##### 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, 2009
 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  (Registrants telephone number,
  (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, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations (Unaudited) for
the Three Months Ended March 31, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for
the Three Months Ended March 31, 2009 and 2008
    
    
    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.
    
    
    42Item 4  Controls and Procedures
    
    
    43Part II. Other InformationItem 1  Legal Proceedings.
    
    
    44Item 1A  Risk Factors.
    
    
    44Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3  Defaults Upon Senior Securities.
    
    
    44Item 4  Submission of Matters to a Vote of Security Holders.
    
    
    44Item 5  Other Information.
    
    
    44Item 6  Exhibits
    
    
    45Signatures
    
    
    46EX-31.1EX-31.2EX-32
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Part I  Financial Information
 
 Item 1  Financial Statements
 LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Balance Sheets (Unaudited)
  March 31,
    
    
    December 31,2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    7,041
    
    
    $
    10,800Accounts receivable, net
    
    
    68,350
    
    
    
    63,620Other current assets
    
    
    8,364
    
    
    
    9,107Total current assets
    
    
    83,755
    
    
    
    83,527Property and equipment, net
    
    
    254,413
    
    
    
    273,830Debt issuance costs, net
    
    
    8,158
    
    
    
    9,117Intangible assets, net
    
    
    112,694
    
    
    
    115,134Goodwill
    
    
    100,081
    
    
    
    100,081Other assets
    
    
    8,418
    
    
    
    8,097Total assets
    
    $
    567,519
    
    
    $
    589,786Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    50,750
    
    
    $
    44,291Other current liability
    
    
    12,935
    
    
    
    1,446Current maturities of long-term debt
    
    
    7,416
    
    
    
    7,597Accrued expenses
    
    
    20,253
    
    
    
    23,870Deferred revenue
    
    
    14,797
    
    
    
    17,168Total current liabilities
    
    
    106,151
    
    
    
    94,372Long-term debt
    
    
    541,360
    
    
    
    580,923Other long-term liabilities
    
    
    40,613
    
    
    
    43,239Total liabilities
    
    
    688,124
    
    
    
    718,534Commitments and contingenciesStockholders deficiency:Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized;
23,009,164 and 23,014,164 shares outstanding at March 31,
2009 and December 31, 2008, respectively
    
    
    230
    
    
    
    230Treasury stock, at cost: 530,000 shares at March 31, 2009
and December 31, 2008
    
    
    (5,737
    )
    
    
    (5,737
    )Additional paid-in capital
    
    
    332,924
    
    
    
    332,649Accumulated deficit
    
    
    (410,098
    )
    
    
    (416,056
    )Accumulated other comprehensive loss
    
    
    (37,924
    )
    
    
    (39,834
    )Total stockholders deficiency
    
    
    (120,605
    )
    
    
    (128,748
    )Total liabilities and stockholders deficiency
    
    $
    567,519
    
    
    $
    589,786
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LodgeNet Interactive Corporation and Subsidiaries
  Consolidated Statements of Operations (Unaudited)
  Three Months EndedMarch 31,2009
    
    
    2008Revenues:Hospitality
    
    $
    124,041
    
    
    $
    136,998Other
    
    
    4,051
    
    
    
    2,789Total revenues
    
    
    128,092
    
    
    
    139,787Direct costs and operating expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately below):Hospitality
    
    
    70,321
    
    
    
    73,783Other
    
    
    2,819
    
    
    
    2,127Operating expenses:System operations
    
    
    10,326
    
    
    
    15,387Selling, general and administrative
    
    
    10,425
    
    
    
    15,225Depreciation and amortization
    
    
    27,105
    
    
    
    33,100Restructuring charge
    
    
    107
    
    
    
    2,002Other operating (income) expense
    
    
    (132
    )
    
    
    10Total direct costs and operating expenses
    
    
    120,971
    
    
    
    141,634Income (loss) from operations
    
    
    7,121
    
    
    
    (1,847
    )Other income and (expenses):Interest expense
    
    
    (9,881
    )
    
    
    (10,974
    )Gain on extinguishment of debt
    
    
    9,295
    
    
    
    Loss on early retirement of debt
    
    
    (541
    )
    
