##### 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, 2006
 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 Entertainment 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)
 Common Stock, $.01 par value.
 None.
 o þ
 o þ
 þ o
 þ
  o þ o
 o þ
 $253,727,000




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##### 



Table of Contents
 Item 1 - Business
    
    
    1Overview
    
    
    1Overview of Markets Served
    
    
    2Pending Acquisition of Ascent Entertainment Group, Inc.
    
    
    3Hotel Market and Customers
    
    
    4Hotel Market Services and Products
    
    
    4Healthcare and Adjacent Markets
    
    
    8Corporate Operations Utilized Across Multiple Markets
    
    
    8Competition
    
    
    10Business Strategy
    
    
    11Regulation
    
    
    12Employees
    
    
    13Corporate Information and Web Site Access to SEC Filings
    
    
    13Item 1A - Risk Factors
    
    
    14Item 1B - Unresolved Staff Comments
    
    
    20Item 2 - Properties
    
    
    20Item 3 - Legal Proceedings
    
    
    20Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    20Item 5 - Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    20Dividends
    
    
    21Stockholder Rights Plan
    
    
    21Item 6 - Selected Financial Data
    
    
    23Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Executive Overview
    
    
    25Liquidity and Capital Resources
    
    
    33Seasonality
    
    
    35Results of Operations - Years Ended December 31, 2006 and 2005
    
    
    36Results of Operations - Years Ended December 31, 2005 and 2004
    
    
    39Critical Accounting Policies
    
    
    42Recent Accounting Developments
    
    
    45Item 7A - Quantitative and Qualitative Disclosures About Market Risk
    
    
    46Item 8 - Financial Statements and Supplementary Data
    
    
    46Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    46Item 9A - Controls and Procedures
    
    
    46Item 9B - Other Information
    
    
    47Item 10 - Directors and Executive Officers of the Registrant
    
    
    48Item 11 - Executive Compensation
    
    
    48Item 12 - Security Ownership of Certain Beneficial Owners and Management
    
    
    48Item 13 - Certain Relationships and Related Transactions
    
    
    48Item 14 - Principal Accountant Fees and Services
    
    
    48Item 15  - Exhibits and Financial Statement Schedules
    
    
    49Amended and Restated Rights PlanSecond Supplemental IndentureSeventh Amendment to Credit AgreementEighth Amendment to Credit AgreementAsset Purchase AgreementStock Purchase AgreementShareholders AgreementStock Purchase AgreementStatement of Computation of RatiosSubsidiariesConsent of Independent Registered Public Accounting FirmCertification of Chief Financial OfficerCertification of Chief Executive OfficerSection 1350 Certifications




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##### Table of Contents



PART I
 
 Item 1  Business
 
 Overview
     Ø
    
    expand our interactive television and broadband networks within the lodging industry;Ø
    
    increase hotel guest room revenue and gross profit;Ø
    
    diversify our business into healthcare and other adjacent markets; andØ
    
    generate increasing levels of cash flow.
  LodgeNet Entertainment Corporation
    
    1
    
    Form 10-K 2006




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##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Selected Operations Data:Total rooms served (1) (4)
    
    
    1,052,025
    
    
    
    1,053,806
    
    
    
    1,034,605
    
    
    
    994,127
    
    
    
    952,673Total Guest Pay interactive rooms (2) (4)
    
    
    1,004,937
    
    
    
    1,001,929
    
    
    
    974,798
    
    
    
    924,643
    
    
    
    876,348Total Digital rooms (3)
    
    
    733,362
    
    
    
    629,085
    
    
    
    508,979
    
    
    
    385,426
    
    
    
    265,097Total revenues
    
    $
    288,213
    
    
    $
    275,771
    
    
    $
    266,441
    
    
    $
    250,149
    
    
    $
    234,990Operating income
    
    
    26,932
    
    
    
    22,693
    
    
    
    12,970
    
    
    
    6,500
    
    
    
    5,975Depreciation and amortization
    
    
    66,311
    
    
    
    69,862
    
    
    
    77,045
    
    
    
    78,459
    
    
    
    75,918Share-based compensation
    
    
    1,677
    
    
    
    288
    
    
    
    198
    
    
    
    
    
    
    
    Interest expense
    
    
    25,730
    
    
    
    29,351
    
    
    
    31,891
    
    
    
    34,239
    
    
    
    33,037Net income (loss)
    
    $
    1,841
    
    
    $
    (6,959
    )
    
    $
    (20,781
    )
    
    $
    (35,052
    )
    
    $
    (29,126
    )Cash provided by operating activities
    
    $
    72,301
    
    
    $
    64,285
    
    
    $
    60,614
    
    
    $
    48,563
    
    
    $
    43,769Cash used for investing activities
    
    
    (50,604
    )
    
    
    (51,455
    )
    
    
    (54,350
    )
    
    
    (53,618
    )
    
    
    (70,708
    )Difference
    
    $
    21,697
    
    
    $
    12,830
    
    
    $
    6,264
    
    
    $
    (5,055
    )
    
    $
    (26,939
    )
 
 (1)
    
    Total rooms served include Guest Pay interactive rooms, rooms served by international
licensees, and properties receiving only basic and premium television services.(2)
    
    Guest Pay interactive rooms are equipped with our interactive television systems.(3)
    
    Digital rooms are equipped with an interactive digital system where on-demand movies,
television on-demand programming, and music content are stored in a digital format and are
updated and delivered via satellite to our systems within respective hotels. Digital rooms
are included in total Guest Pay interactive rooms and represent 73% of the Guest Pay
interactive rooms served as of December 31, 2006.(4)
    
    As a result of Hurricane Katrina, room count as of December 31 was reduced by 4,053 rooms in
2006 and 8,195 rooms in 2005. 
 Overview of Markets Served
    LodgeNet Entertainment Corporation
    
    2
    
    Form 10-K 2006




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##### Table of Contents



Ø
    
    increased variety and availability of on-demand movies;Ø
    
    television on-demand programming;Ø
    
    on-demand digital music programming;Ø
    
    subscription sports programming;Ø
    
    Internet on television;Ø
    
    access to Internet-sourced content;Ø
    
    on-screen controls that allow the guest more viewing control and flexibility;Ø
    
    improved guest marketing and merchandising capabilities; andØ
    
    system architecture that receives video and music content via a satellite distribution
network, resulting in operating cost reductions.
    
 Pending Acquisition of Ascent Entertainment Group, Inc.
  LodgeNet Entertainment Corporation
    
    3
    
    Form 10-K 2006




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##### Table of Contents



Hotel Market and Customers
 U.S. and Canadian Market
 Diversified Customer Base.
 International Hotel Markets.
 
 Hotel Market Services and Products
 Guest Pay Interactive Services.
  LodgeNet Entertainment Corporation
    
    4
    
    Form 10-K 2006




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##### Table of Contents



SM
 Ø
    
    customize the look and feel of the user interface;Ø
    
    use the system for the hotels internal branding or marketing campaigns; andØ
    
    use the system to provide information regarding other hotel services.
 SM SM
 SM SM SM
 SM TM SM SM
  Ø
    
    the number of rooms equipped with our interactive television system;Ø
    
    the range of interactive television and broadband 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; andØ
    
    the occupancy rate at the property.
  LodgeNet Entertainment Corporation
    
    5
    
    Form 10-K 2006




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##### Table of Contents



High Speed Internet Access System Sales, Service and Support.
 Other Services.
 Contracts.
  LodgeNet Entertainment Corporation
    
    6
    
    Form 10-K 2006




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##### Table of Contents



Programming. SM
 Technology, Product Development, and Patents.
    LodgeNet Entertainment Corporation
    
    7
    
    Form 10-K 2006




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##### Table of Contents



Healthcare and Adjacent Markets
   Programming
  Technology, Product Development:
 
 Corporate Operations Utilized Across Multiple Markets
 Trademarks.
 Sales and Marketing.
 LodgeNet Entertainment Corporation
    
    8
    
    Form 10-K 2006




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##### Table of Contents



Installation Operations.
 Service Operations.
  Component Suppliers.
 LodgeNet Entertainment Corporation
    
    9
    
    Form 10-K 2006




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##### Table of Contents



Competition
  Ø
    
    other interactive television service providers such as On Command Corporation (a
wholly-owned subsidiary of Liberty Media Corporation), Hospitality Networks, Inc. (a
wholly-owned subsidiary of Cox Communications, Inc.), NXTV, Kool Connect, Oxford SVI,
SeaChange, TotalVision and other international providers, such as Quadriga, GalaVu
Entertainment, Guest-Tek, MagiNet and Acentic;Ø
    
    cable, television and broadband service providers, such as Charter Communications,
Comcast, Cox Cable and Time Warner;Ø
    
    direct broadcast satellite companies such as DIRECTV and EchoStar Communications;Ø
    
    television networks and programmers such as ABC, NBC, CBS, FOX, HBO, and Showtime;Ø
    
    Internet service providers and high-speed portals such as but not limited to iBahn,
Wayport, Guest-Tek, Time Warner, Yahoo, Google and T-Mobile;Ø
    
    companies offering web sites that provide on-demand movies;Ø
    
    rental companies that provide videocassettes and DVDs that can be viewed in properly
equipped hotel rooms and on other portable viewing devices; andØ
    
    hotels that offer in-room laptops with Internet access or other types of Internet access
systems.
    Ø
    
    the features and benefits of the service offering and Internet systems;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; andØ
    
    the ability to complete system installation in a timely and efficient manner.
  Ø
    
    our history of innovation;Ø
    
    our diverse client base;Ø
    
    our proven ability to retain existing customers and secure new ones;Ø
    
    our technically-innovative digital platform;Ø
    
    our high definition platform;Ø
    
    our flexible SigNETure TVSMsystem; andØ
    
    our content management system.
 LodgeNet Entertainment Corporation
    
    10
    
    Form 10-K 2006




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##### Table of Contents



Business Strategy
 Expand our interactive television and broadband networks. SM
 Increase guest room revenue and gross profit.
 LodgeNet Entertainment Corporation
    
    11
    
    Form 10-K 2006




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##### Table of Contents



SM
 Diversify our business into healthcare and other adjacent markets.
   Generate increasing levels of cash flow
 
 Regulation
 Cable Television Regulation
  LodgeNet Entertainment Corporation
    
    12
    
    Form 10-K 2006




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##### Table of Contents



Healthcare Regulation.
 High-Speed Internet Access.
  
 Employees
  
 Corporate Information and Web Site Access to SEC Filings
   LodgeNet Entertainment Corporation
    
    13
    
    Form 10-K 2006




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##### Table of Contents



Item 1A  Risk Factors
 We have experienced substantial net losses. If we do not remain profitable or generate sustained
levels of net 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.
 Acquisitions of companies or technologies may be difficult to integrate, disrupt our business,
dilute stockholder value or divert management attention, and could result in significant
incremental expenses.
 We operate in a very competitive business environment and competition could reduce our revenue and
our cash flow.
  LodgeNet Entertainment Corporation
    
    14
    
    Form 10-K 2006




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##### Table of Contents



Our business could be adversely impacted by conditions affecting the lodging industrys
performance.
  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 and product enhancements, our business and prospects could be
harmed.
 Ø
    
    unanticipated delays;Ø
    
    access to capital;Ø
    
    budget overruns; andØ
    
    technical problems.
  LodgeNet Entertainment Corporation
    
    15
    
    Form 10-K 2006




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##### Table of Contents



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 that 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.
  Our business could be harmed if we are unable to protect our proprietary technology.
 If our products or services employ technology that 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.
 Diversification activities may not be successful and may divert management attention from our core
business.
 LodgeNet Entertainment Corporation
    
    16
    
    Form 10-K 2006




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##### Table of Contents



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.
 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.
 LodgeNet Entertainment Corporation
    
    17
    
    Form 10-K 2006




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##### Table of Contents



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.
 Our revenue is affected by seasonality and dependent on other factors beyond our control.
 Opportunities to expand our installed customer room base may be limited, so we may be unable to
grow our revenue.
 We may not have adequate capital resources to carry out our business plan, which could have a
harmful effect on our business and prospects.
 Ø
    
    we may be required to delay or be unable to make the capital expenditures 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 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.
 LodgeNet Entertainment Corporation
    
    18
    
    Form 10-K 2006




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##### Table of Contents



We have substantial debt and significant interest payment requirements, which will increase in
connection with the On Command acquisition.
 Ø
    
    we may have difficulty borrowing money for working capital, capital expenditures,
acquisitions or other purposes;Ø
    
    we will need to use a large portion of our cash flow to pay interest on borrowings under
our Credit Facility and other debt instruments, which will reduce the amount of money
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;Ø
    
    we may not have the flexibility to respond to changing business and economic conditions,
including increased competition and demand for new products and services; andØ
    
    our various debt instruments contain cross-default provisions; if we default under any
of these instruments, such default could constitute a default under our other debt
instruments and may result in the acceleration of such indebtedness.
 Covenant restrictions under our current Credit Facility, a New Credit Facility related to the
acquisition of On Command or other instruments governing our debt securities may limit our ability
to operate our business.
 Ø
    
    borrow money;Ø
    
    pay dividends or make distributions;Ø
    
    purchase or redeem stock;Ø
    
    repay subordinated indebtedness before its stated maturity date;Ø
    
    make investments and extend credit;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.
  LodgeNet Entertainment Corporation
    
    19
    
    Form 10-K 2006




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##### Table of Contents



Our data systems could fail or their security could be compromised.
 
