ratio were 4.20 and 2.51, respectively, versus covenant ratios of 4.50
and 2.25, respectively. In addition, the Company was in compliance with all
covenants, terms and conditions of the bank credit facility. 9.50% Senior Notes In June 2003, the Company issued $200 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 March 31, 2004, the
Company was in compliance with all covenants, terms, and conditions of the
9.50% Notes. 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.




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 10-Q
 11.50% Senior Notes During 1995, the Company issued $30 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 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 March 31, 2004,
the Company was in compliance with all covenants, terms, and conditions of the
11.50% Notes. 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 using the cashless method as provided for by the 11.50% Notes which
resulted in the Company issuing 150,256 shares of common stock. Capital Leases As of March 31, 2004, the Company has total capital lease
obligations of $2,420,000. Equipment acquired under capital lease
arrangements totaled $785,000 during the year ended December 31, 2003, and
$19,000 during the three months ended March 31, 2004. Long-term debt has the following scheduled principal maturities for the twelve
months ended March 31 (in thousands of dollars): 2005  $8,591; 2006  $8,259;
2007  $1,961; 2008  $1,548; 2009  $140,250; 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 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
million of long-term debt, of which $50 million expires in December 2005 and
$50 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 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 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.




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##### Table of Contents





LodgeNet Entertainment Corporation
    
    From 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 March 31 (in
thousands):

Three Months EndedMarch 31,2004
    
    2003Net loss
    
    $
    (6,216
    )
    
    $
    (8,419
    )Foreign currency translation adjustment
    
    
    (103
    )
    
    
    865Unrealized gain on derivative instruments
    
    
    175
    
    
    
    143Comprehensive loss
    
    $
    (6,144
    )
    
    $
    (7,411
    )


Components of accumulated other comprehensive loss as shown on the Companys
consolidated balance sheets were as follows (in thousands):

March 31,
    
    December 31,2004
    
    2003Unrealized loss on derivative instruments
    
    $
    (8,221
    )
    
    $
    (8,396
    )Foreign currency translation adjustment
    
    
    568
    
    
    
    671Accumulated other comprehensive loss
    
    $
    (7,653
    )
    
    $
    (7,725
    )




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 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 March 31, 2004, the Company provided television services to
approximately 5,800 hotel properties serving more than one million rooms. For the first quarter of 2004, the Company continued to execute on its
operating plans and delivered increased revenue, greater margin and positive
cash flow as compared to the first quarter of 2003, and a debt reduction of
$7.6 million from the end of 2003. Additionally, the Company expanded its
digital room base to 45% (more than 415,000 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.




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 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. In the quarters indicated, the Company
installed its systems in the following number of net new rooms and had the
following total rooms installed as of March 31: 2004
    
    2003Net new Guest Pay interactive rooms (1)
    
    
    9,617
    
    
    
    13,428Total Guest Pay interactive rooms (2)
    
    
    934,260
    
    
    
    889,776Total rooms served (3)
    
    
    1,001,876
    
    
    
    962,852
  (1)
    
    All Guest Pay interactive rooms installations in the first quarter of
2004 and 2003 received the Companys digital storage 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 on-demand.(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.




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LodgeNet Entertainment Corporation
    
    From 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.

March 31,2004
    
    2003Net digital room installations (1)
    
    
    29,989
    
    
    
    32,495Total digital rooms installed
    
    
    415,415
    
    
    
    297,592Digital rooms as a percent of total Guest Pay
interactive rooms
    
    
    45
    %
    
    
    33
    %




|(1) |  | Digital room installations for the quarter 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 quarter ended March 31:

2004
    
    2003Average cost per room  new installation
    
    $
    382
    
    
    $
    420Average cost per room  conversion
    
    $
    305
    
    
    $
    343


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 quarters ended as
set forth in the following table:

March 31,2004
    
    2003Cash provided by operating activities
    
    $
    18,280
    
    
    $
    17,569Cash used for investing activities
    
    
    (12,634
    )
    
    
    (17,180
    )Difference
    
    $
    5,646
    
    
    $
    389




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 10-Q
 Operating Expense Per Room The Company will continue to manage operating and SG&A expenses while balancing
the Companys growth objective. The following table sets forth the Companys
decreased operating expenses and SG&A as a percent of revenue during the
quarters ended March 31: 2004
    
    2003Guest Pay operating expenses
    
    $
    2.93
    
    
    $
    2.88SG&A expense
    
    
    2.05
    
    
    
