##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 2007
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 3900 West Innovation Street, Sioux Falls, South Dakota 57107
  (605) 988-1000
 (Registrants telephone number,
 (Former name, former address and former fiscal year, if changed since last report
 þ o
  o þ o
 o þ




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##### 



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiaries
 Index
  
 PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets (Unaudited) as of March 31, 2007 and December 31, 2006
    
    3Consolidated Statements of Operations (Unaudited) for
the Three Months Ended March 31, 2007 and 2006
    
4Consolidated Statements of Cash Flows (Unaudited) for
the three Months Ended March 31, 2007 and 2006
    
5Notes to Consolidated Financial Statements (Unaudited)
    
6Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
14Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
32Item 4  Controls and Procedures
    
32Part II. Other InformationItem 1  Legal Proceedings
    
33Item 1A  Risk Factors
    
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
    
34Certification of Chief Financial OfficerCertification of Chief Executive OfficerSection 1350 Certifications
    March 31, 2007
    
    Page 2




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Part I  Financial Information
 
 Item 1  Financial Statements
 LodgeNet Entertainment Corporation and Subsidiaries
 
 Consolidated Balance Sheets (Unaudited)
  March 31,
    
    
    December 31,2007
    
    
    2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    16,320
    
    
    $
    22,795Restricted cash
    
    
    
    
    
    
    1,006Accounts receivable, net
    
    
    37,655
    
    
    
    32,959Other current assets
    
    
    9,689
    
    
    
    10,728Total current assets
    
    
    63,664
    
    
    
    67,488Property and equipment, net
    
    
    187,003
    
    
    
    185,770Debt issuance costs, net
    
    
    5,338
    
    
    
    5,704Intangible assets, net
    
    
    5,174
    
    
    
    690Goodwill
    
    
    9,707
    
    
    
    Other assets
    
    
    3,578
    
    
    
    3,557Total assets
    
    $
    274,464
    
    
    $
    263,209Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    22,070
    
    
    $
    19,165Current maturities of long-term debt
    
    
    2,115
    
    
    
    2,536Accrued expenses
    
    
    20,820
    
    
    
    18,193Deferred revenue
    
    
    10,500
    
    
    
    8,076Total current liabilities
    
    
    55,505
    
    
    
    47,970Long-term debt
    
    
    267,200
    
    
    
    267,633Other long-term liabilities
    
    
    5,749
    
    
    
    5,728Total liabilities
    
    
    328,454
    
    
    
    321,331Commitments 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;
19,323,469 and 19,084,734 shares outstanding at March 31,
2007 and December 31, 2006, respectively
    
    
    193
    
    
    
    191Additional paid-in capital
    
    
    246,528
    
    
    
    242,383Accumulated deficit
    
    
    (302,494
    )
    
    
    (302,466
    )Accumulated other comprehensive income
    
    
    1,783
    
    
    
    1,770Total stockholders deficiency
    
    
    (53,990
    )
    
    
    (58,122
    )Total liabilities and stockholders deficiency
    
    $
    274,464
    
    
    $
    263,209
  March 31, 2007
    
    Page 3




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiaries
 
 Consolidated Statements of Operations (Unaudited)
  Three Months EndedMarch 31,2007
    
    
    2006Revenues:Guest Pay
    
    $
    70,270
    
    
    $
    68,208Other
    
    
    5,015
    
    
    
    1,985Total revenues
    
    
    75,285
    
    
    
    70,193Costs and Expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately
below):Guest Pay
    
    
    33,150
    
    
    
    30,686Other
    
    
    3,363
    
    
    
    909Operating expenses:Guest Pay operations
    
    
    8,534
    
    
    
    8,786Selling, general and administrative
    
    
    7,791
    
    
    
    6,892Depreciation and amortization
    
    
    16,089
    
    
    
    16,915Restructuring expense
    
    
    241
    
    
    
    Total costs and operating expenses
    
    
    69,168
    
    
    
    64,188Income from operations
    
    
    6,117
    
    
    
    6,005Other Income and Expenses:Interest expense
    
    
    ( 6,204
    )
    