 Item 1B  Unresolved Staff Comments
  
 Item 2  Properties
   
 Item 3  Legal Proceedings
  
 Item 4  Submission of Matters to a Vote of Security Holders
  PART II
 
 Item 5  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
   LodgeNet Entertainment Corporation
    
    20
    
    Form 10-K 2006




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##### Table of Contents



Quarter Ended
    
    High
    
    Low
    
    Quarter Ended
    
    High
    
    LowMarch 31, 2006
    
    
    15.70
    
    
    
    13.05
    
    
    March 31, 2005
    
    
    18.84
    
    
    
    16.93June 30, 2006
    
    
    19.33
    
    
    
    15.41
    
    
    June 30, 2005
    
    
    19.51
    
    
    
    15.62September 30, 2006
    
    
    19.41
    
    
    
    17.80
    
    
    September 30, 2005
    
    
    18.08
    
    
    
    14.00December 31, 2006
    
    
    26.75
    
    
    
    17.63
    
    
    December 31, 2005
    
    
    14.82
    
    
    
    11.82
  
 Dividends
  
 Stockholder Rights Plan
        LodgeNet Entertainment Corporation
    
    21
    
    Form 10-K 2006




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##### Table of Contents



Ø
    
    For all shares of the Company;Ø
    
    At the same price for all shares acquired and such price must be greater than the
highest reported market price per share during the prior 2 years and represents a premium
above the average closing prices for the previous five trading days;Ø
    
    Conditioned on tender of at least 90% of the shares; andØ
    
    Paid with at least 80% cash consideration, and any share consideration must be limited
to publicly traded securities listed on the NASDAQ or NYSE.
 LodgeNet Entertainment Corporation
    
    22
    
    Form 10-K 2006




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##### Table of Contents



Item 6  Selected Financial Data
  Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Statement of Operations Data:Revenues:Guest Pay
    
    $
    277,433
    
    
    $
    267,754
    
    
    $
    258,571
    
    
    $
    243,732
    
    
    $
    226,238Other
    
    
    10,780
    
    
    
    8,017
    
    
    
    7,870
    
    
    
    6,417
    
    
    
    8,752Total revenues
    
    
    288,213
    
    
    
    275,771
    
    
    
    266,441
    
    
    
    250,149
    
    
    
    234,990Direct costs (exclusive of operating expenses and depreciation
and amortization)
    
    
    131,953
    
    
    
    123,228
    
    
    
    119,193
    
    
    
    111,947
    
    
    
    100,782Operating expenses
    
    
    129,328
    
    
    
    129,850
    
    
    
    134,278
    
    
    
    131,702
    
    
    
    128,233Income from operations
    
    
    26,932
    
    
    
    22,693
    
    
    
    12,970
    
    
    
    6,500
    
    
    
    5,975Investment gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    872Litigation settlements (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,700
    )Write-off of debt issuance costs (2)
    
    
    (227
    )
    
    
    (272
    )
    
    
    (810
    )
    
    
    (7,061
    )
    
    
    Interest expense
    
    
    (25,730
    )
    
    
    (29,351
    )
    
    
    (31,891
    )
    
    
    (34,239
    )
    
    
    (33,037
    )Other (expense) income, net
    
    
    1,165
    
    
    
    421
    
    
    
    (629
    )
    
    
    (43
    )
    
    
    314Income (loss) before income taxes
    
    
    2,140
    
    
    
    (6,509
    )
    
    
    (20,360
    )
    
    
    (34,593
    )
    
    
    (28,576
    )Provision for income taxes (3)
    
    
    (299
    )
    
    
    (450
    )
    
    
    (421
    )
    
    
    (459
    )
    
    
    (550
    )Net income (loss)
    
    $
    1,841
    
    
    $
    (6,959
    )
    
    $
    (20,781
    )
    
    $
    (35,052
    )
    
    $
    (29,126
    )Net income (loss) per common share (basic and diluted)
    
    $
    0.10
    
    
    $
    (0.39
    )
    
    $
    (1.36
    )
    
    $
    (2.80
    )
    
    $
    (2.35
    )Other Data:Capital expenditures (4)
    
    $
    48,268
    
    
    $
    51,855
    
    
    $
    54,917
    
    
    $
    52,868
    
    
    $
    72,115Average cost per room  new installation
    
    $
    354
    
    
    $
    340
    
    
    $
    364
    
    
    $
    405
    
    
    $
    438Depreciation and amortization
    
    $
    66,311
    
    
    $
    69,862
    
    
    $
    77,045
    
    
    $
    78,459
    
    
    $
    75,918Share-based compensation
    
    $
    1,677
    
    
    $
    288
    
    
    $
    198
    
    
    $
    
    
    
    $
    Non-Financial Operating Data:Total rooms served (5) (8)
    
    
    1,052,025
    
    
    
    1,053,806
    
    
    
    1,034,605
    
    
    
    994,127
    
    
    
    952,673Guest Pay interactive rooms served (6) (8)
    
    
    1,004,937
    
    
    
    1,001,929
    
    
    
    974,798
    
    
    
    924,643
    
    
    
    876,348Rooms with Digital services (7)
    
    
    733,362
    
    
    
    629,085
    
    
    
    508,979
    
    
    
    385,426
    
    
    
    265,097Free-to-guest rooms served (9)
    
    
    535,777
    
    
    
    536,984
    
    
    
    525,436
    
    
    
    500,170
    
    
    
    477,698Average monthly revenue per Guest Pay room:Movie revenue
    
    $
    17.27
    
    
    $
    17.00
    
    
    $
    17.39
    
    
    $
    17.55
    
    
    $
    17.77Other interactive service revenue
    
    
    5.75
    
    
    
    5.53
    
    
    
    5.47
    
    
    
    5.04
    
    
    
    4.57Total
    
    $
    23.02
    
    
    $
    22.53
    
    
    $
    22.86
    
    
    $
    22.59
    
    
    $
    22.34
 LodgeNet Entertainment Corporation
    
    23
    
    Form 10-K 2006




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##### Table of Contents



As of December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Balance Sheet Data:Cash and cash equivalents
    
    $
    22,795
    
    
    $
    20,742
    
    
    $
    24,995
    
    
    $
    2,772
    
    
    $
    1,107Total assets
    
    $
    263,209
    
    
    $
    263,072
    
    
    $
    283,036
    
    
    $
    283,268
    
    
    $
    298,084Total debt
    
    $
    270,169
    
    
    $
    292,000
    
    
    $
    312,291
    
    
    $
    368,248
    
    
    $
    353,790Total stockholders deficiency
    
    $
    (58,122
    )
    
    $
    (70,233
    )
    
    $
    (72,118
    )
    
    $
    (129,002
    )
    
    $
    (101,304
    )
 Year Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Statement of Cash Flows Data:Cash provided by operating activities
    
    $
    72,301
    
    
    $
    64,285
    
    
    $
    60,614
    
    
    $
    48,563
    
    
    $
    43,769Cash used for investing activities
    
    $
    (50,604
    )
    
    $
    (51,455
    )
    
    $
    (54,350
    )
    
    $
    (53,618
    )
    
    $
    (70,708
    )Difference
    
    $
    21,697
    
    
    $
    12,830
    
    
    $
    6,264
    
    
    $
    (5,055
    )
    
    $
    (26,939
    )
 
 (1)
    
    During 2002, we entered into settlement agreements with Broadcast Music Inc. (BMI) and the
American Society of Composers, Authors and Publishers (ASCAP), which resolved claims for
alleged nonpayment of royalties on copyrighted musical works performed in major motion
pictures. BMI and ASCAP had asserted that the music, primarily background music, used within
major motion pictures required licensing. BMI and ASCAP sought damages for public
performances of such music from their respective catalogues. As a result of the settlements,
we recorded a provision for the litigation settlements of $2.7 million that is related to
pre-2002 reporting periods. This charge has been reported as a litigation expense in the
accompanying statements of operations.(2)
    
    During 2006, we wrote off debt issuance costs of $227,000 as a result of $20.0 million in
prepayments on our Term B notes under our bank Credit Facility. We wrote off debt issuance
costs of $272,000 during 2005 as a result of $19.0 million in prepayments on our Term B notes
under our bank Credit Facility. During 2004, we incurred a charge of $810,000 as a result of
the early retirement of $35.0 million of our Term B notes. In 2003, we retired our 10.25%
Senior Notes and incurred a $7.1 million loss on the write-off of related debt issuance costs
and payment of call and tender premiums, and transaction expenses.(3)
    
    The provision for income taxes consists of current federal income and state franchise taxes.(4)
    
    Presented as cash used for property and equipment additions as reported in the Statement of
Cash Flows.(5)
    
    Total rooms served include guest pay interactive rooms, rooms served by international
licensees, and properties receiving only basic and premium televisions services.(6)
    
    Guest Pay interactive rooms are equipped with our interactive television system digital and
tape-based systems.(7)
    
    Digital rooms are equipped with an interactive digital system where on-demand movies,
television on-demand programming, and music content are stored in a digital format and are
updated and delivered via satellite to our systems within respective hotels. Digital rooms
are included in total Guest Pay interactive rooms and represent 73% of the Guest Pay
interactive rooms served as of December 31, 2006.(8)
    
    As a result of Hurricane Katrina, room count as of December 31 was reduced by 4,053 rooms in
2006 and 8,195 in 2005.(9)
    
    Free-to-guest (FTG) rooms are equipped to provide satellite-delivered basic and premium
television programming. FTG rooms are included in total rooms served. LodgeNet Entertainment Corporation
    
    24
    
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##### Table of Contents



Special Note Regarding Forward-Looking Statements
 Certain statements in this Report on form 10K constitute forward-looking statements. When used
in this report, the words intends, expects, anticipates, estimates, believes, goal, no
assurance and similar expressions, and statements which are made in the future tense or refer to
future events or developments, including, without limitation, those related to estimated free cash
flow, cash earnings per share, debt ratios and synergies, are intended to identify such
forward-looking statements. Such forward-looking statements are subject to risks, uncertainties,
and other factors that could cause the actual results, performance or achievements to be materially
different from any future results, performance, or achievements expressed or implied by such
forward-looking statements. In addition to the risks and uncertainties discussed herein, such
factors include, among others, the following: the effects of economic conditions, including in
particular the economic condition of the lodging industry, which can be particularly affected by
international crisis, acts or threats of terrorism and public health issues; competition from
providers of similar services and from alternative sources; changes in demand for our products and
services; programming costs, availability, timeliness, and quality; technological developments by
competitors; developmental costs, difficulties, and delays; relationships with clients and property
owners; the availability of capital to finance growth; the impact of government regulations;
potential effects of litigation; risks of expansion into new markets; risks related to the security
of our data systems; and other factors detailed, from time to time, in our filings with the
Securities and Exchange Commission. With respect to any proposed acquisition, we are subject to
risks that integration costs will exceed expectations, that synergies we anticipate will not be
realized, or will take longer than anticipated to realize, that our management and management
systems will encounter difficulties in dealing with a bigger, more diversified enterprise, and that
the financial results we expect from the acquisition will not be realized. These forward-looking
statements speak only as of the date of this report. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
 
 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
   LodgeNet Entertainment Corporation
    
    25
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
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##### Table of Contents



SM SM SM
  Guest Pay Interactive Services.
  
