##### 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, 2010
 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 Interactive 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
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



LodgeNet Interactive Corporation and Subsidiaries
 Index
 PageNo.Part I. Financial InformationItem 1   Financial Statements:Consolidated Balance Sheets (Unaudited) as of March 31, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations (Unaudited) for
the Three Months Ended March 31, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 2010 and 2009
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    20Item 3   Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4  Controls and Procedures
    
    
    41Part II. Other InformationItem 1  Legal Proceedings
    
    
    42Item 1A  Risk Factors
    
    
    42Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3   Defaults Upon Senior Securities
    
    
    42Item 5  Other Information
    
    
    42Item 6  Exhibits
    
    
    43Signatures
    
    
    44EX-31.1EX-31.2EX-32
    Page 2




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##### Table of Contents



Part I  Financial Information
 
 Item 1   Financial Statements
 LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Balance Sheets (Unaudited)
 March 31,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash
    
    $
    9,928
    
    
    $
    17,011Accounts receivable, net
    
    
    53,193
    
    
    
    51,706Other current assets
    
    
    9,008
    
    
    
    9,189Total current assets
    
    
    72,129
    
    
    
    77,906Property and equipment, net
    
    
    191,761
    
    
    
    206,663Debt issuance costs, net
    
    
    5,159
    
    
    
    6,005Intangible assets, net
    
    
    103,838
    
    
    
    106,041Goodwill
    
    
    100,081
    
    
    
    100,081Other assets
    
    
    12,104
    
    
    
    11,658Total assets
    
    $
    485,072
    
    
    $
    508,354Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    50,196
    
    
    $
    40,040Current maturities of long-term debt
    
    
    5,561
    
    
    
    6,101Accrued expenses
    
    
    18,087
    
    
    
    19,137Deferred revenue
    
    
    16,982
    
    
    
    17,531Total current liabilities
    
    
    90,826
    
    
    
    82,809Long-term debt
    
    
    421,474
    
    
    
    463,845Other long-term liabilities
    
    
    29,999
    
    
    
    32,687Total liabilities
    
    
    542,299
    
    
    
    579,341Commitments and contingenciesStockholders deficiency:Preferred stock, $.01 par value, 5,000,000 shares authorized;
Series B cumulative perpetual convertible, 10%, 57,500 issued and
outstanding at March 31, 2010 and December 31, 2009, respectively
(liquidation preference of $1,000 per share or $57,500,000 total)
    
    
    1
    
    
    
    1Common stock, $.01 par value, 50,000,000 shares authorized;
25,025,414 and 22,537,664 shares outstanding at March 31, 2010
and December 31, 2009, respectively
    
    
    251
    
    
    
    225Additional paid-in capital
    
    
    391,767
    
    
    
    379,223Accumulated deficit
    
    
    (428,713
    )
    
    
    (426,211
    )Accumulated other comprehensive loss
    
    
    (20,533
    )
    
    
    (24,225
    )Total stockholders deficiency
    
    
    (57,227
    )
    
    
    (70,987
    )Total liabilities and stockholders deficiency
    
    $
    485,072
    
    
    $
    508,354
  Page 3




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LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Operations (Unaudited)
 Three Months EndedMarch 31,2010
    
    
    2009Revenues:Hospitality and Advertising Services
    
    $
    115,499
    
    
    $
    125,802Healthcare
    
    
    2,553
    
    
    
    2,290Total revenues
    
    
    118,052
    
    
    
    128,092Direct costs and operating expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately below):Hospitality and Advertising Services
    
    
    65,261
    
    
    
    71,794Healthcare
    
    
    1,346
    
    
    
    953Operating expenses:System operations
    
    
    10,515
    
    
    
    10,326Selling, general and administrative
    
    
    12,115
    
    
    
    10,818Depreciation and amortization
    
    
    22,173
    
    
    
    27,105Restructuring charge
    
    
    3
    
    
    
    107Other operating expense (income)
    
    
    5
    
    
    
    (132
    )Total direct costs and operating expenses
    
    
    111,418
    
    
    
    120,971Income from operations
    
    
    6,634
    
    
    
    7,121Other income and (expenses):Interest expense
    
    
    (8,682
    )
    
    
    (9,881
    )Gain on extinguishment of debt
    
    
    
    
    
    
    9,295Loss on early retirement of debt
    
    
    (493
    )
    
    
    (541
    )Other income
    
    
    223
    
    
    
    175(Loss) income before income taxes
    
    
    (2,318
    )
    
    
    6,169Provision for income taxes
    
    
    (184
    )
    
    
    (211
    )Net (loss) income
    
    
    (2,502
    )
    
    
    5,958Preferred stock dividends
    
    
    (1,437
    )
    
    
    Net (loss) income attributable to common stockholders
    
    $
    (3,939
    )
    
    $
    5,958Net (loss) income per common share (basic)
    
    $
    (0.17
    )
    
    $
    0.27Net (loss) income per common share (diluted)
    
    $
    (0.17
    )
    