    
    (6,533
    )Write-off of debt issuance costs
    
    
    
    
    
    
    (129Other income
    
    
    160
    
    
    
    126Income (loss) before income taxes
    
    
    73
    
    
    
    (531
    )Provision for income taxes
    
    
    (101
    )
    
    
    (123
    )Net loss
    
    $
    (28
    )
    
    $
    (654
    )Net loss per common share (basic and diluted)
    
    $
    (0.00
    )
    
    $
    (0.04
    )Weighted average shares outstanding (basic and diluted)
    
    
    19,040,156
    
    
    
    18,125,623
  March 31, 2007
    
    Page 4




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows (Unaudited)
  Three Months Ended March 31,2007
    
    
    2006Operating activities:Net loss
    
    $
    (28
    )
    
    $
    (654
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    16,089
    
    
    
    16,915Write-off of debt issuance costs
    
    
    
    
    
    
    129Share-based compensation
    
    
    265
    
    
    
    669Change in operating assets and liabilities:Accounts receivable
    
    
    (2,613
    )
    
    
    (2,041
    )Other current assets
    
    
    (1,260
    )
    
    
    141Accounts payable
    
    
    1,777
    
    
    
    3,164Accrued expenses and deferred revenue
    
    
    3,823
    
    
    
    3,612Other
    
    
    (26
    )
    
    
    31Net cash provided by operating activities
    
    
    18,027
    
    
    
    21,966Investing activities:Property and equipment additions
    
    
    (15,897
    )
    
    
    (12,518
    )Deferred acquisition costs
    
    
    (447
    )
    
    
    Acquisition of StayOnline
    
    
    (14,422
    )
    
    
    Net cash used for investing activities
    
    
    (30,766
    )
    
    
    (12,518
    )Financing activities:Repayment of long-term debt
    
    
    (375
    )
    
    
    (10,375
    )Payment of capital lease obligations
    
    
    (636
    )
    
    
    (354
    )Exercise of stock options
    
    
    7,272
    
    
    
    145Net cash provided by (used for) financing activities
    
    
    6,261
    
    
    
    (10,584
    )Effect of exchange rates on cash
    
    
    3
    
    
    
    (7
    )Decrease in cash and cash equivalents
    
    
    (6,475
    )
    
    
    (1,143
    )Cash and cash equivalents at beginning of period
    
    
    22,795
    
    
    
    20,742Cash and cash equivalents at end of period
    
    $
    16,320
    
    
    $
    19,599
  March 31, 2007
    
    Page 5




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements (Unaudited)
      Share-Based Payment
  Three Months EndedMarch 31,2007
    
    
    2006Compensation Cost:Stock options
    
    $
    47
    
    
    $
    493Non-vested (restricted) shares
    
    
    218
    
    
    
    176Total share-based compensation expense
    
    $
    265
    
    
    $
    669Compensation expense per common share:
    
    $
    0.01
    
    
    $
    0.04
  March 31, 2007
    
    Page 6




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    March 31,
    
    
    December 31,2007
    
    
    2006Land, building and equipment
    
    $
    87,164
    
    
    $
    85,642Free-to-guest equipment
    
    
    35,436
    
    
    
    35,065Guest Pay systems:Installed system costs
    
    
    437,698
    
    
    
    438,865Customer acquisition costs
    
    
    53,357
    
    
    
    53,156System components
    
    
    27,254
    
    
    
    26,464Software costs
    
    
    22,909
    
    
    
    22,520Total
    
    
    663,818
    
    
    
    661,712Less  depreciation and amortization
    
    
    (476,815
    )
    
    
    (475,942
    )Property and equipment, net
    
    $
    187,003
    
    
    $
    185,770
      March 31, 2007
    
    
    December 31, 2006Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired technology
    
    $
    11,780
    
    
    $
    10,343
    
    
    $
    10,280
    
    
    $
    10,280Acquired intangibles
    
    
    9,174
    
    
    
    5,458
    
    
    
    5,774
    
    
    
    5,101Other
    
    
    459
    
    
    