    
    The number of rooms on our network.We can increase revenue over
time by increasing the number of rooms served by our interactive
systems. Our ability to expand our room base is dependent on a
number of factors, including the attractiveness of our technology,
service and support to hotels currently operating without an
interactive television system, newly constructed hotel properties,
and hotels with expiring contracts currently served by our
competitors.
 
    
    The variety of services offered at the hotel.Rooms equipped with
our digital system generate higher revenue than rooms equipped
with our tape-based system primarily because they offer a greater
variety of services and content choices. We plan to continue to
grow the revenue we generate per average room by the installation
of our digital system in all newly contracted rooms and by
converting selected tape-based rooms to our digital system in
exchange for long-term contract extensions.
 
    
    The popularity, timeliness and amount of content offered at the
hotel.Our revenues vary to a certain degree with the number,
timeliness and popularity of movie content available for viewing.
Historically, a decrease in the availability of popular movie
content has adversely impacted revenue. Although not completely
within our control, we seek to program and promote the most
popular available movie content and other content to maximize
revenue and gross profit.
 
    
    The price of the service purchased by the hotel guest.Generally,
we control the prices charged for our products and services and
manage pricing in an effort to maximize revenue and overall gross
profit. We establish pricing based on such things as the
demographics of the property served, the popularity of the content
and overall economic conditions. Our technology enables us to
measure popularity of our content and make decisions to best
position such content and optimize revenue from such content.
 
    
    The occupancy rate at the property.Our revenue also varies
depending on hotel occupancy rates, which are subject to a number
of factors, including seasonality, general economic conditions and
world events, such as terrorist threats or public health issues.
Occupancy rates are typically higher during the second and third
quarters due to seasonal travel patterns. We target higher
occupancy properties in diverse demographic and geographic
locations in an effort to mitigate occupancy-related risks.
  Ø
    
    license fees paid to major motion picture studios, which are based on a percent of
guest-generated revenue, for non-exclusive distribution rights of recently released major
motion pictures;Ø
    
    commissions paid to our hotel customers, which are also based on a percent of
guest-generated revenue;
 LodgeNet Entertainment Corporation
    
    27
    
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##### Table of Contents



Ø
    
    fixed monthly programming charges paid primarily to DIRECTV for satellite-delivered
basic and premium television programming;Ø
    
    Internet connectivity costs;Ø
    
    license fees, which are based on a percent of guest-generated revenue, for television on
demand, music, music video, video games and sports programming; andØ
    
    one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences.
 Other Products and Services.
 Healthcare System Sales and Support.
 High Speed Internet Access System Sales, Service and Support.
 System Sales and Support to Travel Centers.
 Other.
 Ø
    
    Revenue generated from the sale of our Guest Pay interactive systems to hotels, along
with recurring support for interactive content, software maintenance and technical field
service for a fixed fee;Ø
    
    Revenue from the sale of miscellaneous system equipment such as television remotes and
service parts and labor;Ø
    
    Revenues from the sale of equipment to our international markets;Ø
    
    Revenues from the installation of master antenna wiring and related infrastructure;Ø
    
    Revenues from the sale and installation of DirecTV satellite systems; andØ
    
    Revenue generated from delivery of satellite basic and premium television programming
for which the hotel pays us a fixed monthly charge per room.
 LodgeNet Entertainment Corporation
    
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##### Table of Contents



Key Metrics:
 Special Note Regarding the Use of Non-GAAP Financial Information
   Free Cash Flow
   2006
    
    
    2005
    
    
    2004Cash provided by operating activities
    
    $
    72,301
    
    
    $
    64,285
    
    
    $
    60,614Cash used for investing activities
    
    
    (50,604
    )
    
    
    (51,455
    )
    
    
    (54,350
    )Difference
    
    $
    21,697
    
    
    $
    12,830
    
    
    $
    6,264
   2006
    
    2005
    
    2004Expansion Capital Investment
    
    $
    22,292
    
    
    $
    24,230
    
    
    $
    27,648
 LodgeNet Entertainment Corporation
    
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##### Table of Contents



Rooms Served
  2006
    
    2005
    
    2004Total rooms served (1) (3)
    
    
    1,052,025
    
    
    
    1,053,806
    
    
    
    1,034,605Total Guest Pay interactive rooms (2) (3)
    
    
    1,004,937
    
    
    
    1,001,929
    
    
    
    974,798Net new Guest Pay interactive rooms (4)
    
    
    3,008
    
    
    
    35,326
    
    
    
    50,155
 
 (1)
    
    Total rooms served include guest pay interactive rooms, rooms served by international
licensees, and properties receiving only basic and premium television services.(2)
    
    Guest Pay interactive rooms are equipped with our interactive television systems.(3)
    
    As a result of Hurricane Katrina, room count as of December 31 was reduced by 4,053 rooms in
2006 and 8,195 rooms in 2005.(4)
    
    Amounts shown are net of de-installations during the period. The gross number of new rooms
installed was 65,993, 71,731 and 75,932 in 2006, 2005 and 2004, respectively. Digital Room Growth
  2006
    
    2005
    
    2004Digital room installations
    
    
    104,277
    
    
    
    120,106
    
    
    
    123,553Total digital rooms installed
    
    
    733,362
    
    
    
    629,085
    
    
    
    508,979Digital rooms as a percent of total Guest Pay interactive rooms
    
    
    73
    %
    
    
    63
    %
    
    
    52
    %
 LodgeNet Entertainment Corporation
    
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##### Table of Contents



Capital Investment Per Room
  2006
    
    2005
    
    2004Average cost per room  new installation
    
    $
    354
    
    
    $
    340
    
    
    $
    364Average cost per room  conversion
    
    $
    252
    
    
    $
    262
    
    
    $
    284
  Revenue Per Room
  2006
    
    
    2005
    
    
    2004Average monthly revenue per room:Movie revenue
    
    $
    17.27
    
    
    $
    17.00
    
    
    $
    17.39Other interactive service revenue
    
    
    5.75
    
    
    
    5.53
    
    
    
    5.47Total per Guest Pay room
    
    $
    23.02
    
    
    $
    22.53
    
    
    $
    22.86
 Direct Costs
  2006
    
    2005
    
    2004Guest Pay direct costs per room
    
    $
    10.51
    
    
    $
    10.03
    
    
    $
    10.22Guest Pay direct costs as a percent of total revenue
    
    
    45.6
    %
    
    
    44.5
    %
    
    
    44.7
    %
 LodgeNet Entertainment Corporation
    
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##### Table of Contents



Operating Expense Per Room
  2006
    
    
    2005
    
    
    2004Guest Pay operating expenses
    
    $
    2.92
    
    
    $
    2.96
    
    
    $
    2.97SG&A expense
    
    
    2.41
    
    
    
    2.14
    
    
    
    2.09Depreciation and amortization (D&A)
    
    
    5.50
    
    
    
    5.88
    
    
    
    6.81Other operating income, net (1)
    
    
    (0.10
    )
    
    
    (0.04
    )
    
    
    $
    10.73
    
    
    $
    10.94
    
    
    $
    11.87Guest Pay operations as a percent of total revenue
    
    
    12.2
    %
    
    
    12.7
    %
    
    
    12.6
    %SG&A as a percent of total revenue
    
    
    10.1
    %
    
    
    9.2
    %
    
    
    8.9
    %D&A as a percent of total revenue
    
    
    23.0
    %
    
    
    25.3
    %
    
    
    28.9
    %
 
 (1)
    
    Other operating income includes net proceeds received from insurance related to business
interruption and property damage claims associated with Hurricane Katrina and recoveries
related to early contract terminations. Net Income/(Loss)
  2006
    
    2005
    
    2004Net income (loss)
    
    $
    1,841
    
    
    $
    (6,959
    )
    
    $
    (20,781
    )
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##### Table of Contents



Liquidity and Capital Resources
      2006
    
    2005
    
    2004Actual consolidated total leverage ratio (1) (4)
    
    
    2.86
    
    
    
    3.16
    
    
    
    3.48Maximum per covenant
    
    
    3.50
    
    
    
    4.00
    
    
    
    4.50Actual senior secured leverage ratio (2) (4)
    
    
    0.74
    
    
    
    1.00
    
    
    
    1.25Maximum per covenant
    
    
    2.25
    
    
    
    2.25
    
    
    
    2.50Actual consolidated interest coverage ratio (3)
(4)
    
    
    3.85
    
    
    
    3.20
    
    
    
    2.76Minimum per covenant
    
    
    2.75
    
    
    
    2.50
    
    
    
    2.25
 
 (1)
    
    Our maximum consolidated total leverage ratio is a function of total indebtedness divided by
operating income exclusive of depreciation and amortization and other miscellaneous
non-recurring items as defined by the covenant. LodgeNet Entertainment Corporation
    
    33
    
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##### Table of Contents



(2)
    
    Our maximum senior secured leverage ratio is a function of total indebtedness less total
unsecured indebtedness, divided by operating income exclusive of depreciation and amortization
and other miscellaneous non-recurring items as defined by the covenant.(3)
    
    Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and other miscellaneous non-recurring items divided by
interest expense as defined by the covenant.(4)
    
    Maximum consolidated total leverage ratio, maximum consolidated senior secured leverage
ratio, and minimum consolidated interest coverage ratios are not based on generally accepted
accounting principles and are not presented as alternative measures of operating performance
or liquidity. They are presented here to demonstrate compliance with the covenants in our
Credit Facility, as noncompliance with such covenants could have a material adverse effect on
us.        pari passu
  LodgeNet Entertainment Corporation
    
    34
    
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##### Table of Contents



Payments due by periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    270,169
    
    
    $
    2,536
    
    
    $
    67,477
    
    
    $
    156
    
    
    $
    200,000Interest on fixed rate debt
    
    
    123,500
    
    
    
    19,000
    
    
    
    38,000
    
    
    
    38,000
    
    
    
    28,500Interest on bank term loan (1)
    
    
    8,579
    
    
    
    5,206
    
    
    
    3,373
    
    
    
    
    
    
    
    Other long-term obligationsAcquired intangible asset (2)
    
    
    2,500
    
    
    
    2,500
    
    
    
    
    
    
    
    
    
    
    
    Operating lease payments
    
    
    1,622
    
    
    
    608
    
    
    
    851
    
    
    
    163
    
    
    
    Purchase obligations
    
    
    3,462
    
    
    
    3,462
    
    
    
    
    
    
    
    
    
    
    
    Nintendo minimum royalty (3)
    
    
    26,950
    
    
    
    4,200
    
    
    
    8,400
    
    
    
    8,400
    
    
    
    5,950Programming related minimum
royalties and commissions (4)
    
    
    10,613
    
    
    
    2,609
    
    
    
    5,846
    
    
    
    2,158
    
    
    
    Total contractual obligations
    
    $
    447,395
    
    
    $
    40,121
    
    
    $
    123,947
    
    
    $
    48,877
    
    
    $
    234,450
 Amount of commitment expiration per periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    1,213
    
    
    $
    1,213
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled amortization.7(2)
    
    In July 2002, we acquired from Hilton Hotels Corporation the right to provide Internet on
television access and television on-demand programming services to participating hotels and
the right to independently pursue and further develop interactive television content
throughout our entire room base.(3)
    
    Nintendo video games pursuant to a non-exclusive license agreement with Nintendo, which
expires in May 2013. Under the terms of the agreement, we pay a monthly royalty equal to a
percent of revenue generated from the sale of Nintendo video game services, subject to a
monthly minimum.(4)
    
    In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. See Note 10 to the Consolidated
Financial Statements. 
 Seasonality
   LodgeNet Entertainment Corporation
    
    35
    
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##### Table of Contents



Results of Operations  Years Ended December 31, 2006 and 2005
 Metrics are calculated based on reduced room counts due to the impact of Hurricane Katrina. As of
December 31, 2006, 4,053 rooms remained out of service.
 Revenue Analysis
  2006
    
    
    2005Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest Pay
    
    $
    277,433
    
    
    
    96.3
    %
    
    $
    267,754
    
    
    
    97.1
    %Other
    
    
    10,780
    
    
    
    3.7
    %
    
    
    8,017
    
    
    
    2.9
    %$
    288,213
    
    
    
    100.0
    %
    
    $
    275,771
    
    
    
    100.0
    %
 Guest Pay Interactive Services.
 2006
    
    
    2005Average monthly revenue per room:Movie revenue
    
    $
    17.27
    
    
    $
    17.00Other interactive service revenue
    
    
    5.75
    
    
    
