##### 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, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 Commission File Number: 0-22334
 LodgeNet Interactive Corporation
  Delaware
    
    46-0371161(State of Incorporation)
    
    (IRS Employer Identification Number)
 3900 West Innovation Street, Sioux Falls, South Dakota 57107
 (605) 988  1000  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
    
    Common Stock, $.01 par value. 
Registered on the NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:
    
    None.
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þIndicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þIndicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No oIndicate by check mark whether the Registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the Registrant was required to submit and post such
files). Yes o No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the
best of Registrants knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þIndicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2
of the Exchange Act.
 Large Accelerated Filer o
    
    Accelerated Filer þ
    
    Non-accelerated Filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No þState the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold,
or the average bid and asked price of such common equity, as of the last business day of the
registrants most recently completed second fiscal quarter. $87,708,006




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Table of Contents
 Item 1  Business
    
    
    1Overview
    
    
    1Competitive Strengths
    
    
    1Business Strategy
    
    
    3Overview of Markets Served
    
    
    5Hospitality and Advertising Services
    
    
    5Healthcare
    
    
    12Competition
    
    
    14Regulation
    
    
    16Employees
    
    
    17Corporate Information and Web Site Access to SEC Filings
    
    
    17Item 1A  Risk Factors
    
    
    18Item 1B  Unresolved Staff Comments
    
    
    25Item 2  Properties
    
    
    25Item 3  Legal Proceedings
    
    
    25Item 5  Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    27Performance Graph
    
    
    27Issuer Purchases of Equity Securities
    
    
    28Dividends
    
    
    28Stockholder Rights Plan
    
    
    28Item 6  Selected Financial Data
    
    
    32Item 7  Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    34Executive Overview
    
    
    34Hospitality and Advertising Services Business
    
    
    35Healthcare Business
    
    
    39General Operations
    
    
    40Liquidity and Capital Resources
    
    
    41Seasonality
    
    
    44Results of Operations  Years Ended December 31, 2010 and 2009
    
    
    45Results of Operations  Years Ended December 31, 2009 and 2008
    
    
    49Critical Accounting Policies
    
    
    51Recent Accounting Developments
    
    
    51Item 7A  Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 8  Financial Statements and Supplementary Data
    
    
    53Item 9  Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    53Item 9A  Controls and Procedures
    
    
    53Item 9B  Other Information
    
    
    54Item 10  Directors, Executive Officers and Corporate Governance
    
    
    55Item 11  Executive Compensation
    
    
    55Item 12  Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    55




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Item 13  Certain Relationships and Related Transactions, and Director Independence
    
    
    55Item 14  Principal Accountant Fees and Services
    
    
    55Item 15  Exhibits and Financial Statement Schedules
    
    
    56EX-12.1EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1




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PART I
 
 Item 1  Business
 
 Overview
      
 Competitive Strengths
 Leading Market Position
 1




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Long-term relationships. SM
 Proprietary, interactive high-definition platform.
 Increasingly Diversified Revenue Streams.
 Free Cash Flow Generation.
 2




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Business Strategy
  Capitalize on the favorable economics of and demand for our HD system.
 Leverage our installed base of over 1.8 million hotel rooms to continue to introduce new products
and services.
 Maintain strong relationships with our hotel, studio and technology partners
 Successfully continue to grow our healthcare business.
 Focus on free cash flow generation.
 3




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Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Financial Highlights:Revenue
    
    $
    452,172
    
    
    $
    484,492
    
    
    $
    533,879
    
    
    $
    485,588
    
    
    $
    288,213Operating income (loss)
    
    
    23,410
    
    
    
    21,692
    
    
    
    (5,071
    )
    
    
    (4,236
    )
    
    
    26,932Depreciation and amortization (1)
    
    
    83,236
    
    
    
    100,309
    
    
    
    124,060
    
    
    
    116,378
    
    
    
    66,311Share-based compensation and restricted stock
    
    
    1,762
    
    
    
    1,724
    
    
    
    2,275
    
    
    
    1,737
    
    
    
    1,677Net (loss) income
    
    
    (11,685
    )
    
    
    (10,155
    )
    
    
    (48,418
    )
    
    
    (65,172
    )
    
    
    1,841Net (loss) income attributable to common stockholders
    
    $
    (17,435
    )
    
    $
    (13,269
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )
    
    $
    1,841Selected Operations Data:HospitalityTotal rooms served (2)
    
    
    1,829,712
    
    
    
    1,909,323
    
    
    
    1,977,015
    
    
    
    1,962,090
    
    
    
    1,052,025Total Guest Entertainment rooms (3) (8)
    
    
    1,680,322
    
    
    
    1,779,979
    
    
    
    1,866,353
    
    
    
    1,860,720
    
    
    
    1,004,937Total High Definition rooms (4) (8)
    
    
    270,384
    
    
    
    231,588
    
    
    
    191,491
    
    
    
    84,327
    
    
    
    23,502Percentage of Total Guest Entertainment rooms
    
    
    16.1
    %
    
    
    13.0
    %
    
    
    10.3
    %
    
    
    4.5
    %
    
    
    2.3
    %Total Television Programming (FTG) rooms (5) (8)
    
    
    1,030,437
    
    
    
    1,087,860
    
    
    
    1,105,754
    
    
    
    1,068,256
    
    
    
    535,777Percentage of Total Guest Entertainment rooms
    
    
    61.3
    %
    
    
    61.1
    %
    
    
    59.2
    %
    
    
    57.4
    %
    
    
    53.3
    %Total Broadband Internet rooms (6) (8)
    
    
    178,047
    
    
    
    201,936
    
    
    
    229,003
    
    
    
    218,860
    
    
    
    37,686AdvertisingTotal Advertising and Media Services rooms (7) (8)
    
    
    1,173,808
    
    
    
    1,207,465
    
    
    
    893,738
    
    
    
    716,219
    
    
    
    HealthcareTotal hospitals installed
    
    
    56
    
    
    
    45
    
    
    
    28
    
    
    
    20
    
    
    
    11Total beds installed
    
    
    12,224
    
    
    
    9,192
    
    
    
    6,543
    
    
    
    4,387
    
    
    
    2,162
 
 (1)
    
    Includes amortization of acquired intangibles.(2)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees. The increase from 2006 to 2007 is due primarily to the
addition of the On Command room base of approximately 830,000 rooms.(3)
    
    Guest Entertainment rooms are equipped with our interactive television systems.(4)
    
    High Definition rooms are equipped with high-definition video-on-demand capabilities.(5)
    
    Television programming (which we refer to as free-to-guest or FTG) rooms receiving basic or
premium television programming.(6)
    
    Represents rooms receiving high-speed Internet service. The increase from 2006 to 2007 is
due to the addition of the StayOnline and On Command room bases of approximately 137,000 and
12,000 rooms, respectively.(7)
    
    Includes rooms receiving satellite-delivered and server-based channels.(8)
    
    Included in total rooms served.  4




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Overview of Markets Served
 
 HOSPITALITY AND ADVERTISING SERVICES
  Markets and Customers
 Diversified Customer Base.
  5




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Products and Services
 Guest Entertainment
   Ø
    
    on-demand movies;Ø
    
    on-demand television programming;Ø
    
    on-demand digital music programming;Ø
    
    daily subscription sports programming;Ø
    
    on-screen controls which allow the guest more viewing control and flexibility; andØ
    
    interactive guest marketing and merchandising capabilities.
  TM
  Ø
    
    the number of rooms equipped with our interactive television system;Ø
    
    the range of interactive and HD television content and services offered at each hotel;Ø
    
    the popularity, amount and timeliness of content offered, as well as the popularity and
availability of other entertainment alternatives;Ø
    
    the profile of the guest at each property;Ø
    
    the price of the service purchased by the hotel guest;Ø
    
    the occupancy rate at the property; andØ
    
    general economic conditions and consumer sentiment.
 6




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Hotel Contracts.
   7




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Hotel Services, System Sales and Related Services and Other Diversified Revenue
  Television Programming
  Broadband Internet System Sales, Service and Support.
  System Sales and Related Services.
 8




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Hospitality Operations and Structure
 Sales and Marketing.
  Installation Operations.
 Service Operations.
  Component Suppliers.
 9




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Programming. ® SM
 Technology, Product Development, and Patents.
    10




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Advertising and Media Services
   1)
    
    Traditional Television Advertising.The THN Superblock consists of a package of 10
cable networks broadcast through THNs private satellite network. Based on the agreement
THN has with most of these networks, THN has 100% of the national and local commercials
available across these networks, which is then sold to advertisers in a block format.2)
    
    Video-On-Demand/Interactive Advertising.THN offers two approaches to interactive
advertising. Freeviews is an on-demand advertising program which enables guests to
choose from a variety of advertiser-sponsored content within the interactive television
menu, which they can view free of charge. Interactive Channels is a program which allows
marketers to promote their products or brands on an interactive, linear channel located
within the standard free television lineup, from which guests can then telescope into
content stored on the interactive television server. Freeviews and Interactive Channel
content categories include target areas such as golf, travel, technology, health, fitness,
and music. These programs are also Nielsen rated, so we can demonstrate to advertisers
their ad impressions are being delivered.3)
    
    Programming Carriage Services. Network, cable and content companies value the branding
and sampling hotel broadcast distribution provides to a large and important demographic.
Both satellite and server channels can provide programming trial, which research shows
leads to a significant viewership conversion when guests return home.
 Sales and Marketing.
 11




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Installation and Service Operations
 Programming
 Technology and Product Development.
 
 HEALTHCARE
   Healthcare Market and Customers
     12




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Healthcare Market Services and Products
  Ø
    
    eSUITE, an interactive television system which includes specialized applications and
integrated services;Ø
    
    professional services  including cable plant design, modification and installation, as
well as television installation services;Ø
    
    DIRECTV satellite equipment sales and programming;Ø
    
    digital signage and messaging solutions; andØ
    
    service agreements covering cable plant, DIRECTV, television and interactive system support.
  Ø
    
    custom welcome channel;Ø
    
    safety videos;Ø
    
    hospital information channel;Ø
    
    digital healthcare open channel;Ø
    
    relaxation channel;Ø
    
    music channels;Ø
    
    interactive games;Ø
    
    interactive information about the hospital and its services;Ø
    
    interactive information about a patients care team and schedule;
 Ø
    
    assigned education application  enables care providers to assign specific videos to
patients based on their diagnoses; includes ability to track viewing and comprehension and
the ability to chart the information in the patients electronic medical record;Ø
    
    patient request application  allows patients to submit common requests through the
television directly to the person responsible for fulfillment, allowing nursing staff to
focus on patient care;Ø
    
    patient feedback surveys  designed to capture and build in-service recovery so patient
issues can be identified and addressed by the care staff while the patient is still in the
hospital;Ø
    
    retail promotions  for revenue-generating services such as outpatient pharmacy, home
medical equipment, health clubs and other outreach/continuum of care services; andØ
    
    meal ordering application  provides information on diet types and allows patients to
order meals based on diagnosis and allergies.
 Sales and Marketing.
 Installation and Service Operations
 Programming
 13




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Technology and Product Development.
 