    
    Other income
    
    
    175
    
    
    
    11Income (loss) before income taxes
    
    
    6,169
    
    
    
    (12,810
    )Provision for income taxes
    
    
    (211
    )
    
    
    (201
    )Net income (loss)
    
    $
    5,958
    
    
    $
    (13,011
    )Net income (loss) per common share (basic)
    
    $
    0.27
    
    
    $
    (0.57
    )Net income (loss) per common share (diluted)
    
    $
    0.26
    
    
    $
    (0.57
    )Weighted average shares outstanding (basic)
    
    
    22,479,164
    
    
    
    22,782,100Weighted average shares outstanding (diluted)
    
    
    22,498,914
    
    
    
    22,782,100
  Page 4




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LodgeNet Interactive Corporation and Subsidiaries
  Consolidated Statements of Cash Flows (Unaudited)
  Three Months Ended March 31,2009
    
    
    2008Operating activities:Net income (loss)
    
    $
    5,958
    
    
    $
    (13,011
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation and amortization
    
    
    27,105
    
    
    
    33,100Gain on extinguishment of debt (non-cash)
    
    
    (9,295
    )
    
    
    Loss on early retirement of debt
    
    
    541
    
    
    
    Share-based compensation
    
    
    271
    
    
    
    509Other, net
    
    
    (135
    )
    
    
    16Change in operating assets and liabilities:Accounts receivable, net
    
    
    (4,449
    )
    
    
    (4,556
    )Other current assets
    
    
    730
    
    
    
    1,527Accounts payable
    
    
    6,499
    
    
    
    (1,190
    )Accrued expenses and deferred revenue
    
    
    (6,039
    )
    
    
    (4,287
    )Other
    
    
    (239
    )
    
    
    (211
    )Net cash provided by operating activities
    
    
    20,947
    
    
    
    11,897Investing activities:Property and equipment additions
    
    
    (5,301
    )
    
    
    (18,935
    )Net cash used for investing activities
    
    
    (5,301
    )
    
    
    (18,935
    )Financing activities:Repayment of long-term debt
    
    
    (8,200
    )
    
    
    (1,563
    )Payment of capital lease obligations
    
    
    (523
    )
    
    
    (413
    )Borrowings on revolving credit facility
    
    
    
    
    
    
    30,000Repayments of revolving credit facility
    
    
    
    
    
    
    (23,000
    )Purchase of long-term debt
    
    
    (10,750
    )
    
    
    Proceeds from investment in long-term debt
    
    
    91
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (4,662
    )Net cash (used for) provided by financing activities
    
    
    (19,382
    )
    
    
    362Effect of exchange rates on cash
    
    
    (23
    )
    
    
    (57
    )Decrease in cash and cash equivalents
    
    
    (3,759
    )
    
    
    (6,733
    )Cash and cash equivalents at beginning of period
    
    
    10,800
    
    
    
    25,569Cash and cash equivalents at end of period
    
    $
    7,041
    
    
    $
    18,836
  Page 5




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LodgeNet Interactive Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements (Unaudited)
        March 31,
    
    
    December 31,2009
    
    
    2008Land, building and equipment
    
    $
    110,094
    
    
    $
    111,870Hotel systems:Installed system costs
    
    
    631,557
    
    
    
    636,986Customer acquisition costs
    
    
    59,329
    
    
    
    58,995System components
    
    
    32,221
    
    
    
    31,409Software costs
    
    
    36,194
    
    
    
    35,522Total
    
    
    869,395
    
    
    
    874,782Less  depreciation and amortization
    
    
    (614,982
    )
    
    
    (600,952
    )Property and equipment, net
    
    $
    254,413
    
    
    $
    273,830
   Page 6




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Hospitality
    
    
    Other
    
    
    TotalBalance as of December 31, 2008
    
    $
    92,614
    
    
    $
    7,467
    
    
    $
    100,081Activity during the quarter
    
    
    
    
    
    
    
    
    
    
    Balance as of March 31, 2009
    
    $
    92,614
    
    
    $
    7,467
    
    
    $
    100,081
    March 31, 2009
    
    
    December 31, 2008Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and
relationships
    
