##### 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, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
 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
 Securities registered pursuant to Section 12(b) of the Act:
    
    None.Securities registered pursuant to Section 12(g) of the Act:
    
    Common Stock, $.01 par value.
 o þ
 o þ
 þ o
 o
  Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-accelerated filer o
 o þ
 $212,000,000.




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##### 



Table of Contents
 Item 1 - Business
    
    
    1Overview
    
    
    1Corporate Information
    
    
    3Markets and Customers
    
    
    3Services and Products
    
    
    4Operations
    
    
    5Competition
    
    
    8Business Strategy
    
    
    10Regulation
    
    
    11Employees
    
    
    12Web Site Access to SEC Filings
    
    
    12Item 1A  Risk Factors
    
    
    12Item 1B  Unresolved Staff Comments
    
    
    18Item 2 - Properties
    
    
    18Item 3 - Legal Proceedings
    
    
    18Item 4 - Submission of Matters to a Vote of Security Holders
    
    
    19Item 5 - Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    19Dividends
    
    
    19Stockholder Rights Plan
    
    
    19Item 6 - Selected Financial Data
    
    
    21Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Executive Overview
    
    
    23Liquidity and Capital Resources
    
    
    30Seasonality
    
    
    32Results of Operations  Years Ended December 31, 2005 and 2004
    
    
    33Results of Operations  Years Ended December 31, 2004 and 2003
    
    
    37Critical Accounting Policies
    
    
    39Recent Accounting Developments
    
    
    42Item 7A  Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 8 - Financial Statements and Supplementary Data
    
    
    43Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    43Item 9A  Controls and Procedures
    
    
    43Item 9B  Other Information
    
    
    44Item 10 - Directors and Executive Officers of the Registrant
    
    
    45Item 11 - Executive Compensation
    
    
    45Item 12 - Security Ownership of Certain Beneficial Owners and Management
    
    
    45Item 13 - Certain Relationships and Related Transactions
    
    
    45Item 14 - Principal Accountant Fees and Services
    
    
    45Item 15 - Exhibits and Financial Statement Schedules
    
    
    46Form of Restricted Stock AgreementForm of Restricted Stock Agreement for Performance-Based VestingStatement of Computation of RatiosSubsidiariesConsent of Independent Registered Public Accounting FirmRule 13a-14(a)/15d-14(a) Certifications of CFORule 13a-14(a)/15d-14(a) Certifications of CEOSection 1350 Certifications
  
    LodgeNet Entertainment Corporation
    
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PART I
 
 Item 1  Business
 
 Overview
     Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Selected Operations Data:Total rooms served (1) (3) (4)
    
    
    1,053,806
    
    
    
    1,034,605
    
    
    
    994,127
    
    
    
    952,673
    
    
    
    890,546Total Guest Pay interactive rooms
(1) (4)
    
    
    1,001,929
    
    
    
    974,798
    
    
    
    924,643
    
    
    
    876,348
    
    
    
    812,149Total Digital rooms (1) (2)
    
    
    629,085
    
    
    
    508,979
    
    
    
    385,426
    
    
    
    265,097
    
    
    
    115,378Total revenues
    
    $
    275,771
    
    
    $
    266,441
    
    
    $
    250,149
    
    
    $
    234,990
    
    
    $
    216,895Operating income
    
    
    22,693
    
    
    
    12,970
    
    
    
    6,500
    
    
    
    5,975
    
    
    
    9,120Depreciation and amortization
    
    
    69,862
    
    
    
    77,045
    
    
    
    78,459
    
    
    
    75,918
    
    
    
    66,008Share-based compensation
    
    
    288
    
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    Interest expense
    
    
    29,351
    
    
    
    31,891
    
    
    
    34,239
    
    
    
    33,037
    
    
    
    30,306Net loss
    
    $
    (6,959
    )
    
    $
    (20,781
    )
    
    $
    (35,052
    )
    
    $
    (29,126
    )
    
    $
    (26,408
    )Cash provided by operating activities
    
    $
    64,285
    
    
    $
    60,614
    
    
    $
    48,563
    
    
    $
    43,769
    
    
    $
    46,477Cash used for investing activities
    
    
    (51,455
    )
    
    
    (54,350
    )
    
    
    (53,618
    )
    
    
    (70,708
    )
    
    
    (77,995
    )Difference
    
    $
    12,830
    
    
    $
    6,264
    
    
    $
    (5,055
    )
    
    $
    (26,939
    )
    
    $
    (31,518
    )
 (1)
    
    End of year statistics. Guest Pay interactive rooms are equipped with our interactive
television system, which includes high-definition (HD), digital and tape-based systems.
 LodgeNet Entertainment Corporation
    
    1
    
    Form 10-K 2005




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(2)
    
    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 with the total Guest Pay interactive rooms and represent 62.8% of the Guest Pay
interactive rooms served as of December 31, 2005.(3)
    
    Total rooms served include Guest Pay interactive rooms, rooms served by international
licensees, and properties receiving only basic and premium television services.(4)
    
    As a result of Hurricane Katrina, room count as of December 31, 2005, was reduced by 8,195
rooms.
    SM
 
    
    increased variety and availability of on-demand movies;
    
    television on-demand programming;
    
    digital music and music videos;
    
    subscription sports programming;
    
    Internet on television;
    
    access to Internet-sourced content;
    
    on-screen controls that allow the guest more viewing control and flexibility;
    
    improved guest marketing and merchandising capabilities; and
    
    system architecture that receives video and music content via a satellite distribution
network, resulting in operating cost reductions.
  TM
 LodgeNet Entertainment Corporation
    
    2
    
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
    
    expand our interactive television and broadband networks
    
    increase guest room revenue and gross profit
    
    expand into healthcare and other adjacent markets
    
    increase the profitability of our business model; and
    
    strengthen our balance sheet and generate increasing levels of cash flow
 
 Corporate Information
  
 Markets and Customers
 Domestic Market
 Diversified Customer Base.
 International Market.
 Healthcare and Adjacent Markets.
 LodgeNet Entertainment Corporation
    
    3
    
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Services and Products
 Guest Pay Interactive Services. SM
  SM
 
    
    customize the look and feel of the user interface;
    
    use the system for the hotels internal branding or marketing campaigns; and
    
    use the system to provide information regarding other hotel services.
 SM SM
 SM SM
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
    
    the number of rooms equipped with our interactive television system;
    
    the range of interactive television and broadband services offered at each hotel;
    
    the popularity, amount and timeliness of content offered, as well as the popularity and
availability of other entertainment alternatives;
    
    the profile of the guest at each property;
    
    the price of the service purchased by the hotel guest; and
    
    the occupancy rate at the property.
  Other Services.
  
 Operations
 Contracts.
  LodgeNet Entertainment Corporation
    
    5
    
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Customer Retention and Acquisitions
 Programming. SM
 Technology, Product Development, and Patents.
   LodgeNet Entertainment Corporation
    
    6
    
    Form 10-K 2005




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Sales and Marketing.
   Installation Operations.
 LodgeNet Entertainment Corporation
    
    7
    
    Form 10-K 2005




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Service Operations.
  Component Suppliers.
 