    $
    0.26Weighted average shares outstanding (basic)
    
    
    22,746,527
    
    
    
    22,404,106Weighted average shares outstanding (diluted)
    
    
    22,746,527
    
    
    
    22,423,856
  Page 4




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LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows (Unaudited)
 Three Months Ended March 31,2010
    
    
    2009Operating activities:Net (loss) income
    
    $
    (2,502
    )
    
    $
    5,958Adjustments to reconcile net (loss) income to net cash provided
by operating activities:Depreciation and amortization
    
    
    22,173
    
    
    
    27,105Gain on extinguishment of debt (non-cash)
    
    
    
    
    
    
    (9,295
    )Unrealized loss on derivative instruments
    
    
    659
    
    
    
    Loss on early retirement of debt
    
    
    493
    
    
    
    541Share-based compensation and restricted stock
    
    
    312
    
    
    
    271Other, net
    
    
    40
    
    
    
    (135
    )Change in operating assets and liabilities:Accounts receivable, net
    
    
    (1,350
    )
    
    
    (4,449
    )Other current assets
    
    
    170
    
    
    
    730Accounts payable
    
    
    10,222
    
    
    
    6,499Accrued expenses and deferred revenue
    
    
    (1,521
    )
    
    
    (6,039
    )Other
    
    
    (598
    )
    
    
    (239
    )Net cash provided by operating activities
    
    
    28,098
    
    
    
    20,947Investing activities:Property and equipment additions
    
    
    (4,525
    )
    
    
    (5,301
    )Net cash used for investing activities
    
    
    (4,525
    )
    
    
    (5,301
    )Financing activities:Repayment of long-term debt
    
    
    (45,274
    )
    
    
    (8,200
    )Payment of capital lease obligations
    
    
    (287
    )
    
    
    (523
    )Purchase of long-term debt
    
    
    
    
    
    
    (10,750
    )Proceeds from investment in long-term debt
    
    
    2,643
    
    
    
    91Proceeds from issuance of common stock, net of offering costs
    
    
    13,692
    
    
    
    Payment of dividends to preferred shareholders
    
    
    (1,437
    )
    
    
    Exercise of stock options
    
    
    3
    
    
    
    Net cash used for financing activities
    
    
    (30,660
    )
    
    
    (19,382
    )Effect of exchange rates on cash
    
    
    4
    
    
    
    (23
    )Decrease in cash
    
    
    (7,083
    )
    
    
    (3,759
    )Cash at beginning of period
    
    
    17,011
    
    
    
    10,800Cash at end of period
    
    $
    9,928
    
    
    $
    7,041
  Page 5




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LodgeNet Interactive Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements (Unaudited)
        March 31,
    
    
    December 31,2010
    
    
    2009Land, building and equipment
    
    $
    112,361
    
    
    $
    111,777Hotel systems:Installed system costs
    
    
    626,578
    
    
    
    630,651Customer acquisition costs
    
    
    55,977
    
    
    
    55,889System components
    
    
    31,631
    
    
    
    31,832Software costs
    
    
    36,803
    
    
    
    36,497Total
    
    
    863,350
    
    
    
    866,646Less  depreciation and amortization
    
    
    (671,589
    )
    
    
    (659,983
    )Property and equipment, net
    
    $
    191,761
    
    
    $
    206,663
 Page 6




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AdvertisingHospitality
    
    
    Services
    
    
    TotalBalance as of December 31, 2009Goodwill
    
    $
    92,614
    
    
    $
    18,679
    
    
    $
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )92,614
    
    
    
    7,467
    
    
    
    100,081Activity during the period
    
    
    
    
    
    
    
    
    
    
    Balance as of March 31, 2010Goodwill
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )$
    92,614
    
    
    $
    7,467
    
    
    $
    100,081
   March 31, 2010
    
    
    December 31, 2009Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and relationships
    
    $
    120,315
    
    
    $
    (19,213
    )
    
    $
    120,315
    
    
    $
    (17,629
    )Other acquired intangibles
    
    
    12,884
    
    
    
    (12,374
    )
    
    
    12,884
    
    
    
    (12,130
    )Tradenames
    
    
    3,100
    
    
    
    (1,759
    )
    
    
    3,094
    
    
    
    (1,626
    )Acquired patents
    
    
    5,155
    
    
    
    (4,270
    )
    
    
    5,142
    
    
    
    (4,009
    )$
    141,454
    
    
    $
    (37,616
    )
    
    $
    141,435
    
    
    $
    (35,394
    )
 Page 7




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Page 8




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Three Months EndedMarch 31,2010
    
    
    2009Basic EPS:Net (loss) income
    
    $
    (2,502
    )
    
    $
    5,958Preferred stock dividends
    
    
    (1,437
    )
    
    
    $
    (3,939
    )
    
    $
    5,958(Loss) income allocated to participating securities
    
    
    
    
    
    
    20Net (loss) income available to common stockholders
    
    $
    (3,939
    )
    