    $
    120,315
    
    
    $
    (12,866
    )
    
    $
    120,315
    
    
    $
    (11,274
    )Other acquired intangibles
    
    
    12,984
    
    
    
    (11,458
    )
    
    
    12,984
    
    
    
    (11,079
    )Tradenames
    
    
    3,059
    
    
    
    (1,227
    )
    
    
    3,042
    
    
    
    (1,079
    )Acquired patents
    
    
    5,112
    
    
    
    (3,225
    )
    
    
    5,100
    
    
    
    (2,875
    )$
    141,470
    
    
    $
    (28,776
    )
    
    $
    141,441
    
    
    $
    (26,307
    )
    Page 7




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Three Months EndedMarch 31,2009
    
    
    2008Basic EPS:Net income (loss)
    
    $
    5,958
    
    
    $
    (13,011
    )Income (loss) allocated to participating securities
    
    
    48
    
    
    
    (100
    )Net income (loss) available to common stockholders
    
    $
    5,910
    
    
    $
    (12,911
    )Basic weighted average shares outstanding
    
    
    22,479,164
    
    
    
    22,782,100Less participating securities included in weighted average shares outstanding
    
    
    (181,118
    )
    
    
    (175,137
    )Weighted average shares outstanding for basic earnings per common share
    
    
    22,298,046
    
    
    
    22,606,963Basic earnings per share
    
    $
    0.27
    
    
    $
    (0.57
    )Diluted EPS:Net income (loss)
    
    $
    5,958
    
    
    $
    (13,011
    )Income (loss) allocated to participating securities
    
    
    48
    
    
    
    (100
    )Net income (loss) available to common stockholders
    
    $
    5,910
    
    
    $
    (12,911
    )Basic weighted average shares outstanding
    
    
    22,479,164
    
    
    
    22,782,100Less participating securities included in weighted average shares outstanding
    
    
    (181,118
    )
    
    
    (175,137
    )Weighted average shares outstanding for basic earnings per common share
    
    
    22,298,046
    
    
    
    22,606,963Dilutive effect of potential shares
    
    
    19,750
    
    
    
    N/AWeighted average shares outstanding for diluted earnings per common share
    
    
    22,317,796
    
    
    
    22,606,963Diluted earnings per share
    
    $
    0.26
    
    
    $
    (0.57
    )
 Page 8




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March 31,
    
    
    December 31,2009
    
    
    2008Property, sales and other taxes
    
    $
    8,878
    
    
    $
    8,876Compensation
    
    
    5,038
    
    
    
    7,406Interest
    
    
    138
    
    
    
    109Programming related
    
    
    1,979
    
    
    
    1,751Restructuring and reorganization
    
    
    1,018
    
    
    
    2,436Other
    
    
    3,202
    
    
    
    3,292$
    20,253
    
    
    $
    23,870
   March 31,
    
    
    December 31,2009
    
    
    2008Bank Credit Facility:Bank term loan
    
    $
    546,066
    
    
    $
    585,323Revolving credit facility
    
    
    
    
    
    
    Capital leases
    
    
    2,710
    
    
    
    3,197548,776
    
    
    
    588,520Less current maturities
    
    
    (7,416
    )
    
    
    (7,597
    )$
    541,360
    
    
    $
    580,923
 Bank Credit Facility 3⁄4
 Page 9




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Capital Leases
  2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    ThereafterLong-term debt
    
    $
    4,687
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    516,379Capital leases
    
    
    1,005
    
    
    
    1,065
    
    
    
    658
    
    
    
    251
    
    
    
    
    
    
    
    5,692
    
    
    
    7,315
    
    
    
    6,908
    
    
    
    6,501
    
    
    
    6,250
    
    
    
    516,379Less amount
representing
interest on
capital leases
    
    
    (116
    )
    
    
    (103
    )
    
    
    (39
    )
    
    
    (11
    )
    
    
    
    
    