 Competition
  
    
    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, InRoom Video, Kool Connect,
SeaChange, Verizon, SVI and other international providers, such as Quadriga and Acentic;
    
    cable, television and broadband service providers, such as Charter Communications,
Comcast, Cox Cable and Time Warner;
    
    direct broadcast satellite companies such as DIRECTV and EchoStar Communications;
    
    television networks and programmers such as ABC, NBC, CBS, FOX, HBO, and Showtime;
    
    internet service providers and high-speed portals such as but not limited to iBahn,
Wayport, Guest-Tek, Time Warner, Yahoo, Google and T-Mobile;
    
    companies offering web sites that provide on-demand movies;
    
    rental companies that provide videocassettes and DVDs that can be viewed in properly
equipped hotel rooms and on other portable viewing devices; and
    
    hotels that offer in-room laptops with Internet access or other types of Internet access
systems.
  LodgeNet Entertainment Corporation
    
    8
    
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
    
    the features and benefits of the service offering and Internet systems;
    
    the quality of the vendors technical support and maintenance services;
    
    the financial terms and conditions of the proposed contract, including commissions to the hotel; and
    
    the ability to complete system installation in a timely and efficient manner.
  
    
    our history of innovation;
    
    our diverse client base;
    
    our proven ability to retain existing customers and secure new ones;
    
    our technically-innovative digital platform;
    
    our high definition platform;
    
    our flexible SigNETure TVSMsystem;
    
    our LodgeNet Media Management System; and
    
    our experienced management team and sales organization.
     LodgeNet Entertainment Corporation
    
    9
    
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Business Strategy
 Expand
our interactive television and broadband networks. SM
 Increase guest room revenue and gross profit. SM
 Expand into healthcare and other adjacent markets.
   Increase the profitability of our business model.
 LodgeNet Entertainment Corporation
    
    10
    
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Strengthen our balance sheet and generate increasing levels of cash flow
 
 Regulation
 Cable Television Regulation
  Internet Regulation
  LodgeNet Entertainment Corporation
    
    11
    
    Form 10-K 2005




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Employees
  
 Web Site Access to SEC Filings
  
 Item 1A  Risk Factors
 We have experienced substantial net losses. If we cannot become profitable or generate sustained
levels of net free cash flow which we define as having cash provided by operating activities
exceeding cash used for investing, it could have a harmful effect on our results of operations,
business and the value of our common stock.
 We operate in a very competitive business environment and competition could reduce our revenue and
our cash flow.
 LodgeNet Entertainment Corporation
    
    12
    
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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.
 LodgeNet Entertainment Corporation
    
    13
    
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If we
fail to develop new products and product enhancements, our business
and prospects could be harmed.
 
    
    unanticipated delays;
    
    access to capital;
    
    budget overruns; and
    
    technical problems.
   We may have to incur significant capital expenditures in order to adapt to technological change.
 
    
    rapid and significant technological change, including continuing developments in
technology that do not presently have widely accepted standards; and
    
    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.
 LodgeNet Entertainment Corporation
    
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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.


Acquisitions of companies or technologies may be difficult to integrate, disrupt our business,
dilute stockholder value or divert management attention.


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.


LodgeNet Entertainment Corporation
    
    15
    
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Federal, state, local and foreign legislation and regulation may negatively impact our business and
growth.
 If our hotel customers become dissatisfied with our service, they may elect not to renew or to
terminate service agreements with us and, in that event, our ability to maintain or grow our
revenue would be adversely affected.
 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.
 LodgeNet Entertainment Corporation
    
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We may not have adequate capital resources to carry out our business plan, which could have a
harmful effect on our business and prospects.
 
    
    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;
    
    we may have insufficient capital to make payments on our outstanding indebtedness as
they become due;
    
    we may have to delay or limit our product development activities; and
    
    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.
 We have substantial debt and significant interest payment requirements.
 
    
    we may have difficulty borrowing money for working capital, capital expenditures,
acquisitions or other purposes;
    
    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;
    
    some of our debt has a variable rate of interest, which exposes us to the risk of increased interest rates;
    
    we are more vulnerable to economic downturns and adverse development in our business;
    
    we may not have the flexibility to respond to changing business and economic conditions,
including increased competition and demand for new products and services; and
    
    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 Credit Facility and instruments governing our debt securities may
limit our ability to operate our business.
 
    
    borrow money;
    
    pay dividends or make distributions;
    
    purchase or redeem stock;
    
    repay subordinated indebtedness before its stated maturity date;
    
    make investments and extend credit;
    
    engage in transactions with affiliates;
    
    engage in sale-leaseback transactions;
    
    consummate certain asset sales;
    
    effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all
or substantially all of our assets; and
    
    create liens on our assets.
  LodgeNet Entertainment Corporation
    
    17
    
    Form 10-K 2005




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Our data systems could fail or their security could be compromised.
 
 Item 1B  Unresolved Staff Comments
  
 Item 2  Properties
   
 Item 3  Legal Proceedings
   LodgeNet Entertainment Corporation
    
    18
    
    Form 10-K 2005




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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
   Quarter Ended
    
    High
    
    
    Low
    
    
    Quarter Ended
    
    High
    
    
    LowMarch 31, 2005
    
    
    18.84
    
    
    
    16.93
    
    
    March 31, 2004
    
    
    19.82
    
    
    
    18.26June 30, 2005
    
    
    19.51
    
    
    
    15.62
    
    
    June 30, 2004
    
    
    20.69
    
    
    
    16.26September 30, 2005
    
    
    18.08
    
    
    
    14.00
    
    
    September 30, 2004
    
    
    17.01
    
    
    
    13.17December 31, 2005
    
    
    14.82
    
    
    
    11.82
    
    
    December 31, 2004
    
    
    17.69
    
    
    
    13.43
  
 Dividends
  
 Stockholder Rights Plan
   LodgeNet Entertainment Corporation
    
    19
    
    Form 10-K 2005




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LodgeNet Entertainment Corporation
    
    20
    
    Form 10-K 2005




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Item 6  Selected Financial Data
  Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Statement of Operations Data:Revenues:Guest Pay
    
    $
    267,754
    
    
    $
    258,571
    
    
    $
    243,732
    
    
    $
    226,238
    
    
    $
    206,001Other
    
    
    8,017
    
    
    
    7,870
    
    
    
    6,417
    
    
    
    8,752
    
    
    
    10,894Total revenues
    
    
    275,771
    
    
    
    266,441
    
    
    
    250,149
    
    
    
    234,990
    
    
    
    216,895Direct costs (exclusive of operating
expenses and depreciation and
amortization)
    
    
    123,228
    
    
    
    119,193
    
    
    
    111,947
    
    
    
    100,782
    
    
    
    92,090Operating expenses
    
    
    129,850
    
    
    
    134,278
    
    
    
    131,702
    
    
    
    128,233
    
    
    
    115,685Income from operations
    
    
    22,693
    
    
    
    12,970
    
    
    
    6,500
    
    
    
    5,975
    
    
    
    9,120Investment gains (losses)
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    872
    
    
    
    (2,790
    )Litigation settlements (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,700
    )
    
    
    Write-off of debt issuance costs (2)
    
    
    (272
    )
    
    
    (810
    )
    
    
    (7,061
    )
    
    
    
    
    
    
    (2,091
    )Interest expense
    
    
    (29,351
    )
    
    
    (31,891
    )
    
    
    (34,239
    )
    
    
    (33,037
    )
    
    
    (30,306
    )Other (expense) income, net
    
    
    421
    
    
    
    (629
    )
    
    
    (43
    )
    
    
    314
    
    
    
    348Loss before income taxes
    
    
    (6,509
    )
    
    
    (20,360
    )
    
    
    (34,593
    )
    
    
    (28,576
    )
    
    
    (25,719
    )Provision for income taxes (3)
    
    
    (450
    )
    
    
    (421
    )
    
    
    (459
    )
    
    
    (550
    )
    
    
    (689
    )Net loss
    
    $
    (6,959
    )
    
    $
    (20,781
    )
    
    $
    (35,052
    )
    
    $
    (29,126
    )
    
    $
    (26,408
    )Net loss per common share (basic and
diluted)
    