    $
    5,938Weighted average shares outstanding for basic
earnings per common share
    
    
    22,746,527
    
    
    
    22,404,106Basic earnings per share
    
    $
    (0.17
    )
    
    $
    0.27Diluted EPS:Net (loss) income
    
    $
    (2,502
    )
    
    $
    5,958Preferred stock dividends
    
    
    (1,437
    )
    
    
    $
    (3,939
    )
    
    $
    5,958(Loss) income allocated to participating securities
    
    
    
    
    
    
    20Net (loss) income available to common stockholders
    
    $
    (3,939
    )
    
    $
    5,938Weighted average shares outstanding for basic
earnings per common share
    
    
    22,746,527
    
    
    
    22,404,106Dilutive effect of potential shares (1)
    
    
    N/A
    
    
    
    19,750Weighted average shares outstanding for diluted
earnings per common share
    
    
    22,746,527
    
    
    
    22,423,856Diluted earnings per share
    
    $
    (0.17
    )
    
    $
    0.26
 
 (1)
    
    For the three months ended March 31, 2010, potential dilutive shares were not included in
the calculations of earnings per share, as we were in a loss position and their inclusion
would have been anti-dilutive. Page 9




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March 31,
    
    
    December 31,2010
    
    
    2009Property, sales and other taxes
    
    $
    6,658
    
    
    $
    6,933Compensation
    
    
    5,084
    
    
    
    4,360Interest
    
    
    118
    
    
    
    92Programming related
    
    
    1,842
    
    
    
    2,510Restructuring and reorganization
    
    
    506
    
    
    
    758Preferred stock dividends
    
    
    1,437
    
    
    
    1,437Other
    
    
    2,442
    
    
    
    3,047$
    18,087
    
    
    $
    19,137
   March 31,
    
    
    December 31,2010
    
    
    2009Bank Credit Facility:Bank term loan
    
    $
    425,367
    
    
    $
    467,998Revolving credit facility
    
    
    
    
    
    
    Capital leases
    
    
    1,668
    
    
    
    1,948427,035
    
    
    
    469,946Less current maturities
    
    
    (5,561
    )
    
    
    (6,101
    )$
    421,474
    
    
    $
    463,845
 Bank Credit Facility
 Page 10




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Capital Leases
  2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014Long-term debt
    
    $
    3,484
    
    
    $
    4,645
    
    
    $
    4,645
    
    
    $
    4,645
    
    
    $
    407,948Capital leases
    
    
    788
    
    
    
    703
    
    
    
    290
    
    
    
    16
    
    
    
    4,272
    
    
    
    5,348
    
    
    
    4,935
    
    
    
    4,661
    
    
    
    407,948Less amount representing
interest on capital leases
    
    
    (70
    )
    
    
    (46
    )
    
    
    (13
    )
    
    
    
    
    
    
    $
    4,202
    
    
    $
    5,302
    
    
    $
    4,922
    
    
    $
    4,661
    
    
    $
    407,948
  Page 11




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Three Months EndedMarch 31,2010
    
    
    2009Net (loss) income
    
    $
    (2,502
    )
    
    $
    5,958Foreign currency translation adjustment
    
    
    595
    
    
    
    (752
    )Unrealized gain on interest rate swap agreements
    
    
    3,097
    
    
    
    2,662Comprehensive income
    
    $
    1,190
    
    
    $
    7,868
  March 31,
    
    
    December 31,2010
    
    
    2009Unrealized loss on interest rate swap agreements
    
    $
    (23,526
    )
    
    $
    (26,623
    )Foreign currency translation adjustment
    
    
    2,993
    
    
    
    2,398Accumulated other comprehensive loss
    
    $
    (20,533
    )
    
    $
    (24,225
    )
      Three Months EndedMarch 31,2010
    
    
    2009Compensation cost:Stock options
    
    $
    312
    
    
    $
    170Restricted stock
    
    
    
    
    
    
    101Total share based compensation expense
    
    $
    312
    
    
    $
    271
 Page 12




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Stock Options
  Restricted Stock
      Cost of closingSeverance and
    
    
    redundantother benefit
    
    
    acquiredrelated costs
    
    
    facilities
    
    
    TotalDecember 31, 2009 balance
    
    $
    336
    
    
    $
    422
    
    
    $
    758Charges to expense
    
    
    
    
    
    
    3
    
    
    
    3Cash payments
    
    
    (164
    )
    
    
    (91
    )
    
    
    (255
    )March 31, 2010 balance
    
    $
    172
    
    
    $
    334
    
    
    $
    506
 Page 13




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Financial Assets and Financial Liabilities 3⁄4
 March 31, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueInterest rate swaps
- liability
position
    
    $
    24,185
    
    
    $
    24,185
    
    
    $
    26,623
    
    
    $
    26,623Long-term debt
    
    $
    427,035
    
    
    $
    403,639
    
    
    $
    469,946
    
    
    $
    421,976
    Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantTotal
    
    
    Markets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Asset
    
    
    Inputs
    
    
    InputsMeasurement
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Year Ended December 31, 2009:Interest rate swaps -
liability position
    