 Competition
 Hospitality
  Ø
    
    other interactive television service providers, such as Hospitality Networks, Inc. (a
wholly-owned subsidiary of Cox Communications, Inc.), NXTV, Kool Connect, SuiteLinq,
Guest-Tek, iBAHN, Tivus, Roomlinx and international providers, such as Acentic, MagiNet and
Quadriga;Ø
    
    other providers of basic and premium television programming, such as Charter
Communications, Comcast, Cox Cable, Dish Network, DIRECTV, Time Warner, BulkTV, Televue,
Tangerine Global and World Cinema;Ø
    
    television networks and programmers, such as ABC, NBC, CBS, FOX, HBO, and Showtime;Ø
    
    other broadband Internet service providers, such as iBAHN, Guest-Tek, EthoStream,
SuperClick, Comcast, Time Warner, Verizon, AT&T, Wi-Fi Venue Services, Influx, Xeta and
T-Mobile; andØ
    
    companies which offer in-room computers with Internet access or other types of Internet
access systems.
 ® ®
   Ø
    
    the features and benefits of the service offering, and Internet or interactive system;Ø
    
    the quality of the vendors technical support and maintenance services;Ø
    
    the financial terms and conditions of the proposed contract, including commissions to
the hotel or capital cost of the system; andØ
    
    the ability to complete system installation in a timely and efficient manner.
 14




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Ø
    
    the size of our existing customer base;Ø
    
    our history of innovation;Ø
    
    our diverse client base;Ø
    
    our technically-innovative high definition platform;Ø
    
    our digital platform;Ø
    
    our flexible interactive television system;Ø
    
    our content management system; andØ
    
    our field service group, which is, we believe, the largest technical services group
focused on the hospitality industry.
    Advertising and Media Services
  Ø
    
    Airport Advertising: Place-based OOH media found in airports, represented by companies
such as Viacom, CBS Outdoor and JC Decaux;Ø
    
    Airline Advertising: Television programming supported with commercials during flight,
tray-top ads and ad-supported in-flight magazines and airline sampling programs,
represented by companies such as IdeaCast and Brand Connections; andØ
    
    Office Advertising: Place-based digital media in office buildings, office elevators,
etc., represented by companies such as Wall Street Journal, Captivate Media and others.
  15




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Ø
    
    significant experience in the hotel space, with well established hotel relationships;Ø
    
    ability to leverage the LodgeNet field support and technical infrastructure;Ø
    
    broad array of advertising options, including hotel television media, VOD media and
in-room promotion;Ø
    
    hotel television media which is Nielsen monitored, rated and guaranteed for advertisers;Ø
    
    ideal environmental factors for ad receptivity  no DVRs, few distractions, comfortable setting;Ø
    
    consumer engagement which is both long and of a high quality;Ø
    
    ability to integrate our marketing programs  combining media with promotion;Ø
    
    sophisticated technology allowing telescoping, where consumers can click from a linear
commercial to an interactive ad menu; andØ
    
    large size of our existing customer base.
 Healthcare
  Ø
    
    other interactive patient care providers, such as GetWell Network, Skylight and Allen Technologies;Ø
    
    companies which primarily sell or lease television sets and also offer some phone and
television-based interactive services, which include TVRC and TeleHealth; andØ
    
    other providers of basic and premium television programming, such as Charter
Communications, Comcast, Cox Cable, Dish Network, DIRECTV and Time Warner.
  Ø
    
    our significant experience from thirty years of service in the lodging sector;Ø
    
    the technical reliability of our solution;Ø
    
    our nationwide service and support organization;Ø
    
    our ability to leverage features from our lodging systems to efficiently customize and
deploy new solutions to healthcare facilities;Ø
    
    our ability to provide our services over existing cable infrastructure;Ø
    
    our access to HD content with Pro:IdiomTM encryption technology;Ø
    
    our understanding of interactive television and guest ease-of-use;Ø
    
    our ability to assign content to specific patients through multiple mediums and track behaviors; andØ
    
    our ability to integrate to third-party systems for patient information, as well as
reporting of viewing and end-user behaviors.
 
 Regulation
 Hospitality
 Cable Television Regulation
 16




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Broadband Internet Access.
  Healthcare
   
 Employees
  
 Corporate Information and Web Site Access to SEC Filings
   17




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Item 1A  Risk Factors
 We experienced sustained revenue decline and net losses in 2010, 2009 and 2008. If we are not
profitable in the long-term or do not generate sustained levels of free cash flow , a non-GAAP
measure which we define as cash provided by operating activities less cash used for investing
activities, it could have a harmful effect on our results of operations and business.
 Our business is generally impacted by conditions affecting the hospitality industrys performance.
 Our revenue is dependent on factors beyond our control, including the currently recovering economy,
reduced business travel and reduced consumer spending.
 We operate in a very competitive business environment and competition could reduce our revenue and
our cash flow.
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Diversification activities may not be successful.
 Our revenue could be affected if our hotel customers decide to eliminate certain services we
provide or restrict the types of content offered at their hotels.
 We may not have adequate capital resources to support our business, which could have a harmful
effect on our business and prospects.
 Ø
    
    we may modify our business plan and adjust or delay capital spending necessary to expand
or maintain our customer base or to continue to deploy our HD systems and other
technological advances throughout our installed room base;Ø
    
    we may lose a substantial number of customers if we delay or limit our capital
investments;Ø
    
    we may have insufficient capital to make payments on our outstanding indebtedness as
they become due;Ø
    
    we may have to delay or limit our product development and diversification activities;
andØ
    
    we may be required to seek additional capital through additional equity or debt
financings, asset sales, collaborative arrangements or other sources, which may not be
available to us on a timely basis, if at all, or may not be available on acceptable terms.
 We may have to incur significant capital expenditures in order to adapt to technological change.
 Ø
    
    rapid and significant technological change, including continuing developments in
technology, which do not presently have widely accepted standards; andØ
    
    frequent introductions of new services and alternative technologies, including new
technologies for providing high-definition television and providing Internet content.
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Opportunities to expand our installed customer room base may be limited, so we may be unable to
grow our revenue.
 We may not be successful in renewing hotel properties to long-term contracts, which may reduce our
revenue.
 New technologies, including the growth of wireless devices, roll out of 4G technologies and
expansion of digital distribution of content in our markets, may increase competition and result in
a decrease in our revenue.
 20




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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.
 If we fail to develop new products, services and product enhancements, our business and prospects
could be harmed.
 Ø
    
    unanticipated delays;Ø
    
    access to capital;Ø
    
    budget overruns;Ø
    
    technical problems; andØ
    
    customer acceptance.
   Our business could be harmed if we are unable to protect our proprietary technology.
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If our products or services employ technology which infringes the proprietary rights of others, we
may be subject to infringement claims, forced to pay certain fees to license technology or be
required to stop selling our products.
 We are dependent on others for our programming content and increases in our costs or license fees
to obtain such programming could reduce our cash flow and profitability.
 The lack of quality programming or a change in available content could reduce our profitability and
cash flows.
 22




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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 certain
products or services with us or elect to terminate service agreements, which could have an adverse
affect on our ability to maintain or grow our revenue.
 Our data systems could fail or their security could be compromised, and we will increasingly be
handling personal data requiring our compliance with a variety of regulations.
 Many of our key functions are concentrated in a single location, and a natural disaster could
seriously impact our ability to operate.
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Our significant level of debt and interest payment obligations may impair our financial condition,
limit our ability to compete, expose us to interest rate risk to the extent of our variable-rate
debt and prevent us from meeting our financial obligations.
 Ø
    
    make it more difficult for us to satisfy our financial obligations and dividend payments
required on our outstanding preferred stock;Ø
    
    require us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness and dividend payments required on our outstanding preferred
stock, thereby reducing the availability of our cash flow to fund working capital, capital
expenditures and other general corporate purposes;Ø
    
    limit our ability to borrow additional funds to expand our business or alleviate liquidity constraints;Ø
    
    limit our ability to refinance all or a portion of our indebtedness on or before maturity;Ø
    
    limit our ability to pursue potential acquisitions;Ø
    
    increase our vulnerability to general adverse economic and industry conditions;Ø
    
    increase our cost of borrowing;Ø
    
    limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we operate; andØ
    
    place us at a competitive disadvantage relative to companies which have proportionately
less indebtedness.
 Covenants under our Credit Facility may restrict our future operations and adverse consequences
could result in the event of non-compliance.
 Ø
    
    incur, assume or permit to exist additional indebtedness, guaranty obligations or
hedging arrangements;Ø
    
    declare or pay certain dividends or make other payments on, redeem or repurchase our
capital stock; make loans and investments or repay subordinated indebtedness;Ø
    
    engage in sale-leaseback transactions;Ø
    
    enter into transactions with affiliates;Ø
    
    sell assets;Ø
    
    create or suffer to exist liens;Ø
    
    create restrictions on dividend and other payments to us from our subsidiaries;Ø
    
    change the nature of the business we conduct; andØ
    
    issue or sell stock of subsidiaries; and engage in a merger, sale or consolidation.
  24




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The price of our common stock may be subject to volatility.
 
 Item 1B  Unresolved Staff Comments
  
 Item 2  Properties
   
 Item 3  Legal Proceedings
   25




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26




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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, 2010
    
    
    7.38
    
    
    
    4.96
    
    
    March 31, 2009
    
    
    1.73
    
    
    
    0.50June 30, 2010
    
    
    7.41
    
    
    
    3.61
    
    
    June 30, 2009
    
    
    5.99
    
    
    
    1.50September 30, 2010
    
    
    4.50
    
    
    
    2.32
    
    
    September 30, 2009
    
    
    7.75
    
    
    
    3.11December 31, 2010
    
    
    4.48
    
    
    
    2.14
    
    
    December 31, 2009
    
    
    7.77
    
    
    
    4.26
   
 Performance Graph
  This graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the
Exchange Act, except to the extent the Company specifically incorporates this information by
reference, and shall not otherwise be deemed filed under such Acts.
 27




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Issuer Purchases of Equity Securities
  
 Dividends
   
 Stockholder Rights Plan
  28




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General
   Events Causing Exercisability and Separate Transferability
  (1)
    
    the first public announcement a person or group (other than the Company, any
subsidiary, or a benefit plan of the Company or its subsidiaries), has acquired, or
obtained the right to acquire, except under limited circumstances, beneficial ownership
of 20 percent or more of the outstanding common stock; or(2)
    
    the close of business on the tenth business day (or such later date as the
Companys Board of Directors may determine) after the commencement of, or a public
announcement of, an intention to commence (which tender offer is not terminated within
such ten business days), a tender or exchange offer the consummation of which would
result in a person or group becoming an Acquiring Person (as defined in the following).
  Events Causing Adjustment of the Shares Acquirable Upon Exercise of the Purchase Price
  29




