##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 Commission File Number: 0-22334
 LodgeNet Interactive Corporation
  Delaware
    
    46-0371161(State of Incorporation)
    
    (IRS Employer Identification Number)
 3900 West Innovation Street, Sioux Falls, South Dakota 57107
 (605) 988  1000  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
    
    Common Stock, $.01 par value.
Registered on the NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:
    
    None.
 o þ
 o þ
 þ o
 o o
 þ
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-accelerated Filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ
 $72,637,829




---



##### 



Table of Contents
 Item 1   Business
    
    
    1Overview
    
    
    1Overview of Markets Served
    
    
    3Hospitality
    
    
    3Advertising and Media Services
    
    
    9Healthcare
    
    
    10Competition
    
    
    13Business Strategy
    
    
    15Regulation
    
    
    16Employees
    
    
    16Corporate Information and Web Site Access to SEC Filings
    
    
    17Item 1A   Risk Factors
    
    
    18Item 1B   Unresolved Staff Comments
    
    
    24Item 2   Properties
    
    
    24Item 3   Legal Proceedings
    
    
    24Item 5   Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    26Issuer Purchases of Equity Securities
    
    
    26Dividends
    
    
    26Stockholder Rights Plan
    
    
    26Item 6   Selected Financial Data
    
    
    30Item 7   Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    32Executive Overview
    
    
    32Hospitality Business
    
    
    33Other Businesses
    
    
    37General Operations
    
    
    38Liquidity and Capital Resources
    
    
    39Seasonality
    
    
    43Market Conditions
    
    
    44Results of Operations  Years Ended December 31, 2009 and 2008
    
    
    45Results of Operations  Years Ended December 31, 2008 and 2007
    
    
    50Critical Accounting Policies
    
    
    52Recent Accounting Developments
    
    
    52Item 7A   Quantitative and Qualitative Disclosures About Market Risk
    
    
    53Item 8   Financial Statements and Supplementary Data
    
    
    53Item 9   Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    54Item 9A   Controls and Procedures
    
    
    54Item 9B   Other Information
    
    
    54Item 10   Directors, Executive Officers and Corporate Governance
    
    
    55Item 11   Executive Compensation
    
    
    55Item 12   Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    55Item 13   Certain Relationships and Related Transactions, and Director Independence
    
    
    55Item 14   Principal Accountant Fees and Services
    
    
    55Item 15   Exhibits and Financial Statement Schedules
    
    
    56EX-12.1EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1




---



##### Table of Contents



PART I
 
 Item 1   Business
 
 Overview
   TM
  1




---



##### Table of Contents



Year Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Financial Highlights:Revenue
    
    $
    484,492
    
    
    $
    533,879
    
    
    $
    485,588
    
    
    $
    288,213
    
    
    $
    275,771Operating income (loss)
    
    
    21,692
    
    
    
    (5,071
    )
    
    
    (4,236
    )
    
    
    26,932
    
    
    
    22,693Depreciation and amortization (1)
    
    
    100,309
    
    
    
    124,060
    
    
    
    116,378
    
    
    
    66,311
    
    
    
    69,862Share-based compensation and restricted stock
    
    
    1,724
    
    
    
    2,275
    
    
    
    1,737
    
    
    
    1,677
    
    
    
    288Net (loss) income
    
    
    (10,155
    )
    
    
    (48,418
    )
    
    
    (65,172
    )
    
    
    1,841
    
    
    
    (6,959
    )Net (loss) income attributable to common stockholders
    
    $
    (13,269
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )
    
    $
    1,841
    
    
    $
    (6,959
    )Selected Operations Data:HospitalityTotal rooms served (2) (7)
    
    
    1,909,323
    
    
    
    1,977,015
    
    
    
    1,962,090
    
    
    
    1,052,025
    
    
    
    1,053,806Total Guest Entertainment rooms (3) (7) (9)
    
    
    1,779,979
    
    
    
    1,866,353
    
    
    
    1,860,720
    
    
    
    1,004,937
    
    
    
    1,001,929Total High Definition rooms (4) (9)
    
    
    231,588
    
    
    
    191,491
    
    
    
    84,327
    
    
    
    23,502
    
    
    
    259Percentage of Total Guest Entertainment rooms
    
    
    13.0
    %
    
    
    10.3
    %
    
    
    4.5
    %
    
    
    2.3
    %
    
    
    0.0
    %Total Television Programming (FTG) rooms (5) (9)
    
    
    1,087,860
    
    
    
    1,105,754
    
    
    
    1,068,256
    
    
    
    535,777
    
    
    
    536,984Percentage of Total Guest Entertainment rooms
    
    
    61.1
    %
    
    
    59.2
    %
    
    
    57.4
    %
    
    
    53.3
    %
    
    
    53.6
    %Total Broadband Internet rooms (6) (9)
    
    
    201,936
    
    
    
    229,003
    
    
    
    218,860
    
    
    
    37,686
    
    
    
    33,175AdvertisingTotal Advertising and Media Services rooms (8) (9)
    
    
    1,207,465
    
    
    
    893,738
    
    
    
    716,219
    
    
    
    
    
    
    
    HealthcareTotal Hospitals installed
    
    
    45
    
    
    
    28
    
    
    
    20
    
    
    
    11
    
    
    
    3
 
 (1)
    
    Includes amortization of acquired intangibles.(2)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees. The increase from 2006 to 2007 is due primarily to the
addition of the On Command room base of approximately 830,000 rooms.(3)
    
    Guest Entertainment rooms are equipped with our interactive television systems.(4)
    
    High Definition rooms are equipped with high-definition video-on-demand capabilities.(5)
    
    Television programming (which we refer to as free-to-guest or FTG) rooms receiving basic or
premium television programming.(6)
    
    Represents rooms receiving high-speed Internet service. The increase from 2006 to 2007 is
due to the addition of the StayOnline and On Command room bases of approximately 137,000 and
12,000 rooms, respectively.(7)
    
    Total room count was reduced as a result of Hurricane Katrina by 4,053 rooms in 2006 and
8,195 rooms in 2005.(8)
    
    Includes rooms receiving satellite-delivered and server-based channels.(9)
    
    Included in total rooms served. 2




---



##### Table of Contents



Overview of Markets Served
 
 HOSPITALITY
  Markets and Customers
 United States, Canadian and Mexican Market
 Diversified Customer Base.
   3




---



##### Table of Contents



Products and Services
 Guest Entertainment
   Ø
    
    on-demand movies;Ø
    
    on-demand television programming;Ø
    
    on-demand digital music programming;Ø
    
    daily subscription sports programming;Ø
    
    on-screen controls that allow the guest more viewing control and flexibility; andØ
    
    interactive guest marketing and merchandising capabilities.
  TM
  Ø
    
    the number of rooms equipped with our interactive television system;Ø
    
    the range of interactive and HD television content and services offered at each hotel;Ø
    
    the popularity, amount and timeliness of content offered, as well as the popularity and
availability of other entertainment alternatives;Ø
    
    the profile of the guest at each property;Ø
    
    the price of the service purchased by the hotel guest;Ø
    
    the occupancy rate at the property; andØ
    
    general economic conditions and consumer sentiment.
 4




---



##### Table of Contents



Hotel Contracts.
  5




---



##### Table of Contents



Hotel Services, System Sales and Other Diversified Revenue
  Television Programming ®
  Broadband Internet Access System Sales, Service and Support.
  System Sales and Other Services.
 Operations and Structure
 Sales and Marketing.
 6




---



##### Table of Contents



Installation Operations.
 Service Operations.
  Component Suppliers.
 7




---



##### Table of Contents



Programming. ® SM
 Technology, Product Development, and Patents.
   8




---



##### Table of Contents



ADVERTISING AND MEDIA SERVICES
   1)
    
    Traditional Television Advertising.The THN Superblock consists of a package of 10
cable networks broadcast through THNs private satellite network. Based on the agreement
THN has with most of these networks, THN has 100% of the national and local commercials
available across these networks, which is then sold to advertisers in a block format.
 9




---



##### Table of Contents



2)
    
    Video-On-Demand/Interactive Advertising.THN offers two approaches to interactive
advertising. Freeviews is an on-demand advertising program which enables guests to choose
from a variety of advertiser-sponsored content within the interactive television menu, which
they can view free of charge. Interactive Channels is a program which allows marketers to
promote their products or brands on an interactive, linear channel located within the
standard free television lineup, from which guests can then telescope into content stored
on the interactive television server. Freeviews and Interactive Channel content categories
include target areas such as golf, travel, technology, health, fitness, and music. These
programs are also Nielsen rated, so we can demonstrate to advertisers their ad impressions
are being delivered.3)
    
    Programming Carriage Services. Network, cable and content companies value the branding
and sampling hotel broadcast distribution provides to a large and important demographic.
Both satellite and server channels can provide programming trial, which research shows
leads to a significant viewership conversion when guests return home.
 Sales and Marketing.
 Installation and Service Operations
 Programming
 Technology and Product Development.
 
 HEALTHCARE
    10




---



##### Table of Contents



Healthcare Market and Customers
   Healthcare Market Services and Products
  Ø
    
    LodgeNetRX Interactive Patient Television system, including specialized applications and
services;Ø
    
    professional services  including cable plant design, modification and installation, as
well as television installation services;Ø
    
    DIRECTV satellite equipment sales and programming;Ø
    
    digital signage and messaging solutions; andØ
    
    service agreements covering cable plant, DIRECTV, television and interactive system support.
  11




---



##### Table of Contents



Ø
    
    a custom welcome channel;Ø
    
    safety videos;Ø
    
    a hospital information channel;Ø
    
    a relaxation channel;Ø
    
    music channels;Ø
    
    interactive games;Ø
    
    interactive information about the hospital and its services;Ø
    
    patient request application  allows patients to submit common requests through the
television, which are sent directly to the appropriate party, freeing the nursing staff to
better focus on patient care;Ø
    
    patient feedback surveys  designed to capture and build in-service recovery so patient
issues can be identified and addressed by the care staff while the patient is still in the
hospital;Ø
    
    other revenue-generating services promotion  such as outpatient pharmacy, home medical
equipment, health clubs, and other outreach/continuum of care services; andØ
    
    meal ordering application  provides information on the diet types, and allows patients
to order meals which are offered based on diagnosis and allergies.
 Sales and Marketing.
 Installation and Service Operations
 Programming
 Technology and Product Development.
 12




---



##### Table of Contents



Competition
 Hospitality
  Ø
    
    other interactive television service providers such as Hospitality Networks, Inc. (a
wholly-owned subsidiary of Cox Communications, Inc.), NXTV, Kool Connect, Guest-Tek, iBAHN,
Roomlinx and international providers, such as Acentic, MagiNet and Quadriga;Ø
    
    other providers of basic and premium television programming, such as Charter
Communications, Comcast, Cox Cable, Dish Network, DIRECTV, Time Warner, BulkTV and World
Cinema;Ø
    
    television networks and programmers such as ABC, NBC, CBS, FOX, HBO, and Showtime;Ø
    
    other broadband Internet service providers, such as iBAHN, Guest-Tek, EthoStream,
SuperClick, Comcast, Time Warner, Verizon, AT&T Wi-Fi Venue Services and T-Mobile; andØ
    
    companies which offer in-room computers with Internet access or other types of Internet
access systems.
 ®
   Ø
    
    the features and benefits of the service offering, and Internet or interactive system;Ø
    

    the quality of the vendors technical support and maintenance services;Ø
    
    the financial terms and conditions of the proposed contract, including commissions to
the hotel or capital cost of the system; andØ
    
    the ability to complete system installation in a timely and efficient manner.
  Ø
    
    the size of our existing customer base;Ø
    
    our history of innovation;Ø
    
    our diverse client base;Ø
    
    our technically-innovative digital platform;Ø
    
    our high definition platform;Ø
    
    our flexible interactive television system;Ø
    
    our content management system; andØ
    
    our field service group, which is, we believe, the largest technical services group
focused on the hospitality industry.
 13




