##### 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 September 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
 (Registrants telephone number, including area code)
 (Former
name, former address and former fiscal year, if changed since last report)
 þ o
 þ o
 o þ




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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 September 30, 2005 and December 31, 2004
    
    3Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2005 and 2004
    
    4Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2005 and 2004
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    6Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    32Item 4  Controls and Procedures
    
    32Part II. Other InformationItem 1  Legal Proceedings
    
    33Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    33Item 3  Defaults Upon Senior Securities
    
    33Item 4  Submission of Matters to a Vote of Security Holders
    
    33Item 5  Other Information
    
    33Item 6  Exhibits
    
    33Signatures
    
    34Rule 13a-14(a)/15(d)-14(a) Certifiation of CFORule 13a-14(a)/15(d)-14(a) Certifiation of CEOSection 1350 Certifications
      September 30, 2005
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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)
  September 30,
    
    
    December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    32,028
    
    
    $
    24,995Accounts receivable, net
    
    
    32,953
    
    
    
    28,031Prepaid expenses and other
    
    
    2,656
    
    
    
    1,959Total current assets
    
    
    67,637
    
    
    
    54,985Property and equipment, net
    
    
    203,469
    
    
    
    212,659Debt issuance costs, net
    
    
    7,957
    
    
    
    9,330Intangible assets, net
    
    
    2,648
    
    
    
    4,628Other assets
    
    
    815
    
    
    
    1,434Total assets
    
    $
    282,526
    
    
    $
    283,036Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    19,599
    
    
    $
    16,807Current maturities of long-term debt
    
    
    2,829
    
    
    
    2,543Accrued expenses
    
    
    18,279
    
    
    
    12,738Deferred revenue
    
    
    4,636
    
    
    
    4,364Total current liabilities
    
    
    45,343
    
    
    
    36,452Long-term debt
    
    
    299,909
    
    
    
    309,748Other long-term liabilities
    
    
    3,405
    
    
    
    3,154Derivative instruments
    
    
    2,890
    
    
    
    5,800Total liabilities
    
    
    351,547
    
    
    
    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;
18,125,543 and 17,625,364 shares outstanding at September 30,
2005 and December 31, 2004, respectively
    
    
    181
    
    
    
    176Additional paid-in capital
    
    
    231,819
    
    
    
    226,986Accumulated deficit
    
    
    (302,022
    )
    
    
    (297,348
    )Accumulated other comprehensive income (loss)
    
    
    1,001
    
    
    
    (1,932
    )Total stockholders deficiency
    
    
    (69,021
    )
    
    
    (72,118
    )Total liabilities and stockholders deficiency
    
    $
    282,526
    
    
    $
    283,036
   September 30, 2005
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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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenues:Guest Pay
    
    $
    71,579
    
    
    $
    69,902
    
    
    $
    202,013
    
    
    $
    196,443Other
    
    
    2,566
    
    
    
    1,748
    
    
    
    6,236
    
    
    
    5,319Total revenues
    
    
    74,145
    
    
    
    71,650
    
    
    
    208,249
    
    
    
    201,762Costs and Expenses:Direct costs (exclusive of operating
expenses and
depreciation and amortization shown separately
below) :Guest Pay
    
    
    32,741
    
    
    
    31,979
    
    
    
    89,437
    
    
    
    87,830Other
    
    
    1,629
    
    
    
    694
    
    
    
    3,276
    
    
    
    2,156Operating expenses:Guest Pay operations
    
    
    8,862
    
    
    
    8,503
    
    
    
    26,311
    
    
    
    24,980Selling, general and administrative
    
    
    6,249
    
    
    
    5,939
    
    
    
    18,560
    
    
    
    17,823Depreciation and amortization
    
    
    16,729
    
    
    
    19,162
    
    
    
    52,609
    
    
    
    58,292Other operating expense
    
    
    250
    
    
    
    
    
    
    
    250
    
    
    
    Total costs and operating expenses
    
    
    66,460
    
    
    
    66,277
    
    
    
    190,443
    
    
    
    191,081Income from operations
    
    
    7,685
    
    
    
    5,373
    
    
    
    17,806
    
    
    
    10,681Other Income and Expenses:Write-off of debt issuance costs
    
    
    
    
    
    
    (810
    )
    
    
    (143
    )
    
    
    (810
    )Interest expense
    
    
    (7,254
    )
    
    
    (8,108
    )
    
    
    (22,133
    )
    
    
    (24,479
    )Other income
    
    
    254
    
    
    
    89
    
    
    