    $
    26,623
    
    
    $
    
    
    
    $
    26,623
    
    
    $
    Three Months Ended March 31,
2010:Interest rate swaps -
liability position
    
    $
    24,185
    
    
    $
    
    
    
    $
    24,185
    
    
    $
    
 Page 14




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Nonfinancial Assets and Nonfinancial Liabilities 3⁄4
       Page 15




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Three Months EndedMarch 31,2010
    
    
    2009Total revenues:Hospitality
    
    $
    113,159
    
    
    $
    124,041Advertising Services
    
    
    2,340
    
    
    
    1,761Healthcare
    
    
    2,553
    
    
    
    2,290Total
    
    $
    118,052
    
    
    $
    128,092Income (loss) before income taxes:Hospitality
    
    $
    34,494
    
    
    $
    39,702Advertising Services
    
    
    (222
    )
    
    
    (722
    )Healthcare
    
    
    345
    
    
    
    718Operating profit
    
    
    34,617
    
    
    
    39,698Corporate
    
    
    (5,802
    )
    
    
    (5,497
    )Depreciation and amortization
    
    
    (22,173
    )
    
    
    (27,105
    )Restructuring charge
    
    
    (3
    )
    
    
    (107
    )Other operating (expense) income
    
    
    (5
    )
    
    
    132Interest expense
    
    
    (8,682
    )
    
    
    (9,881
    )Gain on extinguishment of debt
    
    
    
    
    
    
    9,295Loss on early retirement of debt
    
    
    (493
    )
    
    
    (541
    )Other income
    
    
    223
    
    
    
    175Income (loss) before income taxes
    
    $(2,318)
    
    $
    6,169
     Page 16




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Contractual/
    
    
    
    
    
    
    Estimated FairNotional
    
    
    Balance Sheet
    
    
    ValueAmount
    
    
    Location
    
    
    Asset
    
    
    (Liability)Interest rate swaps
    
    $
    437,500
    
    
    Other long-term liabilities
    
    $
    
    
    
    $
    (24,185
    )
   Effective PortionIncome StatementLocation of
    
    
    HedgeAmount of
    
    
    Gain (Loss)
    
    
    Gain (Loss)
    
    
    Ineffective PortionGain (Loss)
    
    
    Reclassified From
    
    
    Reclassified From
    
    
    IncomeRecognized
    
    
    Accumulated
    
    
    Accumulated
    
    
    Statementin Other
    
    
    Other
    
    
    Other
    
    
    Location of
    
    
    HedgeType of Cash
    
    Comprehensive
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    Gain (Loss)
    
    
    Gain (Loss)Flow Hedge
    
    Income
    
    
    Income
    
    
    Income
    
    
    Recognized
    
    
    RecognizedThree Months Ended March 31, 2009:Interest rate swaps
    
    $
    7,276
    
    
    Interest expense
    
    $
    (4,614
    )
    
    Interest expense
    
    $
    Three Months Ended March 31, 2010:Interest rate swaps
    
    $
    8,408
    
    
    Interest expense
    
    $
    (5,311
    )
    
    Interest expense
    
    $
    (659
    )
     Page 17




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Page 18




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Page 19




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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 or documents incorporated herein by reference 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 rooms converted to our HD platform and repayment of debt, 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 elsewhere in this Report and in Item 1A of our most recent Annual Report on
Form 10-K for the year ended December 31, 2009 and filed on March 12, 2010, in any prospectus
supplement or any report or document incorporated herein by reference, such factors include, among
others, the following:
 
    
    the effects of economic conditions, including general financial conditions (including
those represented recently by liquidity crises, government bailouts and assistance plans,
bank failures and recessionary threats and developments);
 
    
    the economic condition of the lodging industry, which can be particularly affected by
the financial conditions referenced above, as well as by high gas prices, levels of
unemployment, consumer confidence, acts or threats of terrorism and public health issues;
    
    decreases in hotel occupancy, whether related to economic conditions or other causes;
    
    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 impact of covenants contained in our credit agreement, compliance with which could
adversely affect capital available for other business purposes, and the violation of which
would constitute an event of default;
    
    the impact of governmental regulations;
    
    potential effects of litigation;
    
    risks of expansion into new markets and territories;
    
    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.
 Executive Overview
  Page 20




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Hospitality and Advertising Services Business
  Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and
music videos and television on-demand programming).
  
    
    The number of rooms on our network.We can increase revenue over time by increasing the
number of rooms served by our interactive television systems. Our ability to expand our room
base is dependent on a number of factors, including newly constructed hotel properties and the
attractiveness of our technology, service and support to hotels currently operating without an
interactive television system.
 