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Redemption of the Rights
  th th
  Ø
    
    the same per share price is offered for all shares, and such price per share is greater
than the highest closing price for the common stock during the 12 month period immediately
preceding the date on which the offer is commenced, represents a reasonable premium above
the average of the closing prices for the five trading days immediately preceding the date
on which the offer is commenced, is at least 80 percent cash (with any non-cash
consideration consisting of common stock of the offeror), and is to be paid upon
consummation of the offer;Ø
    
    if the consideration offered includes shares of common stock of the offeror, the offeror
is a publicly owned United States corporation and its common stock is traded on either the
New York Stock Exchange or The NASDAQ Stock Market (NASDAQ), no further stockholder
approval is required to issue such common stock, no other class of voting stock of the
offeror is outstanding, and the offeror shall permit the Companys investment banking firm
and legal counsel to have access to such offerors books, records, management, accountants
and other advisers for the purpose of permitting such investment banking firm and such
legal counsel to conduct a due diligence review to permit such investment banking firm to
be able to render a fairness opinion with respect to the consideration being offered; the
offer is accompanied by written financing commitments and/or the offeror has on hand cash
or cash equivalents for the full amount of all financing necessary to consummate the offer
and follow-on merger;
 30




---



##### Table of Contents



Ø
    
    the offer is subject to a non-waivable condition that a minimum of 90 percent of the
outstanding common stock (other than those owned by the offeror) will be tendered and not
withdrawn as of the offers expiration date;Ø
    
    the offer by its terms remains open for at least 60 business days and at least 10
business days after the date of any special meeting of shareholders called under the
redemption provisions, plus 15 business days after any change in price or after any bona
fide alternative offer for a higher consideration is made;Ø
    
    the offer is accompanied by a written opinion of a nationally recognized investment
banking firm stating the price to be paid to holders pursuant to the offer is fair and
including any written presentation of such firm showing the analysis and range of values
underlying such conclusion;Ø
    
    on or before the date the offer is commenced, such person makes an irrevocable written
commitment to the Company (1) to acquire, within five business days following completion of
the offer, all shares of common stock not beneficially owned by such person at the same
cash price per share as paid in the offer, (2) not to amend its offer to reduce the price
or otherwise change the terms in a way which is adverse to tendering shareholders, and (3)
if the offer is not consummated, such person will not make another offer for the common
stock within one year if at least 85 percent of the common stock not owned by such person
has not been tendered; andØ
    
    the offer is subject only to the conditions specified in the definition and usual and
customary terms and conditions, and is not subject to any financing, funding or similar
condition, nor to any condition relating to completion of or satisfaction with any due
diligence or similar investigation.
 Amendments
  Term
  31




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##### Table of Contents



Item 6  Selected Financial Data
  Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Select Financial Data:Revenues:Hospitality and Advertising Services
    
    $
    443,654
    
    
    $
    476,658
    
    
    $
    527,810
    
    
    $
    481,111
    
    
    $
    285,939Healthcare
    
    
    8,518
    
    
    
    7,834
    
    
    
    6,069
    
    
    
    4,477
    
    
    
    2,274Total revenues
    
    
    452,172
    
    
    
    484,492
    
    
    
    533,879
    
    
    
    485,588
    
    
    
    288,213Income (loss) from operations
    
    
    23,410
    
    
    
    21,692
    
    
    
    (5,071
    )
    
    
    (4,236
    )
    
    
    26,932Net (loss) income
    
    
    (11,685
    )
    
    
    (10,155
    )
    
    
    (48,418
    )
    
    
    (65,172
    )
    
    
    1,841Preferred stock dividends
    
    
    (5,750
    )
    
    
    (3,114
    )
    
    
    
    
    
    
    
    
    
    
    Net (loss) income attributable to common stockholders
    
    $
    (17,435
    )
    
    $
    (13,269
    )
    
    $
    (48,418
    )
    
    $
    (65,172
    )
    
    $
    1,841Net (loss) income per common share (basic and diluted)
    
    $
    (0.71
    )
    
    $
    (0.59
    )
    
    $
    (2.16
    )
    
    $
    (3.00
    )
    
    $
    0.10Other Data:Investing activities:Capital expenditures (1)
    
    $
    21,825
    
    
    $
    21,341
    
    
    $
    64,407
    
    
    $
    79,097
    
    
    $
    48,268Average cost per room  new HD installation
    
    $
    200
    
    
    $
    339
    
    
    $
    398
    
    
    $
    460
    
    
    $
    438Average Hospitality and Advertising Services revenue per room
    
    $
    21.29
    
    
    $
    21.73
    
    
    $
    23.69
    
    
    $
    21.76
    
    
    $
    23.72
 As of December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Balance Sheet Data:Cash and cash equivalents
    
    $
    8,381
    
    
    $
    17,011
    
    
    $
    10,800
    
    
    $
    25,569
    
    
    $
    22,795Total assets
    
    $
    444,006
    
    
    $
    508,354
    
    
    $
    589,786
    
    
    $
    693,823
    
    
    $
    263,209Total debt
    
    $
    373,639
    
    
    $
    469,946
    
    
    $
    588,520
    
    
    $
    624,594
    
    
    $
    270,169Total stockholders deficiency
    
    $
    (54,349
    )
    
    $
    (70,987
    )
    
    $
    (128,748
    )
    
    $
    (48,242
    )
    
    $
    (58,122
    )
 Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Statement of Cash Flows Data:Cash provided by operating activities
    
    $
    101,706
    
    
    $
    86,172
    
    
    $
    89,853
    
    
    $
    58,869
    
    
    $
    72,301Property and equipment additions
    
    
    (21,825
    )
    
    
    (21,341
    )
    
    
    (64,407
    )
    
    
    (79,097
    )
    
    
    (48,268
    )79,881
    
    
    
    64,831
    
    
    
    25,446
    
    
    
    (20,228
    )
    
    
    24,033Cash used for acquisition and other activities, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (354,177
    )
    
    
    (2,336
    )$
    79,881
    
    
    $
    64,831
    
    
    $
    25,446
    
    
    $
    (374,405
    )
    
    $
    21,697
 
 (1)
    
    Presented as cash used for property and equipment additions as reported in the Statement
of Cash Flows. 32




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##### Table of Contents



Special Note Regarding Forward-Looking Statements
 Certain statements in this report or documents incorporated herein by reference constitute
forward-looking statements. When used in this report, the words intends, expects,
anticipates, estimates, believes, goal, no assurance and similar expressions, and
statements which are made in the future tense or refer to future events or developments, are
intended to identify such forward-looking statements. Such forward-looking statements are subject
to risks, uncertainties and other factors which could cause the actual results, performance or
achievements to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. In addition to the risks and uncertainties
discussed in Item 1A of this Annual Report on Form 10-K for the year ended December 31, 2010, in
any prospectus supplement or any report or document incorporated herein by reference, such factors
include, among others, the following:
 Ø
    
    the effects of general economic and financial conditions;Ø
    
    the economic condition of the hospitality industry, which can be particularly affected
by general economic and financial conditions, as well as by factors such as high gas
prices, levels of unemployment, consumer confidence, acts or threats of terrorism and
public health issues;Ø
    
    decreases in hotel occupancy, whether related to economic conditions or other causes;Ø
    
    competition from providers of similar services and from alternative sources;Ø
    
    changes in demand for our products and services;Ø
    
    programming costs, availability, timeliness and quality;Ø
    
    technological developments by competitors;Ø
    
    developmental costs, difficulties and delays;Ø
    
    relationships with clients and property owners;Ø
    
    the impact of covenants contained in our credit agreement, compliance with which could
adversely affect capital available to finance growth, and the violation of which would
constitute an event of default;Ø
    
    changes to government laws and regulations and industry compliance standards;Ø
    
    potential effects of litigation;Ø
    
    risks of expansion into new markets and territories;Ø
    
    risks related to the security of our data systems; andØ
    
    other factors detailed, from time to time, in our filings with the SEC.
 These forward-looking statements speak only as of the date of this report. We expressly disclaim
any obligation or undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is based.
 33




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##### Table of Contents



Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion should be read in conjunction with our Consolidated Financial Statements,
including the notes thereto, appearing elsewhere herein.
 
 Executive Overview
     34




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##### Table of Contents



Hospitality and Advertising Services Business
 Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and
music videos and television on-demand programming).
  Ø
    
    The number of rooms on our network.We can increase revenue over time by increasing the
number of rooms served by our interactive television systems. Our ability to expand our
room base is dependent on a number of factors, including newly constructed hotel properties
and the attractiveness of our technology, service and support to hotels currently operating
without an interactive television system.Ø
    
    The occupancy rate at the property.Our revenue also varies depending on hotel
occupancy rates, which are subject to a number of factors, including seasonality, general
economic conditions and world events, such as terrorist threats or public health issues.
Occupancy rates for the properties we serve are typically higher during the second and
third quarters due to seasonal travel patterns. We target higher occupancy properties in
diverse demographic and geographic locations in an effort to mitigate occupancy-related
risks.Ø
    
    The buy rate of hotel guests.This is impacted by a number of issues, some of which are
not under our control. Specific issues impacting buy rate include:
 Ø
    
    The number of rooms equipped with our high-definition (HD) systems. We can
increase revenue by increasing the number of HD rooms served. Our ability to expand
our HD room base is dependent on a number of factors, including availability of capital
resources from the hotels and us to invest in HD televisions and equipment. We are
focused on accelerating the installation of our HD systems as hotels increase their
purchase of HD televisions, since the revenue generated from the digital quality
experience within our installed HD rooms is approximately 60% higher than our analog
rooms.Ø
    
    The popularity, timeliness and amount of content offered at the hotel.Our
revenues vary, to a certain degree, with the number, timeliness and popularity of movie
content available for viewing, and whether the content is presented in digital or
analog format. Historically, a decrease in the availability of popular movie content
has adversely impacted revenue, and the availability of high definition content has
increased revenue. Although not completely within our control, we seek to program and
promote the most popular available movie content and other content to maximize revenue
and profitability.Ø
    
    The price of the service purchased by the hotel guest.Generally, we control
the prices charged for our products and services and manage pricing in an effort to
maximize revenue and overall profitability. We establish pricing based on such things
as the demographics of the property served, the popularity of the content and overall
general economic conditions. Our technology enables us to measure the popularity of
our content and make decisions to best position such content and optimize revenue from
such content.
 35




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##### Table of Contents



Ø
    
    The availability of alternative programming.We compete directly for customers with a
variety of other interactive service providers, including other interactive television
service providers, cable television companies, direct broadcast satellite companies,
television networks and programmers, Internet service providers and portals, technology
consulting and service firms, companies offering web sites which provide on-demand
movies, movie downloads, rental companies providing DVDs which can be viewed in properly
equipped hotel rooms or on other portable viewing devices and hotels which offer in-room
laptops with Internet access or other types of Internet access systems. We also
compete, in varying degrees, with other leisure-time activities such as movie theaters,
the Internet, radio, print media, personal computers and other alternative sources of
entertainment and information.Ø
    