    
    $
    5,576
    
    
    $
    7,212
    
    
    $
    6,869
    
    
    $
    6,490
    
    
    $
    6,250
    
    
    $
    516,379
  Page 10




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
    
    borrow money;
    
    pay dividends;
    
    purchase or redeem stock;
    
    repay subordinated indebtedness before its stated maturity date;
    
    make investments and extend credit;
    
    engage in transactions with affiliates;
    
    engage in sale-leaseback transactions;
    
    consummate certain asset sales;
    
    effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or
substantially all of our assets; and
    
    create liens on our assets.
  3⁄4
  Three Months EndedMarch 31,2009
    
    
    2008Net income (loss)
    
    $
    5,958
    
    
    $
    (13,011
    )Foreign currency translation adjustment
    
    
    (752
    )
    
    
    (997
    )Unrealized gain (loss) on interest rate swap agreements
    
    
    2,662
    
    
    
    (17,147
    )Comprehensive income (loss)
    
    $
    7,868
    
    
    $
    (31,155
    )
  March 31,
    
    
    December 31,2009
    
    
    2008Unrealized loss on interest rate swap agreements
    
    $
    (37,709
    )
    
    $
    (40,371
    )Foreign currency translation adjustment
    
    
    (215
    )
    
    
    537Accumulated other comprehensive loss
    
    $
    (37,924
    )
    
    $
    (39,834
    )
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3⁄4
     Three Months EndedMarch 31,2009
    
    
    2008Compensation cost (benefit):Stock options
    
    $
    170
    
    
    $
    245Non-vested shares
    
    
    101
    
    
    
    264Total share based compensation expense
    
    $
    271
    
    
    $
    509Compensation expense per common share (basic and diluted):
    
    $
    0.01
    
    
    $
    0.02
  Stock Option Valuation and Expense Information under SFAS No. 123R
  Page 12




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Non-Vested Shares (Restricted Stock)
       12/31/08
    
    
    Charges to
    
    
    Cash
    
    
    3/31/09Balance
    
    
    Expense
    
    
    Payments
    
    
    BalanceSeverance and other benefit related costs
    
    $
    1,996
    
    
    $
    (302
    )
    
    $
    (1,294
    )
    
    $
    400Cost of closing redundant acquired facilities
    
    
    440
    
    
    
    409
    
    
    
    (231
    )
    
    
    618Total
    
    $
    2,436
    
    
    $
    107
    
    
    $
    (1,525
    )
    
    $
    1,018
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Financial Assets and Financial Liabilities 3⁄4
 March 31, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueInterest rate swaps  liability position
    
    $
    37,709
    
    
    $
    37,709
    
    
    $
    40,371
    
    
    $
    40,371Long-term debt
    
    $
    548,776
    
    
    $
    434,102
    
    
    $
    588,520
    
    
    $
    295,858
    Total
    
    Quoted Prices inFair Value
    
    Active Markets for
    
    Significant Other
    
    SignificantMeasurement
    
    Identical Asset
    
    Observable Inputs
    
    Unobservable InputsMarch 31, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Interest rate swaps -
liability position
    
    $
    37,709
    
    
    $
    
    
    
    $
    37,709
    
    
    $
    
  Nonfinancial Assets and Nonfinancial Liabilities 3⁄4
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Three Months EndedMarch 31,2009
    
    
    2008Total revenues:Hospitality
    
    $
    124,041
    
    
    $
    136,998Other
    
    
    4,051
    
    
    
    2,789Total
    
    $
    128,092
    
    
    $
    139,787Income (loss) before income taxes:Hospitality
    
    $
    39,702
    
    
    $
    43,198Other
    
    
    (4
    )
    
    
    (795
    )Operating profit
    
    
    39,698
    
    
    
    42,403Corporate
    
    
    (5,497
    )
    
    
    (9,138
    )Depreciation and amortization
    
    
    (27,105
    )
    
    
    (33,100
    )Restructuring charge
    
    
    (107
    )
    
    
    (2,002
    )Other operating income (expense)
    
    
    132
    
    
    
    (10
    )Interest expense
    
    
    (9,881
    )
    
    
    (10,974
    )Gain on extinguishment of debt
    
    
    9,295
    
    
    
    Loss on early retirement of debt
    
    
    (541
    )
    
    
    Other income
    
    
    175
    
    
    
    11Income (loss) before income taxes
    
    $
    6,169
    
    
    $
    (12,810
    )
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Contractual/
    
    
    