    $
    (0.39
    )
    
    $
    (1.36
    )
    
    $
    (2.80
    )
    
    $
    (2.35
    )
    
    $
    (2.16
    )Other Data:Capital expenditures (4)
    
    $
    51,855
    
    
    $
    54,917
    
    
    $
    52,868
    
    
    $
    72,115
    
    
    $
    78,386Average cost per room  new installation
    
    $
    340
    
    
    $
    364
    
    
    $
    405
    
    
    $
    438
    
    
    $
    456Depreciation and amortization
    
    $
    69,862
    
    
    $
    77,045
    
    
    $
    78,459
    
    
    $
    75,918
    
    
    $
    66,008Share-based compensation
    
    $
    288
    
    
    $
    198
    
    
    
    
    
    
    
    
    
    
    
    Non-Financial Operating Data:Total rooms served (5) (6) (7)
    
    
    1,053,806
    
    
    
    1,034,605
    
    
    
    994,127
    
    
    
    952,673
    
    
    
    890,546Guest Pay interactive rooms served (5) (7)
    
    
    1,001,929
    
    
    
    974,798
    
    
    
    924,643
    
    
    
    876,348
    
    
    
    812,149Rooms with Digital services (5)
    
    
    629,085
    
    
    
    508,979
    
    
    
    385,426
    
    
    
    265,097
    
    
    
    115,378Free-to-guest rooms served (5)
    
    
    536,984
    
    
    
    525,436
    
    
    
    500,170
    
    
    
    477,698
    
    
    
    449,485Average monthly revenue per Guest Pay
room:Movie revenue
    
    $
    17.00
    
    
    $
    17.39
    
    
    $
    17.55
    
    
    $
    17.77
    
    
    $
    17.93Other interactive service revenue
    
    
    5.53
    
    
    
    5.47
    
    
    
    5.04
    
    
    
    4.57
    
    
    
    4.48Total
    
    $
    22.53
    
    
    $
    22.86
    
    
    $
    22.59
    
    
    $
    22.34
    
    
    $
    22.41
 As of December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Balance Sheet Data:Cash and cash equivalents
    
    $
    20,742
    
    
    $
    24,995
    
    
    $
    2,772
    
    
    $
    1,107
    
    
    $
    1,528Total assets
    
    $
    263,072
    
    
    $
    283,036
    
    
    $
    283,268
    
    
    $
    298,084
    
    
    $
    291,485Total debt
    
    $
    292,000
    
    
    $
    312,291
    
    
    $
    368,248
    
    
    $
    353,790
    
    
    $
    325,831Total stockholders deficiency
    
    $
    (70,233
    )
    
    $
    (72,118
    )
    
    $
    (129,002
    )
    
    $
    (101,304
    )
    
    $
    (67,568
    )
 Year Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Statement of Cash Flows Data:Cash provided by operating activities
    
    $
    64,285
    
    
    $
    60,614
    
    
    $
    48,563
    
    
    $
    43,769
    
    
    $
    46,477Cash used for investing activities
    
    $
    (51,455
    )
    
    $
    (54,350
    )
    
    $
    (53,618
    )
    
    $
    (70,708
    )
    
    $
    (77,995
    )Difference
    
    $
    12,830
    
    
    $
    6,264
    
    
    $
    (5,055
    )
    
    $
    (26,939
    )
    
    $
    (31,518
    )
 LodgeNet Entertainment Corporation
    
    21
    
    Form 10-K 2005




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##### Table of Contents



(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)
    
    We incurred charges 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 the third quarter of 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 June 2003, we retired our 10.25% Senior Notes. As a result of the early
retirement, we 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 of $450,000 in 2005, $421,000 in 2004, and $459,000 in 2003,
consist of current state franchise taxes.(4)
    
    Presented as cash used for property and equipment additions as reported in the Statement of
Cash Flows.(5)
    
    End of year statistics. Guest Pay interactive rooms are equipped with our interactive
television system, which includes high-definition, digital and tape-based systems.(6)
    
    Total rooms served include guest pay interactive rooms, rooms served by international
licensees, and properties receiving only basic and premium televisions services.(7)
    
    As a result of Hurricane Katrina, room count as of December 31, 2005, was reduced by 8,195
rooms.
 LodgeNet Entertainment Corporation
    
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##### Table of Contents



Special Note Regarding Forward-Looking Statement
 Certain statements in this Report on Form 10-K 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, 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 crises, acts or threats of terrorism
and public health issues;, competition from providers of similar services and from alternative
systems for accessing in-room entertainment;, changes in demand for our products and services;,
programming cost, availability, timeliness and quality;, technological developments by
competitors;, developmental costs, difficulties and delays;, changes in 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. These forward-looking statements speak only as of the
date of this press release. 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
    
    23
    
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##### Table of Contents



SM
 SM
  TM
 LodgeNet Entertainment Corporation
    
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##### Table of Contents



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.
  
    
    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;
    
    commissions paid to our hotel customers, which are also based on a percent of
guest-generated revenue;
    
    fixed monthly programming charges paid primarily to DIRECTV for satellite-delivered
basic and premium television programming;
    
    internet connectivity costs;
    
    license fees, which are based on a percent of guest-generated revenue, for television on
demand, music, music video, video games and sports programming; and
    
    one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences.
 Other Services. .
  LodgeNet Entertainment Corporation
    
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##### Table of Contents



Key Metrics:
 Rooms Served
  2005
    
    
    2004
    
    
    2003Total rooms served (3) (4)
    
    
    1,053,806
    
    
    
    1,034,605
    
    
    
    994,127Total Guest Pay interactive rooms
(2) (4)
    
    
    1,001,929
    
    
    
    974,798
    
    
    
    924,643New Guest Pay interactive rooms (1)
    
    
    35,326
    
    
    
    50,155
    
    
    
    48,295
 (1)
    
    Amounts shown are net of de-installations during the period. The gross numbers of new rooms
installed were 71,731 in 2005, 75,932 in 2004, and 71,775 in 2003.(2)
    
    Guest Pay interactive rooms are equipped with our interactive television system, which
includes high-definition (HD), digital and tape-based systems.(3)
    
    Total rooms served include guest pay interactive rooms, rooms served by international
licensees, and properties receiving only basic and premium television services.(4)
    
    As a result of Hurricane Katrina, room count as of December 31, 2005, was reduced by 8,195
rooms.
 Digital Room Growth
  2005
    
    
    2004
    
    
    2003Digital room installations
    
    
    120,106
    
    
    
    123,553
    
    
    
    120,329Total Digital rooms installed (1)
    
    
    629,085
    
    
    
    508,979
    
    
    
    385,426Digital rooms as a percent of
total Guest Pay interactive
rooms
    
    
    63
    %
    
    
    52
    %
    
    
    42
    %
 (1)
    
    Total digital room count as of December 31, 2005, was reduced by 3,551 rooms due to the
impact of Hurricane Katrina. Total room count was reduced by an additional 4,644 tape-based
rooms due to the impact of Hurricane Katrina.
 LodgeNet Entertainment Corporation
    
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##### Table of Contents



Cost of Installation
  2005
    
    
    2004
    
    
    2003Average cost per room  new installation
    
    $
    340
    
    
    $
    364
    
    
    $
    405Average cost per room  conversion
    
    $
    262
    
    
    $
    284
    
    
    $
    337
 Revenue Per Room
  2005
    
    
    2004
    
    
    2003Average monthly revenue per room:Movies
    
    $
    17.00
    
    
    $
    17.39
    
    
    $
    17.55Other interactive services
    
    
    5.53
    
    
    
    5.47
    
    
    