---



##### Table of Contents



Advertising and Media Services
  Ø
    
    Airport Advertising: Place-based OOH media found in airports, represented by companies
such as Viacom, CBS Outdoor and JC Decaux;Ø
    
    Airline Advertising: Television programming supported with commercials during flight,
tray-top ads and ad-supported in-flight magazines and airline sampling programs,
represented by companies such as IdeaCast and Brand Connections; andØ
    
    Office Advertising: Place-based digital media in office buildings, office elevators,
etc., represented by companies such as Wall Street Journal, Captivate Media and others.
   Ø
    
    significant experience in the hotel space with well established hotel relationships;Ø
    
    ability to leverage the LodgeNet field support and technical infrastructure;Ø
    
    broad array of advertising options including hotel television media, VOD media and
in-room promotion;Ø
    
    hotel television media which is Nielsen monitored, rated and guaranteed for advertisers;Ø
    
    ideal environmental factors for ad receptivity  no DVRs, few distractions, comfortable setting;Ø
    
    consumer engagement which is both long and of a high quality;Ø
    
    ability to integrate our marketing programs  combining media with promotion;Ø
    
    sophisticated technology allowing telescoping, where consumers can click from a linear
commercial to an interactive ad menu; andØ
    
    large size of our existing customer base.
 14




---



##### Table of Contents



Healthcare
  Ø
    
    other interactive patient care providers such as GetWell Network, Skylight, and Allen Technologies;Ø
    
    companies which primarily sell or lease television sets and also offer some interactive
services, which include TVRC and TeleHealth; andØ
    
    other providers of basic and premium television programming, such as Charter
Communications, Comcast, Cox Cable, Dish Network, DIRECTV and Time Warner.
  Ø
    
    our significant experience from thirty years of service in the lodging sector;Ø
    
    the technical reliability of our solution;Ø
    
    our nationwide service and support organization;Ø
    
    our ability to leverage features from our lodging systems to efficiently customize and
deploy new solutions to healthcare facilities;Ø
    
    our ability to provide our services over existing cable infrastructure; andØ
    
    our access to HD content with Pro:IdiomTM encryption technology.
 
 Business Strategy
     15




---



##### Table of Contents



Regulation
 Hospitality
 Cable Television Regulation
  Broadband Internet Access.
  Healthcare
  
 Employees
  16




---



##### Table of Contents



Corporate Information and Web Site Access to SEC Filings
   17




---



##### Table of Contents



Item 1A  Risk Factors
 We experienced net losses in 2009, 2008 and 2007. If we are not profitable in the long-term or do
not generate sustained levels of free cash flow a non-GAAP measure which we define as cash
provided by operating activities less cash used for investing activities, it could have a harmful
effect on our results of operations, business and the value of our common stock.
 We have substantial debt and significant interest payment requirements.
 Ø
    
    we may have difficulty utilizing our credit revolver to fund working capital, capital
expenditures, acquisitions or for other purposes;Ø
    
    we will need to use a large portion of our cash flow to repay higher levels of interest
on borrowings, which will reduce the amount of cash flow available to fund operations,
capital expenditures and other activities;Ø
    
    some of our debt has a variable rate of interest, which exposes us to the risk of increased interest rates;Ø
    
    we are more vulnerable to economic downturns and adverse development in our business; andØ
    
    we may not have the flexibility to respond to changing business and economic conditions,
including increased competition and demand for new products and services.
 Covenant restrictions under our current Credit Facility may limit our ability to operate our
business.
 Ø
    
    borrow money;Ø
    
    pay dividends;Ø
    
    purchase or redeem stock;Ø
    
    repay subordinated indebtedness before its stated maturity date;Ø
    
    make investments in third parties and extend credit outside the normal course of business;Ø
    
    engage in transactions with affiliates;Ø
    
    engage in sale-leaseback transactions;Ø
    
    consummate certain asset sales;Ø
    
    effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all
or substantially all of our assets; andØ
    
    create liens on our assets.
  18




---



##### Table of Contents



Diversification activities may not be successful and may divert management attention from our
traditional business.
 Our revenue is affected by seasonality and dependent on other factors beyond our control, including
current negative economic climate and reduced business travel.
 Our revenue per room could be affected if hotel brands modify brand standards or decide to
eliminate certain services we provide.
 19




---



##### Table of Contents



We may not have adequate capital resources to support our business, which could have a harmful
effect on our business and prospects.
 Ø
    
    we may modify our business plan and adjust or delay capital spending necessary to expand
or maintain our customer base or to continue to deploy our digital systems and other
technological advances throughout our installed room base;Ø
    
    we may lose a substantial number of customers if we delay or limit our capital
investments;Ø
    
    we may have insufficient capital to make payments on our outstanding indebtedness as
they become due;Ø
    
    we may have to delay or limit our product development activities; andØ
    
    we may be required to seek additional capital through additional equity or debt
financings, asset sales, collaborative arrangements or other sources, which may not be
available to us on a timely basis, if at all, or may not be available on acceptable terms.
 Opportunities to expand our installed customer room base may be limited, so we may be unable to
grow our revenue.
 We operate in a very competitive business environment and competition could reduce our revenue and
our cash flow.
 Our business could be adversely impacted by conditions affecting the lodging industrys
performance.
 20




---



##### Table of Contents



New technologies, including the expansion of digital distribution of content in our markets, may
increase competition and result in a decrease in our revenue.
 If we fail to develop new products, services and product enhancements, our business and prospects
could be harmed.
 Ø
    
    unanticipated delays;Ø
    
    access to capital;Ø
    
    budget overruns; andØ
    
    technical problems.
   We may have to incur significant capital expenditures in order to adapt to technological change.
 Ø
    
    rapid and significant technological change, including continuing developments in
technology which do not presently have widely accepted standards; andØ
    
    frequent introductions of new services and alternative technologies, including new
technologies for providing high-definition television and providing Internet content.
 21




---



##### Table of Contents



Our business could be harmed if we are unable to protect our proprietary technology.
 If our products or services employ technology which infringes the proprietary rights of others, we
may be subject to infringement claims, forced to pay certain fees to license technology or be
required to stop selling our products.
 We are dependent on others for our programming content and increases in our costs or license fees
to obtain such programming could reduce our cash flow and profitability.
 22




---



##### Table of Contents



Our revenue may be adversely affected by a reduction or elimination of the time between our receipt
of movies and the movies being made available to the home market.
 The lack of quality programming or a change in available content could reduce our profitability and
cash flows.
 Federal, state, local and foreign legislation and regulation may negatively impact our business and
growth.
 If our hotel customers become dissatisfied with our service, they may elect not to renew or to
terminate service agreements with us and, in that event, our ability to maintain or grow our
revenue would be adversely affected.
 23




---



##### Table of Contents



Our data systems could fail or their security could be compromised.
 The price of our common stock may be subject to volatility.
 
 Item 1B  Unresolved Staff Comments
  
 Item 2  Properties
   
 Item 3  Legal Proceedings
   24




---



##### Table of Contents



25




---



##### Table of Contents



PART II
 
 Item 5  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
   Quarter Ended
    
    High
    
    Low
    
    Quarter Ended
    
    High
    
    LowMarch 31, 2009
    
    
    1.73
    
    
    
    0.50
    
    
    March 31, 2008
    
    
    17.64
    
    
    
    5.92June 30, 2009
    
    
    5.99
    
    
    
    1.50
    
    
    June 30, 2008
    
    
    7.46
    
    
    
    4.81September 30, 2009
    
    
    7.75
    
    
    
    3.11
    
    
    September 30, 2008
    
    
    4.92
    
    
    
    1.98December 31, 2009
    
    
    7.77
    
    
    
    4.26
    
    
    December 31, 2008
    
    
    2.45
    
    
    
    0.48
   
 Issuer Purchases of Equity Securities
  
 Dividends
   
 Stockholder Rights Plan
  26




---



##### Table of Contents



General
   Events Causing Exercisability and Separate Transferability
  (1)
    
    the first public announcement a person or group (other than the Company, any
subsidiary, or a benefit plan of the Company or its subsidiaries), has acquired, or
obtained the right to acquire, except under limited circumstances, beneficial ownership
of 20 percent or more of the outstanding common stock; or(2)
    
    the close of business on the tenth business day (or such later date as the
Companys Board of Directors may determine) after the commencement of, or a public
announcement of, an intention to commence (which tender offer is not terminated within
such ten business days), a tender or exchange offer the consummation of which would
result in a person or group becoming an Acquiring Person (as defined in the following).
  Events Causing Adjustment of the Shares Acquirable Upon Exercise of the Purchase Price
  27




---



##### Table of Contents



Redemption of the Rights
  th th
  Ø
    
    the same per share price is offered for all shares, and such price per share is greater
than the highest closing price for the common stock during the 12 month period immediately
preceding the date on which the offer is commenced, represents a reasonable premium above
the average of the closing prices for the five trading days immediately preceding the date
on which the offer is commenced, is at least 80 percent cash (with any non-cash
consideration consisting of common stock of the offeror), and is to be paid upon
consummation of the offer;Ø
    
    if the consideration offered includes shares of common stock of the offeror, the offeror
is a publicly owned United States corporation and its common stock is traded on either the
New York Stock Exchange or The NASDAQ Stock Market (NASDAQ), no further stockholder
approval is required to issue such common stock, no other class of voting stock of the
offeror is outstanding, and the offeror shall permit the Companys investment banking firm
and legal counsel to have access to such offerors books, records, management, accountants
and other advisers for the purpose of permitting such investment banking firm and such
legal counsel to conduct a due diligence review to permit such investment banking firm to
be able to render a fairness opinion with respect to the consideration being offered; the
offer is accompanied by written financing commitments and/or the offeror has on hand cash
or cash equivalents, for the full amount of all financing necessary to consummate the offer
and follow-on merger;
 28




---



##### Table of Contents



Ø
    
    the offer is subject to a non-waivable condition that a minimum of 90 percent of the
outstanding common stock (other than those owned by the offeror) will be tendered and not
withdrawn as of the offers expiration date;Ø
    
    the offer by its terms remains open for at least 60 business days and at least 10
business days after the date of any special meeting of shareholders called under the
redemption provisions, plus 15 business days after any change in price or after any bona
fide alternative offer for a higher consideration is made;Ø
    
    the offer is accompanied by a written opinion of a nationally recognized investment
banking firm stating the price to be paid to holders pursuant to the offer is fair and
including any written presentation of such firm showing the analysis and range of values
underlying such conclusion;Ø
    
    on or before the date the offer is commenced, such person makes an irrevocable written
commitment to the Company (1) to acquire, within five business days following completion of
the offer, all shares of common stock not beneficially owned by such person at the same
cash price per share as paid in the offer, (2) not to amend its offer to reduce the price
or otherwise change the terms in a way which is adverse to tendering shareholders, and (3)
if the offer is not consummated, such person will not make another offer for the common
stock within one year if at least 85 percent of the common stock not owned by such person
has not been tendered; andØ
    
    the offer is subject only to the conditions specified in the definition and usual and
customary terms and conditions, and is not subject to any financing, funding or similar
condition, nor to any condition relating to completion of or satisfaction with any due
diligence or similar investigation.
 Amendments
  29