    Estimated FairNotional
    
    Balance Sheet
    
    ValueAmount
    
    Location
    
    Asset
    
    (Liability)Interest rate swaps
    
    $537,500
    
    Other long-term liabilities
    
    $
    
    $(37,709)
   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
    
    RecognizedInterest rate swaps
    
    $2,662
    
    Interest expense
    
    $
    
    None
    
    $
 3⁄4
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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 document 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
System Operations and SG&A expenses, capital investment and debt reduction, 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, 2008 and filed on March 13, 2009, in any prospectus supplement or any report or
document incorporated herein by reference, such factors include, among others, the following:
 Ø
    
    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);Ø
    
    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;Ø
    
    decreases in hotel occupancy, whether related to economic conditions or other causes;Ø
    
    competition from providers of similar services and from alternative sources;Ø
    
    changes in demand for our products and services, programming costs, availability,
timeliness and quality;Ø
    
    technological developments by competitors;Ø
    
    developmental costs, difficulties, and delays;Ø
    
    relationships with clients and property owners;Ø
    
    the availability of capital to finance growth;Ø
    
    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;Ø
    
    the impact of governmental regulations;Ø
    
    potential effects of litigation;Ø
    
    risks of expansion into new markets;Ø
    
    risks related to the security of our data systems; andØ
    
    other factors detailed, from time to time, in our filings with the Securities and Exchange Commission.
 Executive Overview
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Hospitality
 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 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
profitability.
    
    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 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 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, companies offering web sites
which provide on-demand movies, rental companies which provide videocassettes and DVDs that
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 and the first quarter of 2009, 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 increase to levels previously experienced by the
Company.
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
    
    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 distributed to approximately 60% of our guest rooms over the internal hotel network, and
typically includes premium channels such as HBO, Showtime and The Disney Channel, 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, allow hotels to charge or provide the access as a guest amenity and
provide bandwidth management tools. 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 existing
hotel customer relationships, our nationwide field service network and a 24-hour call center
to support calls from hotel customers.
 System Sales and Related Services.
 Key Metrics:
 Special Note Regarding the Use of Non-GAAP Financial Information
  Page 23




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Rooms Served
  March 31,2009
    
    2008Total rooms served (1)
    
    
    1,973,472
    
    
    
    1,968,000Total Guest Entertainment rooms (2)
    
    
    1,849,304
    
    
    
    1,863,599Total Cable Television Programming (FTG) rooms (3)
    
    
    1,106,833
    
    
    
    1,076,894Total THN SuperBlock rooms (4)
    
    
    372,489
    
    
    
    357,104Total THN VOD rooms (5)
    
    
    1,144,633
    
    
    
    543,794Total Broadband Internet rooms (6)
    
    
    229,184
    
    
    
    221,906Net new Guest Entertainment rooms for the three months ended (7)
    
    
    (17,049
    )
    
    
    9,156
 (1)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees.(2)
    
    Guest Entertainment rooms are equipped with our interactive television systems.(3)
    
    Cable television programming (FTG) rooms receive basic or premium television programming.(4)
    
    Includes rooms receiving satellite-delivered television channels.(5)
    
    Includes rooms receiving server-based channels.(6)
    
    Represents rooms receiving high-speed Internet service and are included in total rooms
served.(7)
    
    Amounts shown are net of de-installations during the period. The gross number of new rooms
installed was 5,960 and 17,331 for the three months ended March 31, 2009 and 2008,
respectively.  High Definition Room Growth
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##### Table of Contents



March 31,2009
    
    2008Net new HDTV rooms for the three months ended (1)
    
    
    7,799
    
    
    
    23,588Total HDTV rooms installed (1)
    
    
    199,290
    
    
    
    109,980HDTV rooms as a percent of total Guest Entertainment rooms
    
    
    10.8
    %
    
    
    5.9
    %
  (1)
    
    HDTV rooms, including new installations and major upgrades, are equipped with high-definition
capabilities. Capital Investment Per VOD Room
  Three Months Ended
    