    128
    
    
    
    187Income (loss) before income taxes
    
    
    685
    
    
    
    (3,456
    )
    
    
    (4,342
    )
    
    
    (14,421
    )Provision for income taxes
    
    
    (100
    )
    
    
    (26
    )
    
    
    (332
    )
    
    
    (283
    )Net income (loss)
    
    $
    585
    
    
    $
    (3,482
    )
    
    $
    (4,674
    )
    
    $
    (14,704
    )Net income (loss) per common share (basic)
    
    $
    0.03
    
    
    $
    (0.20
    )
    
    $
    (0.26
    )
    
    $
    (1.01
    )Net income (loss) per common share (diluted)
    
    $
    0.03
    
    
    $
    (0.20
    )
    
    $
    (0.26
    )
    
    $
    (1.01
    )Weighted average shares outstanding (basic)
    
    
    18,010,017
    
    
    
    17,244,562
    
    
    
    17,863,076
    
    
    
    14,487,717Weighted average shares outstanding (diluted)
    
    
    18,238,914
    
    
    
    17,244,562
    
    
    
    17,863,076
    
    
    
    14,487,717
   September 30, 2005
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Consolidated Statements of Cash Flows (Unaudited)
  Nine Months EndedSeptember 30,2005
    
    
    2004Operating activities:Net loss
    
    $
    (4,674
    )
    
    $
    (14,704
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    52,609
    
    
    
    58,292Write-off of debt issuance costs
    
    
    143
    
    
    
    810Non-cash equipment loss
    
    
    250
    
    
    
    Non-cash stock compensation
    
    
    223
    
    
    
    168Change in operating assets and liabilities:Accounts receivable
    
    
    (4,866
    )
    
    
    (3,945
    )Prepaid expenses and other
    
    
    (840
    )
    
    
    225Accounts payable
    
    
    2,774
    
    
    
    6,436Accrued expenses and deferred revenue
    
    
    5,797
    
    
    
    6,473Other
    
    
    781
    
    
    
    122Net cash provided by operating activities
    
    
    52,197
    
    
    
    53,877Investing activities:Property and equipment additions
    
    
    (39,232
    )
    
    
    (41,259
    )Note receivable repayments
    
    
    
    
    
    
    567Net cash used for investing activities
    
    
    (39,232
    )
    
    
    (40,692
    )Financing activities:Repayment of long-term debt
    
    
    (10,125
    )
    
    
    (48,125
    )Proceeds from equipment financing
    
    
    1,022
    
    
    
    Payment of capital lease obligations
    
    
    (1,057
    )
    
    
    (818
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    13,000Repayments of revolving credit facility
    
    
    
    
    
    
    (20,000
    )Debt issuance costs
    
    
    
    
    
    
    (838
    )Proceeds from sale of interest rate swap
    
    
    
    
    
    
    3,052Proceeds from issuance of common stock, net of
offering costs
    
    
    
    
    
    
    66,767Exercise of stock options and warrants
    
    
    4,184
    
    
    
    4,419Net cash (used for) provided by financing activities
    
    
    (5,976
    )
    
    
    17,457Effect of exchange rates on cash
    
    
    44
    
    
    
    74Increase in cash and cash equivalents
    
    
    7,033
    
    
    
    30,716Cash and cash equivalents at beginning of period
    
    
    24,995
    
    
    
    2,772Cash and cash equivalents at end of period
    
    $
    32,028
    
    
    $
    33,488
   September 30, 2005
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Notes to Consolidated Financial Statements (Unaudited)
       Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss), as reported
    
    $
    585
    
    
    $
    (3,482
    )
    
    $
    (4,674
    )
    
    $
    (14,704
    )Add: stock based employee
compensation expense included in
reported net income (loss)
    
    
    108
    
    
    
    80
    
    
    
    223
    
    
    
    168Less: stock based employee
compensation expense determined
under fair value method, net of
related tax effects
    
    
    (206
    )
    
    
    (157
    )
    
    
    (1,573
    )
    
    
    (1,932
    )Net income (loss), pro forma
    
    $
    487
    
    
    $
    (3,559
    )
    
    $
    (6,024
    )
    
    $
    (16,468
    )Income (loss) per share (basic)As reported
    
    $
    0.03
    
    
    $
    (0.20
    )
    
    $
    (0.26
    )
    
    $
    (1.01
    )Pro forma
    
    
    0.03
    
    
    
    (0.21
    )
    
    
    (0.34
    )
    