    438
    
    
    
    449
    
    
    
    432$
    21,413
    
    
    $
    16,239
    
    
    $
    16,503
    
    
    $
    15,813
 March 31, 2007
    
    Page 7




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LodgeNet Entertainment Corporation
    
    Form 10-Q
       March 31,
    
    
    December 31,2007
    
    
    2006Accrued taxes
    
    $
    4,026
    
    
    $
    4,088Accrued compensation
    
    
    3,759
    
    
    
    6,842Accrued interest
    
    
    5,783
    
    
    
    946Accrued programming related
    
    
    2,745
    
    
    
    1,748Other
    
    
    4,507
    
    
    
    4,569$
    20,820
    
    
    $
    18,193
   March 31,
    
    
    December 31,2007
    
    
    2006Bank Credit Facility:Bank term loan
    
    $
    67,750
    
    
    $
    68,125Revolving credit facility
    
    
    
    
    
    
    9.50% senior notes
    
    
    200,000
    
    
    
    200,000Capital leases
    
    
    1,565
    
    
    
    2,044269,315
    
    
    
    270,169Less current maturities
    
    
    (2,115
    )
    
    
    (2,536
    )$
    267,200
    
    
    $
    267,633
 Bank Credit Facility 3⁄4
 March 31, 2007
    
    Page 8




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
       9.50% Senior Notes 3⁄4 pari
passu
  March 31, 2007
    
    Page 9




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Capital Leases
  2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    ThereafterLong-term debt (1)
    
    $
    1,125
    
    
    $
    66,625
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    200,000Capital leases
    
    
    558
    
    
    
    609
    
    
    
    399
    
    
    
    207
    
    
    
    9
    
    
    
    1,683
    
    
    
    67,234
    
    
    
    399
    
    
    
    207
    
    
    
    9
    
    
    
    200,000Less amount representing
interest on capital leases
    
    
    (85
    )
    
    
    (75
    )
    
    
    (39
    )
    
    
    (17
    )
    
    
    (1
    )
    
    
    $
    1,598
    
    
    $
    67,159
    
    
    $
    360
    
    
    $
    190
    
    
    $
    8
    
    
    $
    200,000
 
   3⁄4
  Three Months EndedMarch 31,2007
    
    
    2006Net income (loss)
    
    $
    (28
    )
    
    $
    (654
    )Foreign currency translation adjustment
    
    
    13
    
    
    
    13Unrealized gain on derivative instruments
    
    
    
    
    
    
    156Comprehensive income (loss)
    
    $
    (15
    )
    
    $
    (485
    )
  March 31,
    
    
    December 31,2007
    
    
    2006Foreign currency translation adjustment
    
    $
    1,783
    
    
    $
    1,770
 3⁄4
  March 31, 2007
    
    Page 10




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LodgeNet Entertainment Corporation
    
    Form 10-Q
 3⁄4
 Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contract
 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
 Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115.
   March 31, 2007
    
    Page 11




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   Receivables
    
    $
    2,082Other current assets
    
    
    794Property and equipment
    
    
    474Intangible assets
    
    
    4,900Goodwill
    
    
    9,707Other assets
    
    
    17Accounts payable
    
    
    (1,127
    )Deferred revenue
    
    
    (1,251
    )Total purchase consideration
    
    $
    15,596
   Pro FormaThree Months EndedMarch 31,2007
    
    2006Total revenue
    
    $
    76,812
    
    
    $
    72,314Net loss
    
    $
    (956
    )
    
    $
    (2,297
    )Net loss per share
    
    $
    (0.05
    )
    
    $
    (0.13
    )
     March 31, 2007
    
    Page 12




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Pro FormaThree Months EndedMarch 31,2007
    
    2006Total revenue
    
    $
    135,291
    
    
    $
    129,181Net loss
    
    $
    (10,807
    )
    
    $
    (13,451
    )Net loss per share
    
    $
    (0.57
    )
    