    5.53Total per Guest Pay room
    
    $
    23.02
    
    
    $
    22.53
    LodgeNet Entertainment Corporation
    
    36
    
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##### Table of Contents



Expense Analysis
     2006
    
    2005
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    45.8
    %
    
    
    44.7
    %
    
    
    1.1
    %Change drivers:Internet related
    
    
    
    
    
    
    
    
    
    
    -0.3
    %Programming costs (product mix)
    
    
    
    
    
    
    
    
    
    
    1.1
    %Hotel incentive commissions
    
    
    
    
    
    
    
    
    
    
    0.3
    %1.1
    %
 Operating Expenses.
 2006
    
    
    2005Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    35,223
    
    
    
    12.2
    %
    
    $
    35,117
    
    
    
    12.7
    %Selling, general and administrative
    
    
    28,999
    
    
    
    10.1
    %
    
    
    25,379
    
    
    
    9.2
    %Depreciation and amortization
    
    
    66,311
    
    
    
    23.0
    %
    
    
    69,862
    
    
    
    25.3
    %Other operating income, net
    
    
    (1,205
    )
    
    
    (0.4
    )%
    
    
    (508
    )
    
    
    -0.2
    %Total operating expenses
    
    $
    129,328
    
    
    
    44.9
    %
    
    $
    129,850
    
    
    
    47.1
    %
   LodgeNet Entertainment Corporation
    
    37
    
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##### Table of Contents



Operating Income.
 Write-Off of Debt Issuance Costs.
 Interest Expense.
 Other Income (Expense).
 Taxes.
 Net Income (Loss).
  LodgeNet Entertainment Corporation
    
    38
    
    Form 10-K 2006




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##### Table of Contents



Results of Operations  Years Ended December 31, 2005 and 2004
 Metrics are calculated based on reduced room counts due to the impact of Hurricane Katrina. As of
December 31, 2005, 8,195 rooms remained out of service.
 Revenue Analysis
  2005
    
    
    2004Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest Pay
    
    $
    267,754
    
    
    
    97.1
    %
    
    $
    258,571
    
    
    
    97.0
    %Other
    
    
    8,017
    
    
    
    2.9
    %
    
    
    7,870
    
    
    
    3.0
    %$
    275,771
    
    
    
    100.0
    %
    
    $
    266,441
    
    
    
    100.0
    %
 Guest Pay Interactive Services.
 2006
    
    
    2005Average monthly revenue per room:Movie revenue
    
    $
    17.27
    
    
    $
    17.00Other interactive service revenue
    
    
    5.75
    
    
    
    5.53Total per Guest Pay room
    
    $
    23.02
    
    
    $
    22.53
    LodgeNet Entertainment Corporation
    
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##### Table of Contents



Expense Analysis
 Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
    2005
    
    2004
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    44.7
    %
    
    
    44.7
    %
    
    
    0.0
    %Change drivers:Internet related
    
    
    
    
    
    
    
    
    
    
    -0.9
    %Programming costs (product mix)
    
    
    
    
    
    
    
    
    
    
    0.5
    %Hotel incentive commissions
    
    
    
    
    
    
    
    
    
    
    0.4
    %0.0
    %
 Operating Expenses.
 2005
    
    
    2004Percent
    
    
    
    
    
    
    Percenof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amoun
    
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    35,117
    
    
    
    12.7
    %
    
    $
    33,637
    
    
    
    12.6
    %Selling, general and administrative
    
    
    25,379
    
    
    
    9.2
    %
    
    
    23,596
    
    
    
    8.9
    %Depreciation and amortization
    
    
    69,862
    
    
    
    25.3
    %
    
    
    77,045
    
    
    
    28.9
    %Other operating income, net
    
    
    (508
    )
    
    
    (0.2
    )%
    
    
    
    
    
    
    Total operating expenses
    
    $
    129,850
    
    
    
    47.1
    %
    
    $
    134,278
    
    
    
    50.4
    %
   LodgeNet Entertainment Corporation
    
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##### Table of Contents



Operating Income.
 Write-Off of Debt Issuance Costs.
 Interest Expense.
 Other Income (Expense).
 Taxes.
  LodgeNet Entertainment Corporation
    
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##### Table of Contents



Net Loss.
 
 Critical Accounting Policies
  Revenue Recognition 
 
    
    Guest Pay Services.Our primary source of revenue is from
providing in-room, interactive television services to the lodging
industry, which the hotel guest typically purchases on a per-view,
hourly or daily basis. These services include on-demand movies,
on-demand games, music and music video, Internet on television and
television on-demand. We recognize revenue from the sale of these
Guest Pay services in the period in which such services are sold
to the hotel guest and when collection is reasonably assured.
Persuasive evidence of a purchase exists through a guest buy
transaction recorded on our system. No future performance
obligations exist with respect to these types of services once
they have been provided to the hotel guest. The prices related to
our products or services are fixed or determinable prior to
delivery of the products or services.
    
    Free-to-Guest Services.We generate revenue from the sale of
basic and premium television programming to individual hotels. In
contrast to Guest Pay Services, where the hotel guest is charged
directly for the service, we charge the hotel for our
Free-to-Guest Services. We recognize revenue from the sale of
Free-to-Guest Services in the period in which such services are
sold and when collection is reasonably assured. We establish the
prices charged to each hotel and no future performance obligations
exist on programming that has been provided to the hotel.
Persuasive evidence of an arrangement exists through our long-term
contract with each hotel. We also have advance billings from one
month to three months for certain free-to-guest programming
services where the revenue is deferred and recognized in the
periods that services are provided.
    
    High Speed Internet Access System Sales.We provide high-speed
Internet access through the sale and installation of equipment.
Revenue from the sale and installation of this equipment is
recognized when the equipment is installed. The delivery and
installation of the equipment are concurrent. In addition, this
equipment, which can be acquired from other manufacturers or
retailers, has stand-alone value to the customer. The software
used within these systems can also be supplied by other vendors
unrelated to us. Equipment prices are fixed and determinable
prior to delivery and are based on objective and reliable sales
evidence from a stand-alone basis.
    
    High Speed Internet Access Service and Support.We provide
ongoing maintenance, service and call center support services to
hotel properties that have been installed by us and also to hotel
properties that have been installed by other providers. In
addition, we provide, in some cases, the hotel property with the
portal to access the Internet. We receive monthly service fees
from such hotel properties for our maintenance services and
Internet access. We recognize the service fee ratably over the
term of the contract. The prices for these services are fixed and
determinable prior to delivery of the service. The fair value of
these services are known due to objective and reliable evidence
from contracts and stand-alone sales. Under the service
agreement, which includes maintenance and Internet access, we
recognize revenue ratably over the term of the maintenance and
service contract, typically three years.
    
    Healthcare System Sales and Support.We provide our interactive
television infrastructure and content to the healthcare industry.
We generate revenue from two sources: 1) the sale and installation
of system equipment
 LodgeNet Entertainment Corporation
    
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##### Table of Contents



and 2) support agreements with the facility to
provide software maintenance, programming and system maintenance
for one year. Typically, revenue from the sale and installation
of our interactive system is recognized ratably over the one-year
maintenance period after the equipment is installed. The
contracted system hardware, installation and maintenance elements
are not separable during this start-up phase due to insufficient
vendor specific objective evidence (VSOE). The package price of
the interactive system and related maintenance is fixed and
determinable prior to delivery. Upon completion of the initial
year, the support arrangement, which includes interactive content,
software maintenance, and system services, is
renewable and is recognized ratably over the term of the related contract. The hospital is
under no obligation to contract with us for the support arrangement. They may contract with
other providers and utilize the equipment and software installed by us. Management expects VSOE
to be established after at least eighteen months of market history and meaningful renewal
activity for maintenance services. Once VSOE has been established, the entire selling price of
the interactive system will be recognized upon installation.
    
    System Sales and Support to Travel Centers.We also market and
sell our interactive systems to travel centers. We generate
revenue from three sources: 1) the sale of the interactive system,
which includes equipment, operating software and a one-year parts
and labor warranty 2) optional extended service and maintenance
agreements, which include future software upgrades as they become
available and 3) programming. The interactive system price
includes a non-exclusive, non-transferable right to use the
initial software package. Currently, revenue from the sale of our
interactive system and the extended service and maintenance
agreement is recognized ratably over the three-year maintenance
period, which includes the original one-year warranty and the
two-year extension, after the equipment is delivered. The
contracted interactive system and extended service and maintenance
elements are not separable during this start-up phase due to
insufficient vendor specific objective evidence (VSOE). The
prices of the interactive system and extended service and
maintenance agreement are fixed and determinable prior to
delivery. Management expects VSOE to be established after at
least eighteen months of market history and meaningful renewal
activity for maintenance services. Once VSOE has been
established, the entire selling price of the interactive system
will be recognized upon delivery. Programming revenue from this
arrangement is recognized on a recurring basis over the term of
the related contract.
    
    Hotel System Sales and Support.We also market and sell our Guest
Pay interactive systems to hotels, along with recurring support
for interactive content, software maintenance and technical field
service for a fixed fee. Revenue from the sale and installation
of the interactive system, including the operating software, is
deferred and recognized over the term of the contract, generally
five years, due to inseparable proprietary software elements. The
multiple elements are not separable because the proprietary
software is required to operate the system and we do not license
or sell the software separately under this business model. The
interactive system prices are fixed and determinable prior to
delivery. Revenue from this arrangement, which includes
equipment, operating software, interactive content, and
maintenance services, is recognized ratably over the term of the
related contract.
    
    Master Antenna Television (MATV) Services.We generate revenues
from the installation of master antenna wiring and related
infrastructure. Revenues are recognized upon completion of the
MATV installation and the prices of the services are fixed and
determinable prior to delivery. MATV equipment and services are
not proprietary and can be supplied by other vendors.
    
    Satellite System Sales.We also generate revenues from the sale
and installation of DirecTV satellite systems. Revenues are
recognized upon installation of the satellite system and the
prices for these services are fixed and determinable prior to
delivery. DirecTV equipment and installation services are not
proprietary and can be supplied by other vendors other than us.
    
    Other.We also generate revenue from the sale of miscellaneous
system equipment such as television remotes and service parts and
labor. These sales are not made under multiple element
arrangements and we recognize the revenue when the equipment is
delivered or service (repair or installation) has been performed.
No future performance obligation exists on an equipment sale or on
a repair service that has been provided.
 LodgeNet Entertainment Corporation
    
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##### Table of Contents



Allowance for Doubtful Accounts.
 Allowance for Excess or Obsolete System Components.
 Long-Lived Assets.
 Property and Equipment.
 YearsBuildings
    
    
    30Guest Pay systems:Installed system costs
    
    
    2  7Customer acquisition costs
    
    
    5  7System components
    
    
    5  7Software costs
    
    
    3  5Other equipment
    
    
    3  10
 Allowance for System Removal.
  LodgeNet Entertainment Corporation
    
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Recent Accounting Developments
 Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contract
 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)
 Accounting
for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 Fair Value Measurements
  LodgeNet Entertainment Corporation
    
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Item 7A  Quantitative and Qualitative Disclosures About Market Risk
  Interest.
 Foreign Currency Transactions.
 