    
    (1.14
    )Income (loss) per share (diluted)As reported
    
    $
    0.03
    
    
    $
    (0.20
    )
    
    $
    (0.26
    )
    
    $
    (1.01
    )Pro forma
    
    
    0.03
    
    
    
    (0.21
    )
    
    
    (0.34
    )
    
    
    (1.14
    )
  September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    September 30,
    
    
    December 31,2005
    
    
    2004Land, building and equipment
    
    $
    82,243
    
    
    $
    80,956Free-to-guest equipment
    
    
    33,879
    
    
    
    32,753Guest Pay systems:Installed system costs
    
    
    448,931
    
    
    
    450,495Customer acquisition costs
    
    
    51,811
    
    
    
    50,869System components
    
    
    23,799
    
    
    
    25,466Software costs
    
    
    21,429
    
    
    
    20,393Total
    
    
    662,092
    
    
    
    660,932Less  depreciation and amortization
    
    
    (458,623
    )
    
    
    (448,273
    )Property and equipment, net
    
    $
    203,469
    
    
    $
    212,659
    September 30, 2005
    
    
    December 31, 2004Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to
amortization:Acquired technology
    
    $
    14,291
    
    
    $
    13,809
    
    
    $
    14,291
    
    
    $
    12,786Acquired intangibles
    
    
    5,774
    
    
    
    3,657
    
    
    
    5,774
    
    
    
    2,791Other
    
    
    497
    
    
    
    448
    
    
    
    512
    
    
    
    372$
    20,562
    
    
    $
    17,914
    
    
    $
    20,577
    
    
    $
    15,949
   September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Average
shares outstanding  basic
    
    
    18,010,017
    
    
    
    17,244,562
    
    
    
    17,863,076
    
    
    
    14,487,717Average
shares outstanding 
diluted
    
    
    18,238,914
    
    
    
    17,244,562
    
    
    
    17,863,076
    
    
    
    14,487,717
    September 30,
    
    
    December 31,2005
    
    
    2004Accrued taxes
    
    $
    4,039
    
    
    $
    3,413Accrued compensation
    
    
    3,719
    
    
    
    4,869Accrued interest
    
    
    6,059
    
    
    
    970Other
    
    
    4,462
    
    
    
    3,486$
    18,279
    
    
    $
    12,738
   September 30, 2005
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LodgeNet Entertainment Corporation
    
    Form 10-Q
   September 30,
    
    
    December 31,2005
    
    
    2004Bank Credit Facility:Bank term loan
    
    $
    100,000
    
    
    $
    110,125Revolving credit facility
    
    
    3⁄4
    
    
    
    3⁄49.50% senior notes
    
    
    200,000
    
    
    
    200,000Capital leases
    
    
    2,738
    
    
    
    2,166302,738
    
    
    
    312,291Less current maturities
    
    
    (2,829
    )
    
    
    (2,543
    )$
    299,909
    
    
    $
    309,748
 Bank Credit Facility 3⁄4
   9.50% Senior Notes 3⁄4 pari
passu
   September 30, 2005
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Capital Leases
  2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterLong-term debt
    
    $
    375
    
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    96,625
    
    
    $
    
    
    
    $
    200,000Capital leases
    
    
    409
    
    
    
    1,375
    
    
    
    831
    
    
    
    296
    
    
    
    70
    
    
    
    784
    
    
    
    2,875
    
    
    
    2,331
    
    
    
    96,921
    
    
    
    70
    
    
    
    200,000Less amount representing
interest on capital leases
    
    
    (46
    )
    
    
    (126
    )
    
    
    (54
    )
    
    
    (15
    )
    
    
    (2
    )
    
    
    $
    738
    
    
    $
    2,749
    
    
    $
    2,277
    
    
    $
    96,906
    
    
    $
    68
    
    
    $
    200,000
   3⁄4
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    585
    
    
    $
    (3,482
    )
    
    $
    (4,674
    )
    
    $
    (14,704
    )Foreign currency translation adjustment
    
    
    436
    
    
    
    618
    
    
    
    234
    
    
    
    206Unrealized gain on derivative instruments
    
    
    773
    
    
    
    679
    
    
    
    2,699
    
    
    
    3,555Comprehensive income (loss)
    
    $
    1,794
    
    
    $
    (2,185
    )
    
    $
    (1,741
    )
    
    $
    (10,943
    )
  September 30,
    
    
    December 31,2005
    
    
    2004Unrealized loss on derivative instruments
    
    $
    (713
    )
    
    $
    (3,412
    )Foreign currency translation adjustment
    
    
    1,714
    
    
    
    1,480Accumulated other comprehensive income
(loss)
    
    $
    1,001
    
    
    $
    (1,932
    )
    September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 3⁄4
         September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   September 30, 2005
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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
     September 30, 2005
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LodgeNet Entertainment Corporation
    
    Form 10-Q
     SM TM
   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.
  September 30, 2005
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 
    
    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.
    