    $
    (0.74
    )
   March 31, 2007
    
    Page 13




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LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion should be read in conjunction with our Consolidated Financial Statements,
including the notes thereto, appearing elsewhere herein.
 Special Note Regarding Forward-Looking Statements
 Certain statements in this Report on form 10Q constitute forward-looking statements. When used
in this report, the words intends, expects, anticipates, estimates, believes, goal, no
assurance and similar expressions, and statements which are made in the future tense or refer to
future events or developments, including, without limitation, those related to estimated free cash
flow, cash earnings per share, debt ratios and synergies, are intended to identify such
forward-looking statements. Such forward-looking statements are subject to risks, uncertainties,
and other factors that could cause the actual results, performance or achievements to be materially
different from any future results, performance, or achievements expressed or implied by such
forward-looking statements. In addition to the risks and uncertainties discussed herein, such
factors include, among others, the following: the effects of economic conditions, including in
particular the economic condition of the lodging industry, which can be particularly affected by
international crisis, acts or threats of terrorism and public health issues; competition from
providers of similar services and from alternative sources; changes in demand for our products and
services; programming costs, availability, timeliness, and quality; technological developments by
competitors; developmental costs, difficulties, and delays; relationships with clients and property
owners; the availability of capital to finance growth; the impact of government regulations;
potential effects of litigation; risks of expansion into new markets; 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. With respect to any acquisition, we are subject to risks that
integration costs will exceed expectations, that synergies we anticipate will not be realized, or
will take longer than anticipated to realize, that our management and management systems will
encounter difficulties in dealing with a bigger, more diversified enterprise, and that the
financial results we expect from the acquisition will not be realized. These forward-looking
statements speak only as of the date of this report. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
 Executive Overview
    March 31, 2007
    
    Page 14




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
       Guest Pay Interactive Services.
  
    
    The number of rooms on our network.We can increase revenue over time by increasing the
number of rooms served by our interactive systems. With the acquisition of On Command, we
have expanded our room base to over 1.8 million rooms. Our ability to continue expanding 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 and
newly constructed hotel properties.
 March 31, 2007
    
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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 movie content available for viewing.
Historically, a decrease in the availability of popular movie
content has adversely impacted revenue. Although not completely
within our control, we seek to program and promote the most
popular available movie content and other content to maximize
revenue and gross 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 revenue and overall gross
profit. We establish pricing based on such things as the
demographics of the property served, the popularity of the content
and overall economic conditions. Our technology enables us to
measure popularity of our content 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.
 The primary direct costs of providing Guest Pay interactive services are:
 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

    
    HSIA customer support costs;Ø

    
    Internet connectivity costs;Ø

    
    license fees, which are based on a percent of guest-generated revenue, for television on
demand, music, music video, video games and sports programming; andØ

    
    one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences.
 Other Products and Services.
 High Speed Internet Access System Sales, Service and Support.
 March 31, 2007
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Healthcare System Sales and Support.
 System Sales and Support to Travel Centers.
 Other.
 Ø

    
    revenue generated from the sale of our Guest Pay interactive systems to hotels, along
with recurring support for interactive content, software maintenance and technical field
service for a fixed fee;Ø

    
    revenue from the sale of miscellaneous system equipment such as television remotes and service parts and labor;Ø

    
    revenues from the sale of equipment to our international licensees;Ø

    
    revenues from the installation of master antenna wiring and related infrastructure;Ø

    
    revenues from the sale and installation of DirecTV satellite systems; andØ

    
    revenue generated from delivery of satellite basic and premium television programming
for which the hotel pays us a fixed monthly charge per room.
 March 31, 2007
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Key Metrics:
 Special Note Regarding the Use of Non-GAAP Financial Information
   Rooms Served
  March 31,2007
    
    2006Total rooms served (1)
    
    
    1,136,411
    
    
    
    1,057,953Total Guest Pay interactive rooms (2)
    
    
    1,010,975
    
    
    
    1,006,513Total HSIA rooms (3)
    
    
    178,430
    
    
    
    34,972Net new Guest Pay interactive rooms for the three months ended (4)
    
    
    6,038
    
    
    
    4,584
 
 (1)
    