    2.05$
    4.98
    
    
    $
    4.93Guest Pay operations as a percent of total revenue
    
    
    12.7
    %
    
    
    12.8
    %SG&A as a percent of total revenue
    
    
    8.9
    %
    
    
    9.1
    %
 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 three months of 2004, cash flow from operations was sufficient to cover
all long-term debt service as well as all capital investments, including growth
capital. Capital expenditures for the first three months of 2004 were $13.2
million as compared to $16.2 million for the same period of 2003. The decline
from 2003 was driven by reductions in the Companys cost per digital room and
the reduction in number of digital rooms installed. The cost per new digital
installed room averaged $382 in the quarter, a 9.0% reduction from the first
quarter of 2003, while the cost of a digital upgrade decreased to $305, an 11%
reduction from the first quarter of 2003. During the first quarter of 2004,
the Company installed approximately 30,700 digital rooms versus 32,800 digital
rooms in the first quarter of 2003. Net cash provided by operating activities
was $18.3 million as compared to $17.6 million in the same period of 2003.
This resulted in cash flow net of investing of $5.6 million utilized to reduce
debt. Depending on the rate of growth of its business and other factors, the Company
expects to incur capital expenditures of $57 to $59 million in 2004. Based on
that range, the Company estimates it will install approximately 50,000 to
55,000 new rooms and convert approximately 65,000 to 70,000 existing rooms from
tape-based to digital systems in exchange for long-term contract extensions. The Company believes that its 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 March 31, 2004, working capital was negative
$8.9 million, compared to negative $9.3 million at March 31, 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
additional borrowings available under its current Credit Facility of
approximately $46.9 million, a reduction in capital spending and/or a reduction
in operating expenses. 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 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 March 31, 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 March 31, 2004 was $360.6 million versus $368.2 million as of
December 31,




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LodgeNet Entertainment Corporation
    
    From 10-Q
 2003. The Companys leverage and interest coverage ratios were as follows for the
periods ended March 31: 2004
    
    2003Actual consolidated total leverage ratio (1) (4)
    
    
    4.20
    
    
    
    4.38Maximum per covenant
    
    
    4.75
    
    
    
    4.50Actual senior secured leverage ratio (2) (4)
    
    
    1.73
    
    
    
    2.30Maximum per covenant
    
    
    2.50
    
    
    
    2.50Actual consolidated interest coverage ratio (3) (4)
    
    
    2.51
    
    
    
    2.44Minimum 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. 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%. 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, the Companys annualized savings are
approximately $1.8 million. The Company does not utilize special purpose entities or off-balance sheet
financial arrangements.




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LodgeNet Entertainment Corporation
    
    From 10-Q
 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 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 March 31, 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)
    
    $
    360,609
    
    
    $
    8,591
    
    
    $
    10,220
    
    
    $
    141,798
    
    
    $
    200,000Interest on fixed rate debt
    
    
    181,880
    
    
    
    20,035
    
    
    
    38,345
    
    
    
    38,000
    
    
    
    85,500Other long-term obligations (1)
    
    
    8,237
    
    
    
    2,100
    
    
    
    3,306
    
    
    
    2,793
    
    
    
    38Purchase obligations
    
    
    5,672
    
    
    
    5,672
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    556,398
    
    
    $
    36,398
    
    
    $
    51,871
    
    
    $
    182,591
    
    
    $
    285,538
 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.




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    From 10-Q
 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, or other
events, such as hostilities in the Middle East, other significant international
crises, acts of terrorism,public health issues, or catastrophic events could
adversely impact the Companys results of operations. The overall travel industry has been adversely affected by the weaker general
economic climate. 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 three months of 2004, occupancy rates were 80
basis points higher than experienced in the first three months of 2003. If
hotel occupancy rates were to decline significantly below current levels, the
Companys revenues would be adversely affected. To help mitigate the impact of occupancy levels on operating income, the
Company continues to control operating expenses and capital spending. The
Company plans to reassess its operating and capital expenditure plans
periodically to respond to changes in the economic environment. 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.