 Item 8  Financial Statements and Supplementary Data
  
 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
  LodgeNet Entertainment Corporation
    
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##### Table of Contents



Internal Control  Integrated Framework
  Changes in Internal Control over Financial Reporting.
 /s/ Scott C. PetersenScott C. PetersenChief Executive Officer /s/ Gary H. RitondaroGary H. RitondaroChief Financial Officer 
 Item 9B  Other Information
   LodgeNet Entertainment Corporation
    
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##### Table of Contents



PART III
 
 Item 10  Directors and Executive Officers of the Registrant
     
 Item 11  Executive Compensation
  
 Item 12  Security Ownership of Certain Beneficial Owners and Management
  
 Item 13  Certain Relationships and Related Transactions
  
 Item 14  Principal Accountant Fees and Services
  LodgeNet Entertainment Corporation
    
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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 (1A)3.3
    
    Amendment No. 1 to Restated Certificate of Incorporation of LodgeNet (7)4.1
    
    Indenture dated June 18, 2003 between LodgeNet Entertainment Corporation and HSBC Bank USA as
Trustee, relating to the 9.50% Senior Subordinated Notes due 2013 (13)4.2
    
    Form of Notes (included in Exhibit 4.1)4.3
    
    First Supplemental Indenture dated June 18, 2003 between LodgeNet Entertainment Corporation
and HSBC Bank USA as Trustee, relating to the 9.50% Senior Subordinated Notes due 2013 (13)4.4
    
    Amended and Restated Rights Plan dated February 28, 2007 between LodgeNet Entertainment
Corporation and Computershare, a Delaware limited liability company as Rights Agent4.5
    
    Second Supplemental Indenture dated January 16, 2007 between LodgeNet Entertainment
Corporation and HSBC Bank USA as Trustee, relating to the 9.50% Senior Subordinated Notes due
201310.1
    
    LodgeNet Entertainment Corporation Stock Option Plan (as amended and restated effective May
8, 2001) (6)10.2
    
    1993 Plan Form of Stock Option Agreement for Non-Employee Directors (2)10.3
    
    1993 Plan Form of Incentive Stock Option Agreement for Key Employees (2)10.4
    
    Form of Executive Severance Agreement between LodgeNet and each of Scott C. Petersen, David
M. Bankers and Steven D. Truckenmiller; all dated of July 25, 1995 (3)10.5
    
    Form of Employment Agreement between LodgeNet and David M. Bankers (4)10.6
    
    Master Services Agreement between Hilton Hotels Corporation and LodgeNet Entertainment
Corporation dated October 9, 2000  (5)
 LodgeNet Entertainment Corporation
    
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10.7
    
    Warrant to Purchase Common Stock of LodgeNet Entertainment Corporation dated October 9, 2000 (5)10.8
    
    Executive Severance Agreement between LodgeNet and Gary H. Ritondaro dated March 1, 2001 (6)10.9
    
    Employment Agreement between LodgeNet and Gary H. Ritondaro dated March 1, 2001 (6)10.10
    
    Credit Agreement dated August 29, 2001 by and among LodgeNet Entertainment Corporation,
Canadian Imperial Bank of Commerce, Bear Stearns Corporate Lending, Inc., U. S. Bank National
Association, Fleet National Bank and the Lenders Named Therein (7)10.11
    
    Amendment To Master Services Agreement dated August 2, 2002 by and between Hilton Hotels
Corporation and LodgeNet Entertainment Corporation (8)10.12
    
    Hilton LodgeNet Agreement dated August 2, 2002 by and between Hilton Hotels Corporation and
LodgeNet Entertainment Corporation (8)10.13
    
    First Amendment to Credit Agreement, dated August 19, 2002, by and between LodgeNet
Entertainment Corporation and Canadian Imperial Bank, as Administrative Agent for the Lenders
named therein (9)10.14
    
    Employment Agreement between LodgeNet and Scott C. Petersen dated September 23, 2002 (10)10.15
    
    Employment Agreement between LodgeNet and Stephen D. McCarty dated March 1, 2003 (11)10.16
    
    Executive Severance Agreement between LodgeNet and Stephen D. McCarty dated March 1, 2003 (11)10.17
    
    Employment Agreement between the LodgeNet and Steven Pofahl dated March 1, 2003 (11)10.18
    
    Executive Severance Agreement between LodgeNet and Steven Pofahl dated March 1, 2003 (11)10.19
    
    Employment Agreement between LodgeNet and Steven D. Truckenmiller dated March 1, 2003 (11)10.20
    
    LodgeNet Entertainment Corporation 2003 Stock Option and Incentive Plan (12)10.21
    
    2003 Plan Form of Stock Option Agreement for Non-Employee Directors (13)10.22
    
    2003 Plan Form of Incentive Stock Option Agreement for Key Employees (13)10.23
    
    Second Amendment to Credit Agreement dated June 2, 2003 among LodgeNet Entertainment
Corporation and Canadian Imperial Bank of Commerce, as Administrative Agent for the Lenders
named therein (13)10.24
    
    Third Amendment to Credit Agreement dated January 13, 2004 among LodgeNet Entertainment
Corporation and Canadian Imperial Bank of Commerce, as Administrative Agent for the Lenders
named therein (13)10.25
    
    Form of Restricted Stock Agreement for Time-based Vesting (14)10.26
    
    Form of Restricted Stock Agreement for Performance-Based Vesting (14)10.27
    
    Seventh Amendment to Credit Agreement dated October 18, 2006 among LodgeNet Entertainment
Corporation and Canadian Imperial Bank of Commerce, as Administrative Agent for the Lenders
named therein10.28
    
    Eighth Amendment to Credit Agreement dated December 13, 2006 among LodgeNet Entertainment
Corporation and Canadian Imperial Bank of Commerce, as Administrative Agent for the Lenders
named therein
 LodgeNet Entertainment Corporation
    
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10.29
    
    Employment Agreement between LodgeNet Entertainment Corp and James G. Naro dated June 26,
2006 (15)10.30
    
    Executive Severance Agreement between LodgeNet Entertainment Corp and James G. Naro dated
June 26, 2006 (15)10.31
    
    Employment Agreement between LodgeNet Entertainment Corp and Scott E. Young dated August 17,
2006 (16)10.32
    
    Executive Severance Agreement between LodgeNet Entertainment Corp and Scott E. Young dated
August 17, 2006 (16)10.33
    
    Asset Purchase Agreement, dated November 14, 2006, between StayOnline, Inc. and LodgeNet
StayOnline, Inc., as assignee of LodgeNet Entertainment Corporation10.34
    
    Stock Purchase Agreement, dated December 13, 2006, between LodgeNet Entertainment Corp and
Liberty Satellite Technology, Inc.10.35
    
    Shareholders Agreement, dated December 13, 2006, between LodgeNet Entertainment Corp and
Liberty Satellite Technology, Inc.10.36
    
    Stock Purchase Agreement, dated December 13, 2006, between LodgeNet Entertainment Corp and
PAR Capital Partners, LLC.12.1
    
    Statement of Computation of Ratios21.1
    
    Subsidiaries of LodgeNet23.1
    
    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
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
    
    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).(1A)
    
    Incorporated by Reference to Exhibit 3.2 to LodgeNets Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005.(2)
    
    Incorporated by Reference to Exhibits 10.13 and 10.14 to LodgeNets Annual Report on Form
10-K for the year ended December 31, 1993.(3)
    
    Incorporated by Reference to Exhibit 10.20 to LodgeNets Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995.(4)
    
    Incorporated by Reference to Exhibit 10.31 to LodgeNets Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999.(5)
    
    Incorporated by Reference to Exhibits 10.32 and 10.33 to LodgeNets Quarterly Report on Form
10-Q for the quarter ended September 30, 2000.(6)
    
    Incorporated by Reference to Exhibits 10.1, 10.35 and 10.36 to LodgeNets Quarterly Report on
Form 10-Q for the quarter ended March 31, 2001.(7)
    
    Incorporated by Reference to Exhibits 10.37 and 10.38 to LodgeNets Quarterly Report on Form
10-Q for the quarter ended September 30, 2001.(8)
    
    Incorporated by Reference to Exhibits 10.1 and 10.2 to LodgeNets Current Report on Form 8-K,
as filed with the Securities and Exchange Commission, August 15, 2002.(9)
    
    Incorporated by Reference to Exhibit 10.1 to LodgeNets Current Report on Form 8-K, as filed
with the Securities and Exchange Commission, August 20, 2002.(10)
    
    Incorporated by Reference to Exhibit 10.24 to LodgeNets Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002.(11)
    
    Incorporated by Reference to Exhibits 10.27, 10.28, 10.29, 10.30 and 10.31 to LodgeNets
Annual Report on Form 10-K for the year ended December 31, 2002.(12)
    
    Incorporated by Reference to LodgeNets 2003 Definitive Proxy Statement.(13)
    
    Incorporated by Reference to Exhibits 4.1, 4.3, 10.26. 10.27, 10.28 and 10.29 to LodgeNets
Annual Report on Form 10-K for the year ended December 31, 2003.(14)
    
    Incorporated by Reference to Exhibits 10.25 and 10.26 to LodgeNets Annual Report on Form
10-K for the year ended December 31, 2005.(15)
    
    Incorporated by Reference to Exhibit 10.1 and 10.2 to LodgeNets Current Report on Form 8-K,
as filed with the Securities and Exchange Commission, June 29, 2006.(16)
    
    Incorporated by Reference to Exhibit 10.1 and 10.2 to LodgeNets Current Report on Form 8-K,
as filed with the Securities and Exchange Commission, August 23, 2006. LodgeNet Entertainment Corporation
    
    52
    
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Signatures
  LodgeNet Entertainment 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

Scott C. Petersen
    
    President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
    
    March 13, 2007/s/ Gary H. Ritondaro

Gary H. Ritondaro
    
    Senior Vice President
Chief Financial Officer
(Principal Financial & Accounting Officer)
    
    March 13, 2007/s/ R. Douglas Bradbury
    
    Director
    
    March 13, 2007R. Douglas Bradbury/s/ Richard R. Hylland
    
    Director
    
    March 13, 2007Richard R. Hylland/s/ R. F. Leyendecker
    
    Director
    
    March 13, 2007R. F. Leyendecker/s/ Vikki I. Pachera
    
    Director
    
    March 13, 2007Vikki I. Pachera/s/ Scott H. Shlecter
    
    Director
    
    March 13, 2007Scott H. Shlecter
 LodgeNet Entertainment Corporation
    
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 LodgeNet Entertainment Corporation and Subsidiary
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F - 2Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    F - 4Consolidated Statements of Operations  Three Years Ended December 31, 2006
    
    
    F - 5Consolidated Statements of Stockholders Deficiency and Comprehensive Income (Loss) 
Three Years Ended December 31, 2006
    
    
    F - 6Consolidated Statements of Cash Flows  Three Years Ended December 31, 2006
    
    
    F - 7Notes to Consolidated Financial Statements
    
    
    F - 8Index to Financial SchedulesSchedule II  Valuation and Qualifying Accounts
    
    
    F - 29
 LodgeNet Entertainment Corporation
    
    F  1
    
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Report of Independent Registered Public Accounting Firm
 
  Consolidated financial statements and financial statement schedule
   Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
 LodgeNet Entertainment Corporation
    
    F  2
    
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LodgeNet Entertainment Corporation
    
    F  3
    
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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiary
Consolidated Balance Sheets
 December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    22,795
    
    
    $
    20,742Restricted cash
    
    
    1,006
    
    
    
    Accounts receivable, net
    
    
    32,959
    
    
    
    29,617Other current assets
    
    
    10,728
    
    
    
    2,629Total current assets
    
    
    67,488
    
    
    
    52,988Property and equipment, net
    
    
    185,770
    
    
    
    199,882Debt issuance costs, net
    
    
    5,704
    
    
    
    7,423Intangible assets, net
    
    
    690
    
    
    
    2,007Other assets
    
    
    3,557
    
    
    
    772Total assets
    
    $
    263,209
    
    
    $
    263,072Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    19,165
    
    
    $
    16,036Current maturities of long-term debt
    
    
    2,536
    
    
    
    2,749Accrued expenses
    
    
    18,193
    
    
    
    15,322Deferred revenue
    
    
    8,076
    
    
    
    5,143Total current liabilities
    
    
    47,970
    
    
    
    39,250Long-term debt
    
    
    267,633
    
    
    
    289,251Other long-term liabilities
    
    
    5,728
    
    
    
    4,804Total liabilities
    
    
    321,331
    
    
    
    333,305Commitments and contingenciesStockholders deficiency:Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued or outstandingCommon stock, $.01 par value, 50,000,000 shares authorized;
19,084,734 and 18,165,643 shares outstanding at December 31,
2006 and December 31, 2005, respectively
    
    
    191
    
    
    
    182Additional paid-in capital
    
    
    242,383
    
    
    
    232,327Accumulated deficit
    
    
    (302,466
    )
    
    
    (304,307
    )Accumulated other comprehensive income
    
    
    1,770
    
    
    
    1,565Total stockholders deficiency
    
    
    (58,122
    )
    
    
    (70,233
    )Total liabilities and stockholders deficiency
    
    $
    263,209
    
    
    $
    263,072
  LodgeNet Entertainment Corporation
    
    F  4
    
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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiary
Consolidated Statements of Operations
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenues:Guest Pay
    
    $
    277,433
    
    
    $
    267,754
    
    
    $
    258,571Other
    
    
    10,780
    
    
    
    8,017
    
    
    
    7,870Total revenues
    
    
    288,213
    
    
    
    275,771
    
    
    
    266,441Costs and Expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately
below):Guest Pay
    
    
    126,635
    
    
    
    119,180
    
    
    
    115,577Other
    
    
    5,318
    
    
    
    4,048
    
    
    