    Total rooms served include guest pay interactive rooms, rooms served by international
licensees, properties receiving only basic and premium television services and properties
receiving only HSIA services.(2)
    
    Guest Pay interactive rooms are equipped with our interactive television systems.(3)
    
    Represents rooms receiving high-speed Internet service included in total rooms served.(4)
    
    Amounts shown are net of de-installations during the period. The gross number of new rooms
installed was 17,664 in the first quarter of 2007 and 12,625 in the first quarter of 2006. March 31, 2007
    
    Page 18




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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Digital Room Growth
  March 31,2007
    
    2006Digital room installations for the three months ended
    
    
    26,017
    
    
    
    29,091Total digital rooms installed
    
    
    759,379
    
    
    
    658,176Digital rooms as a percent of total Guest Pay interactive rooms
    
    
    75.1
    %
    
    
    65.4
    %
 Capital Investment Per Room
  Three Months Ended
    
    Years EndedMarch 31,
    
    March 31,
    
    December 31,
    
    December 31,
    
    December 31,2007
    
    2006
    
    2006
    
    2005
    
    2004Average cost per room 
new installation
    
    $
    366
    
    
    $
    348
    
    
    $
    354
    
    
    $
    340
    
    
    $
    364Average cost per room 
conversion
    
    $
    285
    
    
    $
    262
    
    
    $
    252
    
    
    $
    262
    
    
    $
    284
  Revenue Per Room
  2007
    
    
    2006Average monthly revenue per room:Movie revenue
    
    $
    17.13
    
    
    $
    17.11Other interactive service revenue
    
    
    6.27
    
    
    
    5.55Total per Guest Pay room
    
    $
    23.40
    
    
    $
    22.66
 March 31, 2007
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Direct Costs
  Three Months EndedMarch 31,2007
    
    2006Guest Pay direct costs per room
    
    $
    11.13
    
    
    $
    10.20Guest Pay direct costs as a percent of total revenue
    
    
    47.2
    %
    
    
    45.0
    %
  Operating Expense Per Room
  Net Income/(Loss)
  Three Months EndedMarch 31,2007
    
    2006Net income (loss)
    
    $
    (28
    )
    
    $
    (654
    )
 Free Cash Flow
  March 31, 2007
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Three Months EndedMarch 31,2007
    
    
    2006Cash provided by operating activities
    
    $
    18,027
    
    
    $
    21,966Property and equipment additions
    
    
    (15,897
    )
    
    
    (12,518
    )2,130
    
    
    
    9,448Cash used for acquisition activities
    
    
    (14,869
    )
    
    
    $
    (12,739
    )
    
    $
    9,448
  March 31, 2007
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Liquidity and Capital Resources
     2007
    
    2006Actual consolidated total leverage ratio (1) (4)
    
    
    2.87
    
    
    
    2.99Maximum per covenant
    
    
    3.50
    
    
    
    3.75Actual senior secured leverage ratio (2) (4)
    
    
    0.74
    
    
    
    0.87Maximum per covenant
    
    
    2.25
    
    
    
    2.25Actual consolidated interest coverage ratio (3) (4)
    
    
    3.87
    
    
    
    3.38Minimum per covenant
    
    
    2.75
    
    
    
    2.75
 
 (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.  March 31, 2007
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
      pari passu
  March 31, 2007
    
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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) (1)
    
    $
    269,315
    
    
    $
    2,115
    
    
    $
    67,076
    
    
    $
    124
    
    
    $
    200,000Interest on fixed rate debt
    
    
    123,500
    
    
    
    19,000
    
    
    
    38,000
    
    
    
    38,000
    
    
    
    28,500Interest on bank term loan (2)
    
    
    7,299
    
    
    
    5,192
    
    
    
    2,107
    
    
    
    
    
    
    
    Other long-term obligationsAcquired intangible asset (3)
    
    
    2,500
    
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    Operating lease payments
    
    
    1,455
    
    
    
    593
    
    
    
    746
    
    
    
    116
    
    
    
    Purchase obligations
    
    
    5,518
    
    
    