    5.04Total per Guest Pay room
    
    $
    22.53
    
    
    $
    22.86
    
    
    $
    22.59
 Direct Costs
  2005
    
    
    2004
    
    
    2003Direct costs
per room
    
    $
    10.03
    
    
    $
    10.22
    
    
    $
    10.10Direct costs as a percent of total revenue
    
    
    44.5
    %
    
    
    44.7
    %
    
    
    44.7
    %
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##### Table of Contents



Operating Expense Per Room
  2005
    
    
    2004
    
    
    2003Guest Pay operating expenses
    
    $
    2.96
    
    
    $
    2.97
    
    
    $
    2.93SG&A expense
    
    
    2.14
    
    
    
    2.09
    
    
    
    2.01Depreciation and amortization (D&A)
    
    
    5.88
    
    
    
    6.81
    
    
    
    7.27Other operating expense (income), net (1)
    
    
    (.04
    )
    
    
    
    
    
    
    $
    10.94
    
    
    $
    11.90
    
    
    $
    12.21Guest Pay operations as a percent of
total revenue
    
    
    12.7
    %
    
    
    12.6
    %
    
    
    12.6
    %SG&A as a percent of total revenue
    
    
    9.2
    %
    
    
    8.9
    %
    
    
    8.7
    %D&A as a percent of total revenue
    
    
    25.3
    %
    
    
    28.9
    %
    
    
    31.4
    %
 (1)
    
    Other operating income included insurance proceeds associated with the Hurricane Katrina
recovery offset by a charge for equipment impairment during 2005.
 Net Income/(Loss)
  2005
    
    
    2004
    
    
    2003Net Loss
    
    $
    (6,959
    )
    
    $
    (20,781
    )
    
    $
    (35,052
    )
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##### Table of Contents



Free Cash Flow
   2005
    
    
    2004
    
    
    2003Cash provided by operating activities
    
    $
    64,285
    
    
    $
    60,614
    
    
    $
    48,563Cash used for investing activities
    
    
    (51,455
    )
    
    
    (54,350
    )
    
    
    (53,618
    )Difference
    
    $
    12,830
    
    
    $
    6,264
    
    
    $
    (5,055
    )Expansion
Capital Investment
    
    $
    24,230
    
    
    $
    27,648
    
    
    $
    29,037
  New Revenue Sources
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##### Table of Contents



Liquidity and Capital Resources
       2005
    
    
    2004
    
    
    2003Actual consolidated total leverage ratio (1) (4)
    
    
    3.16
    
    
    
    3.48
    
    
    
    4.39Maximum per covenant
    
    
    4.00
    
    
    
    4.50
    
    
    
    5.00Actual senior secured leverage ratio (2) (4)
    
    
    1.00
    
    
    
    1.25
    
    
    
    1.86Maximum per covenant
    
    
    2.25
    
    
    
    2.50
    
    
    
    2.50Actual consolidated interest coverage ratio (3)
(4)
    
    
    3.20
    
    
    
    2.76
    
    
    
    2.44Minimum per covenant
    
    
    2.50
    
    
    
    2.25
    
    
    
    2.25
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##### Table of Contents



(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.(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 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.
   Q1 2006
    
    
    Q4 2006
    
    
    Q1 2007
    
    
    Q4 2007Maximum consolidated total leverage ratio
    
    
    3.75
    
    
    
    3.50
    
    
    
    3.50
    
    
    
    3.50Maximum senior secured leverage ratio
    
    
    2.25
    
    
    
    2.25
    
    
    
    2.25
    
    
    
    2.25Minimum consolidated interest coverage
ratio
    
    
    2.75
    
    
    
    2.75
    
    
    
    2.75
    
    
    
    2.75
   pari passu
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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)
    
    $
    292,000
    
    
    $
    2,749
    
    
    $
    89,182
    
    
    $
    69
    
    
    $
    200,000Interest on fixed rate debt
    
    
    142,500
    
    
    
    19,000
    
    
    
    38,000
    
    
    
    38,000
    
    
    
    47,500Interest on bank term loan
    
    
    17,021
    
    
    
    6,385
    
    
    
    10,636
    
    
    
    
    
    
    
    Interest on derivative instruments (1)
    
    
    158
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    Other long-term obligations (1)Acquired intangible asset (2)
    
    
    3,750
    
    
    
    1,250
    
    
    
    2,500
    
    
    
    
    
    
    
    Operating lease payments
    
    
    1,696
    
    
    
    596
    
    
    
    840
    
    
    
    260
    
    
    
    Purchase obligations
    
    
    2,906
    
    
    
    2,906
    
    
    
    
    
    
    
    
    
    
    
    Nintendo minimum royalty (3)
    
    
    31,150
    
    
    
    4,200
    
    
    
    8,400
    
    
    
    8,400
    
    
    
    10,150Programming related minimum
royalty and commissions (4)
    
    
    9,203
    
    
    
    2,459
    
    
    
    3,583
    
    
    
    3,161
    
    
    
    Total contractual obligations
    
    $
    500,384
    
    
    $
    39,703
    
    
    $
    153,141
    
    
    $
    49,890
    
    
    $
    257,650
 Amount of commitment expiration per periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    2,020
    
    
    $
    2,020
    
    
    $
    
    
    
    $
    
    
    
    $
    
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled amortization(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
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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
    
    
    
    97.0Other
    
    
    8,017
    
    
    
    2.9
    
    
    
    7,870
    
    
    
    3.0Total
    
    $
    275,771
    
    
    
    100.0
    
    
    $
    266,441
    
    
    
    100.0
 Guest Pay Interactive Services.
 2005
    
    
    2004Average monthly revenue per room:Movie revenue
    
    $
    17.00
    
    
    $
    17.39Other interactive service
    
    
    5.53
    
    
    
    5.47Total per Guest Pay room
    
    $
    22.53
    
    
    $
    22.86
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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)
    
    
    
    
    
    
    
    
    
    
    0.5Hotel incentive commissions
    
    
    
    
    
    
    
    
    
    
    0.40.0
    %
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##### Table of Contents



Operating Expenses.
 2005
    
    
    2004Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    35,117
    
    
    
    12.7
    
    
    $
    33,637
    
    
    
    12.6Selling, general and administrative
    
    
    25,379
    
    
    
    9.2
    
    
    
    23,596
    
    
    
    8.9Depreciation and amortization
    
    
    69,862
    
    
    
    25.3
    
    
    
    77,045
    
    
    
    28.9Other operating income, net
    
    
    (508
    )
    
    
    -0.2
    
    
    
    
    
    
    
    Total operating expenses
    
    $
    129,850
    
    
    
    47.1
    
    
    $
    134,278
    
    
    
    50.4
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##### Table of Contents



Operating Income.
 Write-Off of Debt Issuance Costs.
 Interest Expense.
 Other Income (Expense).
 Taxes.
 Net Loss.
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##### Table of Contents



Results of Operations  Years Ended December 31, 2004 and 2003
 Revenue Analysis
  2004
    
    
    2003Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest Pay
    
    $
    258,571
    
    
    
    97.0
    
    
    $
    243,732
    
    
    
    97.4Other
    
    
    7,870
    
    
    
    3.0
    
    
    
    6,417
    
    
    
    2.6Total
    
    $
    266,441
    
    
    
    100.0
    
    
    $
    250,149
    
    
    
    100.0
 Guest Pay Interactive Services.
 2004
    
    
    2003Average monthly revenue per room:Movie revenue
    
    $
    17.39
    
    
    $
    17.55Other interactive service
    
    
    5.47
    
    
    
    5.04Total per Guest Pay room
    
    $
    22.86
    
    
    $
    22.59
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##### Table of Contents