    Years EndedMarch 31,
    
    March 31,
    
    December 31,
    
    December 31,2009
    
    2008
    
    2008
    
    2007Average cost per room  new installation
    
    $
    459
    
    
    $
    390
    
    
    $
    389
    
    
    $
    399Average cost per room  conversion
    
    $
    357
    
    
    $
    340
    
    
    $
    295
    
    
    $
    309Average cost per HD room  new
installation
    
    $
    465
    
    
    $
    413
    
    
    $
    398
    
    
    $
    460Average cost per HD room  conversion
    
    $
    357
    
    
    $
    348
    
    
    $
    320
    
    
    $
    329
  Average Revenue Per Room
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Three Months EndedMarch 31,2009
    
    
    2008Average monthly revenue per room:HospitalityGuest Entertainment
    
    $
    13.73
    
    
    $
    17.83Hotel Services
    
    
    5.90
    
    
    
    5.29System Sales and Related Services
    
    
    2.63
    
    
    
    1.50Total Hospitality revenue per room
    
    $
    22.26
    
    
    $
    24.62
  Direct Costs
  Three Months Ended
    
    
    Three Months EndedMarch 31, 2009
    
    
    March 31, 2008Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenue
    
    
    Amount
    
    
    RevenueDirect costs per room:HospitalityGuest Entertainment
    
    $
    5.51
    
    
    
    24.0
    %
    
    $
    7.20
    
    
    
    28.7
    %Hotel Services
    
    
    5.24
    
    
    
    22.8
    %
    
    
    4.91
    
    
    
    19.5
    %System Sales and Related Services
    
    
    1.87
    
    
    
    8.1
    %
    
    
    1.15
    
    
    
    4.6
    %Total Hospitality Direct Costs per room
    
    $
    12.62
    
    
    
    54.9
    %
    
    $
    13.26
    
    
    
    52.8
    %
  Healthcare
  
    
    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.
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##### Table of Contents



Sales and Installation
  2009
    
    2008Systems sold (1)
    
    
    45
    
    
    
    29Beds sold
    
    
    10,406
    
    
    
    6,866Systems installed (2)
    
    
    33
    
    
    
    21Beds installed
    
    
    6,151
    
    
    
    4,387
 
 (1)
    
    Systems sold on a cumulative basis.(2)
    
    Systems installed with active service and maintenance agreements.  Advertising and Media Services
  General Operations
 Total Operating Expenses
  Three Months EndedMarch 31,2009
    
    
    2008Sytems operations expenses
    
    $
    1.85
    
    
    $
    2.77SG&A expenses
    
    
    1.87
    
    
    
    2.74Depreciation and amortization (D&A)
    
    
    4.42
    
    
    
    5.38Amortization of acquired intangibles
    
    
    0.44
    
    
    
    0.57Restructuring charge
    
    
    0.02
    
    
    
    0.36Other operating income, net
    
    
    (0.02
    )
    
    
    $
    8.58
    
    
    $
    11.82Systems operations as a percent of total revenue
    
    
    8.1
    %
    
    
    11.0
    %SG&A as a percent of total revenue
    
    
    8.1
    %
    
    
    10.9
    %D&A as a percent of total revenue
    
    
    19.2
    %
    
    
    21.4
    %Amortization of acquired intangibles as a percent of total revenue
    
    
    1.9
    %
    
    
    2.3
    %Total operating expenses as a percent of total revenue
    
    
    37.3
    %
    
    
    47.0
    %
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##### Table of Contents



Free Cash Flow
   Three Months EndedMarch 31,2009
    
    
    2008Cash provided by operating activities (1)
    
    $
    20,947
    
    
    $
    11,897Property and equipment additions
    
    
    (5,301
    )
    
    
    (18,935
    )$
    15,646
    
    
    $
    (7,038
    )
 
 (1)
    
    Cash provided by operating activities for the three months ended March 31, 2009 included $1.5
million of cash used for restructuring and reorganization related activities. The three
months ended March 31, 2008 included $6.0 million of cash used for restructuring and
integration related activities.  Three Months EndedMarch 31,2009
    
    
    2008Expansion capital investment (1)
    
    $
    2,478
    
    
    $
    5,869Renewal investment (2)
    
    
    940
    
    
    
    6,072Corporate capital and minor extensions (3)
    
    
    1,883
    
    
    