    Consumer sentiment.The willingness of guests to purchase our entertainment
services is also impacted by the general economic environment and its impact on
consumer sentiment. Historically, such impacts were not generally material to our
revenue results; however, since the last half of 2008, economic conditions have had a
significant, negative impact on our revenue levels. As economic conditions improve in
the future, guest purchase activity may or may not increase to the same levels
previously experienced by the Company.
  Ø
    
    license fees paid to major motion picture studios, which are variable and based on a
percent of guest-generated revenue, for non-exclusive distribution rights of recently
released major motion pictures;Ø
    
    commissions paid to our hotel customers, which are also variable and based on a percent
of guest-generated revenue;Ø
    
    license fees, which are based on a percent of guest-generated revenue, for television
on-demand, music, music videos, video games and sports programming; andØ
    
    one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences.
 Hotel Services (includes revenue from hotels for services such as television channels and recurring
broadband Internet service and support to the hotels).
 Ø
    
    Cable Television Programming. We offer a wide variety of satellite-delivered cable
television programming paid for by the hotel and provided to guests at no charge. The
cable television programming is delivered via satellite, pursuant to an agreement with
DIRECTV, and is distributed over the internal hotel network, and typically includes premium
channels such as HBO and Showtime, which broadcast major motion pictures and specialty
programming, as well as non-premium channels, such as CNN and ESPN. With the launch of the
high-definition configuration of our interactive television system, we also began offering
high-definition cable television programming to the extent available from broadcast sources
and DIRECTV.Ø
    
    Broadband Internet Service and Support.We also design, install and operate wired and
wireless broadband Internet systems at hotel properties. These systems control access to
the Internet, provide bandwidth management tools and allow hotels to charge guests or
provide the access as a guest amenity. Post-installation, we generate recurring revenue
through the ongoing maintenance, service and call center support services to hotel
properties installed by us and also to hotel properties installed by other providers or
through a revenue-share model in which hotel guests pay for broadband Internet and we pay a
commission to our hotel customers. While this is a highly competitive area, we believe we
have important advantages as a result of our proactive monitoring interface with hotel
systems to improve up time, existing hotel customer relationships and our nationwide field
service network.
 System Sales and Related Services.
 36




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##### Table of Contents



Advertising Services.
 Key Metrics:
 Rooms Served
  2010
    
    
    2009
    
    
    2008Total rooms served (1)
    
    
    1,829,712
    
    
    
    1,909,323
    
    
    
    1,977,015Total Guest Entertainment rooms (2)
    
    
    1,680,322
    
    
    
    1,779,979
    
    
    
    1,866,353Total HD rooms (3)
    
    
    270,384
    
    
    
    231,588
    
    
    
    191,491Percent of Total Guest Entertainment rooms
    
    
    16.1
    %
    
    
    13.0
    %
    
    
    10.3
    %Total Cable Television Programming (FTG) rooms
(4)
    
    
    1,030,437
    
    
    
    1,087,860
    
    
    
    1,105,754Percent of Total Guest Entertainment rooms
    
    
    61.3
    %
    
    
    61.1
    %
    
    
    59.2
    %Total Broadband Internet rooms (5)
    
    
    178,047
    
    
    
    201,936
    
    
    
    229,003Percent of Total rooms served
    
    
    9.7
    %
    
    
    10.6
    %
    
    
    11.6
    %
 
 (1)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees.(2)
    
    Guest Entertainment rooms, of which 87.7% are digital, receive one or more Guest
Entertainment services, such as movies, video games, music or other interactive and
advertising services.(3)
    
    HD rooms are equipped with high-definition capabilities.(4)
    
    Cable television programming (FTG) rooms receive basic or premium cable television programming.(5)
    
    Represents rooms receiving high-speed Internet service. High Definition Room Growth
  2010
    
    
    2009
    
    
    2008Net new HDTV rooms
    
    
    38,633
    
    
    
    40,097
    
    
    
    105,099
  37




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##### Table of Contents



Capital Investment Per Installed Room
  2010
    
    
    2009
    
    
    2008Average cost per HD room  new installation
    
    $
    200
    
    
    $
    339
    
    
    $
    398Average cost per HD room  conversion
    
    $
    167
    
    
    $
    241
    
    
    $
    320
  Average Revenue Per Room
  2010
    
    
    2009
    
    
    2008Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.41
    
    
    $
    13.49
    
    
    $
    16.38Hotel Services
    
    
    6.53
    
    
    
    6.00
    
    
    
    5.45System Sales and Related Services
    
    
    1.88
    
    
    
    1.93
    
    
    
    1.50Advertising Services
    
    
    0.47
    
    
    
    0.31
    
    
    
    0.36Total Hospitality and Advertising
Services revenue per room
    
    $
    21.29
    
    
    $
    21.73
    
    
    $
    23.69
 38




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##### Table of Contents



Direct Costs
  2010
    
    
    2009
    
    
    2008Direct costs per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    4.85
    
    
    $
    5.41
    
    
    $
    6.40Hotel Services
    
    
    5.64
    
    
    
    5.24
    
    
    
    4.99System Sales and Related Services
    
    
    1.25
    
    
    
    1.39
    
    
    
    1.12Advertising Services
    
    
    0.25
    
    
    
    0.27
    
    
    
    0.32Total Hospitality and Advertising Services direct costs per room
    
    $
    11.99
    
    
    $
    12.31
    
    
    $
    12.83
  
 Healthcare Business
  Ø
    
    revenue generated from the sale of the interactive system hardware, software license and
installation services;Ø
    
    revenue from the sale and installation of DIRECTV satellite equipment and related
programming;Ø
    
    revenue from recurring support agreements for interactive content, software maintenance
and technical field service support, including service agreements covering cable plant,
DIRECTV satellite equipment and interactive systems; andØ
    
    revenue generated from cable plant design, modification and installation, as well as
television installation services.
  39




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##### Table of Contents



General Operations
 Total Operating Expenses
  2010
    
    
    2009
    
    
    2008System operations expenses
    
    $
    2.06
    
    
    $
    1.94
    
    
    $
    2.60SG&A expenses
    
    
    2.31
    
    
    
    2.07
    
    
    
    2.37Depreciation and amortization (D&A)
    
    
    4.00
    
    
    
    4.58
    
    
    
    5.57Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    0.50Restructuring charge
    
    
    0.02
    
    
    
    0.02
    
    
    
    0.23Other operating income (1)
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.05
    )$
    8.38
    
    
    $
    8.61
    
    
    $
    11.22System operations as a percent of total revenue
    
    
    9.5
    %
    
    
    8.8
    %
    
    
    10.8
    %SG&A as a percent of total revenue
    
    
    10.6
    %
    
    
    9.4
    %
    
    
    9.9
    %D&A as a percent of total revenue
    
    
    18.4
    %
    
    
    20.7
    %
    
    
    23.3
    %Total operating expenses as a percent of total revenue
    
    
    38.6
    %
    
    
    39.0
    %
    
    
    46.9
    %
 
 (1)
    
    Other operating income for 2008 includes net proceeds received from insurance related to
business interruption and property damage claims associated with Hurricane Katrina. Special Note Regarding the Use of Non-GAAP Financial Information
   Free Cash Flow
  40




---



##### Table of Contents



2010
    
    
    2009
    
    
    2008Cash provided by operating activities
    
    $
    101,706
    
    
    $
    86,172
    
    
    $
    89,853Property and equipment additions
    
    
    (21,825
    )
    
    
    (21,341
    )
    
    
    (64,407
    )$
    79,881
    
    
    $
    64,831
    
    
    $
    25,446
 
 Liquidity and Capital Resources
      41




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##### Table of Contents



2010
    
    
    2009
    
    
    2008Actual consolidated leverage ratio (1) (3)
    
    
    3.43
    
    
    
    3.82
    
    
    
    4.30Maximum per covenant
    
    
    3.50
    
    
    
    4.00
    
    
    
    4.50Actual consolidated interest coverage ratio (2)
(3)
    
    
    3.19
    
    
    
    3.23
    
    
    
    3.22Minimum per covenant
    
    
    3.00
    
    
    
    2.75
    
    
    
    2.50
 
 (1)
    
    Our maximum consolidated leverage ratio is the total amount of all indebtedness of the
Company, determined on a consolidated basis in accordance with GAAP, divided by operating
income exclusive of depreciation and amortization and adjusted (plus or minus) for certain
other miscellaneous cash items, non-cash items and non-recurring items, as defined by the
terms of the bank Credit Facility.(2)
    
    Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous
cash items, non-cash items and non-recurring items divided by interest expense, as defined by
the terms of the bank Credit Facility.(3)
    
    Maximum consolidated leverage ratio and minimum consolidated interest coverage ratios are
defined terms of the bank Credit Facility and are presented here to demonstrate compliance
with the covenants in our Credit Facility, as noncompliance with such covenants could have a
material adverse effect on us.   42




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##### Table of Contents



43




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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)
    
    $
    373,639
    
    
    $
    4,807
    
    
    $
    8,591
    
    
    $
    360,241
    
    
    $
    Interest on bank term loan (1)
    
    
    29,464
    
    
    
    9,210
    
    
    
    17,981
    
    
    
    2,273
    
    
    
    Interest on derivative instruments (net)
    
    
    10,435
    
    
    
    10,435
    
    
    
    
    
    
    
    
    
    
    
    Operating lease payments
    
    
    2,967
    
    
    
    1,440
    
    
    
    1,307
    
    
    
    220
    
    
    
    Purchase obligations (2)
    
    
    10,509
    
    
    
    4,886
    
    
    
    3,688
    
    
    
    1,840
    
    
    
    95Minimum royalties and commissions (3)
    
    
    1,499
    
    
    
    1,019
    
    
    
    480
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    428,513
    
    
    $
    31,797
    
    
    $
    32,047
    
    
    $
    364,574
    
    
    $
    95
 Amount of commitment expiration per periodLess than
    
    
    2 - 3
    
    
    4 - 5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    395
    
    
    $
    395
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled debt amortization.(2)
    
    Consists of open purchase orders and commitments.(3)
    
    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
  44




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##### Table of Contents



Results of Operations  Years Ended December 31, 2010 and 2009
 Revenue Analysis.
 2010
    
    
    2009Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    258,617
    
    
    
    57.2
    %
    
    $
    295,817
    
    
    
    61.1
    %Hotel Services
    
    
    136,089
    
    
    
    30.1
    %
    
    
    131,559
    
    
    
    27.2
    %System Sales and Related Services
    
    
    39,081
    
    
    
    8.6
    %
    
    
    42,367
    
    
    
    8.7
    %Advertising Services
    
    
    9,867
    
    
    
    2.2
    %
    
    
    6,915
    
    
    
    1.4
    %Total Hospitality and Advertising Services
    
    
    443,654
    
    
    
    98.1
    %
    
    
    476,658
    
    
    
    98.4
    %Healthcare
    
    
    8,518
    
    
    
    1.9
    %
    
    
    7,834
    
    
    