    3,616Operating expenses:Guest Pay operations
    
    
    35,223
    
    
    
    35,117
    
    
    
    33,637Selling, general and administrative
    
    
    28,999
    
    
    
    25,379
    
    
    
    23,596Depreciation and amortization
    
    
    66,311
    
    
    
    69,862
    
    
    
    77,045Other operating income, net
    
    
    (1,205
    )
    
    
    (508
    )
    
    
    Total costs and operating expenses
    
    
    261,281
    
    
    
    253,078
    
    
    
    253,471Income from operations
    
    
    26,932
    
    
    
    22,693
    
    
    
    12,970Other Income and Expenses:Interest expense
    
    
    (25,730
    )
    
    
    (29,351
    )
    
    
    (31,891
    )Write-off of debt issuance costs
    
    
    (227
    )
    
    
    (272
    )
    
    
    (810
    )Other income (loss)
    
    
    1,165
    
    
    
    421
    
    
    
    (629
    )Income (loss) before income taxes
    
    
    2,140
    
    
    
    (6,509
    )
    
    
    (20,360
    )Provision for income taxes
    
    
    (299
    )
    
    
    (450
    )
    
    
    (421
    )Net income (loss)
    
    $
    1,841
    
    
    $
    (6,959
    )
    
    $
    (20,781
    )Net income (loss) per common share (basic)
    
    $
    0.10
    
    
    $
    (0.39
    )
    
    $
    (1.36
    )Net income (loss) per common share (diluted)
    
    $
    0.10
    
    
    $
    (0.39
    )
    
    $
    (1.36
    )Weighted average shares outstanding (basic)
    
    
    18,332,824
    
    
    
    17,923,297
    
    
    
    15,275,867Weighted average shares outstanding (diluted)
    
    
    18,840,917
    
    
    
    17,923,297
    
    
    
    15,275,867
  LodgeNet Entertainment Corporation
    
    F  5
    
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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiary
Consolidated Statements of Stockholders Deficiency and Comprehensive Income (Loss)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income/(Loss)
    
    
    TotalBalance, December 31, 2003
    
    
    12,722,267
    
    
    $
    127
    
    
    $
    155,163
    
    
    $
    (276,567
    )
    
    $
    (7,725
    )
    
    $
    (129,002
    )Common stock option exercises
    
    
    410,341
    
    
    
    4
    
    
    
    4,447
    
    
    
    
    
    
    
    
    
    
    
    4,451Common stock issuance
    
    
    4,342,500
    
    
    
    43
    
    
    
    66,677
    
    
    
    
    
    
    
    
    
    
    
    66,720Warrants issued (Note 13)
    
    
    
    
    
    
    
    
    
    
    503
    
    
    
    
    
    
    
    
    
    
    
    503Warrants exercised
    
    
    150,256
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    77Restricted stock
    
    
    
    
    
    
    
    
    
    
    121
    
    
    
    
    
    
    
    
    
    
    
    121Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,781
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    810Unrealized gain on
derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,983Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,988
    )Balance, December 31, 2004
    
    
    17,625,364
    
    
    $
    176
    
    
    $
    226,986
    
    
    $
    (297,348
    )
    
    $
    (1,932
    )
    
    $
    (72,118
    )Common stock option exercises
    
    
    288,482
    
    
    
    3
    
    
    
    3,490
    
    
    
    
    
    
    
    
    
    
    
    3,493Warrants issued (Note 13)
    
    
    
    
    
    
    
    
    
    
    446
    
    
    
    
    
    
    
    
    
    
    
    446Warrants exercised
    
    
    207,797
    
    
    
    3
    
    
    
    1,117
    
    
    
    
    
    
    
    
    
    
    
    1,120Share-based compensation
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Restricted stock
    
    
    44,000
    
    
    
    
    
    
    
    231
    
    
    
    
    
    
    
    
    
    
    
    231Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,959
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    241Unrealized gain on
derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,256Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,462
    )Balance, December 31, 2005
    
    
    18,165,643
    
    
    $
    182
    
    
    $
    232,327
    
    
    $
    (304,307
    )
    
    $
    1,565
    
    
    $
    (70,233
    )Common stock option exercises
    
    
    587,721
    
    
    
    6
    
    
    
    8,382
    
    
    
    
    
    
    
    
    
    
    
    8,388Warrants exercised (Note 13)
    
    
    196,570
    
    
    
    2
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    
    
    
    
    700Restricted stock
    
    
    134,800
    
    
    
    1
    
    
    
    976
    
    
    
    
    
    
    
    
    
    
    
    977Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,841
    
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49Unrealized gain on
derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,046Balance, December 31, 2006
    
    
    19,084,734
    
    
    $
    191
    
    
    $
    242,383
    
    
    $
    (302,466
    )
    
    $
    1,770
    
    
    $
    (58,122
    )
  LodgeNet Entertainment Corporation
    
    F  6
    
    Form 10-K 2006




---



##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiary
Consolidated Statements of Cash Flows
 Years Ended December 31,2006
    
    
    2005
    
    
    2004Operating activities:Net income (loss)
    
    $
    1,841
    
    
    $
    (6,959
    )
    
    $
    (20,781
    )Adjustments to reconcile net income (loss) to net
cash provided
by operating activities:Depreciation and amortization
    
    
    66,311
    
    
    
    69,862
    
    
    
    77,045Loss (recovery) on long-term notes receivable
    
    
    (238
    )
    
    
    
    
    
    
    1,000Write-off of debt issuance costs
    
    
    227
    
    
    
    272
    
    
    
    810Share-based compensation
    
    
    1,677
    
    
    
    288
    
    
    
    198Gain due to insurance proceeds
    
    
    (817
    )
    
    
    (788
    )
    
    
    Non-cash other operating expense
    
    
    
    
    
    
    280
    
    
    
    Insurance proceeds related to business interruption
    
    
    526
    
    
    
    388
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (3,332
    )
    
    
    (1,542
    )
    
    
    218Other current assets
    
    
    (2,070
    )
    
    
    (855
    )
    
    
    160Accounts payable
    
    
    3,126
    
    
    
    (786
    )
    
    
    1,766Accrued expenses and deferred revenue
    
    
    7,795
    
    
    
    3,262
    
    
    
    (120
    )Other
    
    
    (2,745
    )
    
    
    863
    
    
    
    318Net cash provided by operating activities
    
    
    72,301
    
    
    
    64,285
    
    
    
    60,614Investing activities:Property and equipment additions
    
    
    (48,268
    )
    
    
    (51,855
    )
    
    
    (54,917
    )Insurance proceeds related to property damage
    
    
    291
    
    
    
    400
    
    
    
    Cash deposit related to acquisition
    
    
    (1,006
    )
    
    
    
    
    
    
    Deferred acquisition costs
    
    
    (1,859
    )
    
    
    
    
    
    
    Note receivable repayment
    
    
    238
    
    
    
    
    
    
    
    567Net cash used for investing activities
    
    
    (50,604
    )
    
    
    (51,455
    )
    
    
    (54,350
    )Financing activities:Repayment of long-term debt
    
    
    (21,500
    )
    
    
    (20,500
    )
    
    
    (48,500
    )Proceeds from lease transaction
    
    
    
    
    
    
    1,022
    
    
    
    Payment of capital lease obligations
    
    
    (1,380
    )
    
    
    (1,421
    )
    
    
    (1,122
    )Borrowings of revolving credit facility
    
    
    
    
    
    
    
    
    
    
    13,000Repayments of revolving credit facility
    
    
    
    
    
    
    
    
    
    
    (20,000
    )Debt issuance costs
    
    
    
    
    
    
    
    
    
    
    (838
    )Proceeds from sale of interest rate swap
    
    
    
    
    
    
    
    
    
    
    3,052Proceeds from issuance of common stock, net of
offering costs
    
    
    
    
    
    
    
    
    
    
    66,720Exercise of stock options
    
    
    4,179
    
    
    
    4,613
    
    
    
    4,451Change in other long-term liability
    
    
    (930
    )
    
    
    (846
    )
    
    
    (995
    )Net cash (used for) provided by financing activities
    
    
    (19,631
    )
    
    
    (17,132
    )
    
    
    15,768Effect of exchange rates on cash
    
    
    (13
    )
    
    
    49
    
    
    
    191Increase (decrease) in cash and cash equivalents
    
    
    2,053
    
    
    
    (4,253
    )
    
    
    22,223Cash and cash equivalents at beginning of period
    
    
    20,742
    
    
    
    24,995
    
    
    
    2,772Cash and cash equivalents at end of period
    
    $
    22,795
    
    
    $
    20,742
    
    
    $
    24,995
  LodgeNet Entertainment Corporation
    
    F  7
    
    Form 10-K 2006




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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiary
Notes to Consolidated Financial Statements
 Note 1  The Company
   Note 2  Summary of Significant Accounting Policies
 Revenue Recognition 
 
    
    Guest Pay Services.Our primary source of revenue is from
providing in-room, interactive television services to the lodging
industry, which the hotel guest typically purchases on a per-view,
hourly or daily basis. These services include on-demand movies,
on-demand games, music and music video, Internet on television and
television on-demand. We recognize revenue from the sale of these
Guest Pay services in the period in which such services are sold
to the hotel guest and when collection is reasonably assured.
Persuasive evidence of a purchase exists through a guest buy
transaction recorded on our system. No future performance
obligations exist with respect to these types of services once
they have been provided to the hotel guest. The prices related to
our products or services are fixed or determinable prior to
delivery of the products or services.
 
    
    Free-to-Guest Services.We generate revenue from the sale of
basic and premium television programming to individual hotels. In
contrast to Guest Pay Services, where the hotel guest is charged
directly for the service, we charge the hotel for our
Free-to-Guest Services. We recognize revenue from the sale of
Free-to-Guest Services in the period in which such services are
sold and when collection is reasonably assured. We establish the
prices charged to each hotel and no future performance obligations
exist on programming that has been provided to the hotel.
Persuasive evidence of an arrangement exists through our long-term
contract with each hotel. We also have advance billings from one
month to three months for certain free-to-guest programming
services where the revenue is deferred and recognized in the
periods that services are provided.
 
    
    High Speed Internet Access System Sales.We provide high-speed
Internet access through the sale and installation of equipment.
Revenue from the sale and installation of this equipment is
recognized when the equipment is installed. The delivery and
installation of the equipment are concurrent. In addition, this
equipment, which can be acquired from other manufacturers or
retailers, has stand-alone value to the customer. The software
used within these systems can also be supplied by other vendors
unrelated to us. Equipment prices are fixed and determinable
prior to delivery and are based on objective and reliable sales
evidence from a stand-alone basis.
 
    
    High Speed Internet Access Service and Support.We provide,
through our wholly-owned subsidiary LodgeNet StayOnline, ongoing
maintenance, service and call center support services to hotel
properties that have been installed by us and also to hotel
properties that have been installed by other providers. In
addition, we provide, in some cases, the hotel property with the
portal to access the Internet. We receive monthly service fees
from such hotel properties for our maintenance services and
Internet access. We recognize the service fee ratably
over the term of the contract. The prices for these services are fixed and
determinable prior to delivery of the service. The fair value of these
services are known due to objective and reliable evidence from contracts and
stand-alone sales.
 LodgeNet Entertainment Corporation
    
    F  8
    
    Form 10-K 2006




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##### Table of Contents



Under the service agreement, which includes maintenance and
Internet access, we recognize revenue ratably over the term of the maintenance
and service contract, typically three years.
    
    Healthcare System Sales and Support.We provide our
interactive television infrastructure and content to
the healthcare industry. We generate revenue from
two sources: 1) the sale and installation of system
equipment and 2) long-term agreements with the
facility to provide software maintenance, programming
and system maintenance for one year. Typically,
revenue from the sale and installation of our
interactive system is recognized ratably over the
one-year maintenance period after the equipment is
installed. The contracted system hardware,
installation and maintenance elements are not
separable during this start-up phase due to
insufficient vendor specific objective evidence
(VSOE). The package price of the interactive system
and related maintenance is fixed and determinable
prior to delivery. Upon completion of the initial
year, the support arrangement, which includes
interactive content, software maintenance, and system
services, is renewable and is recognized ratably over
the term of the related contract. The hospital is
under no obligation to contract with us for the
support arrangement. They may contract with other
providers and utilize the equipment and software
installed by us. Management expects VSOE to be
established after at least eighteen months of market
history and meaningful renewal activity for
maintenance services. Once VSOE has been
established, the entire selling price of the
interactive system will be recognized upon
installation.
    