---



##### Table of Contents



Item 6
    
    - Selected Financial Data
  Year Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Select Financial Data:Revenues:Hospitality
    
    $
    469,743
    
    
    $
    519,922
    
    
    $
    474,473
    
    
    $
    285,770
    
    
    $
    275,568Other
    
    
    14,749
    
    
    
    13,957
    
    
    
    11,115
    
    
    
    2,443
    
    
    
    203Total revenues
    
    
    484,492
    
    
    
    533,879
    
    
    
    485,588
    
    
    
    288,213
    
    
    
    275,771Income (loss) from operations
    
    
    21,692
    
    
    
    (5,071
    )
    
    
    (4,236
    )
    
    
    26,932
    
    
    
    22,693Net (loss) income
    
    
    (10,155
    )
    
    
    (48,418
    )
    
    
    (65,172
    )
    
    
    1,841
    
    
    
    (6,959
    )Preferred stock dividends
    
    
    (3,114
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income attributable to common stockholders
    
    $
    (13,269
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )
    
    $
    1,841
    
    
    $
    (6,959
    )Net (loss) income per common share (basic and diluted)
    
    $
    (0.59
    )
    
    $
    (2.16
    )
    
    $
    (3.00
    )
    
    $
    0.10
    
    
    $
    (0.39
    )Other Data:Investing activities:Capital expenditures (1)
    
    $
    21,341
    
    
    $
    64,407
    
    
    $
    79,097
    
    
    $
    48,268
    
    
    $
    51,855Average cost per room  new installation
    
    $
    345
    
    
    $
    389
    
    
    $
    399
    
    
    $
    354
    
    
    $
    340Guest Entertainment revenue:Movie revenue
    
    $
    277,670
    
    
    $
    338,683
    
    
    $
    327,353
    
    
    $
    208,166
    
    
    $
    201,996Other interactive service revenue
    
    
    18,147
    
    
    
    26,273
    
    
    
    27,668
    
    
    
    18,030
    
    
    
    19,053Total
    
    $
    295,817
    
    
    $
    364,956
    
    
    $
    355,021
    
    
    $
    226,196
    
    
    $
    221,049Average monthly revenue per Guest Entertainment room:Movie revenue
    
    $
    12.66
    
    
    $
    15.20
    
    
    $
    16.62
    
    
    $
    17.27
    
    
    $
    17.00Other interactive service revenue
    
    
    0.83
    
    
    
    1.18
    
    
    
    1.42
    
    
    
    1.50
    
    
    
    1.60Total
    
    $
    13.49
    
    
    $
    16.38
    
    
    $
    18.04
    
    
    $
    18.77
    
    
    $
    18.60
 As of December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Balance Sheet Data:Cash and cash equivalents
    
    $
    17,011
    
    
    $
    10,800
    
    
    $
    25,569
    
    
    $
    22,795
    
    
    $
    20,742Total assets
    
    $
    508,354
    
    
    $
    589,786
    
    
    $
    693,823
    
    
    $
    263,209
    
    
    $
    263,072Total debt
    
    $
    469,946
    
    
    $
    588,520
    
    
    $
    624,594
    
    
    $
    270,169
    
    
    $
    292,000Total stockholders deficiency
    
    $
    (70,987
    )
    
    $
    (128,748
    )
    
    $
    (48,242
    )
    
    $
    (58,122
    )
    
    $
    (70,233
    )
 Year Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005Statement of Cash Flows Data:Cash provided by operating activities
    
    $
    86,172
    
    
    $
    89,853
    
    
    $
    58,869
    
    
    $
    72,301
    
    
    $
    64,285Property and equipment additions
    
    
    (21,341
    )
    
    
    (64,407
    )
    
    
    (79,097
    )
    
    
    (48,268
    )
    
    
    (51,855
    )64,831
    
    
    
    25,446
    
    
    
    (20,228
    )
    
    
    24,033
    
    
    
    12,430Cash (used for) provided by acquisition and other activities, net
    
    
    
    
    
    
    
    
    
    
    (354,177
    )
    
    
    (2,336
    )
    
    
    400$
    64,831
    
    
    $
    25,446
    
    
    $
    (374,405
    )
    
    $
    21,697
    
    
    $
    12,830
 
 (1)
    
    Presented as cash used for property and equipment additions as reported in the Statement
of Cash Flows. 30




---



##### Table of Contents



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,
without limitation, those related to covenant compliance and impairment of goodwill, 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 in
Item 1A of this Annual Report on Form 10-K for the year ended December 31, 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 defaults;Ø
    
    the impact of government 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 SEC.
 31




---



##### Table of Contents



Item 7
    
     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.
 
 Executive Overview
      32




---



##### Table of Contents



Hospitality Business
 Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and
music videos and television on-demand programming).
  Ø
    
    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.Ø
    
    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.Ø
    
    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.
 33




---



##### Table of Contents



Ø
    
    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.Ø
    
    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.Ø
    
    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 2009 and the last half of 2008, 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.
  Ø
    
    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;Ø
    
    commissions paid to our hotel customers, which are also variable and based on a percent
of guest-generated revenue;Ø
    
    license fees, which are based on a percent of guest-generated revenue, for television
on-demand, music, music videos, video games and sports programming; andØ
    
    one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences.
 Hotel Services (includes revenue from hotels for services such as television channels and recurring
broadband Internet service and support to the hotels).
 Ø
    
    Television Programming. We offer a wide variety of satellite-delivered television
programming paid for by the hotel and provided to guests at no charge. The 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
television programming to the extent available from broadcast sources and DIRECTV.Ø
    
    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.
 34




---



##### Table of Contents



System Sales and Related Services.
 Key Metrics:
 Rooms Served
  2009
    
    
    2008
    
    
    2007Total rooms served (1)
    
    
    1,909,323
    
    
    
    1,977,015
    
    
    
    1,962,090Total Guest Entertainment rooms (2)
    
    
    1,779,979
    
    
    
    1,866,353
    
    
    
    1,860,720Total HD rooms (3)
    
    
    231,588
    
    
    
    191,491
    
    
    
    84,327Percent of Total Guest Entertainment rooms
    
    
    13.0
    %
    
    
    10.3
    %
    
    
    4.5
    %Total Television Programming (FTG) rooms (4)
    
    
    1,087,860
    
    
    
    1,105,754
    
    
    
    1,068,256Percent of Total Guest Entertainment rooms
    
    
    61.1
    %
    
    
    59.2
    %
    
    
    57.4
    %Total Broadband Internet rooms (5)
    
    
    201,936
    
    
    
    229,003
    
    
    
    218,860Percent of Total rooms served
    
    
    10.6
    %
    
    
    11.6
    %
    
    
    11.2
    %
 
 (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 85.5% are digital, receive one or more Guest
Entertainment services, such as movies, video games, music or other interactive services.(3)
    
    HD rooms are equipped with high-definition capabilities.(4)
    
    Television programming (FTG) rooms receive basic or premium television programming.(5)
    
    Represents rooms receiving high-speed Internet service. High Definition Room Growth
  2009
    
    
    2008
    
    
    2007Net new HDTV rooms
    
    
    40,097
    
    
    
    105,099
    
    
    
    60,825Total HDTV rooms installed
    
    
    231,588
    
    
    
    191,491
    
    
    
    84,327HDTV rooms as a percent of total Guest Entertainment rooms
    
    
    13.0
    %
    
    
    10.3
    %
    
    
    4.5
    %
  35




---



##### Table of Contents



Capital Investment Per Installed Room
  2009
    
    
    2008
    
    
    2007Average cost per room  new installation
    
    $
    345
    
    
    $
    389
    
    
    $
    399Average cost per room  conversion
    
    $
    235
    
    
    $
    295
    
    
    $
    309Average cost per HD room  new installation
    
    $
    339
    
    
    $
    398
    
    
    $
    460Average cost per HD room  conversion
    
    $
    241
    
    
    $
    320
    
    
    $
    329
  Average Revenue Per Room
  2009
    
    
    2008
    
    
    2007Average monthly revenue per room:HospitalityGuest Entertainment
    
    $
    13.49
    
    
    $
    16.38
    
    
    $
    18.04Hotel Services
    
    
    5.98
    
    
    
    5.44
    
    
    
    4.68System Sales and Related Services
    
    
    1.95
    
    
    
    1.51
    
    
    
    1.22Total Hospitality revenue per room
    
    $
    21.42
    
    
    $
    23.33
    
    
    $
    23.94
  36




---



##### Table of Contents



Direct Costs
  2009
    
    
    2008
    
    
    2007Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof Related
    
    
    
    
    
    
    of Related
    
    
    
    
    
    
    of RelatedAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    RevenueDirect costs per room:HospitalityGuest Entertainment
    
    $
    5.41
    
    
    
    40.1
    %
    
    $
    6.40
    
    
    
    39.0
    %
    
    $
    7.10
    
    
    
    39.2
    %Hotel Services
    
    
    5.23
    
    
    
    87.4
    %
    
    
    4.99
    
    
    
    91.7
    %
    
    
    4.49
    
    
    
    93.0
    %System Sales and Related Services
    
    
    1.40
    
    
    
    71.8
    %
    
    
    1.12
    
    
    
    74.6
    %
    
    
    0.89
    
    
    
    74.1
    %Total Hospitality direct costs per room
    
    $
    12.04
    
    
    
    56.2
    %
    
    $
    12.51
    
    
    
    53.6
    %
    
    $
    12.48
    
    
    
    51.8
    %
  
 Other Businesses
    Ø
    
    revenue generated from the sale of the interactive system hardware, software license and
installation services;Ø
    
    revenue from the sale and installation of DIRECTV satellite equipment and related
programming;Ø
    
    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; andØ
    
    revenue generated from cable plant design, modification and installation, as well as
television installation services.
  37




---



##### Table of Contents



General Operations
 Total Operating Expenses
  2009
    
    
    2008
    
    
    2007System operations expenses (1)
    
    $
    1.94
    
    
    $
    2.60
    
    
    $
    2.71SG&A expenses (1)
    
    
    2.03
    
    
    
    2.34
    
    
    
    2.77Depreciation and amortization (D&A)
    
    
    4.16
    
    
    
    5.05
    
    
    
    5.56Amortization of acquired intangibles
    
    
    0.42
    
    
    
    0.52
    
    
    
    0.51Goodwill impairment charge
    
    
    
    
    
    
    0.50
    
    
    
    Restructuring charge
    
    
    0.02
    
    
    
    0.23
    
    
    
    0.64Other operating income (2)
    
    
    
    
    
    
    (0.05
    )
    
    
    (0.05
    )$
    8.57
    
    
    $
    11.19
    
    
    $
    12.14System operations as a percent of total revenue
    
    
    8.8
    %
    
    
    10.8
    %
    
    
    11.1
    %SG&A as a percent of total revenue
    
    
    9.2
    %
    
    
    9.7
    %
    
    
    11.5
    %D&A as a percent of total revenue
    
    
    18.8
    %
    
    
    21.1
    %
    
    
    22.2
    %Amortization of acquired intangibles as a percent of
total revenue
    
    
    1.9
    %
    
    
    2.2
    %
    
    
    1.8
    %Total operating expenses as a percent of total revenue
    
    
    38.8
    %
    
    
    46.7
    %
    
    
    48.7
    %
 
 (1)
    
    System operations and SG&A expense decreases resulted primarily from integration synergies
from the StayOnline and On Command acquisitions.(2)
    