    1.6
    %$
    452,172
    
    
    
    100.0
    %
    
    $
    484,492
    
    
    
    100.0
    %
  2010
    
    
    2009Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.41
    
    
    $
    13.49Hotel Services
    
    
    6.53
    
    
    
    6.00System Sales and Related Services
    
    
    1.88
    
    
    
    1.93Advertising Services
    
    
    0.47
    
    
    
    0.31Total Hospitality and Advertising Services revenue per room
    
    $
    21.29
    
    
    $
    21.73
  45




---



##### Table of Contents



Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 46




---



##### Table of Contents



Operating Expenses.
 2010
    
    
    2009Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    42,940
    
    
    
    9.5
    %
    
    $
    42,605
    
    
    
    8.8
    %Selling, general and
administrative (1)
    
    
    48,151
    
    
    
    10.6
    %
    
    
    45,494
    
    
    
    9.4
    %Depreciation and amortization
    
    
    83,236
    
    
    
    18.4
    %
    
    
    100,309
    
    
    
    20.7
    %Restructuring charge (2)
    
    
    421
    
    
    
    0.1
    %
    
    
    603
    
    
    
    0.1
    %Other operating income
    
    
    (21
    )
    
    
    0.0
    %
    
    
    (126
    )
    
    
    0.0
    %Total operating expenses
    
    $
    174,727
    
    
    
    38.6
    %
    
    $
    188,885
    
    
    
    39.0
    %
 
 (1)
    
    2010 SG&A expenses include $0.7 million of debt issuance costs related to the marketing of a
high-yield offering, which we did not pursue.(2)
    
    Restructuring costs are defined as costs associated with the closing, disposal or exit of
certain duplicate facilities or operations, including termination benefits and costs to
consolidate facilities or relocate employees, and costs associated with a reduction in force,
including termination benefits. The Company will not realize future benefits from these
costs.     Operating Income.
 Interest Expense.
 Gain on Extinguishment of Debt.
 47




---



##### Table of Contents



Loss on Early Retirement of Debt.
 Other Income (Expense).
 Taxes.
 Net Loss.
 48




---



##### Table of Contents



Results of Operations  Years Ended December 31, 2009 and 2008
 Revenue Analysis.
   Direct costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 Operating Expenses.
    Operating Income (Loss).
 Interest Expense.
 49




---



##### Table of Contents



Gain on Extinguishment of Debt.
 Loss on Early Retirement of Debt.
 Other Expense.
 Taxes.
 Net Loss.
 50




---



##### Table of Contents



Critical Accounting Policies
  Ø
    
    Revenue Recognition  footnote #2Ø
    
    Goodwill and Other Intangible Assets  footnote #6Ø
    
    Restructuring  footnote #14
 
 Recent Accounting Developments
    51




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##### Table of Contents



Item 7A  Quantitative and Qualitative Disclosures About Market Risk
  Interest.
 Carrying
    
    
    FairAmount
    
    
    ValueBank Credit Facility:Bank term loan
    
    $
    372,511
    
    
    $
    348,298Capital leases
    
    
    1,128
    
    
    
    1,128$
    373,639
    
    
    $
    349,426
   52




---



##### Table of Contents



Economic Condition and Consumer Confidence.
 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
 53




---



##### Table of Contents



Internal Control  Integrated Framework
  Changes in Internal Control over Financial Reporting.
 
 Item 9B  Other Information
  54




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



10.11
    
    
    Form of Restricted Stock Agreement for Performance-Based Vesting (16)10.16
    
    
    $675,000,000 Credit Agreement dated as of April 4, 2007 among LodgeNet Entertainment
Corporation, as Borrower, Credit Suisse Securities (USA) LLC as Syndication Agent, U.S. Bank
National Association as Documentation Agent, and Bear Stearns Corporate Lending Inc. as
Administrative Agent (17)10.17
    
    
    Second Amended and Restated Employment Agreement dated as of January 29, 2008 between
LodgeNet Interactive Corporation and Scott C. Petersen (18)10.18
    
    
    Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive
Corporation and David M. Bankers (19)10.19
    
    
    Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive
Corporation and James G. Naro (20)10.20
    
    
    Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive
Corporation and Steven R. Pofahl (21)10.21
    
    
    Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive
Corporation and Gary H. Ritondaro (22)10.22
    
    
    Executive Employment Agreement dated as of February 4, 2008 between LodgeNet Interactive
Corporation and Derek S. White (23)10.23
    
    
    Executive Employment Agreement dated as of August 27, 2008 between LodgeNet Interactive
Corporation and Scott E. Young (24)10.24
    
    
    Executive Employment Agreement dates as of February 25, 2010 between LodgeNet Interactive
Corporation and Frank P. Elsenbast (25)12.1
    
    
    Statement Regarding Computation of Ratios21.1
    
    
    Subsidiaries of the Company23.1
    
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer31.2
    
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer32.1
    
    
    Section 1350 Certifications
 
 
    
    Confidential Treatment has been requested with respect to certain portions of this agreement.(1)
    
    Incorporated by Reference to LodgeNets Amendment No. 1 to Registration Statement on Form
S-1, as filed with the Securities and Exchange Commission, September 24, 1993. (File No.
033-67676).(2)
    
    Incorporated by Reference to Exhibit 3.2 to LodgeNets Current Report on Form 8-K dated
November 17, 2008.(3)
    
    Incorporated by Reference to Exhibit 10.37 to LodgeNets Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001. 57




---



##### Table of Contents



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




---



##### Table of Contents



(23)
    
    Incorporated by Reference to Exhibit 10.22 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(24)
    
    Incorporated by Reference to Exhibit 10.1 to LodgeNets Current Report on Form 8-K as filed
with the Securities Exchange Commission on September 2, 2008.(25)
    
    Incorporated by Reference to Exhibit 10.1 to LodgeNets Current Report on Form 8-K as filed
with the Securities Exchange Commission on March 2, 2010. 59




---



##### Table of Contents



Signatures
   LodgeNet Interactive CorporationBy:
    /s/ Scott C. PetersenScott C. Petersen,President, Chief Executive Officer and
Chairman of the Board of Directors  Signature
    
    Title
    
    Date/s/ Scott C. Petersen

Scott C. Petersen
    
    President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
    
    March 14, 2011/s/ Frank P. Elsenbast

Frank P. Elsenbast
    
    Senior Vice President
Chief Financial Officer
(Principal Financial & Accounting Officer)
    
    March 14, 2011/s/ Martin L. Abbott

Martin L. Abbott
    
    Director
    
    March 14, 2011/s/ R. Douglas Bradbury

R. Douglas Bradbury
    
    Director
    
    March 14, 2011/s/ John E. Haire

John E. Haire
    
    Director
    
    March 14, 2011/s/ J. Scott Kirby

J. Scott Kirby
    
    Director
    
    March 14, 2011/s/ R. F. Leyendecker

R. F. Leyendecker
    
    Director
    
    March 14, 2011/s/ Vikki I. Pachera

Vikki I. Pachera
    
    Director
    
    March 14, 2011/s/ Edward L. Shapiro

Edward L. Shapiro
    
    Director
    
    March 14, 2011/s/ Scott H. Shlecter

Scott H. Shlecter
    
    Director
    
    March 14, 2011
 60




---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 LodgeNet Interactive Corporation and Subsidiaries
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    
    F - 2Consolidated Balance Sheets as of December 31, 2010 and 2009
    
    
    F - 3Consolidated Statements of Operations  Three Years Ended December 31, 2010, 2009 and 2008
    
    
    F - 4Consolidated Statements of Stockholders Deficiency and Comprehensive Income (Loss) 
Three Years Ended December 31, 2010, 2009 and 2008
    
    
    F - 5Consolidated Statements of Cash Flows  Three Years Ended December 31, 2010, 2009 and 2008
    
    
    F - 6Notes to Consolidated Financial Statements
    
    
    F - 7Index to Financial SchedulesSchedule II  Valuation and Qualifying Accounts
    
    
    F - 34
 F - 1




---



##### Table of Contents



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




---



##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries

Consolidated Balance Sheets
 December 31,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash
    
    $
    8,381
    
    
    $
    17,011Accounts receivable, net
    
    
    49,332
    
    
    
    51,706Other current assets
    
    
    12,728
    
    
    
    9,189Total current assets
    
    
    70,441
    
    
    
    77,906Property and equipment, net
    
    
    156,917
    
    
    
    206,663Debt issuance costs, net
    
    
    3,681
    
    
    
    6,005Intangible assets, net
    
    
    99,005
    
    
    
    106,041Goodwill
    
    
    100,081
    
    
    
    100,081Other assets
    
    
    13,881
    
    
    
    11,658Total assets
    
    $
    444,006
    
    
    $
    508,354Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    60,303
    
    
    $
    40,040Current maturities of long-term debt
    
    
    4,807
    
    
    
    6,101Accrued expenses
    
    
    22,327
    
    
    
    19,137Fair value of derivative instruments
    
    
    10,353
    
    
    
    Deferred revenue
    
    
    23,168
    
    
    
    17,531Total current liabilities
    
    
    120,958
    
    
    
    82,809Long-term debt
    
    
    368,832
    
    
    
    463,845Fair value of derivative instruments
    
    
    
    
    
    
    26,623Other long-term liabilities
    
    
    8,565
    
    
    
    6,064Total liabilities
    
    
    498,355
    
    
    
    579,341Commitments and contingenciesStockholders deficiency:Preferred stock, $.01 par value, 5,000,000 shares authorized;
Series B cumulative perpetual convertible, 10%, 57,500 issued and
outstanding at December 31, 2010 and December 31, 2009, respectively
(liquidation preference of $1,000 per share or $57,500,000 total)
    
    
    1
    
    
    
    1Common stock, $.01 par value, 50,000,000 shares authorized;
25,088,539 and 22,537,664 shares outstanding at December 31, 2010
and December 31, 2009, respectively
    
    
    251
    
    
    
    225Additional paid-in capital
    
    
    388,961
    
    
    
    379,223Accumulated deficit
    
    
    (437,896
    )
    
    
    (426,211
    )Accumulated other comprehensive loss
    
    
    (5,666
    )
    
    
    (24,225
    )Total stockholders deficiency
    
    
    (54,349
    )
    
    
    (70,987
    )Total liabilities and stockholders deficiency
    
    $
    444,006
    
    
    $
    508,354
  F - 3




---



##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries

Consolidated Statements of Operations
 Years Ended December 31,2010
    
    
    2009
    
    
    2008Revenues:Hospitality and Advertising Services
    
    $
    443,654
    
    
    $
    476,658
    
    
    $
    527,810Healthcare
    
    
    8,518
    
    
    
    7,834
    
    
    
    6,069Total revenues
    
    
    452,172
    
    
    
    484,492
    
    
    
    533,879Direct costs and operating expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately below):Hospitality and Advertising Services
    
    
    249,745
    
    
    
    269,997
    
    
    
    285,835Healthcare
    
    
    4,290
    
    
    
    3,918
    
    
    