    System Sales and Support to Travel Centers.We also
market and sell our interactive systems to travel
centers. We generate revenue from three sources: 1)
the sale of the interactive system, which includes
equipment, operating software and a one-year parts
and labor warranty 2) optional extended service and
maintenance agreements, which include future software
upgrades as they become available and 3) programming.
The interactive system price includes a
non-exclusive, non-transferable right to use the
initial software package. Currently, revenue from
the sale of our interactive system and the extended
service and maintenance agreement is recognized
ratably over the three-year maintenance period, which
includes the original one-year warranty and the
two-year extension, after the equipment is delivered.
The contracted interactive system and extended
service and maintenance elements are not separable
during this start-up phase due to insufficient vendor
specific objective evidence (VSOE). The prices of
the interactive system and extended service and
maintenance agreement are fixed and determinable
prior to delivery. Management expects VSOE to be
established after at least eighteen months of market
history and meaningful renewal activity for
maintenance services. Once VSOE has been
established, the entire selling price of the
interactive system will be recognized upon delivery.
Programming revenue from this arrangement is
recognized on a recurring basis over the term of the
related contract.
    
    Hotel System Sales and Support.We also market and
sell our Guest Pay interactive systems to hotels,
along with recurring support for interactive content,
software maintenance and technical field service for
a fixed fee. Revenue from the sale and installation
of the interactive system, including the operating
software, is deferred and recognized over the term of
the contract, generally five years, due to
inseparable proprietary software elements. The
multiple elements are not separable because the
proprietary software is required to operate the
system and we do not license or sell the software
separately under this business model. The
interactive system prices are fixed and determinable
prior to delivery. Revenue from this arrangement,
which includes equipment, operating software,
interactive content, and maintenance services, is
recognized ratably over the term of the related
contract.
    
    Master Antenna Television (MATV) Services.We
generate revenues from the installation of master
antenna wiring and related infrastructure. Revenues
are recognized upon completion of the MATV
installation and the prices of the services are fixed
and determinable prior to delivery. MATV equipment
and services are not proprietary and can be supplied
by other vendors.
    
    Satellite System Sales.We also generate revenues
from the sale and installation of DirecTV satellite
systems. Revenues are recognized upon installation
of the satellite system and the prices for these
services are fixed and
determinable prior to delivery. DirecTV equipment and installation services are not proprietary
and can be supplied by other vendors other than us.
 LodgeNet Entertainment Corporation
    
    F  9
    
    Form 10-K 2006




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##### Table of Contents




    
    Other.We also generate revenue from the sale of miscellaneous system equipment such as
television remotes and service parts and labor. These sales are not made under multiple
element arrangements and we recognize the revenue when the equipment is delivered or service
(repair or installation) has been performed. No future performance obligation exists on an
equipment sale or on a repair service that has been provided.
 Principles of Consolidation 
 Foreign Currency Translation 
 Use of Estimates 
 Long-Lived Assets 
 Property and Equipment 
 YearsBuildings
    
    
    30Guest Pay systems:Installed system costs
    
    
    2 - 7Customer acquisition costs
    
    
    5 - 7System components
    
    
    5 - 7Software costs
    
    
    3 - 5Other equipment
    
    
    3 - 10
 Allowance for System Removal 
 Allowance for Excess or Obsolete System Components 
 LodgeNet Entertainment Corporation
    
    F  10
    
    Form 10-K 2006




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##### Table of Contents



Software Development 
 Concentration of Credit Risks and Customer Data 
 Significant Vendors 
 Allowance for Doubtful Accounts 
 Derivative Financial Instruments 
  LodgeNet Entertainment Corporation
    
    F  11
    
    Form 10-K 2006




---



##### Table of Contents



Income Taxes 
 Comprehensive Income (Loss) 
 Unrealized Gain
    
    
    Foreign
    
    
    Accumulated(Loss) on
    
    
    Currency
    
    
    OtherDerivative
    
    
    Translation
    
    
    ComprehensiveInstruments
    
    
    Adjustment
    
    
    Income (Loss)Balance, December 31, 2003
    
    $
    (8,395
    )
    
    $
    670
    
    
    $
    (7,725
    )Change during period
    
    
    4,983
    
    
    
    810
    
    
    
    5,793Balance, December 31, 2004
    
    
    (3,412
    )
    
    
    1,480
    
    
    
    (1,932
    )Change during period
    
    
    3,256
    
    
    
    241
    
    
    
    3,497Balance, December 31, 2005
    
    
    (156
    )
    
    
    1,721
    
    
    
    1,565Change during period
    
    
    156
    
    
    
    49
    
    
    
    205Balance, December 31, 2006
    
    $
    
    
    
    $
    1,770
    
    
    $
    1,770
 Earnings Per Share Computation 
  2006
    
    
    2005
    
    
    2004Average shares outstanding  basic
    
    
    18,332,824
    
    
    
    17,923,297
    
    
    
    15,275,867Dilutive effect of stock options, non-
vested shares and warrants
    
    
    508,093
    
    
    
    
    
    
    
    Average shares outstanding  diluted
    
    
    18,840,917
    
    
    
    17,923,297
    
    
    
    15,275,867Antidilutive securities excluded
from calculation
    
    
    295,100
    
    
    
    4,295,749
    
    
    
    4,498,169
 LodgeNet Entertainment Corporation
    
    F  12
    
    Form 10-K 2006




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Potential dilutive common shares
    
    
    2,056,754
    
    
    
    3,611,774
    
    
    
    2,745,251
 Share-based Compensation  Share-Based Payment Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation
 Statements of Cash Flows 
 Effect of Recently Issued Accounting Standards  Accounting by Insurance Enterprises
for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contract
 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)
 LodgeNet Entertainment Corporation
    
    F  13
    
    Form 10-K 2006




---



##### Table of Contents



Accounting
for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 Fair Value Measurements
 Note 3 3⁄4 Investments
 Gamet and PointOne 
 LodgeNet Entertainment Corporation
    
    F  14
    
    Form 10-K 2006




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##### Table of Contents



Note 4  Fair Value of Financial Instruments
  2006
    
    2005Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueAssets (Liabilities):Interest rate swaps
    
    $
    
    
    
    $
    
    
    
    $
    (156
    )
    
    $
    (156
    )Other long-term liability
    
    $
    (2,225
    )
    
    $
    (2,225
    )
    
    $
    (2,541
    )
    
    $
    (2,541
    )Long-term debt
    
    $
    (270,169
    )
    
    $
    (285,669
    )
    
    $
    (292,000
    )
    
    $
    (310,259
    )
  Note 5  Property and Equipment
  2006
    
    
    2005Land, building and equipment
    
    $
    85,642
    
    
    $
    83,267Free-to-guest equipment
    
    
    35,065
    
    
    
    33,989Guest Pay systems:Installed system costs
    
    
    438,865
    
    
    
    450,754Customer acquisition costs
    
    
    53,156
    
    
    
    52,264System components
    
    
    26,464
    
    
    
    25,336Software costs
    
    
    22,520
    
    
    
    21,889Total
    
    
    661,712
    
    
    
    667,499Less  depreciation and amortization
    
    
    (475,942
    )
    
    
    (467,617
    )Property and equipment, net
    
    $
    185,770
    
    
    $
    199,882
  Note 6 3⁄4 Debt Issuance Costs
  2006
    
    
    2005Debt issuance costs
    
    $
    13,617
    
    
    $
    13,842Accumulated amortization
    
    
    (7,913
    )
    
    
    (6,419
    )$
    5,704
    
    
    $
    7,423
 LodgeNet Entertainment Corporation
    
    F  15
    
    Form 10-K 2006




---



##### Table of Contents



Note 7  Intangible Assets
    2006
    
    
    2005Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired technology
    
    $
    10,280
    
    
    $
    10,280
    
    
    $
    14,291
    
    
    $
    14,150Acquired intangibles
    
    
    5,774
    
    
    
    5,101
    
    
    
    5,774
    
    
    
    3,945Other
    
    
    449
    
    
    
    432
    
    
    
    497
    
    
    
    460$
    16,503
    
    
    $
    15,813
    
    
    $
    20,562
    
    
    $
    18,555
  Note 8  Accrued Expenses
  2006
    
    
    2005Accrued taxes
    
    $
    4,088
    
    
    $
    3,679Accrued compensation
    
    
    6,842
    
    
    
    5,803Accrued interest
    
    
    946
    
    
    
    1,100Accrued programming related
    
    
    1,748
    
    
    
    1,637Other
    
    
    4,569
    
    
    
    3,103$
    18,193
    
    
    $
    15,322
 LodgeNet Entertainment Corporation
    
    F  16
    
    Form 10-K 2006




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##### Table of Contents



Note 9  Long-term Debt and Credit Facilities
  2006
    
    
    2005Bank Credit Facility:Bank term loan
    
    $
    68,125
    
    
    $
    89,625Revolving credit facility
    
    
    -
    
    
    
    -9.50% senior notes
    
    
    200,000
    
    
    
    200,000Capital leases
    
    
    2,044
    
    
    
    2,375270,169
    
    
    
    292,000Less current maturities
    
    
    (2,536
    )
    
    
    (2,749
    )$
    267,633
    
    
    $
    289,251
 Bank Credit Facility 3⁄4
     9.50% Senior Notes 3⁄4 pari
passu
 LodgeNet Entertainment Corporation
    
    F  17
    
    Form 10-K 2006




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##### Table of Contents



Capital Leases
  2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    ThereafterLong-term debt
    
    $
    1,500
    
    
    $
    66,625
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    200,000Capital leases
    
    
    1,162
    
    
    
    596
    
    
    
    355
    
    
    
    167
    
    
    
    3
    
    
    
    2,662
    
    
    
    67,221
    
    
    
    355
    
    
    
    167
    
    
    
    3
    
    
    
    200,000Less amount representing
interest on capital leases
    
    
    (126
    )
    
    
    (66
    )
    
    
    (33
    )
    
    
    (14
    )
    
    
    
    
    
    
    $
    2,536
    
    
    $
    67,155
    
    
    $
    322
    
    
    $
    153
    
    
    $
    3
    
    
    $
    200,000
  Note 10  Commitments and Contingencies
 Programming Agreements SM
 Minimum Guarantees
  LodgeNet Entertainment Corporation
    
    F  18
    
    Form 10-K 2006




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##### Table of Contents



Purchase Commitments
 Operating Leases  
 Hilton Agreement
 Legal Proceedings
 Note 11  Stockholders Equity
 Preferred Stock 
 Common Stock 
 Stockholder Rights Plan 
    LodgeNet Entertainment Corporation
    
    F  19
    
    Form 10-K 2006




---



##### Table of Contents



The number of rights is adjusted to prevent dilution in the event of a stock split or stock
dividend. The purchase price and the number of shares of preferred stock issuable upon exercise of
the rights are also adjusted for stock splits and dividends, as well as for other events, including
the issuance of preferred stock at less than the market price or the distribution of our assets to
preferred stockholders.If we are acquired without the approval of the directors who are neither officers, nor related to
the acquirer, the rights become exercisable for shares of common stock of the acquiring company
with a market value of two times the exercise price. If there is merely an acquisition of at least
20% of our common stock without such approval, the rights become exercisable for common stock with
a market value of two times the exercise price.Prior to a 20% acquisition or the expiration of the rights, we may redeem the rights at a price of
$.01 per right. The rights are also redeemable in connection with a merger or other similar
transaction not involving a 20% acquirer or if the acquirer has acquired less than 20% and there
are no other acquirers.In addition, the Board of Directors may, after a 20% acquisition (but less than a 50% acquisition),
exchange the rights for shares of common stock on a one for one basis or for cash or other assets
or securities of ours.If issued, the preferred stock will be non-redeemable and junior to any other series of preferred
stock we may issue, but will have a preferential quarterly dividend equal to 1,000 times the
dividend, if any, declared on each share of common stock, but not less than $25.00 and, in the
event of our liquidation, a preferred liquidation preference equal to the greater of $1,000 or
1,000 times the payment per share of common stock. Each share of preferred stock will have 1,000
votes and will vote together with the common stock.Until a right is exercised, the holder will have no rights as a stockholder. We and the rights
agent have broad discretion to amend the rights plan governing the rights; however, following a
separation, no amendment may adversely affect the rights holders.The 2007 Amended Rights Plan provides for a TIDE Committee, selected by and composed solely of
independent directors of the Board, to review the Amended Rights Plan every three years, and to
provide recommendations to the Board concerning the Rights Plan, including any modifications to the
Amended Rights Plan, up to and including termination thereof.The 2007 Amended Rights Plan incorporates a provision which requires that any offer meeting
specified criteria (a Qualified Offer) will be submitted to the Companys stockholders for
consideration in certain circumstances. Under the Amended Rights Plan a Qualified Offer must
include the following criteria:
 