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LodgeNet Entertainment Corporation
    
    From 10-Q
 Discussion and Analysis of Results of Operations
Three Months Ended March 31, 2004 and 2003 Revenue Analysis. The Companys total revenue for the first quarter of 2004
increased 7.0%, or $4.2 million, in comparison to the first quarter of 2003.
The following table sets forth the components of revenue (in thousands) for the
quarter ended March 31: 2004
    
    2003Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesRevenues:Guest Pay
    
    $
    62,323
    
    
    
    97.6
    
    
    $
    57,867
    
    
    
    97.0Other
    
    
    1,508
    
    
    
    2.4
    
    
    
    1,779
    
    
    
    3.0$
    63,831
    
    
    
    100.0
    
    
    $
    59,646
    
    
    
    100.0
 Guest Pay interactive revenue increased 7.7%, or $4.5 million, in the first
quarter of 2004 in comparison to the same quarter of 2003. This increase was
attributable to a 5.2% increase in the average number of installed Guest Pay
interactive rooms, continued deployment of digital systems (118,000 additional
digital rooms deployed compared to the first quarter of 2003) and price
increases to selective Guest Pay services. On a per room basis, revenue
increased 2.4% to $22.41 per month in the first quarter of 2004 from $21.89 per
month in the first quarter of 2003. The following table sets forth information
in regard to average monthly revenue per Guest Pay room for the quarter ended
March 31: 2004
    
    2003Average monthly revenue per room:Movie revenue
    
    $
    17.04
    
    
    $
    17.12Other interactive service revenue
    
    
    5.37
    
    
    
    4.77Total per Guest Pay room
    
    $
    22.41
    
    
    $
    21.89
 Average movie revenue per room decreased slightly from $17.12 to $17.04, due to
less popular movie content as compared to Q1 of 2003. During the first quarter
of 2004, the Company exhibited one title with more than $150 million of box
office revenue versus five titles having more than $150 million during the same
period of 2003. Other interactive service revenue increased 12.6%, driven by expanding revenue
from TV Internet, TV on demand, digital music, cable television programming
services, and other interactive TV services available with the digital system. Other Revenue from free-to-guest services provided to hotels not receiving
Guest Pay services and sales of system equipment and service parts and labor.
Other Revenue decreased $271,000, or 15.2%, resulting from decreased equipment
sales to international licensees.




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LodgeNet Entertainment Corporation
    
    From 10-Q


Gross Profit (exclusive of other operating expenses discussed separately
below).Gross profit totaled $35.6 million for the first quarter ended March
31, 2004, an increase of 7.7% over the first quarter of 2003.

2004
    
    2003Gross profit:Guest Pay
    
    $
    34,816
    
    
    $
    32,123Other
    
    
    766
    
    
    
    927$
    35,582
    
    
    $
    33,050Gross profit margin:Guest Pay
    
    
    55.9
    %
    
    
    55.5
    %Other
    
    
    50.8
    %
    
    
    52.1
    %Total
    
    
    55.7
    %
    
    
    55.4
    %


Gross profit on Guest Pay interactive services increased 8.4%, or $2.7 million
on a 7.7% increase in related revenue. Guest Pay direct costs, all of which
generally fluctuate directly with revenue, include primarily 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 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 55.5% 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. Hotel commissions increased as a result of
the Companys utilization of its pay for performance commission structure
whereby an increase in revenue per room could result in a higher commission
paid to the hotel.

Gross profit on other services decreased $161,000, or 17.4%, in the first
quarter of 2004 from the prior year quarter and the gross profit margin
decreased from 52.1% to 50.8%. The resulting decreased gross profit margin was
attributable to decreased margin on free-to-guest services provided to hotels
not receiving Guest Pay services offset by decreased sales of equipment to
international licensees which have lower margin.

As a percentage of revenue, the Companys overall gross profit margin was 55.7%
compared to 55.4% 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 March 31:

2004
    
    2003
    
    ChangeGross profit margin
    
    
    55.7
    %
    
    
    55.4
    %
    
    
    0.3
    %Change drivers:Programming costs
    
    
    
    
    
    
    
    
    
    
    0.9TV Internet
    
    
    
    
    
    
    
    
    
    
    -0.3Hotel commissions
    
    
    
    
    
    
    
    
    
    
    -0.30.3
    %




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LodgeNet Entertainment Corporation
    
    From 10-Q
 Operating Expenses.The following table sets forth information in regard to
the Companys operating expenses for the quarter ended March 31 (dollar amounts
in thousands): 2004
    
    2003Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    8,138
    
    
    
    12.7
    
    
    $
    7,623
    
    
    
    12.8Selling, general and administrative
    
    
    5,705
    
    
    
    8.9
    
    
    
    5,415
    
    
    