    3,132Operating expenses:System operations
    
    
    42,940
    
    
    
    42,605
    
    
    
    57,853Selling, general and administrative
    
    
    48,151
    
    
    
    45,494
    
    
    
    52,775Depreciation and amortization
    
    
    83,236
    
    
    
    100,309
    
    
    
    124,060Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    11,212Restructuring charge
    
    
    421
    
    
    
    603
    
    
    
    5,047Other operating income
    
    
    (21
    )
    
    
    (126
    )
    
    
    (964
    )Total direct costs and operating expenses
    
    
    428,762
    
    
    
    462,800
    
    
    
    538,950Income (loss) from operations
    
    
    23,410
    
    
    
    21,692
    
    
    
    (5,071
    )Other income and (expenses):Interest expense
    
    
    (33,537
    )
    
    
    (38,092
    )
    
    
    (42,551
    )Gain on extinguishment of debt
    
    
    
    
    
    
    9,292
    
    
    
    1,446Loss on early retirement of debt
    
    
    (1,050
    )
    
    
    (1,537
    )
    
    
    (448
    )Other income (expense)
    
    
    326
    
    
    
    (747
    )
    
    
    (945
    )Loss before income taxes
    
    
    (10,851
    )
    
    
    (9,392
    )
    
    
    (47,569
    )Provision for income taxes
    
    
    (834
    )
    
    
    (763
    )
    
    
    (849
    )Net loss
    
    
    (11,685
    )
    
    
    (10,155
    )
    
    
    (48,418
    )Preferred stock dividends
    
    
    (5,750
    )
    
    
    (3,114
    )
    
    
    Net loss attributable to common stockholders
    
    $
    (17,435
    )
    
    $
    (13,269
    )
    
    $
    (48,418
    )Net loss per common share (basic and diluted)
    
    $
    (0.71
    )
    
    $
    (0.59
    )
    
    $
    (2.16
    )Weighted average shares outstanding (basic and diluted)
    
    
    24,454,796
    
    
    
    22,439,325
    
    
    
    22,372,475
  F - 4




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries

Consolidated Statements of Stockholders Deficiency and Comprehensive Income (Loss)
 AccumulatedAdditional
    
    
    
    
    
    
    OtherPreferred Stock
    
    
    Common Stock
    
    
    Treasury Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    (Loss)/Income
    
    
    TotalBalance, December 31, 2007
    
    
    
    
    
    $
    
    
    
    
    22,969,775
    
    
    $
    230
    
    
    
    60,000
    
    
    $
    (1,075
    )
    
    $
    330,405
    
    
    $
    (367,638
    )
    
    $
    (10,164
    )
    
    $
    (48,242
    )Common stock option exercises
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    470,000
    
    
    
    (4,662
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,662
    )Retirement of treasury stock
    
    
    
    
    
    
    
    
    
    
    (350,000
    )
    
    
    (3
    )
    
    
    (350,000
    )
    
    
    2,912
    
    
    
    (2,909
    )
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    
    
    
    
    
    
    
    
    1,185Restricted stock
    
    
    
    
    
    
    
    
    
    
    44,289
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,090
    
    
    
    
    
    
    
    
    
    
    
    1,090Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    (32
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,418
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,196
    )Unrealized loss on
interest rate swap agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,474
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,088
    )Balance, December 31, 2008
    
    
    
    
    
    $
    
    
    
    
    22,664,164
    
    
    $
    227
    
    
    
    180,000
    
    
    $
    (2,825
    )
    
    $
    329,740
    
    
    $
    (416,056
    )
    
    $
    (39,834
    )
    
    $
    (128,748
    )Common stock option exercises
    
    
    
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Retirement of treasury stock
    
    
    
    
    
    
    
    
    
    
    (180,000
    )
    
    
    (2
    )
    
    
    (180,000
    )
    
    
    2,825
    
    
    
    (2,823
    )
    
    
    
    
    
    
    
    
    
    
    Preferred stock issuance
    
    
    57,500
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,695
    
    
    
    
    
    
    
    
    
    
    
    53,696Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,114
    )
    
    
    
    
    
    
    
    
    
    
    (3,114
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,057
    
    
    
    
    
    
    
    
    
    
    
    1,057Restricted stock
    
    
    
    
    
    
    
    
    
    
    50,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    667
    
    
    
    
    
    
    
    
    
    
    
    667Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,155
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,861Unrealized gain on
interest rate swap agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,748Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,454Balance, December 31, 2009
    
    
    57,500
    
    
    $
    1
    
    
    
    22,537,664
    
    
    $
    225
    
    
    
    
    
    
    $
    
    
    
    $
    379,223
    
    
    $
    (426,211
    )
    
    $
    (24,225
    )
    
    $
    (70,987
    )Common stock option exercises
    
    
    
    
    
    
    
    
    
    
    17,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    48Common stock issuance
    
    
    
    
    
    
    
    
    
    
    2,484,000
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    13,633
    
    
    
    
    
    
    
    
    
    
    
    13,658Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,750
    )
    
    
    
    
    
    
    
    
    
    
    (5,750
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,281
    
    
    
    
    
    
    
    
    
    
    
    1,281Restricted stock
    
    
    
    
    
    
    
    
    
    
    49,875
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    480
    
    
    
    
    
    
    
    
    
    
    
    481Warrants issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    46Comprehensive income:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,685
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    778Unrealized gain on
interest rate swap agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,781Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,874Balance, December 31, 2010
    
    
    57,500
    
    
    $
    1
    
    
    
    25,088,539
    
    
    $
    251
    
    
    
    
    
    
    $
    
    
    
    $
    388,961
    
    
    $
    (437,896
    )
    
    $
    (5,666
    )
    
    $
    (54,349
    )
  F - 5




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries

Consolidated Statements of Cash Flows
 Years Ended December 31,2010
    
    
    2009
    
    
    2008Operating activities:Net loss
    
    $
    (11,685
    )
    
    $
    (10,155
    )
    
    $
    (48,418
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    83,236
    
    
    
    100,309
    
    
    
    124,060Gain on extinguishment of debt (non-cash)
    
    
    
    
    
    
    (9,292
    )
    
    
    (1,446
    )Unrealized loss on derivative instruments
    
    
    1,511
    
    
    
    
    
    
    
    Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    11,212Loss on early retirement of debt
    
    
    1,050
    
    
    
    1,537
    
    
    
    448Share-based compensation and restricted stock
    
    
    1,762
    
    
    
    1,724
    
    
    
    2,275Gain due to insurance proceeds
    
    
    
    
    
    
    
    
    
    
    (815
    )Insurance proceeds related to business interruption
    
    
    
    
    
    
    
    
    
    
    815Other, net
    
    
    304
    
    
    
    588
    
    
    
    576Change in operating assets and liabilities:Accounts receivable, net
    
    
    2,571
    
    
    
    12,385
    
    
    
    9,030Other current assets
    
    
    (1,063
    )
    
    
    1,173
    
    
    
    2,030Accounts payable
    
    
    21,410
    
    
    
    (5,713
    )
    
    
    (5,454
    )Accrued expenses and deferred revenue
    
    
    4,268
    
    
    
    (4,981
    )
    
    
    (5,720
    )Other
    
    
    (1,658
    )
    
    
    (1,403
    )
    
    
    1,260Net cash provided by operating activities
    
    
    101,706
    
    
    
    86,172
    
    
    
    89,853Investing activities:Property and equipment additions
    
    
    (21,825
    )
    
    
    (21,341
    )
    
    
    (64,407
    )Net cash used for investing activities
    
    
    (21,825
    )
    
    
    (21,341
    )
    
    
    (64,407
    )Financing activities:Repayment of long-term debt
    
    
    (101,408
    )
    
    
    (91,109
    )
    
    
    (33,760
    )Payment of capital lease obligations
    
    
    (1,031
    )
    
    
    (1,437
    )
    
    
    (1,365
    )Borrowings on revolving credit facility
    
    
    45,000
    
    
    
    
    
    
    
    30,000Repayments of revolving credit facility
    
    
    (45,000
    )
    
    
    
    
    
    
    (30,000
    )Purchase of long-term debt
    
    
    
    
    
    
    (23,685
    )
    
    
    Proceeds from investment in long-term debt
    
    
    5,921
    
    
    
    5,410
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    (4,662
    )Proceeds from issuance of common stock, net of offering costs
    
    
    13,658
    
    
    
    
    
    
    
    Proceeds from issuance of preferred stock, net of offering costs
    
    
    
    
    
    
    53,696
    
    
    
    Payment of dividends to preferred shareholders
    
    
    (5,750
    )
    
    
    (1,677
    )
    
    
    Exercise of stock options
    
    
    49
    
    
    
    2
    
    
    
    Proceeds from issuance of stock warrants
    
    
    46
    
    
    
    
    
    
    
    Net cash used for financing activities
    
    
    (88,515
    )
    
    
    (58,800
    )
    
    
    (39,787
    )Effect of exchange rates on cash
    
    
    4
    
    
    
    180
    
    
    
    (428
    )(Decrease) increase in cash
    
    
    (8,630
    )
    
    
    6,211
    
    
    
    (14,769
    )Cash at beginning of period
    
    
    17,011
    
    
    
    10,800
    
    
    
    25,569Cash at end of period
    
    $
    8,381
    
    
    $
    17,011
    
    
    $
    10,800
  F - 6




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
Notes to Consolidated Financial Statements
 Note 1  The Company
   Note 2  Summary of Significant Accounting Policies
 Revenue Recognition 
 Ø
    
    Guest Entertainment Services.Our primary source of revenue is from providing in-room,
interactive television services to the lodging industry, which the hotel guest typically
purchases on a per-view, hourly or daily basis. These services include on-demand movies,
on-demand games, music and music videos, Internet on television and television on-demand.
We recognize revenue from the sale of these guest entertainment services in the period in
which such services are sold to the hotel guest and when collection is reasonably assured.
Persuasive evidence of a purchase exists through a guest buy transaction recorded on our
system. No future performance obligations exist with respect to these types of services
once they have been provided to the hotel guest. The prices related to our products or
services are fixed or determinable prior to delivery of the products or services.
 Ø
    
    Cable Television Programming Services.We generate revenue from the sale of basic and
premium cable television programming to individual hotels. In contrast to Guest
Entertainment services, where the hotel guest is charged directly for the service, we
charge the hotel for our cable television programming services. We recognize revenue from
the sale of cable television programming services in the period in which such services are
sold and when collection is reasonably assured. We establish the prices charged to each
hotel and no future performance obligations exist on programming which has been provided to
the hotel. Persuasive evidence of an arrangement exists through our long-term contract
with each hotel. We also have advance billings from one month to three months for certain
basic and premium programming services where the revenue is deferred and recognized in the
periods which services are provided.
 Ø
    