    
    For all shares of the Company;
    
    At the same price for all shares acquired and such price must be greater than the
highest reported market price per share during the prior 2 years and represents a premium
above the average closing prices for the previous five trading days;
    
    Conditioned on tender of at least 90% of the shares; and
    
    Paid with at least 80% cash consideration, and any share consideration must be limited
to publicly traded securities listed on the NASDAQ or NYSE.
 Restricted Stock
  LodgeNet Entertainment Corporation
    
    F  20
    
    Form 10-K 2006




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##### Table of Contents



Note 12  Stock Option Plans
   Accounting for Stock Issued to
Employees Accounting for
Stock-Based Compensation Share-Based Payment
  LodgeNet Entertainment Corporation
    
    F  21
    
    Form 10-K 2006




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##### Table of Contents



Years Ended December 31,2006
    
    
    2005
    
    
    2004Compensation Cost:Stock options
    
    $
    700
    
    
    $
    57
    
    
    $
    77Non-vested (restricted) shares
    
    
    977
    
    
    
    231
    
    
    
    121Total share-based compensation expense
    
    $
    1,677
    
    
    $
    288
    
    
    $
    198Compensation expense per common share:
    
    $
    0.09
    
    
    $
    0.02
    
    
    $
    0.01
  Pro Forma Information under Statement 123
  Years Ended December 31,2005
    
    
    2004Net income (loss), as reported
    
    $
    (6,959
    )
    
    $
    (20,781
    )Add: stock based employee compensation expense
included in reported net income (loss)
    
    
    288
    
    
    
    198Less: stock based employee compensation expense
determined under fair value method, net of
related tax effects
    
    
    (5,708
    )
    
    
    (3,772
    )Net income (loss), pro forma
    
    $
    (12,379
    )
    
    $
    (24,355
    )Net income (loss) per common share (basic and
diluted)As reported
    
    $
    (0.39
    )
    
    $
    (1.36
    )Pro forma
    
    $
    (0.69
    )
    
    $
    (1.59
    )
 Stock Option Valuation and Expense Information under Statement 123(R)
  LodgeNet Entertainment Corporation
    
    F  22
    
    Form 10-K 2006




---



##### Table of Contents



Years Ended December 31,2006
    
    
    2005
    
    
    2004Weighted average fair value of options granted
    
    $
    12.23
    
    
    $
    8.90
    
    
    $
    9.70Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted average risk-free interest
    
    
    4.36
    %
    
    
    3.5
    %
    
    
    3.0
    %Weighted average expected volatility
    
    
    53.5
    %
    
    
    55.6
    %
    
    
    57.4
    %Weighted average expected life  employee
    
    
    N/A
    
    
    5.0 years
    
    5.0 yearsWeighted average expected life  non-employee
director
    
    8.47 years
    
    5.0 years
    
    5.0 years
 LodgeNet Entertainment Corporation
    
    F  23
    
    Form 10-K 2006




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##### Table of Contents



WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicOptions
    
    
    Price
    
    
    in Years
    
    
    ValueOutstanding, December 31, 2003
    
    
    2,652,661
    
    
    $
    14.73Granted
    
    
    306,455
    
    
    
    18.76Exercised
    
    
    (410,341
    )
    
    
    10.98Forfeited/canceled
    
    
    (4,275
    )
    
    
    19.65Outstanding, December 31, 2004
    
    
    2,544,500
    
    
    
    15.81Granted
    
    
    297,920
    
    
    
    17.38Exercised
    
    
    (288,482
    )
    
    
    12.28Forfeited/canceled
    
    
    (61,863
    )
    
    
    18.62Outstanding, December 31, 2005
    
    
    2,492,075
    
    
    
    16.33Granted
    
    
    25,000
    
    
    
    19.09Exercised
    
    
    (587,721
    )
    
    
    14.28Forfeited/canceled
    
    
    (56,400
    )
    
    
    21.79Outstanding, December 31, 2006
    
    
    1,872,954
    
    
    $
    16.85
    
    
    
    5.1
    
    
    $
    15,320,666Outstanding, December 31, 2006,
(net of expected forfeiture)
    
    
    1,872,169
    
    
    $
    16.85
    
    
    
    5.2
    
    
    $
    15,312,496Options exercisable, December
31, 2006
    
    
    1,837,414
    
    
    $
    16.85
    
    
    
    5.0
    
    
    $
    15,023,353
    Non-Vested Shares (Restricted Stock)
    LodgeNet Entertainment Corporation
    
    F  24
    
    Form 10-K 2006




---



##### Table of Contents



Years Ended December 31,2006
    
    
    2005
    
    
    2004Compensation cost  non-vested shares:Time-based vesting
    
    $
    530
    
    
    $
    231
    
    
    $
    121Performance-based vesting
    
    
    447
    
    
    
    
    
    
    
    Total share-based compensation
expense  non-vested shares
    
    $
    977
    
    
    $
    231
    
    
    $
    121
  Year EndedDecember 31, 2006Time Based
    
    
    Performance BasedWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNon-vested
    
    
    Grant-date
    
    
    Non-vested
    
    
    Grant-dateShares
    
    
    Fair Value
    
    
    Shares
    
    
    Fair ValueOutstanding, beginning of
period
    
    
    44,000
    
    
    $
    18.01
    
    
    
    
    
    
    $
    Granted
    
    
    40,750
    
    
    
    16.02
    
    
    
    101,550
    
    
    
    14.47Vested
    
    
    (6,250
    )
    
    
    18.65
    
    
    
    
    
    
    
    Forfeited/canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, end of period
    
    
    78,500
    
    
    $
    16.93
    
    
    
    101,550
    
    
    $
    14.47
 Unrecognized Compensation Expense
  Weighted averageDecember 31,
    
    
    recognition period2006
    
    
    (months)Unrecognized compensation cost:Stock options, net of expected forfeitures
    
    $
    174
    
    
    
    16.4Non-vested shares  time based vesting
    
    
    564
    
    
    
    24.0Non-vested shares  performance based vesting
    
    
    1,022
    
    
    
    24.0Total unrecognized compensation cost
    
    $
    1,760
 LodgeNet Entertainment Corporation
    
    F  25
    
    Form 10-K 2006




---



##### Table of Contents



Note 13  Warrants
     Note 14  Employee Benefit Plans
  Note 15  Income Taxes
  2006
    
    
    2005
    
    
    2004Domestic
    
    $
    1,159
    
    
    $
    (6,288
    )
    
    $
    (19,793
    )Foreign
    
    
    981
    
    
    
    (221
    )
    
    
    (567
    )Total
    
    $
    2,140
    
    
    $
    (6,509
    )
    
    $
    (20,360
    )
  LodgeNet Entertainment Corporation
    
    F  26
    
    Form 10-K 2006




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Federal income tax benefit at statutory rate (35%)
    
    $
    749
    
    
    $
    (2,341
    )
    
    $
    (7,126
    )State income taxes, net of federal benefit
    
    
    441
    
    
    
    (241
    )
    
    
    (439
    )Other non-deductible items
    
    
    134
    
    
    
    152
    
    
    
    306Net change to valuation allowance
    
    
    (1,025
    )
    
    
    2,880
    
    
    
    7,680$
    299
    
    
    $
    450
    
    
    $
    421
 
 2006
    
    
    2005Deferred tax assets:Net operating loss carryforwards
    
    $
    64,096
    
    
    $
    67,458Capital loss carryforwards
    
    
    1,431
    
    
    
    1,431Reserves and accruals
    
    
    1,588
    
    
    
    1,084Deferred credits, net
    
    
    3,371
    
    
    
    2,571Book over tax depreciation/amortization
    
    
    21,692
    
    
    
    20,658Total deferred tax assets
    
    
    92,178
    
    
    
    93,202Total deferred tax liabilities
    
    
    
    
    
    
    Net deferred assets
    
    
    92,178
    
    
    
    93,202Tax valuation allowance
    
    
    (92,178
    )
    
    
    (93,202
    )Net deferred tax assets
    
    $
    
    
    
    $
    
   2006
    
    
    2005Deferred tax assets:Current deferred tax assets
    
    $
    4,243
    
    
    $
    2,939Noncurrent deferred tax assets
    
    
    87,935
    
    
    
    90,263Total deferred tax assets
    
    $
    92,178
    
    
    $
    93,202
  LodgeNet Entertainment Corporation
    
    F  27
    
    Form 10-K 2006




---



##### Table of Contents



Note 16  Other Receivable
  Note 17  Segment Information
  2006
    
    
    2005
    
    
    2004United States
    
    $
    275,190
    
    
    $
    263,927
    
    
    $
    255,047Canada
    
    
    12,310
    
    
    
    11,083
    
    
    
    10,651Other
    
    
    713
    
    
    
    761
    
    
    
    743Total
    
    $
    288,213
    
    
    $
    275,771
    
    
    $
    266,441
  2006
    
    
    2005United States
    
    $
    177,979
    
    
    $
    191,750Canada
    
    
    7,791
    
    
    
    8,132Total
    
    $
    185,770
    
    
    $
    199,882
 Note 18  Write-Off of Debt Issuance Costs
  Note 19  Impact of Hurricane Katrina
  LodgeNet Entertainment Corporation
    
    F  28
    
    Form 10-K 2006




---



##### Table of Contents



Note 20  Selected Quarterly Financial Data (Unaudited)
  Quarter
    
    Quarter
    
    Quarter
    
    QuarterEnded
    
    Ended
    
    Ended
    
    EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2005Revenues
    
    $
    65,989
    
    
    $
    68,115
    
    
    $
    74,145
    
    
    $
    67,522Net income (loss)
    
    
    (3,604
    )
    
    
    (1,655
    )
    
    
    585
    
    
    
    (2,285
    )Per common share (basic and diluted)
    
    $
    (0.20
    )
    
    $
    (0.09
    )
    
    $
    0.03
    
    
    $
    (0.13
    )2006Revenues
    
    $
    70,193
    
    
    $
    71,871
    
    
    $
    76,510
    
    
    $
    69,639Net income (loss)
    
    
    (654
    )
    
    
    433
    
    
    
    2,184
    
    
    
    (122
    )Per common share (basic and diluted)
    
    $
    (0.04
    )
    
    $
    0.02
    
    
    $
    0.12
    
    
    $
    (0.01
    )
 Note 21  Subsequent Events
    LodgeNet Entertainment Corporation
    
    F  29
    
    Form 10-K 2006




---



##### Table of Contents



LodgeNet Entertainment Corporation and
Subsidiary Schedule II  Valuation and Qualifying
Accounts
 AdditionsBalance
    
    Charged to
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    
    
    
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Deductions
    
    PeriodAllowances deducted
from related
balance sheet accounts:Year Ended December
31, 2004:Allowance for Excess
or Obsolete
    
    $
    1,698
    
    
    $
    1,515
    
    
    $
    1,913
    
    
    $
    1,300System ComponentsAllowance for Doubtful
Accounts
    
    
    300
    
    
    
    290
    
    
    
    290
    
    
    
    300Allowance for System
Removal
    
    
    353
    
    
    
    781
    
    
    
    834
    
    
    
    300Year Ended December
31, 2005:Allowance for Excess
or ObsoleteSystem Components
    
    $
    1,300
    
    
    $
    725
    
    
    $
    1,325
    
    
    $
    700Allowance for Doubtful
Accounts
    
    
    300
    
    
    
    135
    
    
    
    135
    
    
    
    300Allowance for System
Removal
    
    
    300
    
    
    
    1,534
    
    
    
    994
    
    
    
    840Year Ended December
31, 2006:Allowance for Excess
or ObsoleteSystem Components
    
    $
    700
    
    
    $
    946
    
    
    $
    1,186
    
    
    $
    460Allowance for Doubtful
Accounts
    
    
    300
    
    
    
    (154
    )
    
    
    (29
    )
    
    
    175Allowance for System
Removal
    
    
    840
    
    
    
    2,155
    
    
    
    2,175
    
    
    
    820
 LodgeNet Entertainment Corporation
    
    F  30
    
    Form 10-K 2006