    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. .
   September 30, 2005
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Key Metrics:
 Rooms Served
  September 30,2005
    
    2004New Guest Pay interactive rooms for the
three months ended (1)
    
    
    10,564
    
    
    
    10,549New Guest Pay interactive rooms for the
nine months ended (1)
    
    
    31,273
    
    
    
    28,904Total Guest Pay interactive rooms (2) (4)
    
    
    985,378
    
    
    
    953,547Total rooms served (3) (4)
    
    
    1,038,529
    
    
    
    1,014,538
 
 (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.(4)
    
    Total room count as of September 30, 2005, was reduced by approximately 20,700 rooms due to
the impact of Hurricanes Katrina and Rita.
 Digital Room Growth
  September 30,2005
    
    2004Digital room installations for the three months ended
    
    
    32,165
    
    
    
    27,191Digital room installations for the nine months ended
    
    
    96,001
    
    
    
    84,014Total Digital rooms installed (1)
    
    
    592,212
    
    
    
    469,440Digital rooms as a percent of total Guest Pay
interactive rooms
    
    
    60.1
    %
    
    
    49.2
    %
 
 (1)
    
    Total room count as of September 30, 2005, was reduced by approximately 20,700 rooms due to
the impact of Hurricanes Katrina and Rita.
  September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Cost of Installation
  Three Months Ended
    
    
    Years EndedSeptember 30,
    
    
    September 30,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2004
    
    
    2003
    
    
    2002Average cost per room 
new installation
    
    $
    321
    
    
    $
    375
    
    
    $
    364
    
    
    $
    405
    
    
    $
    438Average cost per room 
conversion
    
    $
    276
    
    
    $
    275
    
    
    $
    284
    
    
    $
    337
    
    
    $
    358
  Direct Costs
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Direct Costs
    
    $
    11.47
    
    
    $
    11.52
    
    
    $
    10.42
    
    
    $
    10.61Direct Costs as a percent of total revenue
    
    
    46.4
    %
    
    
    45.6
    %
    
    
    44.5
    %
    
    
    44.6
    %
  Operating Expense Per Room
 September
30:
  September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Guest Pay operating expenses
    
    $
    2.96
    
    
    $
    3.00
    
    
    $
    2.96
    
    
    $
    2.96SG&A expense
    
    
    2.08
    
    
    
    2.09
    
    
    
    2.09
    
    
    
    2.11Depreciation and amortization (D&A)
    
    
    5.58
    
    
    
    6.76
    
    
    
    5.91
    
    
    
    6.87Other operating expense (1)
    
    
    0.08
    
    
    
    
    
    
    
    0.03
    
    
    
    $
    10.70
    
    
    $
    11.85
    
    
    $
    10.99
    
    
    $
    11.94Guest Pay operations as a percent
of total revenue
    
    
    12.0
    %
    
    
    11.9
    %
    
    
    12.6
    %
    
    
    12.4
    %SG&A as a percent of total revenue
    
    
    8.4
    %
    
    
    8.3
    %
    
    
    8.9
    %
    
    
    8.8
    %D&A as a percent of total revenue
    
    
    22.6
    %
    
    
    26.7
    %
    
    
    25.3
    %
    
    
    28.9
    %
 
 (1)
    
    Charge for equipment impairment related to the impact from Hurricane Katrina.
 Cash Flow
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Cash provided by operating activities
    
    $
    18,957
    
    
    $
    25,618
    
    
    $
    52,197
    
    
    $
    53,877Cash used for investing activities
    
    
    (11,128
    )
    
    
    (14,605
    )
    
    
    (39,232
    )
    
    
    (40,692
    )Difference
    
    $
    7,829
    
    
    $
    11,013
    
    
    $
    12,965
    
    
    $
    13,185
 Liquidity and Capital Resources
    September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
     2005
    
    2004Actual consolidated total leverage ratio (1) (4)
    
    
    3.30
    
    
    
    3.53Maximum per covenant
    
    
    4.25
    
    
    
    4.50Actual consolidated senior secured leverage ratio (2) (4)
    
    
    1.12
    
    
    