    9.1Depreciation and amortization
    
    
    19,668
    
    
    
    30.8
    
    
    
    19,977
    
    
    
    33.5Total operating expenses
    
    $
    33,511
    
    
    
    52.4
    
    
    $
    33,015
    
    
    
    55.4
 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 $515,000, or 6.8%, in 2004 from the prior year quarter.
The increase was primarily due to the 5.2% increase in average rooms served by
the Company. As a percentage of revenue, Guest Pay operations expenses
decreased to 12.7% in the first quarter of 2004 compared to 12.8% in the year
earlier period. Per average installed room, Guest Pay operations expenses
increased to $2.93 per month in the first quarter of 2004 from $2.88 per month
in the prior year quarter, which represents a 1.7% increase. Selling, general and administrative expenses were $5.7 million, an increase of
$290,000 compared to $5.4 million in the first quarter of 2003. The increase
was primarily attributable to increases in professional fees and
payroll-related expenses. As a percentage of revenue, SG&A decreased to 8.9% in
the current quarter compared to 9.1% for first quarter 2003. Per average Guest
Pay room, SG&A expenses remained flat at $2.05 in the first quarter of 2003 and
2004. Depreciation and amortization expenses decreased to $19.7 million in the
current year quarter versus $20.0 million in the first quarter of 2003. The
decrease was primarily due to assets becoming fully depreciated. As a
percentage of revenue, depreciation and amortization decreased to 30.8% in the
first quarter of 2004 versus 33.5% in the first quarter of 2003. Operating Income.As a result of the factors described above, the Company
generated operating income of $2.1 million in the first quarter of 2004
compared to $35,000 in the first quarter of 2003. Interest Expense.Interest expense decreased $166,000, or 2.0%, to $8.2
million during the first quarter of 2004. Average principal amount of
long-term debt outstanding during the quarter ended March 31, 2004 was
approximately $367 million (at an average interest rate of approximately 9.0%)
as compared to an average principal amount outstanding of approximately $354
million (at an average interest rate of approximately 9.5%) during the
comparable period of 2003. Taxes.For the first quarter of 2004, the Company incurred franchise tax of
$117,000 versus $129,000 during the first quarter of 2003. Net Loss.For the reasons previously described, the Companys net loss
decreased to $6.2 million in the first quarter of 2004 from a net loss of $8.4
million in the prior year quarter.




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LodgeNet Entertainment Corporation
    
    From 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 quarters ended
March 31, 2004 and 2003, charges to the allowance for doubtful account for
related interactive television services were $60,000 and $69,000, 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




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LodgeNet Entertainment Corporation
    
    From 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 March 31, 2004, the Company had debt totaling $360 million. The
Company has interest rate swap arrangements covering debt with a notional
amount of $100 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 million and variable rate debt of $46
million at March 31, 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
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 $463,000 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 quarter 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 March 31, 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.




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LodgeNet Entertainment Corporation
    
    From 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 Not applicable. 
 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 February 6, 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 and year ended as of December 31, 2003 and certain other
information and a copy of a Power Point presentation posted on the Companys
web site in advance of an earnings telephone conference held February 5, 2004.




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LodgeNet Entertainment Corporation
    
    From 10-Q
 On February 11, 2004, the Company filed a Report on Form 8-K to furnish under
Item 5 a copy of a press release announcing that Scott H. Shlecter was elected
to the Companys board of directors. On March 3, 2004, the Company filed a Report on Form 8-K to furnish under Item
12 a copy of a PowerPoint slide presentation presented on March 3, 2004, to the
South Dakota Investment Society and South Dakota Investment Council. On March 16, 2004, the Company filed a Report on Form 8-K to furnish under Item
9 a copy of a PowerPoint slide presentation presented on March 16, 2004, to the
CIBC 13th Annual Gaming, Lodging & Leisure Conference in New York, New York. On April 20, 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 as of March 31, 2004 and certain other information and a copy of
a Power Point presentation posted on the Companys web site in advance of an
earnings telephone conference held April 20, 2004.




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LodgeNet Entertainment Corporation
    
    From 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: May 5, 2004
    
    / s / Scott C. PetersenScott C. PetersenPresident, Chief Executive Officer andChairman of the Board of Directors(Principal Executive Officer)Date: May 5, 2004
    
    / s / Gary H. RitondaroGary H. RitondaroSenior Vice President, Chief Financial Officer(Principal Financial & Accounting Officer)




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