    Other operating income for 2008 includes net proceeds received from insurance related to
business interruption and property damage claims associated with Hurricane Katrina. Other
operating income for 2007 includes recoveries related to early contract terminations. Special Note Regarding the Use of Non-GAAP Financial Information
   38




---



##### Table of Contents



Free Cash Flow
   2009
    
    
    2008
    
    
    2007Cash provided by operating activities (1)
    
    $
    86,172
    
    
    $
    89,853
    
    
    $
    58,869Property and equipment additions
    
    
    (21,341
    )
    
    
    (64,407
    )
    
    
    (79,097
    )64,831
    
    
    
    25,446
    
    
    
    (20,228
    )Cash used for acquisitions and other activities
    
    
    
    
    
    
    
    
    
    
    (354,177
    )$
    64,831
    
    
    $
    25,446
    
    
    $
    (374,405
    )
 
 (1)
    
    Cash provided by operating activities include acquisitions and integration of On Command, THN
and StayOnline.  2009
    
    
    2008
    
    
    2007Expansion capital investment (1)
    
    $
    5,774
    
    
    $
    22,896
    
    
    $
    24,668Renewal investment (2)
    
    
    5,499
    
    
    
    18,919
    
    
    
    25,772Corporate capital and minor extensions (3)
    
    
    10,068
    
    
    
    22,592
    
    
    
    28,657$
    21,341
    
    
    $
    64,407
    
    
    $
    79,097
 
 (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
  39




---



##### Table of Contents



40




---



##### Table of Contents



2009
    
    2008
    
    2007Actual consolidated leverage ratio (1) (3)
    
    
    3.82
    
    
    
    4.30
    
    
    
    4.39Maximum per covenant
    
    
    4.00
    
    
    
    4.50
    
    
    
    5.00Actual consolidated interest coverage ratio (2) (3)
    
    
    3.23
    
    
    
    3.22
    
    
    
    3.47Minimum per covenant
    
    
    2.75
    
    
    
    2.50
    
    
    
    2.25
 
 (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.   Q3 2010Q1 2010
    
    to maturity (2014)Maximum consolidated leverage ratio
    
    
    3.75
    
    
    
    3.50Minimum consolidated interest coverage ratio
    
    
    3.00
    
    
    
    3.00
 41




---



##### Table of Contents



42




---



##### Table of Contents



Payments due by periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    469,946
    
    
    $
    6,101
    
    
    $
    11,124
    
    
    $
    452,721
    
    
    $
    Interest on bank term loan (1)
    
    
    47,264
    
    
    
    11,335
    
    
    
    22,239
    
    
    
    13,690
    
    
    
    Interest on derivative instruments
    
    
    31,809
    
    
    
    21,264
    
    
    
    10,545
    
    
    
    
    
    
    
    Operating lease payments
    
    
    4,339
    
    
    
    2,255
    
    
    
    1,475
    
    
    
    548
    
    
    
    61Purchase obligations (2)
    
    
    8,003
    
    
    
    5,407
    
    
    
    1,780
    
    
    
    816
    
    
    
    Minimum royalties and commissions
(3)
    
    
    2,681
    
    
    
    2,309
    
    
    
    372
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    564,042
    
    
    $
    48,671
    
    
    $
    47,535
    
    
    $
    467,775
    
    
    $
    61
 Amount of commitment expiration per periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    427
    
    
    $
    427
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (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. See Note 11 to the Consolidated
Financial Statements.  
 Seasonality
  43




---



##### Table of Contents



Market Conditions
   44




---



##### Table of Contents



Results of Operations  Years Ended December 31, 2009 and 2008
 Revenue Analysis.
 2009
    
    
    2008Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:HospitalityGuest Entertainment
    
    $
    295,817
    
    
    
    61.1
    %
    
    $
    364,956
    
    
    
    68.4
    %Hotel Services
    
    
    131,222
    
    
    
    27.1
    %
    
    
    121,177
    
    
    
    22.7
    %System Sales and Related Services
    
    
    42,704
    
    
    
    8.8
    %
    
    
    33,789
    
    
    
    6.3
    %Total Hospitality
    
    
    469,743
    
    
    
    97.0
    %
    
    
    519,922
    
    
    
    97.4
    %Other
    
    
    14,749
    
    
    
    3.0
    %
    
    
    13,957
    
    
    
    2.6
    %$
    484,492
    
    
    
    100.0
    %
    
    $
    533,879
    
    
    
    100.0
    %
 Hospitality
   2009
    
    
    2008Average monthly revenue per room:Movie revenue
    
    $
    12.66
    
    
    $
    15.20Other interactive service revenue
    
    
    0.83
    
    
    
    1.18Total Guest Entertainment per room
    
    $
    13.49
    
    
    $
    16.38
  45




---



##### Table of Contents



2009
    
    
    2008Average monthly revenue per room:Cable television programming
    
    $
    5.47
    
    
    $
    4.91Broadband
    
    
    0.51
    
    
    
    0.53Total Hotel Services per room
    
    $
    5.98
    
    
    $
    5.44
   Other
  Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 46




---



##### Table of Contents



2009
    
    
    2008
    
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    56.7
    %
    
    
    54.3
    %
    
    
    2.4
    %Change drivers:HospitalityGuest Entertainment
    
    
    
    
    
    
    
    
    
    
    (2.2
    )%Hotel Services
    
    
    
    
    
    
    
    
    
    
    2.9
    %System Sales and Related Services
    
    
    
    
    
    
    
    
    
    
    1.6
    %Other
    
    
    
    
    
    
    
    
    
    
    0.1
    %2.4
    %
  Operating Expenses.
 2009
    
    
    2008Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    42,605
    
    
    
    8.8
    %
    
    $
    57,853
    
    
    
    10.8
    %Selling, general and administrative (1)
    
    
    44,538
    
    
    
    9.2
    %
    
    
    52,042
    
    
    
    9.7
    %Depreciation and amortization
    
    
    91,135
    
    
    
    18.8
    %
    
    
    112,511
    
    
    
    21.1
    %Amortization of acquired intangibles
    
    
    9,174
    
    
    
    1.9
    %
    
    
    11,549
    
    
    
    2.2
    %Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    11,212
    
    
    
    2.1
    %Restructuring charge (2)
    
    
    603
    
    
    
    0.1
    %
    
    
    5,047
    
    
    
    1.0
    %Other operating income (3)
    
    
    (126
    )
    
    
    (0.0
    )%
    
    
    (964
    )
    
    
    (0.2
    )%Total operating expenses
    
    $
    187,929
    
    
    
    38.8
    %
    
    $
    249,250
    
    
    
    46.7
    %
 
 (1)
    
    SG&A expenses include $0 and $1.0 million for 2009 and 2008, respectively, directly related
to integration activities from the StayOnline and On Command acquisitions.(2)
    
    Restructuring costs are defined as costs associated with the closing, disposal or exit of
certain duplicate facilities or operations including termination benefits and costs to
consolidate facilities or relocate employees. The Company will not realize future benefits
from these costs. Includes $0.6 million and $1.9 million for 2009 and 2008, respectively, of
severance costs related to the 2008 cost reorganization and cost reduction initiative.(3)
    
    Other operating income for 2008 includes net proceeds received from insurance related to
business interruption and property damage claims associated with Hurricane Katrina. 47




---



##### Table of Contents



Operating Income (Loss).
 Interest Expense.
 Gain on Extinguishment of Debt.
 Loss on Early Retirement of Debt.
 48




---



##### Table of Contents



Other Expense.
 Taxes.
 Net Loss.
 49




---



##### Table of Contents



Results of Operations  Years Ended December 31, 2008 and 2007
 Revenue Analysis.
   Direct costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 Operating Expenses.
    50




---



##### Table of Contents



Operating Loss.
 Interest Expense.
 Gain on Extinguishment of Debt.
 Loss on Early Retirement of Debt.
 Other (Expense) Income.
 Taxes.
 Net Loss.
 51




---



##### Table of Contents



Critical Accounting Policies
  Ø
    
    Revenue Recognition  footnote #2Ø
    
    Goodwill and Other Intangible Assets  footnote #7Ø
    
    Restructuring  footnote #15
 
 Recent Accounting Developments
    52




---



##### Table of Contents



Item 7A  Quantitative and Qualitative Disclosures About Market Risk
  Interest.
 Carrying
    
    
    Fair
    
    
    Weighted AverageAmount
    
    
    Value
    
    
    Interest RateBank Credit Facility:Bank term loan
    
    $
    467,998
    
    
    $
    420,028
    
    
    
    2.26
    %Capital leases
    
    
    1,948
    
    
    
    1,948
    
    
    
    6.79
    %$
    469,946
    
    
    $
    421,976
    
    
    
    2.28
    %
   Economic Condition.
 Foreign Currency Transactions.
 
 Item 8  Financial Statements and Supplementary Data
  53




---



##### Table of Contents



Item 9  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Managements report on internal control over financial reporting
  Internal Control  Integrated Framework
  Changes in Internal Control over Financial Reporting.
 
 Item 9B  Other Information
  54




---



##### Table of Contents



PART III
 
 Item 10  Directors, Executive Officers and Corporate Governance
     
 Item 11  Executive Compensation
  
 Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
  
 Item 13  Certain Relationships and Related Transactions, and Director Independence
  
 Item 14  Principal Accountant Fees and Services
  55




---



##### Table of Contents



PART IV
 
 Item 15  Exhibits and Financial Statement Schedules
 Consolidated Financial Statements and Schedules
 Exhibits
  Exhibit No.3.1
    
    Certificate of Incorporation of LodgeNet (1)3.2
    
    Restated By-Laws of the Registrant (2)3.3
    
    Amendment No. 1 to Restated Certificate of Incorporation of LodgeNet (3)3.4
    
    Certificate of Ownership and Merger merging LodgeNet Interactive
Corporation into LodgeNet Entertainment Corporation (4)4.1
    
    Rights Agreement dated as of February 28, 2008 between LodgeNet
Interactive Corporation and Computershare Investor Services, LLC (5)4.2
    
    Certificate of Designations for 10% Series B Cumulative Perpetual
Convertible Preferred Stock (6)10.1
    
    LodgeNet Interactive Corporation Stock Option Plan (as amended and
restated effective May 9, 2001) (7)10.2
    
    1993 Plan Form of Stock Option Agreement for Non-Employee Directors (8)10.3
    
    1993 Plan Form of Incentive Stock Option Agreement for Key Employees (8)10.4
    
    Master Services Agreement between Hilton Worldwide and LodgeNet
Interactive Corporation dated October 9, 2000  (9)10.5
    
    Amendment To Master Services Agreement dated August 2, 2002 by and
between Hilton Worldwide and LodgeNet Interactive Corporation (10)10.6
    
    Hilton LodgeNet Agreement dated August 2, 2002 by and between Hilton
Worldwide and LodgeNet Interactive Corporation (11)10.7
    
    LodgeNet Interactive Corporation 2003 Stock Option and Incentive Plan (12)10.8
    
    2003 Plan Form of Stock Option Agreement for Non-Employee Directors (13)10.9
    
    2003 Plan Form of Incentive Stock Option Agreement for Key Employees (14)10.10
    
    Form of Restricted Stock Agreement for Time-Based Vesting (15)
 56




---



##### Table of Contents



Exhibit No.10.11
    
    Form of Restricted Stock Agreement for Performance-Based Vesting (16)10.16
    
    $675,000,000 Credit Agreement dated as of April 4, 2007 among LodgeNet
Entertainment Corporation, as Borrower, Credit Suisse Securities (USA)
LLC as Syndication Agent, U.S. Bank National Association as Documentation
Agent, and Bear Stearns Corporate Lending Inc. as Administrative Agent
(17)10.17
    