    1.27Maximum per covenant
    
    
    2.25
    
    
    
    2.50Actual consolidated interest coverage ratio (3) (4)
    
    
    3.03
    
    
    
    2.69Minimum 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 consolidated 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 consolidated 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.
  September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   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
   pari passu
     September 30, 2005
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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)
    
    $
    302,737
    
    
    $
    2,829
    
    
    $
    99,786
    
    
    $
    122
    
    
    $
    200,000Interest on fixed rate debt
    
    
    152,000
    
    
    
    19,500
    
    
    
    38,000
    
    
    
    38,000
    
    
    
    57,000Interest on bank term loan (1)
    
    
    18,809
    
    
    
    6,706
    
    
    
    12,103
    
    
    
    
    
    
    
    Interest on derivative
instruments (1)
    
    
    776
    
    
    
    776
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligationsHilton payments
    
    
    5,000
    
    
    
    1,250
    
    
    
    3,750
    
    
    
    
    
    
    
    Operating lease payments
    
    
    1,844
    
    
    
    615
    
    
    
    891
    
    
    
    336
    
    
    
    2Purchase obligations
    
    
    2,448
    
    
    
    2,448
    
    
    
    
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    483,614
    
    
    $
    33,624
    
    
    $
    154,530
    
    
    $
    38,458
    
    
    $
    257,002
 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
    
    
    $
    3⁄4
    
    
    $
    3⁄4
    
    
    $
    3⁄4
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled amortization.
 Seasonality
  Dependence on Performance of Lodging Industry
   September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Three Months Ended September 30, 2005 and 2004
 Revenue Analysis
 2005
    
    
    2004Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    Of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesRevenues:Guest Pay
    
    $
    71,579
    
    
    
    96.5
    
    
    $
    69,902
    
    
    
    97.6Other
    
    
    2,566
    
    
    
    3.5
    
    
    
    1,748
    
    
    
    2.4$
    74,145
    
    
    
    100.0
    
    
    $
    71,650
    
    
    
    100.0
  2005
    
    
    2004Average monthly revenue per room:Movie revenue
    
    $
    18.01
    
    
    $
    18.90Other interactive service revenue
    
    
    5.87
    
    
    
    5.75Total per Guest Pay room
    
    $
    23.88
    
    
    $
    24.65
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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):
    
    
    46.4
    %
    
    
    45.6
    %
    
    
    0.8
    %Change drivers:Internet related
    
    
    
    
    
    
    
    
    
    
    -1.1
    %Other direct costs (primarily HSIA
system sales related)
    
    
    
    
    
    
    
    
    
    
    1.4Hotel commissions
    
    
    
    
    
    
    
    
    
    
    0.50.8
    %
 Operating Expenses.
 2005
    
    
    2004Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    8,862
    
    
    
    12.0
    
    
    $
    8,503
    
    
    
    11.9Selling, general and administrative
    
    
    6,249
    
    
    
    8.4
    
    
    
    5,939
    
    
    
    8.3Depreciation and amortization
    
    
    16,729
    
    
    
    22.6
    
    
    
    19,162
    
    
    
    26.7Other operating expense
    
    
    250
    
    
    
    0.3
    
    
    
    
    
    
    
    Total operating expenses
    
    $
    32,090
    
    
    
    43.3
    
    
    $
    33,604
    
    
    
    46.9
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    Operating Income.
 Interest Expense.
 Other (Expense) Income.
 Taxes.
 Net Income (Loss).
  September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Nine Months Ended September 30, 2005 and 2004
 Revenue Analysis
 2005
    
    
    2004Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest Pay
    
    $
    202,013
    
    
    
    97.0
    
    
    $
    196,443
    
    
    
    97.4Other
    
    
    6,236
    
    
    
    3.0
    
    
    
    5,319
    
    
    
    2.6$
    208,249
    
    
    
    100.0
    
    
    $
    201,762
    
    
    
    100.0
  2005
    
    
    2004Average monthly revenue per room:Movie revenue
    
    $
    17.11
    
    
    $
    17.75Other interactive service revenue
    
    
    5.60
    
    
    
    5.55Total per Guest Pay room
    
    $
    22.71
    
    
    $
    23.30
   Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
  September 30, 2005
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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):
    
    
    44.5
    %
    
    
    44.6
    %
    
    
    -0.1
    %Change drivers:Internet related
    
    
    
    
    
    
    
    
    
    
    -0.9
    %Other direct costs (primarily HSIA
system sales related)
    
    
    
    
    
    
    