    
    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 for the properties we serve 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 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, and whether the content is presented in digital or analog format. Historically, a
decrease in the availability of popular movie content has adversely impacted revenue, and the
availability of high definition content has increased 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 profitability.
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##### Table of Contents




    
    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 profitability. We establish pricing based on such things as the demographics of the
property served, the popularity of the content and overall general economic conditions. Our
technology enables us to measure the popularity of our content and make decisions to best
position such content and optimize revenue from such content.
 
    
    The availability of alternative programming. We compete directly for customers with a
variety of other interactive service providers, including other interactive television service
providers, cable television companies, direct broadcast satellite companies, television
networks and programmers, Internet service providers and portals, technology consulting and
service firms, companies offering web sites which provide on-demand movies, rental companies
providing DVDs which can be viewed in properly equipped hotel rooms or on other portable
viewing devices and hotels which offer in-room laptops with Internet access or other types of
Internet access systems. We also compete, in varying degrees, with other leisure-time
activities such as movie theaters, the Internet, radio, print media, personal computers and
other alternative sources of entertainment and information.
 
    
    Consumer sentiment.The willingness of guests to purchase our entertainment services is
also impacted by the general economic environment and its impact on consumer sentiment.
Historically, such impacts were not generally material to our revenue results; however, during
the last half of 2008, 2009 and the first quarter of 2010, the deteriorating economic
conditions did have a significant, negative impact on our revenue levels. As economic
conditions improve in the future, guest purchase activity may or may not increase to the same
levels previously experienced by the Company.
  
    
    license fees paid to major motion picture studios, which are variable and based on a
percent of guest-generated revenue, for non-exclusive distribution rights of recently released
major motion pictures;
 
    
    commissions paid to our hotel customers, which are also variable and based on a percent of
guest-generated revenue;
 
    
    license fees, which are based on a percent of guest-generated revenue, for television
on-demand, music, music videos, video games and sports programming; and
 
    
    one-time license fees paid for independent films, most of which are non-rated and intended
for mature audiences.
 Hotel Services (includes revenue from hotels for services such as television channels and recurring
broadband Internet service and support to the hotels).
 
    
    Cable Television Programming.We offer a wide variety of satellite-delivered cable
television programming paid for by the hotel and provided to guests at no charge. The cable
television programming is delivered via satellite, pursuant to an agreement with DIRECTV®, and
is distributed over the internal hotel network, and typically includes premium channels such
as HBO and Showtime, which broadcast major motion pictures and specialty programming, as well
as non-premium channels, such as CNN and ESPN. With the launch of the high-definition
configuration of our interactive television system, we also began offering high-definition
cable television programming to the extent available from broadcast sources and DIRECTV.
 
    
    Broadband Internet Access, Service and Support.We also design, install and operate wired
and wireless broadband Internet access systems at hotel properties. These systems control
access to the Internet, provide bandwidth management tools and allow hotels to charge or
provide the access as a guest amenity. Post-installation, we generate recurring revenue
through the ongoing maintenance, service and call center support services to hotel properties
installed by us and also to hotel properties installed by other providers. While this is a
highly competitive area, we believe we have important advantages as a result of our pro-active
monitoring interface with hotel systems to improve up time, existing hotel customer
relationships and our nationwide field service network.
 Page 23




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##### Table of Contents



System Sales and Related Services.
 Advertising Services
 Key Metrics:
 Rooms Served
  March 31,2010
    
    
    2009Total rooms served (1)
    
    
    1,911,842
    
    
    
    1,973,472Total Guest Entertainment rooms (2)
    
    
    1,764,363
    
    
    
    1,849,304Total HD rooms (3)
    
    
    239,984
    
    
    
    199,290Percent of Total Guest Entertainment rooms
    
    
    13.6
    %
    
    
    10.8
    %Total Cable Television Programming (FTG) rooms (4)
    
    
    1,083,837
    
    
    
    1,106,833Percent of Total Guest Entertainment rooms
    
    
    61.4
    %
    
    
    59.9
    %Total Broadband Internet rooms (5)
    
    
    200,139
    
    
    
    229,184Percent of Total rooms served
    
    
    10.5
    %
    
    
    11.6
    %
 
 (1)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees.(2)
    
    Guest Entertainment rooms, of which 85.9% are digital, receive one or more Guest
Entertainment services, such as movies, video games, music or other interactive and
advertising services.(3)
    
    HD rooms are equipped with high-definition capabilities.(4)
    
    Cable television programming (FTG) rooms receive basic or premium cable television
programming.(5)
    
    Represents rooms receiving high-speed Internet service. Page 24




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##### Table of Contents



High Definition Room Growth
  March 31,2010
    
    
    2009Net new HDTV rooms for the three months ended
    
    
    8,396
    
    
    
    7,799Total HDTV rooms installed
    
    
    239,984
    
    
    