    6,994$
    5,301
    
    
    $
    18,935
 
 (1)
    
    Capital investment to install newly contracted rooms with our digital or HDTV system.(2)
    
    Capital investment to convert rooms to our digital 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. Liquidity and Capital Resources
  Page 28




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2009
    
    2008Actual consolidated leverage ratio (1) (3)
    
    
    4.04
    
    
    
    4.45Maximum per covenant
    
    
    4.25
    
    
    
    4.75Actual consolidated interest coverage ratio (2) (3)
    
    
    3.27
    
    
    
    3.10Minimum per covenant
    
    
    2.75
    
    
    
    2.50
 
 (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 could have a
material adverse effect on us.  Page 29




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Q3 2010Q3 2009
    
    Q1 2010
    
    to maturityMaximum consolidated leverage ratio
    
    
    4.00
    
    
    
    3.75
    
    
    
    3.50Minimum consolidated interest
coverage ratio
    
    
    2.75
    
    
    
    3.00
    
    
    
    3.00
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Payments due by periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    548,776
    
    
    $
    7,416
    
    
    $
    13,897
    
    
    $
    12,646
    
    
    $
    514,817Interest on bank term loan (1)
    
    
    92,149
    
    
    
    18,567
    
    
    
    37,101
    
    
    
    36,285
    
    
    
    196Interest on derivative
instruments (net)
    
    
    70,556
    
    
    
    19,107
    
    
    
    29,572
    
    
    
    21,877
    
    
    
    Operating lease payments
    
    
    5,763
    
    
    
    2,739
    
    
    
    2,265
    
    
    
    614
    
    
    
    145Purchase obligations (2)
    
    
    3,034
    
    
    
    3,034
    
    
    
    
    
    
    
    
    
    
    
    Nintendo minimum royalty (3)
    
    
    17,500
    
    
    
    4,200
    
    
    
    8,400
    
    
    
    4,900
    
    
    
    Minimum royalties and
commissions (4)
    
    
    4,436
    
    
    
    2,625
    
    
    
    1,762
    
    
    
    49
    
    
    
    Total contractual obligations
    
    $
    742,214
    
    
    $
    57,688
    
    
    $
    92,997
    
    
    $
    76,371
    
    
    $
    515,158
 Amount of commitment expiration per periodLess than
    
    2  3
    
    4  5
    
    OverTotal
    
    1 year
    
    years
    
    years
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    452
    
    
    $
    452
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled debt amortization.(2)
    
    Consists of open purchase orders primarily for the procurement of system components.(3)
    
    Nintendo video game royalties 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.(4)
    
    In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. Seasonality
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Market Conditions
  Page 32




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Discussion and Analysis of Results of Operations
Three Months Ended March 31, 2009 and 2008
 Revenue Analysis.
 2009
    
    
    2008Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:HospitalityGuest Entertainment
    
    $
    76,488
    
    
    
    59.7
    %
    
    $
    99,203
    
    
    
    71.0
    %Hotel Services
    
    
    32,889
    
    
    
    25.7
    %
    
    
    29,410
    
    
    
    21.0
    %System Sales and Related Services
    
    
    14,664
    
    
    
    11.4
    %
    
    
    8,385
    
    
    
    6.0
    %Total Hospitality
    
    
    124,041
    
    
    
    96.8
    %
    
    
    136,998
    
    
    
    98.0
    %Other
    
    
    4,051
    
    
    
    3.2
    %
    
    
    2,789
    
    
    
    2.0
    %$
    128,092
    
    
    
    100.0
    %
    
    $
    139,787
    
    
    
    100.0
    %
 Hospitality
   2009
    
    
    2008Average monthly revenue per room:Movie revenue
    
    $
    12.93
    
    
    $
    16.51Other interactive service revenue
    
    
    0.80
    
    
    
    1.32Total Guest Entertainment per room
    
    $
    13.73
    
    
    $
    17.83
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2009
    
    
    2008Average monthly revenue per room:Cable television programming
    
    $
    5.39
    
    
    $
    4.76Broadband
    
    
    0.51
    
    
    
    0.53Total Hotel Services per room
    
    $
    5.90
    
    
    $
    5.29
   Other
  Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
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2009
    