    
    
    
    0.5Hotel commissions
    
    
    
    
    
    
    
    
    
    
    0.3-0.1
    %
 Operating Expenses.
 2005
    
    
    2004Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    26,311
    
    
    
    12.6
    
    
    $
    24,980
    
    
    
    12.4Selling, general and administrative
    
    
    18,560
    
    
    
    8.9
    
    
    
    17,823
    
    
    
    8.8Depreciation and amortization
    
    
    52,609
    
    
    
    25.3
    
    
    
    58,292
    
    
    
    28.9Other operating expense
    
    
    250
    
    
    
    0.1
    
    
    
    
    
    
    
    Total operating expenses
    
    $
    97,730
    
    
    
    46.9
    
    
    $
    101,095
    
    
    
    50.1
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   Operating Income.
 Interest Expense.
 Other (Expense) Income.
 Taxes.
 Net Loss.
  September 30, 2005
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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, which the hotel guest typically purchases on a per-view,
hourly or daily basis. These services include on-demand movies,
on-demand games, music and music video, Internet on television and
television on-demand. We recognize revenue from the sale of these
Guest Pay services in the period in which such services are sold
to the hotel guest and when collection is reasonably assured.
Persuasive evidence of a purchase exists through a guest buy
transaction recorded on our system. No future performance
obligations exist with respect to these types of services once
they have been provided to the hotel guest. The prices related to
our products or services are fixed or determinable prior to
delivery of the products or services.
 
    
    Free-to-Guest Services.We generate revenue from the sale of
basic and premium television programming to individual hotels. In
contrast to Guest Pay Services, where the hotel guest is charged
directly for the service, we charge the hotel for our
Free-to-Guest Services. We recognize revenue from the sale of
Free-to-Guest Services in the period in which such services are
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 hotel
properties that have been installed by us and also to hotel
properties that have been installed by other providers. In
addition, we provide, in some cases, the hotel property with the
portal to access the Internet. We receive monthly service fees
from such hotel properties for our maintenance services and
Internet access. We recognize the service fee ratably over the
term of the contract. The prices for these services are fixed and
determinable prior to delivery of the service. The fair value of
these services are known due to objective and reliable evidence
from contracts and stand-alone sales. Under the service
agreement, which includes maintenance and Internet access, we
recognize revenue ratably over the term of the maintenance and
service contract, typically three-years.
 
    
    Healthcare System Sales and Support.We provide our interactive
television infrastructure and content to the healthcare industry.
Revenue from the sale and installation of our interactive system
is recognized ratably over a one-year period after the equipment
is installed. Under the contract terms for the first year, the
system hardware and software maintenance elements are not
separable because we are providing the maintenance
service with no additional fee during the first year. The package price of the interactive
system and software
  September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  
    
    Hotel System Sales and Support.We also market and sell our Guest
Pay interactive systems to hotels, along with recurring support
for interactive content, software maintenance and technical field
service for a fixed fee. Revenue from the sale and installation
of the interactive system, including the operating software, is
deferred and recognized over the term of the contract, generally
five years, due to inseparable proprietary software elements. The
multiple elements are not separable because the proprietary
software is required to operate the system and we do not license
or sell the software separately under this business model. The
interactive system prices are fixed and determinable prior to
delivery. Revenue from this arrangement, which includes equipment,
operating software, interactive content, and maintenance services,
is recognized ratably over the term of the related contract.
 
    
    Other.We also generate revenue from the sale of miscellaneous
system equipment such as television remotes and service parts and
labor. These sales are not made under multiple element
arrangements and we recognize the revenue when the equipment is
delivered or service (repair or installation) has been performed.
No future performance obligation exists on an equipment sale or on
a repair service that has been provided.
 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
  September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Allowance for system removal.
 Recent Accounting Developments
       September 30, 2005
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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.
 
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting.
  September 30, 2005
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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
  
 Item 5  Other Information
  
 Item 6
 Exhibits
 31.1
    
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer31.2
    
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer32
    
    
    Section 1350 Certifications
  September 30, 2005
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Signatures
  LodgeNet Entertainment Corporation(Registrant)Date: November 7, 2005
    
    /s/ Scott C. Petersen

            Scott C. PetersenPresident, Chief Executive Officer andChairman of the Board of Directors(Principal Executive Officer)Date: November 7, 2005
    
    /s/ Gary H. RitondaroGary H. RitondaroSenior Vice President, Chief Financial Officer(Principal Financial & Accounting Officer)
  September 30, 2005
 Page 34