    5,518
    
    
    
    
    
    
    
    
    
    
    
    Nintendo minimum royalty (4)
    
    
    25,900
    
    
    
    4,200
    
    
    
    8,400
    
    
    
    8,400
    
    
    
    4,900Programming related minimum
royalties and commissions (5)
    
    
    10,304
    
    
    
    2,713
    
    
    
    5,390
    
    
    
    2,201
    
    
    
    Total contractual obligations
    
    $
    445,791
    
    
    $
    41,831
    
    
    $
    121,719
    
    
    $
    48,841
    
    
    $
    233,400
 Amount of commitment expiration per periodLess than
    
    
    2-3
    
    
    4-5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    600
    
    
    $
    600
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    The current long-term debt will be superseded by the new $675.0 million Credit Facility with the following
payment schedule (in thousands): 2007  $3,125; 2008  $6,250; 2009  $6,250; 2010  6,250;
2011  6,250; thereafter $596,875.(2)
    
    Interest payments are estimates based on current LIBOR and scheduled amortization.(3)
    
    In July 2002, we acquired from Hilton Hotels Corporation the right 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
throughout our entire room base.(4)
    
    Nintendo video games pursuant to a non-exclusive license agreement with Nintendo, which
expires in May 2013. Under the terms of the agreement, we pay a monthly royalty equal to a
percent of revenue generated from the sale of Nintendo video game services, subject to a
monthly minimum.(5)
    
    In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. Seasonality
  March 31, 2007
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Three Months Ended March 31, 2007 and 2006
 Revenue Analysis.
 2007
    
    
    2006Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest Pay
    
    $
    70,270
    
    
    
    93.3
    %
    
    $
    68,208
    
    
    
    97.2
    %Other
    
    
    5,015
    
    
    
    6.7
    %
    
    
    1,985
    
    
    
    2.8
    %$
    75,285
    
    
    
    100.0
    %
    
    $
    70,193
    
    
    
    100.0
    %
  2007
    
    
    2006Average monthly revenue per room:Movie revenue
    
    $
    17.13
    
    
    $
    17.11Other interactive service revenue
    
    
    6.27
    
    
    
    5.55Total per Guest Pay room
    
    $
    23.40
    
    
    $
    22.66
   Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
    March 31, 2007
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 2007
    
    
    2006
    
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    48.5
    %
    
    
    45.0
    %
    
    
    3.5
    %Change drivers:TV Internet related
    
    
    
    
    
    
    
    
    
    
    -0.4
    %HSIA related
    
    
    
    
    
    
    
    
    
    
    1.7
    %Movie royalties
    
    
    
    
    
    
    
    
    
    
    0.8
    %Other direct costs
    
    
    
    
    
    
    
    
    
    
    1.4
    %3.5
    %
 Operating Expenses.
 2007
    
    
    2006Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    8,534
    
    
    
    11.3
    %
    
    $
    8,786
    
    
    
    12.5
    %Selling, general and administrative
    
    
    7,791
    
    
    
    10.3
    %
    
    
    6,892
    
    
    
    9.8
    %Depreciation and amortization
    
    
    16,089
    
    
    
    21.4
    %
    
    
    16,915
    
    
    
    24.1
    %Restructuring
    
    
    241
    
    
    
    0.3
    %
    
    
    
    
    
    
    0.0
    %Other operating expense (income),
net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %Total operating expenses
    
    $
    32,655
    
    
    
    43.4
    %
    
    $
    32,593
    
    
    
    46.4
    %
     Operating Income.
 March 31, 2007
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Interest Expense.
 Other (Expense) Income.
 Taxes.
 Net Loss.
 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, which can be acquired from other
manufacturers or retailers, has stand-alone value to the
customer. The software used within these systems can also be
supplied by other vendors unrelated to us. Equipment prices
are fixed and determinable prior to delivery and are based on
objective and reliable sales evidence from a stand-alone
basis.
 