    Second Amended and Restated Employment Agreement dated as of January 29,
2008 between LodgeNet Interactive Corporation and Scott C. Petersen (18)10.18
    
    Executive Employment Agreement dated as of January 29, 2008 between
LodgeNet Interactive Corporation and David M. Bankers (19)10.19
    
    Executive Employment Agreement dated as of January 29, 2008 between
LodgeNet Interactive Corporation and James G. Naro (20)10.20
    
    Executive Employment Agreement dated as of January 29, 2008 between
LodgeNet Interactive Corporation and Steven R. Pofahl (21)10.21
    
    Executive Employment Agreement dated as of January 29, 2008 between
LodgeNet Interactive Corporation and Gary H. Ritondaro (22)10.22
    
    Executive Employment Agreement dated as of February 4, 2008 between
LodgeNet Interactive Corporation and Derek S. White (23)10.23
    
    Executive Employment Agreement dated as of August 27, 2008 between
LodgeNet Interactive Corporation and Scott E. Young (24)12.1
    
    Statement Regarding Computation of Ratios21.1
    
    Subsidiaries of the Company23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer32.1
    
    Section 1350 Certifications
 
 
    
    Confidential Treatment has been requested with respect to certain portions of this agreement.(1)
    
    Incorporated by Reference to LodgeNets Amendment No. 1 to Registration Statement on Form
S-1, as filed with the Securities and Exchange Commission, September 24, 1993. (File No.
033-67676).(2)
    
    Incorporated by Reference to Exhibit 3.2 to LodgeNets Current Report on Form 8-K dated
November 17, 2008.(3)
    
    Incorporated by Reference to Exhibit 10.37 to LodgeNets Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.(4)
    
    Incorporated by Reference to Exhibit 3.1 to LodgeNets Current Report on Form 8-K as filed
with the Securities and Exchange Commission on January 15, 2008. 57




---



##### Table of Contents



(5)
    
    Incorporated by Reference to Exhibit 4.6 to LodgeNets Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on March 14, 2008.(6)
    
    Incorporated by Reference to Exhibit 3.1 to LodgeNets Current Report on Form 8-K as filed
with the Securities and Exchange Commission on June 29, 2009.(7)
    
    Incorporated by Reference to Exhibit 99.1 to LodgeNets Registration Statement on Form S-8
as filed with the Securities and Exchange Commission on March 27, 2002.(8)
    
    Incorporated by Reference to Exhibit 10.13 and 10.14 to LodgeNets Annual Report on Form
10-K for the year ended December 31, 1993.(9)
    
    Incorporated by Reference to Exhibit 10.32 to LodgeNets Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000.(10)
    
    Incorporated by Reference to Exhibit 10.2 to LodgeNets Current Report on Form 8-K as filed
with the Securities and Exchange Commission on August 15, 2002.(11)
    
    Incorporated by Reference to Exhibit 10.1 to LodgeNets Current Report on Form 8-K as filed
with the Securities and Exchange Commission on August 15, 2002.(12)
    
    Incorporated by Reference to Annex 2 of LodgeNets Definitive Proxy Statement dated March
30, 2006.(13)
    
    Incorporated by Reference to Exhibit 10.26 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2003.(14)
    
    Incorporated by Reference to Exhibit 10.27 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2003.(15)
    
    Incorporated by Reference to Exhibit 10.25 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2005.(16)
    
    Incorporated by Reference to Exhibit 10.26 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2005.(17)
    
    Incorporated by Reference to Exhibit 10.1 to LodgeNets Current Report on Form 8-K dated
April 4, 2007.(18)
    
    Incorporated by Reference to Exhibit 10.17 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(19)
    
    Incorporated by Reference to Exhibit 10.18 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(20)
    
    Incorporated by Reference to Exhibit 10.19 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(21)
    
    Incorporated by Reference to Exhibit 10.20 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(22)
    
    Incorporated by Reference to Exhibit 10.21 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(23)
    
    Incorporated by Reference to Exhibit 10.22 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(24)
    
    Incorporated by Reference to Exhibit 10.1 to LodgeNets Current Report on Form 8-K as filed
with the Securities Exchange Commission on September 2, 2008. 58




---



##### Table of Contents



Signatures
  LodgeNet Interactive CorporationBy:
    /s/ Scott C. PetersenScott C. Petersen,President, Chief Executive Officer and
Chairman of the Board of Directors  Signature
    
    Title
    
    Date/s/ Scott C. Petersen
    
    President, Chief Executive Officer
and Chairman of the Board of Directors
    
    March 12, 2010Scott C. Petersen
    
    (Principal Executive Officer)/s/ Gary H. Ritondaro
    
    Senior Vice President
Chief Financial Officer
    
    March 12, 2010Gary H. Ritondaro
    
    (Principal Financial & Accounting Officer)/s/ Martin L. Abbott
    
    Director
    
    March 12, 2010Martin L. Abbott/s/ R. Douglas Bradbury
    
    Director
    
    March 12, 2010R. Douglas Bradbury/s/ John E. Haire
    
    Director
    
    March 12, 2010John E. Haire/s/ J. Scott Kirby
    
    Director
    
    March 12, 2010J. Scott Kirby/s/ R. F. Leyendecker
    
    Director
    
    March 12, 2010R. F. Leyendecker/s/ Vikki I. Pachera
    
    Director
    
    March 12, 2010Vikki I. Pachera/s/ Scott H. Shlecter
    
    Director
    
    March 12, 2010Scott H. Shlecter
 59




---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 LodgeNet Interactive Corporation and Subsidiaries
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    F  2Consolidated Balance Sheets as of December 31, 2009 and 2008
    
    F  3Consolidated Statements of Operations  Three Years Ended December 31, 2009, 2008 and 2007
    
    F  4Consolidated Statements of Stockholders Deficiency and Comprehensive Income (Loss) 
Three Years Ended December 31, 2009, 2008 and 2007
    
    F  5Consolidated Statements of Cash Flows  Three Years Ended December 31, 2009, 2008 and 2007
    
    F  6Notes to Consolidated Financial Statements
    
    F  7Index to Financial SchedulesSchedule II  Valuation and Qualifying Accounts
    
    F  34
 F - 1




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
 Internal Control  Integrated Framework
   
 F - 2




---



##### Table of Contents



LodgeNet
Interactive Corporation and Subsidiaries
 
 Consolidated Balance Sheets
 December 31,
    
    
    December 31,2009
    
    
    2008AssetsCurrent assets:Cash
    
    $
    17,011
    
    
    $
    10,800Accounts receivable, net
    
    
    51,706
    
    
    
    63,620Other current assets
    
    
    9,189
    
    
    
    9,107Total current assets
    
    
    77,906
    
    
    
    83,527Property and equipment, net
    
    
    206,663
    
    
    
    273,830Debt issuance costs, net
    
    
    6,005
    
    
    
    9,117Intangible assets, net
    
    
    106,041
    
    
    
    115,134Goodwill
    
    
    100,081
    
    
    
    100,081Other assets
    
    
    11,658
    
    
    
    8,097Total assets
    
    $
    508,354
    
    
    $
    589,786Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    40,040
    
    
    $
    44,291Other current liability
    
    
    
    
    
    
    1,446Current maturities of long-term debt
    
    
    6,101
    
    
    
    7,597Accrued expenses
    
    
    19,137
    
    
    
    23,870Deferred revenue
    
    
    17,531
    
    
    
    17,168Total current liabilities
    
    
    82,809
    
    
    
    94,372Long-term debt
    
    
    463,845
    
    
    
    580,923Other long-term liabilities
    
    
    32,687
    
    
    
    43,239Total liabilities
    
    
    579,341
    
    
    
    718,534Commitments 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 December 31, 2009 (liquidation preference of $1,000 per
share or $57,500,000 total); none issued or outstanding at December 31, 2008
    
    
    1
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized;
22,537,664 and 22,664,164 shares outstanding at December 31, 2009
and December 31, 2008, respectively
    
    
    225
    
    
    
    227Treasury stock, at cost: 0 and 180,000 shares at December 31, 2009
and December 31, 2008, respectively
    
    
    
    
    
    
    (2,825
    )Additional paid-in capital
    
    
    379,223
    
    
    
    329,740Accumulated deficit
    
    
    (426,211
    )
    
    
    (416,056
    )Accumulated other comprehensive loss
    
    
    (24,225
    )
    
    
    (39,834
    )Total stockholders deficiency
    
    
    (70,987
    )
    
    
    (128,748
    )Total liabilities and stockholders deficiency
    
    $
    508,354
    
    
    $
    589,786
  F - 3




---



##### Table of Contents



LodgeNet
Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Operations
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Revenues:Hospitality
    
    $
    469,743
    
    
    $
    519,922
    
    
    $
    474,473Other
    
    
    14,749
    
    
    
    13,957
    
    
    
    11,115Total revenues
    
    
    484,492
    
    
    
    533,879
    
    
    
    485,588Direct costs and operating expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately below):Hospitality
    
    
    264,081
    
    
    
    278,776
    
    
    
    245,609Other
    
    
    10,790
    
    
    
    10,924
    
    
    
    7,554Operating expenses:System operations
    
    
    42,605
    
    
    
    57,853
    
    
    
    54,114Selling, general and administrative
    
    
    44,538
    
    
    
    52,042
    
    
    
    55,878Depreciation and amortization
    
    
    100,309
    
    
    
    124,060
    
    
    
    116,378Goodwill impairment charge
    
    
    
    
    
    
    11,212
    
    
    
    Restructuring charge
    
    
    603
    
    
    
    5,047
    
    
    
    11,158Other operating income
    
    
    (126
    )
    
    
    (964
    )
    
    
    (867
    )Total direct costs and operating expenses
    
    
    462,800
    
    
    
    538,950
    
    
    
    489,824Income (loss) from operations
    
    
    21,692
    
    
    
    (5,071
    )
    
    
    (4,236
    )Other income and (expenses):Interest expense
    
    
    (38,092
    )
    
    
    (42,551
    )
    
    
    (40,950
    )Gain on extinguishment of debt
    
    
    9,292
    
    
    
    1,446
    
    
    
    Loss on early retirement of debt
    
    
    (1,537
    )
    
    
    (448
    )
    
    
    (22,195
    )Other (expense) income
    
    
    (747
    )
    
    
    (945
    )
    
    
    1,526Loss before income taxes
    
    
    (9,392
    )
    
    
    (47,569
    )
    
    
    (65,855
    )(Provision) benefit for income taxes
    
    
    (763
    )
    
    
    (849
    )
    
    
    683Net loss
    
    
    (10,155
    )
    
    
    (48,418
    )
    
    
    (65,172
    )Preferred stock dividends
    
    
    (3,114
    )
    
    
    
    
    
    
    Net loss attributable to common stockholders
    
    $
    (13,269
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )Net loss per common share (basic and diluted)
    
    $
    (0.59
    )
    
    $
    (2.16
    )
    
    $
    (3.00
    )Weighted average shares outstanding (basic and diluted)
    
    
    22,439,325
    
    
    
    22,372,475
    
    
    
    21,758,066
  F - 4




---



##### Table of Contents



LodgeNet
Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Stockholders Deficiency and Comprehensive Income (Loss)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    
    Treasury Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    (Loss)/Income
    
    
    TotalBalance, December 31, 2006
    
    
    
    
    
    $
    
    
    
    
    19,084,734
    
    
    $
    191
    
    
    
    
    
    
    $
    
    
    
    $
    242,383
    
    
    $
    (302,466
    )
    
    $
    1,770
    
    
    $
    (58,122
    )Common stock option exercises
    
    
    