Expense Analysis
 Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
    2004
    
    
    2003
    
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    44.7
    %
    
    
    44.8
    %
    
    
    -0.1
    %Change drivers:Programming costs (product mix)
    
    
    
    
    
    
    
    
    
    
    -0.4Hotel incentive commissions
    
    
    
    
    
    
    
    
    
    
    0.3-0.1
    %
 Operating Expenses.
 2004
    
    
    2003Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    33,637
    
    
    
    12.6
    
    
    $
    31,597
    
    
    
    12.6Selling, general and administrative
    
    
    23,596
    
    
    
    8.9
    
    
    
    21,646
    
    
    
    8.7Depreciation and amortization
    
    
    77,045
    
    
    
    28.9
    
    
    
    78,459
    
    
    
    31.4Total operating expenses
    
    $
    134,278
    
    
    
    50.4
    
    
    $
    131,702
    
    
    
    52.7
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##### Table of Contents



Operating Income.
 Investment Gains  ResNet Merger/GICC Investment
 Write-Off of Debt Issuance Costs.
 Interest Expense.
 Other Income (Expense).
 Taxes.
 Net Loss.
 
 Critical Accounting Policies
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##### Table of Contents



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 has stand-alone value to the customer. The software
used within these systems is not proprietary and can 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 and 2) long-term agreements with the facility
to provide software maintenance, programming and system
maintenance. Typically, revenue from the sale and installation of
our interactive system is recognized ratably over a one-year
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. As more systems are
sold and services renewed, VSOE should be established and
management expects to recognize the sale of the interactive system
upon installation.
 LodgeNet Entertainment Corporation
    
    40
    
    Form 10-K 2005




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##### Table of Contents




    
    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.
    
    Other.We also generate revenue from the sale of miscellaneous system equipment such as
television remotes and service parts and labor. These sales are not made under multiple
element arrangements and we recognize the revenue when the equipment is delivered or service
(repair or installation) has been performed. No future performance obligation exists on an
equipment sale or on a repair service that has been provided.
 Allowance for doubtful accounts.
 Allowance for excess or obsolete system components.
 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
    
    41
    
    Form 10-K 2005




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Recent Accounting Developments
       LodgeNet Entertainment Corporation
    
    42
    
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##### Table of Contents



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
    
    43
    
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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
    
    44
    
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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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##### Table of Contents



PART IV
 
 Item 15   Exhibits and Financial Statement Schedules
 Consolidated Financial Statements and Schedules
 Exhibits
  Exhibit No.3.1
    
    Certificate of Incorporation of LodgeNet (1)3.2
    
    Restated By-Laws of the Registrant (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)10.1
    
    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)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)
 LodgeNet Entertainment Corporation
    
    46
    
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##### Table of Contents



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 13, 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 Agreement10.26
    
    Form of Restricted Stock Agreement for Performance-Based Vesting12.1
    
    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
 LodgeNet Entertainment Corporation
    
    47
    
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##### Table of Contents



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.
 LodgeNet Entertainment Corporation
    
    48
    
    Form 10-K 2005




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##### Table of Contents



Signatures
  LodgeNet Entertainment CorporationBy:
    /s/ Scott C. PetersenScott C. Petersen,President, Chief Executive Officer and
Chairman of the Board of Directors  Signature
    
    Title
    
    DatePresident, Chief Executive Officer
    
    March 13, 2006/s/ Scott C. Petersen
    
    and Chairman of the Board of DirectorsScott C. Petersen
    
    (Principal Executive Officer)Senior Vice President
    
    March 13, 2006/s/ Gary H. Ritondaro
    
    Chief Financial OfficerGary H. Ritondaro
    
    (Principal Financial & Accounting Officer)/s/ R. Douglas Bradbury
    
    Director
    
    March 13, 2006R. Douglas Bradbury/s/ Richard R. Hylland
    
    Director
    
    March 13, 2006Richard R. Hylland/s/ R. F. Leyendecker
    
    Director
    
    March 13, 2006R. F. Leyendecker/s/ Scott H. Shlecter
    
    Director
    
    March 13, 2006Scott H. Shlecter/s/ Vikki I. Pachera
    
    Director
    
    March 13, 2006Vikki I. Pachera
 LodgeNet Entertainment Corporation
    
    49
    
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##### Table of Contents



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, 2005 and 2004
    
    
    F - 4Consolidated Statements of Operations  Three Years Ended December 31, 2005
    
    
    F - 5Consolidated Statements of Stockholders Deficiency and Comprehensive Loss  Three Years Ended December 31, 2005
    
    
    F - 6Consolidated Statements of Cash Flows  Three Years Ended December 31, 2005
    
    
    F - 7Notes to Consolidated Financial Statements
    
    
    F - 8Index to Financial SchedulesSchedule II  Valuation and Qualifying Accounts
    
    
    F - 25
 LodgeNet Entertainment Corporation
    
    F-1
    
    Form 10-K 2005




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##### Table of Contents



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
    
    Form 10-K 2005




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    F-3
    
    Form 10-K 2005




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##### Table of Contents



Consolidated Balance Sheets LodgeNet Entertainment Corporation and Subsidiary
Consolidated Balance Sheets
 December 31,2005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    20,742
    
    
    $
    24,995Accounts receivable, net
    
    
    29,617
    
    
    
    28,031Prepaid expenses and other
    
    
    2,629
    
    
    
    1,959Total current assets
    
    
    52,988
    
    
    
    54,985Property and equipment, net
    
    
    199,882
    
    
    
    212,659Debt issuance costs, net
    
    
    7,423
    
    
    
    9,330Intangible assets, net
    
    
    2,007
    
    
    
    4,628Other assets
    
    
    772
    
    
    
    1,434Total assets
    
    $
    263,072
    
    
    $
    283,036Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    16,036
    
    
    $
    16,807Current maturities of long-term debt
    
    
    2,749
    
    
    
    2,543Accrued expenses
    
    
    15,322
    
    
    
    12,738Deferred revenue
    
    
    5,143
    
    
    
    4,364Total current liabilities
    
    
    39,250
    
    
    
    36,452Long-term debt
    
    
    289,251
    
    
    
    309,748Other long-term liability
    
    
    2,541
    
    
    
    3,154Derivative instruments
    
    
    2,263
    
    
    
    5,800Total liabilities
    
    
    333,305
    
    
    
    355,154Commitments 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;
18,165,643 and 17,625,364 shares outstanding at December 31,
2005 and 2004, respectively
    
    
    182
    
    
    
    176Additional paid-in capital
    
    
    232,327
    
    
    
    226,986Accumulated deficit
    
    
    (304,307
    )
    
    
    (297,348
    )Accumulated other comprehensive income (loss)
    
    
    1,565
    
    
    
    (1,932
    )Total stockholders deficiency
    
    
    (70,233
    )
    
    
    (72,118
    )Total liabilities and stockholders deficiency
    
    $
    263,072
    
    
    $
    283,036
  LodgeNet Entertainment Corporation
    
    F-4
    
    Form 10-K 2005




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##### Table of Contents



Consolidated Statements of Operations LodgeNet Entertainment Corporation and Subsidiary
Consolidated Statements of Operations
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Revenues:Guest Pay
    
    $
    267,754
    
    
    $
    258,571
    
    
    $
    243,732Other
    
    
    8,017
    
    
    
    7,870
    
    
    
    6,417Total revenues
    
    
    275,771
    
    
    
    266,441
    
    
    
    250,149Costs and Expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately
below):Guest Pay
    
    
    119,180
    
    
    
    115,577
    
    
    
    108,916Other
    
    
    4,048
    
    
    