    199,290HDTV rooms as a percent of total Guest
Entertainment rooms
    
    
    13.6
    %
    
    
    10.8
    %
  Capital Investment Per Installed Room
  Three Months Ended
    
    
    Years EndedMarch 31,
    
    
    March 31,
    
    
    December 31,
    
    
    December 31,2010
    
    
    2009
    
    
    2009
    
    
    2008Average cost per room  new installation
    
    $
    250
    
    
    $
    459
    
    
    $
    345
    
    
    $
    389Average cost per room  conversion
    
    $
    204
    
    
    $
    357
    
    
    $
    235
    
    
    $
    295Average cost per HD room  new
installation
    
    $
    271
    
    
    $
    465
    
    
    $
    339
    
    
    $
    398Average cost per HD room  conversion
    
    $
    204
    
    
    $
    357
    
    
    $
    241
    
    
    $
    320
  Page 25




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##### Table of Contents



Average Revenue Per Room
  2010
    
    
    2009Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.99
    
    
    $
    13.73Hotel Services
    
    
    6.48
    
    
    
    5.92System Sales and Related Services
    
    
    1.80
    
    
    
    2.61Advertising Services
    
    
    0.44
    
    
    
    0.32Total Hospitality and Advertising Services revenue per room
    
    $
    21.71
    
    
    $
    22.58
 Direct Costs
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2010
    
    
    March 31, 2009Percent
    
    
    
    
    
    
    Percentof Related
    
    
    
    
    
    
    of RelatedAmount
    
    
    Revenue
    
    
    Amount
    
    
    RevenueDirect costs per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    5.20
    
    
    
    40.0
    %
    
    $
    5.51
    
    
    
    40.1
    %Hotel Services
    
    
    5.59
    
    
    
    86.2
    %
    
    
    5.24
    
    
    
    88.6
    %System Sales and Related Services
    
    
    1.21
    
    
    
    67.5
    %
    
    
    1.86
    
    
    
    71.2
    %Advertising Services
    
    
    0.27
    
    
    
    59.6
    %
    
    
    0.28
    
    
    
    85.9
    %Total Hospitality and
Advertising Services direct
costs per room
    
    $
    12.27
    
    
    
    56.5
    %
    
    $
    12.89
    
    
    
    57.1
    %
  Page 26




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##### Table of Contents



Healthcare Business
  
    
    revenue generated from the sale of the interactive system hardware, software license and
installation services;
 
    
    revenue from the sale and installation of DIRECTV satellite equipment and related
programming;
 
    
    revenue from recurring support agreements for interactive content, software maintenance and
technical field service support, including service agreements covering cable plant, DIRECTV
satellite equipment and interactive systems; and
 
    
    revenue generated from cable plant design, modification and installation, as well as
television installation services.
  General Operations
 Total Operating Expenses
  Three Months EndedMarch 31,2010
    
    
    2009Systems operations expenses
    
    $
    1.98
    
    
    $
    1.85SG&A expenses
    
    
    2.28
    
    
    
    1.94Depreciation and amortization (D&A)
    
    
    4.17
    
    
    
    4.86Restructuring charge
    
    
    
    
    
    
    0.02Other operating expense (income), net
    
    
    
    
    
    
    (0.02
    )$
    8.43
    
    
    $
    8.65Systems operations as a percent of total revenue
    
    
    8.9
    %
    
    
    8.1
    %SG&A as a percent of total revenue
    
    
    10.3
    %
    
    
    8.4
    %D&A as a percent of total revenue
    
    
    18.8
    %
    
    
    21.1
    %Total operating expenses as a percent of total revenue
    
    
    38.0
    %
    
    
    37.6
    %
 Special Note Regarding the Use of Non-GAAP Financial Information
  Page 27




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##### Table of Contents



Free Cash Flow
   Three Months EndedMarch 31,2010
    
    
    2009Cash provided by operating activities
    
    $
    28,098
    
    
    $
    20,947Property and equipment additions
    
    
    (4,525
    )
    
    
    (5,301
    )$
    23,573
    
    
    $
    15,646
  Three Months EndedMarch 31,2010
    
    
    2009Expansion capital investment (1)
    
    $
    1,183
    
    
    $
    2,478Renewal investment (2)
    
    
    968
    
    
    
    940Corporate capital and minor extensions (3)
    
    
    2,374
    
    
    
    1,883$
    4,525
    
    
    $
    5,301
 
 (1)
    
    Capital investment to install newly contracted rooms with our digital storage or HDTV system.(2)
    
    Capital investment to convert rooms to our digital storage or HDTV system in exchange for
long-term contract extensions.(3)
    
    Capital investment for corporate infrastructure, including computers, equipment, software
development, minor system upgrades and system components. Page 28




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Liquidity and Capital Resources
      Page 29




---



##### Table of Contents



2010
    
    2009Actual consolidated leverage ratio (1) (3)
    
    
    3.59
    
    
    
    4.04Maximum per covenant
    
    
    3.75
    
    
    
    4.25Actual consolidated interest coverage ratio (2) (3)
    
    
    3.22
    
    
    
    3.27Minimum per covenant
    
    
    3.00
    
    
    
    2.75
 
 (1)
    