    
    2008
    
    
    ChangeDirect costs
as a percent of revenue (exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    57.1
    %
    
    
    54.3
    %
    
    
    2.8
    %Change drivers:HospitalityGuest Entertainment
    
    
    
    
    
    
    
    
    
    
    (4.7
    )%Hotel Services
    
    
    
    
    
    
    
    
    
    
    3.2
    %System Sales and Related Services
    
    
    
    
    
    
    
    
    
    
    3.6
    %Other
    
    
    
    
    
    
    
    
    
    
    0.7
    %2.8
    %
 Operating Expenses.
 2009
    
    
    2008Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    10,326
    
    
    
    8.1
    %
    
    $
    15,387
    
    
    
    11.0
    %Selling,
general and administrative
    
    
    10,425
    
    
    
    8.1
    %
    
    
    15,225
    
    
    
    10.9
    %Depreciation and amortization
    
    
    24,638
    
    
    
    19.2
    %
    
    
    29,948
    
    
    
    21.4
    %Amortization
of acquired intangibles
    
    
    2,467
    
    
    
    1.9
    %
    
    
    3,152
    
    
    
    2.3
    %Restructuring charge
    
    
    107
    
    
    
    0.1
    %
    
    
    2,002
    
    
    
    1.4
    %Other operating (income)
expense
    
    
    (132
    )
    
    
    -0.1
    %
    
    
    10
    
    
    
    0.0
    %Total operating expenses
    
    $
    47,831
    
    
    
    37.3
    %
    
    $
    65,724
    
    
    
    47.0
    %
   Page 35




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Operating Income (Loss).
 Interest Expense.
 Gain on Extinguishment of Debt.
 Loss on Early Retirement of Debt
 Other Income.
 Taxes.
 Net Income (Loss).
 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.
 
    
    Television Programming Services.We generate revenue from the sale of basic and premium
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
television programming services. We recognize revenue from the sale of 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 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.
 
    
    Broadband Service and Support.We provide ongoing maintenance, service and call center
support services to hotel properties which have been 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.
 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.
 
    
    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. 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. Revenues are recognized upon installation of the satellite system. Prices
for these services are fixed and determinable prior to delivery. DIRECTV equipment and
installation services are not proprietary and can be supplied by vendors other than us.
 
    
    Other.We also generate revenue from the sale of miscellaneous system equipment, such as
television remotes or other media devices, 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 which has been provided.
 
    
    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.
 
    
    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, which was acquired in the On Command transaction, delivers
targeted advertising to more than 372,000 hotel rooms on 10 popular 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, which we have operating in more than 1.1 million of our rooms today, 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.
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Allowance for Doubtful Accounts.
 Allowance for Excess or Obsolete System Components.
 Long-Lived Assets.
 Property and Equipment.
 YearsBuildings
    
    
    30Hotel 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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Goodwill and Other Intangibles Assets.
  YearsHotel contracts and relationships
    
    
    10  20Tradenames
    
    
    7Acquired technologies and patents
    
    
    5Content agreements and relationships
    
    
    4
 Recent Accounting Developments
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Item 3  Quantitative and Qualitative Disclosures About Market Risk
  Interest.
 Carrying
    
    
    Fair
    
    
    Weighted AverageAmount
    
    
    Value
    
    
    Interest RateBank Credit Facility:Bank term loan
    
    $
    546,066
    
    
    $
    431,392
    
    
    
    3.17%Capital leases
    
    
    2,710
    
    
    
    2,710
    
    
    
    6.96%$
    548,776
    
    
    $
    434,102
    
    
    
    3.19%
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Economic Condition.
 
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting.
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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
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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
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LodgeNet Interactive Corporation and Subsidiaries
 
 Signatures
  LodgeNet Interactive Corporation(Registrant)Date: May 8, 2009
    
    
    
    /s/ Scott C. PetersenScott C. PetersenPresident, Chief Executive Officer andChairman of the Board of Directors(Principal Executive Officer)Date: May 8, 2009
    
    
    
    /s/ Gary H. RitondaroGary H. RitondaroSenior Vice President, Chief Financial Officer(Principal Financial & Accounting Officer)
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