    3,616
    
    
    
    3,031Operating expenses:Guest Pay operations
    
    
    35,117
    
    
    
    33,637
    
    
    
    31,597Selling, general and administrative
    
    
    25,379
    
    
    
    23,596
    
    
    
    21,646Depreciation and amortization
    
    
    69,862
    
    
    
    77,045
    
    
    
    78,459Other operating income, net
    
    
    (508
    )
    
    
    
    
    
    
    Total costs and operating expenses
    
    
    253,078
    
    
    
    253,471
    
    
    
    243,649Income from operations
    
    
    22,693
    
    
    
    12,970
    
    
    
    6,500Other Income and Expenses:Investment gain
    
    
    
    
    
    
    
    
    
    
    250Write-off of debt issuance costs
    
    
    (272
    )
    
    
    (810
    )
    
    
    (7,061
    )Interest expense
    
    
    (29,351
    )
    
    
    (31,891
    )
    
    
    (34,239
    )Other income (expense)
    
    
    421
    
    
    
    (629
    )
    
    
    (43
    )Loss before income taxes
    
    
    (6,509
    )
    
    
    (20,360
    )
    
    
    (34,593
    )Provision for income taxes
    
    
    (450
    )
    
    
    (421
    )
    
    
    (459
    )Net loss
    
    $
    (6,959
    )
    
    $
    (20,781
    )
    
    $
    (35,052
    )Net loss per common share (basic and diluted)
    
    $
    (0.39
    )
    
    $
    (1.36
    )
    
    $
    (2.80
    )Weighted average shares outstanding (basic and diluted)
    
    
    17,923,297
    
    
    
    15,275,867
    
    
    
    12,512,725
  LodgeNet Entertainment Corporation
    
    F-5
    
    Form 10-K 2005




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##### Table of Contents



Consolidated Statements of Stockholders Deficiency and Comprehensive Loss LodgeNet Entertainment Corporation and Subsidiary
Consolidated Statements of Stockholders Deficiency and Comprehensive Loss
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income/(Loss)
    
    
    TotalBalance, December 31, 2002
    
    
    12,431,149
    
    
    $
    124
    
    
    $
    153,363
    
    
    $
    (241,515
    )
    
    $
    (13,276
    )
    
    $
    (101,304
    )Common stock option exercises
    
    
    291,118
    
    
    
    3
    
    
    
    1,399
    
    
    
    
    
    
    
    
    
    
    
    1,402Warrants issued (Note 13)
    
    
    
    
    
    
    
    
    
    
    401
    
    
    
    
    
    
    
    
    
    
    
    401Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (35,052
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,504Unrealized gain on
derivative instruments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,047Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,501
    )Balance, 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
    )
  LodgeNet Entertainment Corporation
    
    F-6
    
    Form 10-K 2005




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##### Table of Contents



Consolidated Statements of Cash Flows LodgeNet Entertainment Corporation and Subsidiary
Consolidated Statements of Cash Flows
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Operating activities:Net loss
    
    $
    (6,959
    )
    
    $
    (20,781
    )
    
    $
    (35,052
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    69,862
    
    
    
    77,045
    
    
    
    78,459Investment gains
    
    
    
    
    
    
    
    
    
    
    (250
    )Reserve for long-term notes receivable
    
    
    
    
    
    
    1,000
    
    
    
    Share-based compensation
    
    
    288
    
    
    
    198
    
    
    
    Write-off of debt issuance costs
    
    
    272
    
    
    
    810
    
    
    
    2,477Gain due to Katrina
    
    
    (788
    )
    
    
    
    
    
    
    Non-cash operating expense due to Katrina
    
    
    280
    
    
    
    
    
    
    
    Insurance proceeds related to business interruption
    
    
    388
    
    
    
    
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (1,542
    )
    
    
    218
    
    
    
    499Prepaid expenses and other
    
    
    (855
    )
    
    
    160
    
    
    
    580Accounts payable
    
    
    (786
    )
    
    
    1,766
    
    
    
    2,120Accrued expenses and deferred revenue
    
    
    3,262
    
    
    
    (120
    )
    
    
    (162
    )Other
    
    
    863
    
    
    
    318
    
    
    
    (108
    )Net cash provided by operating activities
    
    
    64,285
    
    
    
    60,614
    
    
    
    48,563Investing activities:Property and equipment additions
    
    
    (51,855
    )
    
    
    (54,917
    )
    
    
    (52,868
    )Insurance proceeds related to property damage
    
    
    400
    
    
    
    
    
    
    
    Note receivable repayments (advances)
    
    
    
    
    
    
    567
    
    
    
    (1,000
    )Proceeds from affiliates
    
    
    
    
    
    
    
    
    
    
    250Net cash used for investing activities
    
    
    (51,455
    )
    
    
    (54,350
    )
    
    
    (53,618
    )Financing activities:Proceeds from long-term debt
    
    
    
    
    
    
    
    
    
    
    200,000Proceeds from lease transaction
    
    
    1,022
    
    
    
    
    
    
    
    Repayment of long-term debt
    
    
    (20,500
    )
    
    
    (48,500
    )
    
    
    (158,301
    )Payment of capital lease obligations
    
    
    (1,421
    )
    
    
    (1,122
    )
    
    
    (1,052
    )Borrowings under revolving credit facility
    
    
    
    
    
    
    13,000
    
    
    
    30,500Repayments of revolving credit facility
    
    
    
    
    
    
    (20,000
    )
    
    
    (57,500
    )Debt issuance costs
    
    
    
    
    
    
    (838
    )
    
    
    (7,902
    )Proceeds from sale of interest rate swap
    
    
    
    
    
    
    3,052
    
    
    
    Proceeds from issuance of common stock, net of
offering costs
    
    
    
    
    
    
    66,720
    
    
    
    Exercise of stock options and warrants
    
    
    4,613
    
    
    
    4,451
    
    
    
    1,402Change in other long-term liability
    
    
    (846
    )
    
    
    (995
    )
    
    
    (779
    )Net cash (used for) provided by financing activities
    
    
    (17,132
    )
    
    
    15,768
    
    
    
    6,368Effect of exchange rates on cash
    
    
    49
    
    
    
    191
    
    
    
    352Increase (decrease) in cash and cash equivalents
    
    
    (4,253
    )
    
    
    22,223
    
    
    
    1,665Cash and cash equivalents at beginning of period
    
    
    24,995
    
    
    
    2,772
    
    
    
    1,107Cash and cash equivalents at end of period
    
    $
    20,742
    
    
    $
    24,995
    
    
    $
    2,772
  LodgeNet Entertainment Corporation
    
    F-7
    
    Form 10-K 2005




---



##### Table of Contents



Notes to Consolidated Financial Statements 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 has stand-alone value to the customer. The software
used within these systems is not proprietary and can 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.
 LodgeNet Entertainment Corporation
    
    F-8
    
    Form 10-K 2005




---



##### Table of Contents




    
    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 and 2) long-term agreements with the facility
to provide software maintenance, programming and system
maintenance. Revenue from the sale and installation of our
interactive system is recognized ratably over a one-year 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. As more systems are sold and services
renewed, VSOE should be established and management expects to
recognize the sale of the interactive system upon installation.
 
    
    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.
 