    Our maximum consolidated leverage ratio is the total amount of all indebtedness of the
Company, determined on a consolidated basis in accordance with GAAP, divided by operating
income exclusive of depreciation and amortization and adjusted (plus or minus) for certain
other miscellaneous cash items, non-cash items and non-recurring items, as defined by the
terms of the bank Credit Facility.(2)
    
    Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous
cash items, non-cash items and non-recurring items divided by interest expense, as defined by
the terms of the bank Credit Facility.(3)
    
    Maximum consolidated leverage ratio and minimum consolidated interest coverage ratios are
defined terms of the bank Credit Facility and are presented here to demonstrate compliance
with the covenants in our Credit Facility, as noncompliance with such covenants would have a
material adverse effect on us.   Q3 2010to maturityMaximum consolidated leverage ratio
    
    
    3.50Minimum consolidated interest coverage ratio
    
    
    3.00
  Page 30




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##### Table of Contents



Payments due by periodLess than
    
    
    23
    
    
    45
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    427,035
    
    
    $
    5,561
    
    
    $
    10,034
    
    
    $
    411,440
    
    
    $
    Interest on bank term loan (1)
    
    
    41,154
    
    
    
    10,480
    
    
    
    20,522
    
    
    
    10,152
    
    
    
    Interest on derivative instruments (net)
    
    
    26,344
    
    
    
    21,087
    
    
    
    5,257
    
    
    
    
    
    
    
    Operating lease payments
    
    
    4,332
    
    
    
    2,274
    
    
    
    1,568
    
    
    
    465
    
    
    
    25Purchase obligations (2)
    
    
    6,608
    
    
    
    4,429
    
    
    
    1,771
    
    
    
    408
    
    
    
    Minimum royalties and commissions (3)
    
    
    1,954
    
    
    
    1,692
    
    
    
    262
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    507,427
    
    
    $
    45,523
    
    
    $
    39,414
    
    
    $
    422,465
    
    
    $
    25
 Amount of commitment expiration per periodLess than
    
    
    23
    
    
    45
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    325
    
    
    $
    325
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled debt amortization.(2)
    
    Consists of open purchase orders and commitments, primarily for the procurement of system
components.(3)
    
    In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. Page 31




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Seasonality
  Market Conditions
  Page 32




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Discussion and Analysis of Results of Operations
Three Months Ended March 31, 2010 and 2009
 Revenue Analysis.
 2010
    
    
    2009Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    69,082
    
    
    
    58.5
    %
    
    $
    76,488
    
    
    
    59.7
    %Hotel Services
    
    
    34,486
    
    
    
    29.2
    %
    
    
    32,972
    
    
    
    25.7
    %System Sales and Related Services
    
    
    9,591
    
    
    
    8.1
    %
    
    
    14,581
    
    
    
    11.4
    %Advertising Services
    
    
    2,340
    
    
    
    2.0
    %
    
    
    1,761
    
    
    
    1.4
    %Total Hospitality and Advertising Services
    
    
    115,499
    
    
    
    97.8
    %
    
    
    125,802
    
    
    
    98.2
    %Healthcare
    
    
    2,553
    
    
    
    2.2
    %
    
    
    2,290
    
    
    
    1.8
    %$
    118,052
    
    
    
    100.0
    %
    
    $
    128,092
    
    
    
    100.0
    %
  2010
    
    
    2009Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.99
    
    
    $
    13.73Hotel Services
    
    
    6.48
    
    
    
    5.92System Sales and Related Services
    
    
    1.80
    
    
    
    2.61Advertising Services
    
    
    0.44
    
    
    
    0.32Total Hospitality and Advertising Services revenue per room
    
    $
    21.71
    
    
    $
    22.58
  Page 33




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##### Table of Contents



Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
  2010
    
    2009
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    56.4
    %
    
    
    56.8
    %
    
    
    (0.4
    )%Change drivers:Hospitality and Advertising ServicesGuest Entertainment
    
    
    
    
    
    
    
    
    
    
    (0.5
    )%Hotel Services
    
    
    
    
    
    
    
    
    
    
    2.4
    %System Sales and Related Services
    
    
    
    
    
    
    
    
    
    
    (2.7
    )%Advertising Services
    
    
    
    
    
    
    
    
    
    
    0.0
    %Healthcare
    
    
    
    
    
    
    
    
    
    
    0.4
    %(0.4
    )%
 Page 34




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##### Table of Contents



Operating Expenses.
 2010
    
    
    2009Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    10,515
    
    
    
    8.9
    %
    
    $
    10,326
    
    
    
    8.1
    %Selling, general and
administrative
    
    
    12,115
    
    
    
    10.3
    %
    
    
    10,818
    
    
    
    8.4
    %Depreciation and amortization
    
    
    22,173
    
    
    
    18.8
    %
    
    
    27,105
    
    
    
    21.1
    %Restructuring charge
    
    
    3
    
    
    
    0.0
    %
    
    
    107
    
    
    
    0.1
    %Other operating expense
(income)
    
    
    5
    
    
    
    0.0
    %
    
    
    (132
    )
    
    
    (0.1
    )%Total operating expenses
    
    $
    44,811
    
    
    
    38.0
    %
    
    $
    48,224
    
    
    
    37.6
    %
     Operating Income.
 Page 35




---



##### Table of Contents



Interest Expense.
 Loss on Early Retirement of Debt .
 Gain on Extinguishment of Debt.
 Other Income.
 Taxes.
 Net (Loss) Income.
 Page 36




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##### Table of Contents



Critical Accounting Policies
  Revenue Recognition 
 
    
    Guest Entertainment 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 videos, Internet on television and television on-demand. We
recognize revenue from the sale of these guest entertainment 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.
 