    
    High Speed Internet Access Service and Support.We provide
ongoing maintenance, service and call center
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 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 is
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. We generate revenue from two sources:
1) the sale and installation of system equipment and 2)
support agreements with the facility to provide software
maintenance, programming and system maintenance for one year.
Typically, revenue from the sale and installation of our
interactive system is recognized ratably over the one-year
maintenance period after the equipment is installed. The
contracted system hardware, installation and maintenance
elements are not separable during this start-up phase due to
insufficient vendor specific objective evidence (VSOE). The
package price of the interactive system and related
maintenance is fixed and determinable prior to delivery.
Upon completion of the initial year, the support arrangement,
which includes interactive content, software maintenance, and
system services, is renewable and is recognized ratably over
the term of the related contract. The hospital is under no
obligation to contract with us for the support arrangement.
They may contract with other providers and utilize the
equipment and software installed by us. Management expects
VSOE to be established after at least eighteen months of
market history and meaningful renewal activity for
maintenance services. Once VSOE has been established, the
entire selling price of the interactive system will be
recognized upon installation.
    
    System Sales and Support to Travel Centers.We also market
and sell our interactive systems to travel centers. We
generate revenue from three sources: 1) the sale of the
interactive system, which includes equipment, operating
software and a one-year parts and labor warranty 2) optional
extended service and maintenance agreements, which include
future software upgrades as they become available and 3)
programming. The interactive system price includes a
non-exclusive, non-transferable right to use the initial
software package. Currently, revenue from the sale of our
interactive system and the extended service and maintenance
agreement is recognized ratably over the three-year
maintenance period, which includes the original one-year
warranty and the two-year extension, after the equipment is
delivered. The contracted interactive system and extended
service and maintenance elements are not separable during
this start-up phase due to insufficient vendor specific
objective evidence (VSOE). The prices of the interactive
system and extended service and maintenance agreement are
fixed and determinable prior to delivery. Management expects
VSOE to be established after at least eighteen months of
market history and meaningful renewal activity for
maintenance services. Once VSOE has been established, the
entire selling price of the interactive system will be
recognized upon delivery. Programming revenue from this
arrangement is recognized on a recurring basis over the term
of the related contract.
    
    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.
    
    Master Antenna Television (MATV) Services.We generate
revenues from the installation of master antenna wiring and
related infrastructure. Revenues are recognized upon
completion of the MATV installation and the prices of the
services are fixed and determinable prior to delivery. MATV
equipment and services are not proprietary and can be
supplied by other vendors.
    
    Satellite System Sales.We also generate revenues from the
sale and installation of DirecTV satellite systems.
 March 31, 2007
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Revenues
are recognized upon installation of the satellite system and
the prices for these services are fixed and determinable
prior to delivery. DirecTV equipment and installation
services are not proprietary and can be supplied by other
vendors other than us.
    
    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.
 Long-Lived Assets.
 Property and Equipment.
 YearsBuildings
    
    
    30Guest Pay systems:Installed system costs
    
    
    2  7Customer acquisition costs
    
    
    5  7System components
    
    
    5  7Software costs
    
    
    3  5Other equipment
    
    
    3  10
 Allowance for System Removal.
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LodgeNet Entertainment Corporation
    
    Form 10-Q
  Goodwill and Other Intangibles Assets. Goodwill and Other Intangible Assets .
  Recent Accounting Developments
 Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contract
 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
 March 31, 2007
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
  Fair Value Measurements
 The Fair Value Option for Financial
Assets and Financial Liabilities  Including an Amendment of FASB Statement No. 115.
 March 31, 2007
    
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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.
 March 31, 2007
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Part II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1ARisk Factors
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  
 Item 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
 March 31, 2007
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiaries
 
 Signatures
  LodgeNet Entertainment Corporation(Registrant)Date: May 8, 2007
    
    /s/ Scott C. Petersen

Scott C. PetersenPresident, Chief Executive Officer andChairman of the Board of Directors(Principal Executive Officer)Date: May 8, 2007
    
    /s/ Gary H. Ritondaro

Gary H. RitondaroSenior Vice President, Chief Financial Officer(Principal Financial & Accounting Officer)
 March 31, 2007
    
    Page 34