    
    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 
 LodgeNet Entertainment Corporation
    
    F-9
    
    Form 10-K 2005




---



##### Table of Contents



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 
 Software Development 
 Concentration of Credit Risks and Customer Data 
 LodgeNet Entertainment Corporation
    
    F-10
    
    Form 10-K 2005




---



##### Table of Contents



Significant Vendors 
 Allowance for Doubtful Accounts 
 Derivative Financial Instruments 
  Income Taxes 
 LodgeNet Entertainment Corporation
    
    F-11
    
    Form 10-K 2005




---



##### Table of Contents



Comprehensive Loss 
 Unrealized
    
    
    Foreign
    
    
    AccumulatedGain (Loss) on
    
    
    Currency
    
    
    OtherDerivative
    
    
    Translation
    
    
    ComprehensiveInstruments
    
    
    Adjustment
    
    
    Income (Loss)Balance, December 31, 2002
    
    $
    (11,442
    )
    
    $
    (1,834
    )
    
    $
    (13,276
    )Change during period
    
    
    3,047
    
    
    
    2,504
    
    
    
    5,551Balance, 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
    
    
    $
    1,565
 Earnings Per Share Computation 
  Share-based Compensation 
    LodgeNet Entertainment Corporation
    
    F-12
    
    Form 10-K 2005




---



##### Table of Contents



2005
    
    
    2004
    
    
    2003Net loss, as reported
    
    $
    (6,959
    )
    
    $
    (20,781
    )
    
    $
    (35,052
    )Add: share-based employee compensation expense
included in reported net loss
    
    
    288
    
    
    
    198
    
    
    
    Less: share-based employee compensation expense
determined under fair value method, net
of related tax
effects
    
    
    (5,708
    )
    
    
    (3,772
    )
    
    
    (3,666
    )Net loss, pro forma
    
    $
    (12,379
    )
    
    $
    (24,355
    )
    
    $
    (38,718
    )Loss per share (basic and diluted)As reported
    
    $
    (0.39
    )
    
    $
    (1.36
    )
    
    $
    (2.80
    )Pro forma
    
    
    (0.69
    )
    
    
    (1.59
    )
    
    
    (3.09
    )
  Statements of Cash Flows 
 Effect of Recently Issued Accounting Standards 
    LodgeNet Entertainment Corporation
    
    F-13
    
    Form 10-K 2005




---



##### Table of Contents



Note 3  Investments
 Gamet and PointOne 
   LodgeNet Entertainment Corporation
    
    F-14
    
    Form 10-K 2005




---



##### Table of Contents



ResNet Merger/GICC Investment 
 Note 4  Fair Value of Financial Instruments
  2005
    
    
    2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueAssets (Liabilities):Interest rate swaps
    
    $
    (156
    )
    
    $
    (156
    )
    
    $
    (3,412
    )
    
    $
    (3,412
    )Other long-term liability
    
    $
    (2,541
    )
    
    $
    (2,541
    )
    
    $
    (3,154
    )
    
    $
    (3,154
    )Long-term debt
    
    $
    (292,000
    )
    
    $
    (310,259
    )
    
    $
    (312,291
    )
    
    $
    (333,290
    )
  Note 5  Property and Equipment
  2005
    
    
    2004Land, building and equipment
    
    $
    83,267
    
    
    $
    80,956Free-to-guest systems
    
    
    33,989
    
    
    
    32,753Guest Pay systems:Installed system costs
    
    
    450,754
    
    
    
    450,495Customer acquisition costs
    
    
    52,264
    
    
    
    50,869System components
    
    
    25,336
    
    
    
    25,466Software costs
    
    
    21,889
    
    
    
    20,393Total
    
    
    667,499
    
    
    
    660,932Less  Depreciation and amortization
    
    
    (467,617
    )
    
    
    (448,273
    )Property and equipment, net
    
    $
    199,882
    
    
    $
    212,659
 LodgeNet Entertainment Corporation
    
    F-15
    
    Form 10-K 2005




---



##### Table of Contents



Note 6  Debt Issuance Costs
  2005
    
    
    2004Debt issuance costs
    
    $
    13,842
    
    
    $
    14,113Accumulated amortization
    
    
    (6,419
    )
    
    
    (4,783
    )$
    7,423
    
    
    $
    9,330
 Note 7  Intangible Assets
    2005
    
    
    2004Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to
amortization:Acquired technology
    
    $
    14,291
    
    
    $
    14,150
    
    
    $
    14,291
    
    
    $
    12,786Acquired intangibles
    
    
    5,774
    
    
    
    3,945
    
    
    
    5,774
    
    
    
    2,791Other
    
    
    497
    
    
    
    460
    
    
    
    512
    
    
    
    372$
    20,562
    
    
    $
    18,555
    
    
    $
    20,577
    
    
    $
    15,949
  LodgeNet Entertainment Corporation
    
    F-16
    
    Form 10-K 2005




---



##### Table of Contents



Note 8  Accrued Expenses
  2005
    
    
    2004Accrued taxes
    
    $
    3,679
    
    
    $
    3,413Accrued compensation
    
    
    5,803
    
    
    
    4,869Accrued interest
    
    
    1,100
    
    
    
    970Other
    
    
    4,740
    
    
    
    3,486$
    15,322
    
    
    $
    12,738
 Note 9  Long-term Debt and Credit Facilities
  2005
    
    
    2004Bank Credit Facility:Bank term loan
    
    $
    89,625
    
    
    $
    110,125Revolving credit facility
    
    
    
    
    
    
    9.50% senior notes
    
    
    200,000
    
    
    
    200,000Capital leases
    
    
    2,375
    
    
    
    2,166292,000
    
    
    
    312,291Less current maturities
    
    
    (2,749
    )
    
    
    (2,543
    )$
    289,251
    
    
    $
    309,748
 Bank Credit Facility
   9.50% Senior Notes pari passu
 LodgeNet Entertainment Corporation
    
    F-17
    
    Form 10-K 2005




---



##### Table of Contents



11.50% Senior Notes pari passu
  Capital Leases
  2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLong-term debt
    
    $
    1,500
    
    
    $
    1,500
    
    
    $
    86,625
    
    
    $
    
    
    
    $
    
    
    
    $
    200,000Capital leases
    
    
    1,375
    
    
    
    831
    
    
    
    296
    
    
    
    70
    
    
    
    
    
    
    
    2,875
    
    
    
    2,331
    
    
    
    86,921
    
    
    
    70
    
    
    
    
    
    
    
    200,000Less amount
representing
interest on
capital leases
    
    
    (126
    )
    
    
    (54
    )
    
    
    (15
    )
    
    
    (2
    )
    
    
    
    
    
    
    $
    2,749
    
    
    $
    2,277
    
    
    $
    86,906
    
    
    $
    68
    
    
    $
    
    
    
    $
    200,000
  Note 10  Commitments and Contingencies
 Programming Agreements
 LodgeNet Entertainment Corporation
    
    F-18
    
    Form 10-K 2005




---



##### Table of Contents



SM
 Minimum
Guarantees
  Purchase Commitments
 Operating Leases  
 Hilton Agreement
 Legal Proceedings
 Note 11  Stockholders Equity
 Preferred Stock 
 Common Stock 
 LodgeNet Entertainment Corporation
    
    F-19
    
    Form 10-K 2005




---



##### Table of Contents



Stockholder Rights Plan 
   Restricted Stock
 Note 12  Stock Option Plans
  WeightedAverageOptions
    
    
    ExerciseOutstanding
    
    
    PriceBalance at December 31, 2002
    
    
    2,933,171
    
    
    $
    13.83Options granted
    
    
    89,965
    
    
    
    12.02Options exercised
    
    
    (291,118
    )
    
    
    6.03Options forfeited/canceled
    
    
    (79,357
    )
    
    
    10.24Balance at December 31, 2003
    
    
    2,652,661
    
    
    
    14.73Options granted
    
    
    306,455
    
    
    
    18.76Options exercised
    
    
    (410,341
    )
    
    
    10.98Options forfeited/canceled
    
    
    (4,275
    )
    