    
    Cable Television Programming Services.We generate revenue from the sale of basic and
premium cable television programming to individual hotels. In contrast to Guest Entertainment
services, where the hotel guest is charged directly for the service, we charge the hotel for
our cable television programming services. We recognize revenue from the sale of cable
television programming 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 which 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 basic and premium programming
services where the revenue is deferred and recognized in the periods which services are
provided.
 
    
    Broadband Service and Support.We provide ongoing maintenance, service and call center
support services to hotel properties installed by us and also to hotel properties 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.
 
    
    Broadband System Sales.We provide broadband 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.
 Page 37




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##### Table of Contents




    
    Hotel System Sales and Support.We also market and sell our guest entertainment
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 Cable Television Programming Systems and Equipment Sales and Services.We generate
revenues from the sale and installation of cable television programming systems (i.e. DIRECTV
satellite systems); from the installation of master antenna (MATV) equipment, including
wiring, at the hotel; and from the sale of miscellaneous system equipment or services, such as
in-room terminals, television remotes or other media devices, along with service parts and
labor. Prices for the equipment or services are fixed and determinable prior to delivery.
The equipment is not proprietary and can be supplied by other vendors. These sales are not
made under multiple element arrangements and we recognized 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 which has been provided.
 
    
    Advertising and Media Services.We generate revenue from the sale of advertising-based
media services within our hospitality media and connectivity businesses through our
wholly-owned subsidiary, The Hotel Networks, and server based channels within our interactive
room base. The Hotel Networks delivers targeted advertising to hotel rooms on 10
satellite-delivered channels, known as the SuperBlock, which include MSNBC, CNBC, FOX News and
The Weather Channel. In addition to the satellite platform, we generate revenue from server
based channels and other interactive and location-based applications which can be delivered by
our interactive television platform. Advertising revenue is recognized, net of agency
commissions, when advertisements are broadcast or ratably over a contracted advertising period
and when collection is reasonably assured. We establish the prices charged to each advertiser
and no future performance obligations exist on advertising which has been broadcast.
Persuasive evidence of an arrangement exists through our contracts with each advertiser.
 
    
    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. Historically, revenue
from the sale and installation of our interactive system was recognized ratably over the
one-year maintenance period after the equipment is installed. The contracted system hardware,
installation and maintenance elements were not separable during this start-up phase due to
insufficient vendor specific objective evidence (VSOE) of fair value. 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. In the fourth quarter of 2007, we attained 100% renewal activity
for maintenance services, therefore establishing VSOE of the fair value of maintenance
services. Effective in the fourth quarter of 2007, the entire selling price of the
interactive system is recognized upon installation using the residual method.
 Allowance for Doubtful Accounts.
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Allowance for Excess or Obsolete System Components.
 Long-Lived Assets.
 Property and Equipment.
 YearsBuildings
    
    
    30Hotel systems:Installed system costs
    
    
    2  7Customer acquisition costs
    
    
    4  7System components
    
    
    5  7Software costs
    
    
    1 1/2  5Other equipment
    
    
    3  10
 Intangible Assets.
 YearsHotel contracts and relationships
    
    
    10  20Tradenames
    
    
    7Acquired technologies and patents
    
    
    5Content agreements and relationships
    
    
    4
 Allowance for System Removal.
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Goodwill Impairment.
    Recent Accounting Developments
  
 Item 3   Quantitative and Qualitative Disclosures About Market Risk
   Carrying
    
    
    FairAmount
    
    
    ValueBank Credit Facility:Bank term loan
    
    $
    425,367
    
    
    $
    401,971Capital leases
    
    
    1,668
    
    
    
    1,668$
    427,035
    
    
    $
    403,639
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##### Table of Contents



Economic Condition.
 
 Item 4   Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting
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##### Table of Contents



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 5   Other Information
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##### Table of Contents



Item 6   Exhibits
 31.1
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Principal Accounting Officer31.2
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer32
    
    Section 1350 Certifications
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##### Table of Contents



Signatures
  LodgeNet Interactive Corporation(Registrant)Date: May 7, 2010
    
    /s/ Scott C. Petersen
Scott C. PetersenPresident, Chief Executive Officer and Chairman of the Board of Directors(Principal Executive Officer)Date: May 7, 2010
    
    /s/ Gary H. Ritondaro
Gary H. RitondaroPrincipal Accounting Officer
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