    Broadband Service and Support.We provide ongoing maintenance, service and call center
support services to hotel properties installed by us and also to hotel properties installed
by other providers. In addition, we provide, in some cases, the hotel property with the
portal to access the Internet. We receive monthly service fees from such hotel properties
for our maintenance services and Internet access. We recognize the service fee ratably
over the term of the contract. The prices for these services are fixed and determinable
prior to delivery of the service. The fair value of these services is known due to
objective and reliable evidence from contracts and stand-alone sales. Under the service
agreement, which includes maintenance and Internet access, we recognize revenue ratably
over the term of the maintenance and service contract, typically three years.
 F - 7




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##### Table of Contents



Ø
    
    Broadband System Sales.We provide broadband Internet access through the sale and
installation of equipment. Revenue from the sale and installation of this equipment is
recognized when the equipment is installed. The delivery and installation of the equipment
are concurrent. In addition, this equipment, which can be acquired from other manufacturers
or retailers, has stand-alone value to the customer. The software used within these systems
can also be supplied by other vendors unrelated to us. Equipment prices are fixed and
determinable prior to delivery and are based on objective and reliable sales evidence from a
stand-alone basis.
 Ø
    
    Hotel System Sales and Support.We also market and sell our guest entertainment
interactive systems to hotels, along with recurring support for interactive content,
software maintenance and technical field service, for a fixed fee. Revenue from the sale
and installation of the interactive system, including the operating software, is deferred
and recognized over the term of the contract, generally five years, due to inseparable
proprietary software elements. The multiple elements are not separable because the
proprietary software is required to operate the system and we do not license or sell the
software separately under this business model. The interactive system prices are fixed and
determinable prior to delivery. Revenue from this arrangement, which includes equipment,
operating software, interactive content and maintenance services, is recognized ratably
over the term of the related contract.
 Ø
    
    Other Cable Television Programming Systems and Equipment Sales and Services.We
generate revenues from the sale and installation of cable television programming systems
(i.e. DIRECTV satellite systems); from the installation of master antenna (MATV)
equipment, including wiring, at the hotel; and from the sale of miscellaneous system
equipment or services, such as in-room terminals, television remotes or other media
devices, along with service parts and labor. Prices for the equipment or services are
fixed and determinable prior to delivery. The equipment is not proprietary and can be
supplied by other vendors. These sales are not made under multiple element arrangements
and we recognize the revenue when the equipment is delivered or service (repair or
installation) has been performed. No future performance obligation exists on an equipment
sale or on a repair service which has been provided.
 Ø
    
    Advertising and Media Services.We generate revenue from the sale of advertising-based
media services within our hospitality media and connectivity businesses through our
wholly-owned subsidiary, The Hotel Networks, and server-based channels within our
interactive room base. Advertising-based media services include traditional television
advertising, video-on-demand or interactive advertising, programming carriage services and
channel access services. The Hotel Networks delivers targeted advertising to hotel rooms
on, or sells programming providers access to, 10 satellite-delivered channels, known as the
SuperBlock, which include MSNBC, CNBC, FOX News and The Weather Channel. In addition to
the satellite platform, we generate revenue from server-based channels and other
interactive and location-based applications which can be delivered by our interactive
television platform. Advertising revenue is recognized, net of agency commissions, when
advertisements are broadcast or ratably over a contracted advertising period and when
collection is reasonably assured. We establish the prices charged to each advertiser and
no future performance obligations exist on advertising which has been broadcast.
Persuasive evidence of an arrangement exists through our contracts with each advertiser.
 Ø
    
    Healthcare System Sales and Support.We provide our interactive television
infrastructure and content to the healthcare industry. We generate revenue from two
sources: 1) the sale and installation of system equipment and 2) support agreements with
the facility to provide software maintenance, programming and system maintenance for one
year. Historically, revenue from the sale and installation of our interactive system was
recognized ratably over the one-year maintenance period after the equipment was installed.
The contracted system hardware, installation and maintenance elements were not separable
during this start-up phase due to insufficient vendor specific objective evidence (VSOE)
of fair value. The package price of the interactive system and related maintenance is
fixed and determinable prior to delivery. Upon completion of the initial year, the support
arrangement, which includes interactive content, software maintenance and system services,
is renewable and is recognized ratably over the term of the related contract. The hospital
is under no obligation to contract with us for the support arrangement. They may contract
with other providers and utilize the equipment and software installed by us. We attained
100% renewal activity for maintenance services, therefore establishing VSOE of the fair
value of maintenance services. The entire selling price of the interactive system is
recognized upon installation using the residual method.
 F - 8




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##### Table of Contents



Principles of Consolidation 
 Foreign Currency Translation 
 Use of Estimates 
 Long-Lived Assets 
 Property and Equipment 
 YearsBuildings
    
    
    30Hotel systems
    
    
    1 1/2  7Other equipment
    
    
    3  10
 Allowance for System Removal 
 Allowance for Excess or Obsolete System Components 
 F - 9




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##### Table of Contents



Goodwill Impairment 
     Intangible Assets 
 YearsHotel contracts and relationships
    
    
    10  20Tradenames
    
    
    7Acquired technologies, rights and patents
    
    
    2  10Content agreements and relationships
    
    
    4
 F - 10




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##### Table of Contents



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




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##### Table of Contents



Derivative Financial Instruments 
 Income Taxes 
 Comprehensive Income (Loss) 
 2010
    
    
    2009
    
    
    2008Net loss
    
    $
    (11,685
    )
    
    $
    (10,155
    )
    
    $
    (48,418
    )Foreign currency translation adjustment
    
    
    778
    
    
    
    1,861
    
    
    
    (6,196
    )Unrealized gain (loss) on interest rate swap agreements
    
    
    17,781
    
    
    
    13,748
    
    
    
    (23,474
    )Comprehensive income (loss)
    
    $
    6,874
    
    
    $
    5,454
    
    
    $
    (78,088
    )
  Unrealized(Loss) Gain on
    
    
    Foreign
    
    
    AccumulatedInterest Rate
    
    
    Currency
    
    
    OtherSwap
    
    
    Translation
    
    
    ComprehensiveAgreements
    
    
    Adjustment
    
    
    LossBalance, December 31, 2007
    
    $
    (16,897
    )
    
    $
    6,733
    
    
    $
    (10,164
    )Change during period
    
    
    (23,474
    )
    
    
    (6,196
    )
    
    
    (29,670
    )Balance, December 31, 2008
    
    
    (40,371
    )
    
    
    537
    
    
    
    (39,834
    )Change during period
    
    
    13,748
    
    
    
    1,861
    
    
    
    15,609Balance, December 31, 2009
    
    
    (26,623
    )
    
    
    2,398
    
    
    
    (24,225
    )Change during period
    
    
    17,781
    
    
    
    778
    
    
    
    18,559Balance, December 31, 2010
    
    $
    (8,842
    )
    
    $
    3,176
    
    
    $
    (5,666
    )
 Treasury Stock 
 F - 12




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##### Table of Contents



Earnings Per Share Computation 
   2010
    
    
    2009
    
    
    2008Basic EPS:Net loss
    
    $
    (11,685
    )
    
    $
    (10,155
    )
    
    $
    (48,418
    )Preferred stock dividends
    
    
    (5,750
    )
    
    
    (3,114
    )
    
    
    $
    (17,435
    )
    
    $
    (13,269
    )
    
    $
    (48,418
    )Loss allocated to participating securities (1)
    
    
    
    
    
    
    
    
    
    
    Net loss available to common stockholders
    
    $
    (17,435
    )
    
    $
    (13,269
    )
    
    $
    (48,418
    )Weighted average shares outstanding for basic
earnings per common share
    
    
    24,454,796
    
    
    
    22,439,325
    
    
    
    22,372,475Basic earnings per share
    
    $
    (0.71
    )
    
    $
    (0.59
    )
    
    $
    (2.16
    )Diluted EPS:Net loss
    
    $
    (11,685
    )
    
    $
    (10,155
    )
    
    $
    (48,418
    )Preferred stock dividends
    
    
    (5,750
    )
    
    
    (3,114
    )
    
    
    $
    (17,435
    )
    
    $
    (13,269
    )
    
    $
    (48,418
    )Loss allocated to participating securities (1)
    
    
    
    
    
    
    
    
    
    
    Net loss available to common stockholders
    
    $
    (17,435
    )
    
    $
    (13,269
    )
    
    $
    (48,418
    )Weighted average shares outstanding for basic
earnings per common share
    
    
    24,454,796
    
    
    
    22,439,325
    
    
    
    22,372,475Dilutive effect of potential shares (2)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AWeighted average shares outstanding for diluted
earnings per common share
    
    
    24,454,796
    
    
    
    22,439,325
    
    
    
    22,372,475Diluted earnings per share
    
    $
    (0.71
    )
    
    $
    (0.59
    )
    
    $
    (2.16
    )Potential dilutive common shares (2)
    
    
    17,062,267
    
    
    
    17,029,401
    
    
    
    1,710,718
 
 (1)
    
    For the years ended December 31, 2010, 2009 and 2008, participating securities, which do not
participate in losses, were not included in the calculations of earnings per share, as we were
in a loss position and their inclusion would have been anti-dilutive.(2)
    
    For the years ended December 31, 2010, 2009 and 2008, potential dilutive common shares, which
include stock options, unvested restricted stock, warrants and the conversion of preferred
stock, were not included in the computation of diluted earnings per share, as we were in a loss position and their
inclusion would have been anti-dilutive. F - 13




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##### Table of Contents



Share-based Compensation 
 Statements of Cash Flows 
 Effect of Recently Issued Accounting Standards
   F - 14




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##### Table of Contents



F - 15




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##### Table of Contents



Note 3  Fair Value Measurements
     Financial Assets and Financial Liabilities
 2010
    
    
    2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueInterest rate swaps -
liability position
    
    $
    10,353
    
    
    $
    10,353
    
    
    $
    26,623
    
    
    $
    26,623Long-term debt
    
    $
    373,639
    
    
    $
    349,426
    
    
    $
    469,946
    
    
    $
    421,976
    Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantTotal
    
    
    Markets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Asset
    
    
    Inputs
    
    
    InputsMeasurement
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Year Ended December 31, 2009:Interest rate swaps -
liability position
    
    $
    26,623
    
    
    $
    
    
    
    $
    26,623
    
    
    $
    Year Ended December 31, 2010:Interest rate swaps -
liability position
    
    $
    10,353
    
    
    $
    
    
    
    $
    10,353
    
    
    $
    
 F - 16




---



##### Table of Contents



Nonfinancial Assets and Nonfinancial Liabilities
  Note 4  Property and Equipment, Net
  2010
    
    
    2009Land, building and equipment
    
    $
    115,031
    
    
    $
    111,777Hotel systems
    
    
    726,638
    
    
    
    754,869Total
    
    
    841,669
    
    
    
    866,646Less  depreciation and amortization
    
    
    (684,752
    )
    
    
    (659,983
    )Property and equipment, net
    
    $
    156,917
    
    
    $
    206,663
  Note 5  Debt Issuance Costs
  2010
    
    
    2009Debt issuance costs
    
    $
    9,705
    
    
    $
    10,754Accumulated amortization
    
    
    (6,024
    )
    