    
    
    
    
    
    
    
    818,454
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    12,949
    
    
    
    
    
    
    
    
    
    
    
    12,957Common stock issuance
    
    
    
    
    
    
    
    
    
    
    3,050,000
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    73,382
    
    
    
    
    
    
    
    
    
    
    
    73,413Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    (1,075
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,075
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506
    
    
    
    
    
    
    
    
    
    
    
    506Restricted stock
    
    
    
    
    
    
    
    
    
    
    16,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    
    
    
    
    
    
    
    
    1,185Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,172
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,963Unrealized loss on
interest rate swap agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,897
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,106
    )Balance, December 31, 2007
    
    
    
    
    
    $
    
    
    
    
    22,969,775
    
    
    $
    230
    
    
    
    60,000
    
    
    $
    (1,075
    )
    
    $
    330,405
    
    
    $
    (367,638
    )
    
    $
    (10,164
    )
    
    $
    (48,242
    )Common stock option exercises
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470,000
    
    
    
    (4,662
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,662
    )Retirement of treasury stock
    
    
    
    
    
    
    
    
    
    
    (350,000
    )
    
    
    (3
    )
    
    
    (350,000
    )
    
    
    2,912
    
    
    
    (2,909
    )
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    
    
    
    
    
    
    
    
    1,185Restricted stock
    
    
    
    
    
    
    
    
    
    
    44,289
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,090
    
    
    
    
    
    
    
    
    
    
    
    1,090Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    (32
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,418
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,196
    )Unrealized loss on
interest rate swap agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,474
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,088
    )Balance, December 31, 2008
    
    
    
    
    
    $
    
    
    
    
    22,664,164
    
    
    $
    227
    
    
    
    180,000
    
    
    $
    (2,825
    )
    
    $
    329,740
    
    
    $
    (416,056
    )
    
    $
    (39,834
    )
    
    $
    (128,748
    )Common stock option exercises
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Retirement of treasury stock
    
    
    
    
    
    
    
    
    
    
    (180,000
    )
    
    
    (2
    )
    
    
    (180,000
    )
    
    
    2,825
    
    
    
    (2,823
    )
    
    
    
    
    
    
    
    
    
    
    Preferred stock issuance
    
    
    57,500
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,695
    
    
    
    
    
    
    
    
    
    
    
    53,696Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,114
    )
    
    
    
    
    
    
    
    
    
    
    (3,114
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,057
    
    
    
    
    
    
    
    
    
    
    
    1,057Restricted stock
    
    
    
    
    
    
    
    
    
    
    50,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    667
    
    
    
    
    
    
    
    
    
    
    
    667Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,155
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,861Unrealized gain on
interest rate swap agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,748Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,454Balance, December 31, 2009
    
    
    57,500
    
    
    $
    1
    
    
    
    22,537,664
    
    
    $
    225
    
    
    
    
    
    
    $
    
    
    
    $
    379,223
    
    
    $
    (426,211
    )
    
    $
    (24,225
    )
    
    $
    (70,987
    )
  F - 5




---



##### Table of Contents



LodgeNet
Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
 Years Ended December 31,2009
    
    
    2008
    
    
    2007Operating activities:Net loss
    
    $
    (10,155
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )Adjustments
to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    100,309
    
    
    
    124,060
    
    
    
    116,378Gain on extinguishment of debt (non-cash)
    
    
    (9,292
    )
    
    
    (1,446
    )
    
    
    Goodwill impairment charge
    
    
    
    
    
    
    11,212
    
    
    
    Loss on early retirement of debt
    
    
    1,537
    
    
    
    448
    
    
    
    3,583Share-based compensation and restricted stock
    
    
    1,724
    
    
    
    2,275
    
    
    
    1,737Gain due to insurance proceeds
    
    
    
    
    
    
    (815
    )
    
    
    Insurance proceeds related to business interruption
    
    
    
    
    
    
    815
    
    
    
    Other, net
    
    
    588
    
    
    
    576
    
    
    
    188Change in operating assets and liabilities:Accounts receivable, net
    
    
    12,385
    
    
    
    9,030
    
    
    
    (7,861
    )Other current assets
    
    
    1,173
    
    
    
    2,030
    
    
    
    (2,496
    )Accounts payable
    
    
    (5,713
    )
    
    
    (5,454
    )
    
    
    6,052Accrued expenses and deferred revenue
    
    
    (4,981
    )
    
    
    (5,720
    )
    
    
    8,332Other
    
    
    (1,403
    )
    
    
    1,260
    
    
    
    (1,872
    )Net cash provided by operating activities
    
    
    86,172
    
    
    
    89,853
    
    
    
    58,869Investing activities:Property and equipment additions
    
    
    (21,341
    )
    
    
    (64,407
    )
    
    
    (79,097
    )Acquisition of StayOnline, Inc.
    
    
    
    
    
    
    
    
    
    
    (14,311
    )Acquisition of THN (20% minority interest)
    
    
    
    
    
    
    
    
    
    
    (5,000
    )Acquisition of On Command Corporation, net of cash
acquired
    
    
    
    
    
    
    
    
    
    
    (335,517
    )Other investing activities
    
    
    
    
    
    
    
    
    
    
    651Net cash used for investing activities
    
    
    (21,341
    )
    
    
    (64,407
    )
    
    
    (433,274
    )Financing activities:Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    625,000Repayment of long-term debt
    
    
    (91,109
    )
    
    
    (33,760
    )
    
    
    (271,241
    )Payment of capital lease obligations
    
    
    (1,437
    )
    
    
    (1,365
    )
    
    
    (1,712
    )Borrowings on revolving credit facility
    
    
    
    
    
    
    30,000
    
    
    
    Repayments of revolving credit facility
    
    
    
    
    
    
    (30,000
    )
    
    
    Debt issuance costs
    
    
    
    
    
    
    
    
    
    
    (12,738
    )Purchase of long-term debt
    
    
    (23,685
    )
    
    
    
    
    
    
    Proceeds from investment in long-term debt
    
    
    5,410
    
    
    
    
    
    
    
    Contribution from minority interest holder to subsidiary
    
    
    
    
    
    
    
    
    
    
    300Purchase of treasury stock
    
    
    
    
    
    
    (4,662
    )
    
    
    (1,075
    )Proceeds from issuance of common stock, net of offering
costs
    
    
    
    
    
    
    
    
    
    
    23,290Proceeds from issuance of preferred stock, net of
offering costs
    
    
    53,696
    
    
    
    
    
    
    
    Payment of dividends to preferred shareholders
    
    
    (1,677
    )
    
    
    
    
    
    
    Exercise of stock options
    
    
    2
    
    
    
    
    
    
    
    17,120Change in other long-term liability
    
    
    
    
    
    
    
    
    
    
    (2,225
    )Net cash (used for) provided by financing activities
    
    
    (58,800
    )
    
    
    (39,787
    )
    
    
    376,719Effect of exchange rates on cash
    
    
    180
    
    
    
    (428
    )
    
    
    460Increase (decrease) in cash
    
    
    6,211
    
    
    
    (14,769
    )
    
    
    2,774Cash at beginning of period
    
    
    10,800
    
    
    
    25,569
    
    
    
    22,795Cash at end of period
    
    $
    17,011
    
    
    $
    10,800
    
    
    $
    25,569
  F - 6




---



##### Table of Contents



LodgeNet
Interactive Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements
 Note 1  The Company
   Note 2  Summary of Significant Accounting Policies
 Revenue Recognition 
 Ø
    
    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.Ø
    
    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.Ø
    
    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.
 F - 7




---



##### Table of Contents



Ø
    
    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.Ø
    
    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.Ø
    
    Other Television Programming Systems and Equipment Sales and Services.We generate
revenues from the sale and installation of 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 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.Ø
    
    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.Ø
    
    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.
 F - 8




---



##### Table of Contents



Principles of Consolidation 
 Foreign Currency Translation 
 Use of Estimates 
 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
 Allowance for System Removal 
 Allowance for Excess or Obsolete System Components 
 F - 9




---



##### Table of Contents



Goodwill Impairment 
     Intangible Assets 
 YearsHotel contracts and relationships
    
    
    10  20Tradenames
    
    
    7Acquired technologies and patents
    
    
    5Content agreements and relationships
    
    
    4
 F - 10




---



##### Table of Contents



Software Developed for Internal Use 
 Software Developed for Sale 
 Research and Development Costs 
 Concentration of Credit Risks and Customer Data 
 Significant Vendors 
 Allowance for Doubtful Accounts 
 F - 11




---



##### Table of Contents



Derivative Financial Instruments 
 Income Taxes 
  Comprehensive Income (Loss) 
 2009
    
    
    2008
    
    
    2007Net loss
    
    $
    (10,155
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )Foreign currency
translation adjustment
    
    
    1,861
    
    
    
    (6,196
    )
    
    
    4,963Unrealized gain (loss) on
interest rate swap
agreements
    
    
    13,748
    
    
    
    (23,474
    )
    
    
    (16,897
    )Comprehensive income
(loss)
    
    $
    5,454
    
    
    $
    (78,088
    )
    
    $
    (77,106
    )
  Unrealized(Loss) Gain on
    
    
    Foreign
    
    
    AccumulatedInterest Rate
    
    
    Currency
    
    
    OtherSwap
    
    
    Translation
    
    
    ComprehensiveAgreements
    
    
    Adjustment
    
    
    LossBalance, December 31,
2006
    
    $
    
    
    
    $
    1,770
    
    
    $
    1,770Change during period
    
    
    (16,897
    )
    
    
    4,963
    
    
    
    (11,934
    )Balance, December 31,
2007
    
    
    (16,897
    )
    
    
    6,733
    
    
    
    (10,164
    )Change during period
    
    
    (23,474
    )
    
    
    (6,196
    )
    
    
    (29,670
    )Balance, December 31,
2008
    
    
    (40,371
    )
    
    
    537
    
    
    
    (39,834
    )Change during period
    
    
    13,748
    
    
    
    1,861
    
    
    
    15,609Balance, December 31,
2009
    
    $
    (26,623
    )
    
    $
    2,398
    
    
    $
    (24,225
    )
 F - 12




---



##### Table of Contents



Treasury Stock 
 Earnings Per Share Computation 
  F - 13




---



##### Table of Contents



2009
    
    
    2008
    
    
    2007Basic EPS:Net loss
    
    $
    (10,155
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )Preferred stock dividends
    
    
    (3,114
    )
    
    
    
    
    
    
    $
    (13,269
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )Loss allocated to participating securities
    
    
    
    
    
    
    
    
    
    
    Net loss available to common stockholders
    
    $
    (13,269
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )Basic weighted average shares outstanding
    
    
    22,439,325
    
    
    
    22,372,475
    
    
    
    21,758,066Less participating securities included in
weighted
average shares outstanding (1)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AWeighted average shares outstanding for basic
earnings per common share
    
    
    22,439,325
    
    
    
    22,372,475
    
    
    
    21,758,066Basic earnings per share
    
    $
    (0.59
    )
    
    $
    (2.16
    )
    
    $
    (3.00
    )Diluted EPS:Net loss
    
    $
    (10,155
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )Preferred stock dividends
    
    
    (3,114
    )
    
    
    
    
    
    
    $
    (13,269
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )Loss allocated to participating securities
    
    
    
    
    
    
    
    
    
    
    Net loss available to common stockholders
    
    $
    (13,269
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )Basic weighted average shares outstanding
    
    
    22,439,325
    
    
    
    22,372,475
    
    
    