    
    19.65Balance at December 31, 2004
    
    
    2,544,500
    
    
    
    15.81Options granted
    
    
    297,920
    
    
    
    17.38Options exercised
    
    
    (288,482
    )
    
    
    12.28Options forfeited/canceled
    
    
    (61,863
    )
    
    
    18.62Balance at December 31, 2005
    
    
    2,492,075
    
    
    $
    16.33
 LodgeNet Entertainment Corporation
    
    F-20
    
    Form 10-K 2005




---



##### Table of Contents



Outstanding Options
    
    
    Exercisable OptionsWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Term
    
    
    Exercise
    
    
    
    
    
    
    ExercisePrice Range
    
    Number
    
    
    in Years
    
    
    Price
    
    
    Number
    
    
    Price$6.46 to $9.79
    
    
    82,300
    
    
    
    3.3
    
    
    $
    8.96
    
    
    
    78,050
    
    
    $
    8.98$10.19 to $13.77
    
    
    557,675
    
    
    
    5.0
    
    
    
    10.95
    
    
    
    480,925
    
    
    
    11.06$14.00 to $15.84
    
    
    342,400
    
    
    
    4.6
    
    
    
    15.69
    
    
    
    332,650
    
    
    
    15.72$16.00 to $17.59
    
    
    770,750
    
    
    
    6.5
    
    
    
    16.83
    
    
    
    755,250
    
    
    
    16.83$18.08 to $24.64
    
    
    738,950
    
    
    
    5.7
    
    
    
    21.00
    
    
    
    738,950
    
    
    
    21.002,492,075
    
    
    
    5.6
    
    
    $
    16.33
    
    
    
    2,385,825
    
    
    $
    16.55
  2005
    
    
    2004
    
    
    2003Weighted average fair
value per option granted
    
    $
    8.90
    
    
    $
    9.70
    
    
    $
    6.30
   Note 13  Warrants
  
 LodgeNet Entertainment Corporation
    
    F-21
    
    Form 10-K 2005




---



##### Table of Contents



Note 14  Employee Benefit Plans
  Note 15  Income Taxes
  2005
    
    
    2004
    
    
    2003Domestic
    
    $
    (6,288
    )
    
    $
    (19,793
    )
    
    $
    (33,031
    )Foreign
    
    
    (221
    )
    
    
    (567
    )
    
    
    (1,562
    )Total
    
    $
    (6,509
    )
    
    $
    (20,360
    )
    
    $
    (34,593
    )
  2005
    
    
    2004
    
    
    2003Federal income tax benefit at statutory rate (35%)
    
    $
    (2,341
    )
    
    $
    (7,126
    )
    
    $
    (10,002
    )State income taxes, net of federal benefit
    
    
    (241
    )
    
    
    (439
    )
    
    
    (1,016
    )Other non-deductible items
    
    
    152
    
    
    
    306
    
    
    
    117Net change to valuation allowance
    
    
    2,880
    
    
    
    7,680
    
    
    
    13,466$
    450
    
    
    $
    421
    
    
    $
    459
   2005
    
    
    2004Deferred tax assets:Net operating loss carryforwards
    
    $
    67,458
    
    
    $
    69,491Capital loss carryforwards
    
    
    1,431
    
    
    
    Reserves and accruals
    
    
    1,084
    
    
    
    94Deferred credits
    
    
    2,571
    
    
    
    1,482Book over tax depreciation/amortization
    
    
    20,658
    
    
    
    15,580Total deferred tax assets
    
    
    93,202
    
    
    
    86,647Total deferred tax liabilities
    
    
    
    
    
    
    Net deferred assets
    
    
    93,202
    
    
    
    86,647Tax valuation allowance
    
    
    (93,202
    )
    
    
    (86,647
    )Net deferred tax assets
    
    $
    
    
    
    $
    
  2005
    
    
    2004Deferred tax assets:Current deferred tax assets
    
    $
    2,939
    
    
    $
    1,576Noncurrent deferred tax assets
    
    
    90,263
    
    
    
    85,071Total deferred tax assets
    
    $
    93,202
    
    
    $
    86,647
 LodgeNet Entertainment Corporation
    
    F-22
    
    Form 10-K 2005




---



##### Table of Contents



Note 16  Other Related Party Transactions
  Note 17  Segment Information
  2005
    
    
    2004
    
    
    2003United States
    
    $
    263,927
    
    
    $
    255,047
    
    
    $
    239,364Canada
    
    
    11,083
    
    
    
    10,651
    
    
    
    10,016Other
    
    
    761
    
    
    
    743
    
    
    
    769Total
    
    $
    275,771
    
    
    $
    266,441
    
    
    $
    250,149
  2005
    
    
    2004United States
    
    $
    191,750
    
    
    $
    203,274Canada
    
    
    8,132
    
    
    
    9,385Total
    
    $
    199,882
    
    
    $
    212,659
 Note 18  Write-Off of Debt Issuance Costs
  Note 19  Impact of Hurricane Katrina
  LodgeNet Entertainment Corporation
    
    F-23
    
    Form 10-K 2005




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##### Table of Contents



Note 20  Selected Quarterly Financial Data (Unaudited)
  Quarter
    
    Quarter
    
    Quarter
    
    QuarterEnded
    
    Ended
    
    Ended
    
    EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December 31,2004:Revenues
    
    $
    63,831
    
    
    $
    66,281
    
    
    $
    71,650
    
    
    $
    64,679Net income (loss)
    
    
    (6,216
    )
    
    
    (5,006
    )
    
    
    (3,482
    )
    
    
    (6,077
    )Per common share
(basic and
diluted)
    
    $
    (.48
    )
    
    $
    (.38
    )
    
    $
    (.20
    )
    
    $
    (.34
    )2005:Revenues
    
    $
    65,989
    
    
    $
    68,115
    
    
    $
    74,145
    
    
    $
    67,522Net income (loss)
    
    
    (3,604
    )
    
    
    (1,655
    )
    
    
    585
    
    
    
    (2,285
    )Per common share
(basic and
diluted)
    
    $
    (.20
    )
    
    $
    (.09
    )
    
    $
    .03
    
    
    $
    (.13
    )
 LodgeNet Entertainment Corporation
    
    F-24
    
    Form 10-K 2005




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##### Table of Contents



Schedule II  Valuation and Qualifying Accounts 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, 2003:Allowance for Excess or Obsolete
System Components
    
    $
    2,948
    
    
    $
    719
    
    
    $
    1,969
    
    
    $
    1,698Allowance for Doubtful Accounts
    
    
    300
    
    
    
    313
    
    
    
    313
    
    
    
    300Allowance for System Removal
    
    
    373
    
    
    
    1,206
    
    
    
    1,186
    
    
    
    353Year Ended December 31, 2004:Allowance for Excess or Obsolete
System Components
    
    $
    1,698
    
    
    $
    1,515
    
    
    $
    1,913
    
    
    $
    1,300Allowance for Doubtful Accounts
    
    
    300
    
    
    
    290
    
    
    
    290
    
    
    
    300Allowance for System Removal
    
    
    353
    
    
    
    834
    
    
    
    781
    
    
    
    300Year Ended December 31, 2005:Allowance for Excess or Obsolete
System Components
    
    $
    1,300
    
    
    $
    725
    
    
    $
    1,325
    
    
    $
    700Allowance for Doubtful Accounts
    
    
    300
    
    
    
    135
    
    
    
    135
    
    
    
    300Allowance for System Removal
    
    
    300
    
    
    
    994
    
    
    
    1,534
    
    
    
    840
 LodgeNet Entertainment Corporation
    
    F-25
    
    Form 10-K 2005