    21,758,066Less participating securities included in
weighted
average shares outstanding (1)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AWeighted average shares outstanding for basic
earnings per common share
    
    
    22,439,325
    
    
    
    22,372,475
    
    
    
    21,758,066Dilutive effect of potential shares (2)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AWeighted average shares outstanding for diluted
earnings per common share
    
    
    22,439,325
    
    
    
    22,372,475
    
    
    
    21,758,066Diluted earnings per share
    
    $
    (0.59
    )
    
    $
    (2.16
    )
    
    $
    (3.00
    )
 
 (1)
    
    Participating securities 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.(2)
    
    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. This includes
17,029,401, 1,710,718 and 1,355,631 shares as of December 31, 2009, 2008 and 2007,
respectively. F -14




---



##### Table of Contents



Share-based Compensation 
 Statements of Cash Flows 
 Effect of Recently Issued Accounting Standards
   Note 3  Investments and Business Combinations
  F - 15




---



##### Table of Contents



December 31,2007Pro FormaTotal revenue
    
    $
    547,707Net loss
    
    $
    (77,062
    )Net loss per share
    
    $
    (3.42
    )
  Note 4  Fair Value Measurements
  Level 1: Quoted market prices in active markets for identical assets or liabilities.Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market
data.Level 3: Unobservable inputs that are not corroborated by market data.Financial Assets and Financial Liabilities The estimated carrying and fair values of our
financial instruments in the financial statements are as follows at December 31 (dollar amounts in
thousands):
 2009
    
    
    2008Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueInterest rate swaps 
liability position
    
    $
    26,623
    
    
    $
    26,623
    
    
    $
    40,371
    
    
    $
    40,371Long-term debt
    
    $
    469,946
    
    
    $
    421,976
    
    
    $
    588,520
    
    
    $
    295,858
 F -16




---



##### Table of Contents



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, 2008:Interest rate swaps  liability position
    
    $
    40,371
    
    
    $
    
    
    
    $
    40,371
    
    
    $
    Year Ended December 31, 2009:Interest rate swaps  liability position
    
    $
    26,623
    
    
    $
    
    
    
    $
    26,623
    
    
    $
    
  Nonfinancial Assets and Nonfinancial Liabilities
  Note 5  Property and Equipment, Net
  2009
    
    
    2008Land, building and equipment
    
    $
    111,777
    
    
    $
    111,870Hotel systems:Installed system costs
    
    
    630,651
    
    
    
    636,986Customer acquisition costs
    
    
    55,889
    
    
    
    58,995System components
    
    
    31,832
    
    
    
    31,409Software costs
    
    
    36,497
    
    
    
    35,522Total
    
    
    866,646
    
    
    
    874,782Less  depreciation and amortization
    
    
    (659,983
    )
    
    
    (600,952
    )Property and equipment, net
    
    $
    206,663
    
    
    $
    273,830
  F - 17




---



##### Table of Contents



Note 6  Debt Issuance Costs
  2009
    
    
    2008Debt issuance costs
    
    $
    10,754
    
    
    $
    12,291Accumulated amortization
    
    
    (4,749
    )
    
    
    (3,174
    )$
    6,005
    
    
    $
    9,117
 Note 7  Goodwill and Other Intangible Assets
      F - 18




---



##### Table of Contents



Hospitality
    
    
    Other
    
    
    TotalBalance as of December 31, 2007Goodwill
    
    $
    92,614
    
    
    $
    18,679
    
    
    $
    111,293Accumulated impairment losses
    
    
    
    
    
    
    
    
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Activity during the period  impairment loss
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )Balance as of December 31, 2008Goodwill
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )92,614
    
    
    
    7,467
    
    
    
    100,081Activity during the period
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2009Goodwill
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )$
    92,614
    
    
    $
    7,467
    
    
    $
    100,081
    2009
    
    
    2008Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and
relationships
    
    $
    120,315
    
    
    $
    (17,629
    )
    
    $
    120,315
    
    
    $
    (11,274
    )Other acquired intangibles
    
    
    12,884
    
    
    
    (12,130
    )
    
    
    12,984
    
    
    
    (11,079
    )Tradenames
    
    
    3,094
    
    
    
    (1,626
    )
    
    
    3,042
    
    
    
    (1,079
    )Acquired patents
    
    
    5,142
    
    
    
    (4,009
    )
    
    
    5,100
    
    
    
    (2,875
    )$
    141,435
    
    
    $
    (35,394
    )
    
    $
    141,441
    
    
    $
    (26,307
    )
  F - 19




---



##### Table of Contents



Note 8  Accrued Expenses
  2009
    
    
    2008Property, sales and other taxes
    
    $
    6,933
    
    
    $
    8,876Compensation
    
    
    4,360
    
    
    
    7,406Interest
    
    
    92
    
    
    
    109Programming related
    
    
    2,510
    
    
    
    1,751Restructuring and reorganization
    
    
    758
    
    
    
    2,436Preferred stock dividends
    
    
    1,438
    
    
    
    Other
    
    
    3,046
    
    
    
    3,292$
    19,137
    
    
    $
    23,870
 Note 9  Long-term Debt and Credit Facilities
  2009
    
    
    2008Bank Credit Facility:Bank term loan
    
    $
    467,998
    
    
    $
    585,323Revolving credit facility
    
    
    
    
    
    
    Capital leases
    
    
    1,948
    
    
    
    3,197469,946
    
    
    
    588,520Less current maturities
    
    
    (6,101
    )
    
    
    (7,597
    )$
    463,845
    
    
    $
    580,923
 Bank Credit Facility
 F - 20




---



##### Table of Contents



Capital Leases
  2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014Long-term debt
    
    $
    5,098
    
    
    $
    5,098
    
    
    $
    5,098
    
    
    $
    5,098
    
    
    $
    447,606Capital leases
    
    
    1,106
    
    
    
    701
    
    
    
    288
    
    
    
    16
    
    
    
    6,204
    
    
    
    5,799
    
    
    
    5,386
    
    
    
    5,114
    
    
    
    447,606Less amount representing
interest on capital leases
    
    
    (103
    )
    
    
    (46
    )
    
    
    (13
    )
    
    
    (1
    )
    
    
    $
    6,101
    
    
    $
    5,753
    
    
    $
    5,373
    
    
    $
    5,113
    
    
    $
    447,606
  F - 21




---



##### Table of Contents



Note 10  Derivative Information
     Contractual/
    
    
    
    
    Estimated FairNotional
    
    
    Balance Sheet
    
    ValueAmount
    
    
    Location
    
    Asset
    
    
    (Liability)Interest rate swaps
    
    $
    437,500
    
    
    Other long-term liabilities
    
    $
    
    
    
    $
    (26,623
    )
   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
    
    
    RecognizedYear Ended December 31, 2008:Interest rate swaps
    
    $
    (16,198
    )
    
    Interest expense
    
    $
    (7,276
    )
    
    Interest expense
    
    $
    Year Ended December 31, 2009:Interest rate swaps
    
    $
    35,423
    
    
    Interest expense
    
    $
    (21,675
    )
    
    Interest expense
    
    $
    
 F - 22




---



##### Table of Contents



Note 11  Commitments and Contingencies
 Programming Agreements SM
 Minimum Guarantees
  Operating Leases  
 Legal Proceedings
  F - 23




---



##### Table of Contents



Note 12  Stockholders Equity
 Perpetual Preferred Stock 
       Common Stock 
 F - 24




---



##### Table of Contents



Share Repurchase Program 
 Stockholder Rights Plan 
 Note 13  Stock Option Plans
     2009
    
    
    2008
    
    
    2007Compensation Cost:Stock options
    
    $
    1,057
    
    
    $
    1,185
    
    
    $
    506Restricted stock
    
    
    667
    
    
    
    1,090
    
    
    
    1,231Total share-based compensation expense
    
    $
    1,724
    
    
    $
    2,275
    
    
    $
    1,737
  F - 25




---



##### Table of Contents



Stock Options
       2009
    
    
    2008
    
    
    2007Weighted average fair value of options granted
    
    $
    1.61
    
    
    $
    5.32
    
    
    $
    16.40Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted average risk-free interest
    
    
    4.3
    %
    
    
    4.4
    %
    
    
    4.5
    %Weighted average expected volatility
    
    
    72.0
    %
    
    
    45.4
    %
    
    
    49.6
    %Weighted average expected life  employee
    
    5.25 years
    
    5.25 years
    
    6.25 yearsWeighted average expected life  officers
    
    5.75 years
    
    5.75 years
    
    6.25 yearsWeighted average expected life  non-employee director
    
    8.00 years
    
    8.00 years
    
    
    N/A
 F - 26




---



##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicOptions
    
    
    Price
    
    
    in Years
    
    
    ValueOutstanding, December 31, 2006
    
    
    1,872,954
    
    
    $
    16.85Granted
    
    
    127,500
    
    
    
    30.51Exercised
    
    
    (818,454
    )
    
    
    15.96Forfeited/canceled
    
    
    (16,550
    )
    
    
    17.78Outstanding, December 31, 2007
    
    
    1,165,450
    
    
    
    18.96Granted
    
    
    371,500
    
    
    
    11.32Exercised
    
    
    (100
    )
    
    
    10.24Forfeited/canceled
    
    
    (124,500
    )
    
    
    17.27Outstanding, December 31, 2008
    
    
    1,412,350
    
    
    
    17.10Granted
    
    
    291,500
    
    
    
    2.23Exercised
    
    
    (3,000
    )
    
    
    0.70Forfeited/canceled
    
    
    (18,550
    )
    
    
    19.28Outstanding, December 31, 2009
    
    
    1,682,300
    
    
    $
    14.48
    
    
    
    5.3
    
    
    $
    1,069,705Options exercisable, December 31, 2009
    
    
    1,114,468
    
    
    $
    17.20
    
    
    
    3.6
    
    
    $
    56,100
    Restricted Stock
   F - 27




---



##### Table of Contents



2009
    
    
    2008
    
    
    2007Compensation cost  restricted stock:Time-based vesting
    
    $
    667
    
    
    $
    595
    
    
    $
    753Performance-based vesting
    
    
    
    
    
    
    495
    
    
    
    478Total share-based compensation expense  restricted stock
    
    $
    667
    
    
    $
    1,090
    
    
    $
    1,231
  Time Based
    
    
    Performance BasedWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageRestricted
    
    
    Grant-date
    
    
    Restricted
    
    
    Grant-dateStock
    
    
    Fair Value
    
    
    Stock
    
    
    Fair ValueOutstanding, beginning of period
    
    
    92,084
    
    
    $
    16.08
    
    
    
    99,034
    
    
    $
    14.68Granted
    
    
    87,500
    
    
    
    4.63
    
    
    
    
    
    
    
    Vested
    
    
    (85,709
    )
    
    
    8.21
    
    
    
    (97,950
    )
    
    
    14.50Forfeited/canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, end of period
    
    
    93,875
    
    
    $
    12.60
    
    
    
    1,084
    
    
    $
    31.10
 Unrecognized Compensation Expense
  Weighted averageDecember 31,
    
    
    recognition period2009
    
    
    (months)Unrecognized compensation cost:Stock options, net of expected forfeitures
    
    $
    1,711
    
    
    
    28.1Restricted stock  time based vesting
    
    
    329
    
    
    
    10.8Restricted stock  performance based vesting
    
    
    
    
    
    
    Total unrecognized compensation cost
    
    $
    2,040
 Note 14  Employee Benefit Plans
  F - 28




---



##### Table of Contents



Note 15  Restructuring
     Cost of closingSeverance and
    
    
    redundantother benefit
    
    
    acquiredrelated costs
    
    
    facilities
    
    
    Other
    
    
    TotalDecember 31, 2007 balance
    
    $
    5,289
    
    
    $
    485
    
    
    $
    
    
    
    $
    5,774Charges to expense
    
    
    3,277
    
    
    
    1,587
    
    
    
    183
    
    
    
    5,047Cash payments
    
    
    (6,570
    )
    
    
    (1,632
    )
    
    
    (183
    )
    
    
    (8,385
    )December 31, 2008 balance
    
    $
    1,996
    
    
    $
    440
    
    
    $
    
    
    
    $
    2,436Charges to expense
    
    
    (77
    )
    
    
    680
    
    
    
    
    
    
    
    603Cash payments
    
    
    (1,583
    )
    
    
    (698
    )
    
    
    
    
    
    
    (2,281
    )December 31, 2009 balance
    
    $
    336
    
    
    $
    422
    
    
    $
    
    
    
    $
    758
 Note 16  Income Taxes
  2009
    
    
    2008
    
    
    2007Domestic
    
    $
    (11,401
    )
    
    $
    (48,578
    )
    
    $
    (67,692
    )Foreign
    
    
    2,009
    
    
    
    1,009
    
    
    
    1,837Total
    
    $
    (9,392
    )
    
    $
    (47,569
    )
    
    $
    (65,855
    )
 F - 29




---



##### Table of Contents



2009
    
    
    2008
    
    
    2007Federal income tax (benefit) computed at
statutory rate (35%)
    
    $
    (3,287
    )
    
    $
    (16,652
    )
    
    $
    (23,049
    )State income taxes, net of federal benefit
    
    
    353
    
    
    
    466
    
    
    
    403Impairment charge
    
    
    479
    
    
    
    3,924
    
    
    
    Other non-deductible items
    
    
    60
    
    
    
    124
    
    
    
    345Other
    
    
    
    
    
    
    
    
    
    
    (58
    )Net change to valuation allowance, excluding
change due to acquisitions
    
    
    3,158
    
    
    
    12,987
    
    
    
    21,676Provision (benefit) for income taxes
    
    $
    763
    
    
    $
    849
    
    
    $
    (683
    )
  2009
    
    
    2008
    
    
    2007Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    543
    
    
    
    642
    
    
    
    622Foreign
    
    
    220
    
    
    
    207
    
    
    
    (1,305
    )763
    
    
    
    849
    
    
    
    (683
    )Deferred:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total income tax expense (benefit)
    
    $
    763
    
    
    $
    849
    
    
    $
    (683
    )
  2009
    
    
    2008
    
    
    2007Deferred tax assets:Tax net operating loss and tax credit carryforwards
    
    $
    197,142
    
    
    $
    204,466
    
    
    $
    216,134Capital loss carryforwards
    
    
    
    
    
    
    
    
    
    
    1,469Reserves and accruals
    
    
    2,320
    
    
    
    2,854
    
    
    
    1,579Net deferred revenue
    
    
    5,766
    
    
    
    5,753
    
    
    
    4,636Book over tax depreciation/amortization
    
    
    
    
    
    
    
    
    
    
    Other tax assets
    
    
    10,690
    
    
    
    9,457
    
    
    
    8,292Valuation allowance
    
    
    (194,576
    )
    
    
    (201,104
    )
    
    
    (197,232
    )Total deferred tax assets
    
    
    21,342
    
    
    
    21,426
    
    
    
    34,878Deferred tax liabilities:Reserves and accruals
    
    
    (3,252
    )
    
    
    
    
    
    
    Tax over book depreciation/amortization
    
    
    (18,090
    )
    
    
    (21,426
    )
    
    
    (34,878
    )Total deferred tax liabilities
    
    
    (21,342
    )
    
    
    (21,426
    )
    
    
    (34,878
    )Net deferred tax liability
    
    $
    
    
    
    $
    
    
    
    $
    
 F - 30




---



##### Table of Contents



Beginning
    
    
    
    
    
    
    
    
    
    EndingBalance
    
    Additions
    
    Deductions
    
    BalanceYear Ended December 31, 2008:Uncertain Tax Benefit
    
    $
    677
    
    
    $
    
    
    
    $
    (96
    )
    
    $
    581Year Ended December 31, 2009:Uncertain Tax Benefit
    
    $
    581
    
    
    $
    
    
    
    $
    (19
    )
    
    $
    562
  F - 31




---



##### Table of Contents



Note 17  Segment Information
    2009
    
    
    2008
    
    
    2007Total revenue:Hospitality
    
    $
    469,743
    
    
    $
    519,922
    
    
    $
    474,473Other
    
    
    14,749
    
    
    
    13,957
    
    
    
    11,115Total
    
    $
    484,492
    
    
    $
    533,879
    
    
    $
    485,588Loss before income taxes:Hospitality
    
    $
    146,714
    
    
    $
    167,104
    
    
    $
    155,464Other
    
    
    (991
    )
    
    
    (2,455
    )
    
    
    (1,412
    )Operating profit
    
    
    145,723
    
    
    
    164,649
    
    
    
    154,052Corporate
    
    
    (23,245
    )
    
    
    (30,365
    )
    
    
    (31,619
    )Depreciation and amortization
    
    
    (100,309
    )
    
    
    (124,060
    )
    
    
    (116,378
    )Goodwill impairment charge
    
    
    
    
    
    
    (11,212
    )
    
    
    Restructuring charge
    
    
    (603
    )
    
    
    (5,047
    )
    
    
    (11,158
    )Other operating income
    
    
    126
    
    
    
    964
    
    
    
    867Interest expense
    
    
    (38,092
    )
    
    
    (42,551
    )
    
    
    (40,950
    )Gain on extinguishment of debt
    
    
    9,292
    
    
    
    1,446
    
    
    
    Loss on early retirement of debt
    
    
    (1,537
    )
    
    
    (448
    )
    
    
    (22,195
    )Other (expense) income
    
    
    (747
    )
    
    
    (945
    )
    
    
    1,526Loss before income taxes
    
    $
    (9,392
    )
    
    $
    (47,569
    )
    
    $
    (65,855
    )Capital expenditures:Hospitality
    
    $
    17,433
    
    
    $
    53,422
    
    
    $
    70,142Other
    
    
    463
    
    
    
    376
    
    
    
    85Corporate
    
    
    3,445
    
    
    
    10,609
    
    
    
    8,870Total
    
    $
    21,341
    
    
    $
    64,407
    
    
    $
    79,097Total assets:Hospitality
    
    $
    468,609
    
    
    $
    542,862
    
    
    $
    656,521Other
    
    
    12,344
    
    
    
    12,508
    
    
    
    6,458Corporate
    
    
    27,401
    
    
    
    34,416
    
    
    
    30,844Total
    
    $
    508,354
    
    
    $
    589,786
    
    
    $
    693,823
 F -32




---



##### Table of Contents



2009
    
    
    2008
    
    
    2007United States
    
    $
    456,167
    
    
    $
    497,860
    
    
    $
    454,063Canada
    
    
    24,992
    
    
    
    31,327
    
    
    
    27,794Mexico
    
    
    1,952
    
    
    
    2,973
    
    
    
    2,472Other
    
    
    1,381
    
    
    
    1,719
    
    
    
    1,259Total
    
    $
    484,492
    
    
    $
    533,879
    
    
    $
    485,588
  2009
    
    
    2008
    
    
    2007United States
    
    $
    188,805
    
    
    $
    254,077
    
    
    $
    293,048Canada
    
    
    13,218
    
    
    
    14,791
    
    
    
    24,093Mexico
    
    
    4,640
    
    
    
    4,962
    
    
    
    6,822Total
    
    $
    206,663
    
    
    $
    273,830
    
    
    $
    323,963
 Note 18  Market Conditions
  Note 19  Selected Quarterly Financial Data (Unaudited)
  Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2008Revenues
    
    $
    139,787
    
    
    $
    137,347
    
    
    $
    135,320
    
    
    $
    121,425Net loss
    
    
    (13,011
    )
    
    
    (7,461
    )
    
    
    (6,278
    )
    
    
    (21,668
    )Per common share (basic and diluted)
    
    $
    (0.58
    )
    
    $
    (0.33
    )
    
    $
    (0.28
    )
    
    $
    (0.97
    )2009Revenues
    
    $
    128,092
    
    
    $
    121,982
    
    
    $
    121,122
    
    
    $
    113,296Net income (loss)
    
    
    5,958
    
    
    
    (5,213
    )
    
    
    (4,982
    )
    
    
    (5,918
    )Net income
(loss) attributable to common stockholders
    
    
    5,958
    
    
    
    (5,245
    )
    
    
    (6,627
    )
    
    
    (7,355
    )Per common share (basic)
    
    
    0.27
    
    
    
    (0.23
    )
    
    
    (0.30
    )
    
    
    (0.33
    )Per common share (diluted)
    
    $
    0.26
    
    
    $
    (0.23
    )
    
    $
    (0.30
    )
    
    $
    (0.33
    )
 F -33




---



##### Table of Contents



LodgeNet
Interactive Corporation and Subsidiaries
 
 Schedule II  Valuation and Qualifying Accounts
 Balance
    
    
    AdditionsCharged to
    
    
    Additions
    
    
    AdditionsRelated to
    
    
    
    
    
    
    BalanceBeginning
    
    
    Costs and
    
    
    Related to
    
    
    Other
    
    
    
    
    
    
    End ofDescription
    
    of Period
    
    
    Expenses
    
    
    Acquisition
    
    
    Accounts
    
    
    Deductions
    
    
    PeriodAllowances
deducted from related balance sheet accounts:Year Ended December 31, 2007:Allowance for Excess or
Obsolete System Components
    
    $
    460
    
    
    $
    1,405
    
    
    $
    
    
    
    $
    
    
    
    $
    1,190
    
    
    $
    675Allowance for Doubtful Accounts
    
    
    175
    
    
    
    392
    
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    432Allowance for System Removal
    
    
    820
    
    
    
    2,115
    
    
    
    
    
    
    
    
    
    
    
    2,513
    
    
    
    422Deferred Tax
Valuation Allowance
    
    
    92,178
    
    
    
    
    
    
    
    64,755
    
    
    
    40,637
    
    
    
    338
    
    
    
    197,232Year Ended December 31, 2008:Allowance for Excess or
Obsolete System Components
    
    $
    675
    
    
    $
    513
    
    
    $
    
    
    
    $
    
    
    
    $
    620
    
    
    $
    568Allowance for Doubtful Accounts
    
    
    432
    
    
    
    844
    
    
    
    
    
    
    
    
    
    
    
    723
    
    
    
    553Allowance for System Removal
    
    
    422
    
    
    
    3,157
    
    
    
    
    
    
    
    
    
    
    
    2,314
    
    
    
    1,265Deferred Tax
Valuation Allowance
    
    
    197,232
    
    
    
    
    
    
    
    
    
    
    
    18,308
    
    
    
    14,436
    
    
    
    201,104Year Ended December 31, 2009:Allowance for Excess or
Obsolete System Components
    
    $
    568
    
    
    $
    776
    
    
    $
    
    
    
    $
    
    
    
    $
    499
    
    
    $
    845Allowance for Doubtful Accounts
    
    
    553
    
    
    
    536
    
    
    
    
    
    
    
    
    
    
    
    437
    
    
    
    652Allowance for System Removal
    
    
    1,265
    
    
    
    2,641
    
    
    
    
    
    
    
    
    
    
    
    3,010
    
    
    
    896Deferred Tax
Valuation Allowance
    
    
    201,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,528
    
    
    
    194,576
 F -35