    
    (4,749
    )$
    3,681
    
    
    $
    6,005
 Note 6  Goodwill and Other Intangible Assets
   F - 17




---



##### Table of Contents



AdvertisingHospitality
    
    
    Services
    
    
    TotalBalance as of December 31, 2008Goodwill
    
    $
    92,614
    
    
    $
    18,679
    
    
    $
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )92,614
    
    
    
    7,467
    
    
    
    100,081Activity during the period
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2009Goodwill
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )92,614
    
    
    
    7,467
    
    
    
    100,081Activity during the period
    
    
    
    
    
    
    
    
    
    
    Balance as of December 31, 2010Goodwill
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )$
    92,614
    
    
    $
    7,467
    
    
    $
    100,081
   F - 18




---



##### Table of Contents



2010
    
    
    2009Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and
relationships
    
    $
    120,315
    
    
    $
    (23,950
    )
    
    $
    120,315
    
    
    $
    (17,629
    )Other acquired intangibles
    
    
    13,956
    
    
    
    (12,769
    )
    
    
    12,884
    
    
    
    (12,130
    )Tradenames
    
    
    3,124
    
    
    
    (2,107
    )
    
    
    3,094
    
    
    
    (1,626
    )Acquired patents
    
    
    5,175
    
    
    
    (4,739
    )
    
    
    5,142
    
    
    
    (4,009
    )$
    142,570
    
    
    $
    (43,565
    )
    
    $
    141,435
    
    
    $
    (35,394
    )
  Note 7  Accrued Expenses
  2010
    
    
    2009Property, sales and other taxes
    
    $
    6,411
    
    
    $
    6,933Compensation
    
    
    4,639
    
    
    
    4,360Interest
    
    
    208
    
    
    
    92Programming related
    
    
    1,782
    
    
    
    2,139Restructuring and reorganization
    
    
    172
    
    
    
    758Preferred stock dividends
    
    
    1,438
    
    
    
    1,437Purchase commitments
    
    
    3,414
    
    
    
    371Other
    
    
    4,263
    
    
    
    3,047$
    22,327
    
    
    $
    19,137
 Note 8  Long-term Debt and Credit Facilities
  2010
    
    
    2009Bank Credit Facility:Bank term loan
    
    $
    372,511
    
    
    $
    467,998Revolving credit facility
    
    
    
    
    
    
    Capital leases
    
    
    1,128
    
    
    
    1,948373,639
    
    
    
    469,946Less current maturities
    
    
    (4,807
    )
    
    
    (6,101
    )$
    368,832
    
    
    $
    463,845
 F - 19




---



##### Table of Contents



Bank Credit Facility
     F - 20




---



##### Table of Contents



Capital Leases
  2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015Long-term debt
    
    $
    4,100
    
    
    $
    4,100
    
    
    $
    4,100
    
    
    $
    360,211
    
    
    $
    Capital leases
    
    
    762
    
    
    
    346
    
    
    
    69
    
    
    
    29
    
    
    
    14,862
    
    
    
    4,446
    
    
    
    4,169
    
    
    
    360,240
    
    
    
    1Less amount representing
interest on capital leases
    
    
    (55
    )
    
    
    (18
    )
    
    
    (4
    )
    
    
    (2
    )
    
    
    $
    4,807
    
    
    $
    4,428
    
    
    $
    4,165
    
    
    $
    360,238
    
    
    $
    1
  Note 9  Derivative Information
     F - 21




---



##### Table of Contents



Contractual/
    
    
    
    
    
    Estimated FairNotional
    
    
    Balance Sheet
    
    
    ValueAmount
    
    
    Location
    
    
    Asset
    
    
    (Liability)Year ended December
31, 2009:Interest rate swaps
    
    $
    437,500
    
    
    
    Long-term liabilities
    
    
    $
    
    
    
    $
    (26,623
    )Year ended December
31, 2010:Interest rate swaps
    
    $
    437,500
    
    
    
    Current liabilities
    
    
    $
    
    
    
    $
    (10,353
    )
   Effective PortionIncome StatementLocation ofAmount of
    
    
    Swap Interest
    
    
    Swap InterestGain (Loss)
    
    
    Reclassified From
    
    
    Reclassified FromRecognized
    
    
    Accumulated
    
    
    Accumulated
    
    
    Ineffective Portionin Other
    
    
    Other
    
    
    Other
    
    
    IncomeType of Cash
    
    Comprehensive
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    Statement
    
    
    AmountFlow Hedge
    
    Income
    
    
    Income
    
    
    Income
    
    
    Location
    
    
    RecognizedYear Ended December 31, 2009:Interest rate swaps
    
    $
    (7,877
    )
    
    Interest expense
    
    $
    21,625
    
    
    Interest expense
    
    $
    Year Ended December 31, 2010:Interest rate swaps
    
    $
    (4,632
    )
    
    Interest expense
    
    $
    20,902
    
    
    Interest expense
    
    $
    1,511
 Note 10  Commitments and Contingencies
 Programming Agreements SM
 Minimum Guarantees
 F - 22




---



##### Table of Contents



Operating Leases
 Legal Proceedings
   Note 11  Stockholders Equity
 Perpetual Preferred Stock 
 F - 23




---



##### Table of Contents



Common Stock 
 Share Repurchase Program 
 F - 24




---



##### Table of Contents



Stockholder Rights Plan 
 Warrants 
 Note 12  Stock Option Plans
     2010
    
    
    2009
    
    
    2008Compensation Cost:Stock options
    
    $
    1,281
    
    
    $
    1,057
    
    
    $
    1,185Restricted stock
    
    
    481
    
    
    
    667
    
    
    
    1,090Total share-based compensation expense
    
    $
    1,762
    
    
    $
    1,724
    
    
    $
    2,275
  Stock Options
  F - 25




---



##### Table of Contents



2010
    
    
    2009
    
    
    2008Weighted average fair value of options granted
    
    $
    4.23
    
    
    $
    1.61
    
    
    $
    5.32Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted average risk-free interest
    
    
    4.2
    %
    
    
    4.3
    %
    
    
    4.4
    %Weighted average expected volatility
    
    
    93.0
    %
    
    
    72.0
    %
    
    
    45.4
    %Weighted average expected life  employee
    
    
    5.25 years
    
    
    
    5.25 years
    
    
    
    5.25 yearsWeighted average expected life  officers
    
    
    5.75 years
    
    
    
    5.75 years
    
    
    
    5.75 yearsWeighted average expected life 
non-employee director
    
    
    8.00 years
    
    
    
    8.00 years
    
    
    
    8.00 years
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicOptions
    
    
    Price
    
    
    in Years
    
    
    ValueOutstanding, December 31, 2007
    
    
    1,165,450
    
    
    $
    18.96Granted
    
    
    371,500
    
    
    
    11.32Exercised
    
    
    (100
    )
    
    
    10.24Forfeited/canceled
    
    
    (124,500
    )
    
    
    17.27Outstanding, December 31, 2008
    
    
    1,412,350
    
    
    
    17.10Granted
    
    
    291,500
    
    
    
    2.23Exercised
    
    
    (3,000
    )
    
    
    0.70Forfeited/canceled
    
    
    (18,550
    )
    
    
    19.28Outstanding, December 31, 2009
    
    
    1,682,300
    
    
    
    14.48Granted
    
    
    391,500
    
    
    
    5.50Exercised
    
    
    (17,000
    )
    
    
    2.65Forfeited/canceled
    
    
    (394,050
    )
    
    
    16.59Outstanding, December 31, 2010
    
    
    1,662,750
    
    
    $
    11.99
    
    
    
    5.8
    
    
    $
    568,450Options exercisable, December
31, 2010
    
    
    1,019,299
    
    
    $
    15.16
    
    
    
    4.2
    
    
    $
    138,815
 F - 26




---



##### Table of Contents



Restricted Stock
    2010
    
    
    2009
    
    
    2008Compensation cost  restricted stock:Time-based vesting
    
    $
    481
    
    
    $
    667
    
    
    $
    595Performance-based vesting
    
    
    
    
    
    
    
    
    
    
    495Total share-based compensation expense  restricted stock
    
    $
    481
    
    
    $
    667
    
    
    $
    1,090
  Time Based
    
    
    Performance BasedWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageRestricted
    
    
    Grant-date
    
    
    Restricted
    
    
    Grant-dateStock
    
    
    Fair Value
    
    
    Stock
    
    
    Fair ValueOutstanding, beginning of period
    
    
    93,875
    
    
    $
    12.60
    
    
    
    1,084
    
    
    $
    31.10Granted
    
    
    96,000
    
    
    
    5.61
    
    
    
    
    
    
    
    Vested
    
    
    (97,750
    )
    
    
    7.53
    
    
    
    
    
    
    
    Forfeited/canceled
    
    
    (8,125
    )
    
    
    18.91
    
    
    
    (459
    )
    
    
    31.10Outstanding, end of period
    
    
    84,000
    
    
    $
    9.90
    
    
    
    625
    
    
    $
    31.10
 F - 27




---



##### Table of Contents



Unrecognized Compensation Expense
  Weighted averageDecember 31,
    
    
    recognition period2010
    
    
    (months)Unrecognized compensation cost:Stock options, net of expected forfeitures
    
    $
    1,667
    
    
    
    27.1Restricted stock  time based vesting
    
    
    246
    
    
    
    14.7Restricted stock  performance based vesting
    
    
    
    
    
    
    Total unrecognized compensation cost
    
    $
    1,913
 Note 13  Employee Benefit Plans
  Note 14  Restructuring
     F - 28




---



##### Table of Contents



Severance and other
    
    
    Cost of closingbenefit related
    
    
    redundant acquiredcosts
    
    
    facilities
    
    
    Other
    
    
    TotalDecember 31, 2007 balance
    
    $
    5,289
    
    
    $
    485
    
    
    $
    
    
    
    $
    5,774Charges to expense
    
    
    3,277
    
    
    
    1,587
    
    
    
    183
    
    
    
    5,047Cash payments
    
    
    (6,570
    )
    
    
    (1,632
    )
    
    
    (183
    )
    
    
    (8,385
    )December 31, 2008 balance
    
    
    1,996
    
    
    
    440
    
    
    $
    
    
    
    
    2,436Charges to expense
    
    
    (77
    )
    
    
    680
    
    
    
    
    
    
    
    603Cash payments
    
    
    (1,583
    )
    
    
    (698
    )
    
    
    
    
    
    
    (2,281
    )December 31, 2009 balance
    
    
    336
    
    
    
    422
    
    
    $
    
    
    
    
    758Charges to expense
    
    
    327
    
    
    
    94
    
    
    
    
    
    
    
    421Cash payments
    
    
    (628
    )
    
    
    (379
    )
    
    
    
    
    
    
    (1,007
    )December 31, 2010 balance
    
    $
    35
    
    
    $
    137
    
    
    $
    
    
    
    $
    172
 Note 15  Income Taxes
  2010
    
    
    2009
    
    
    2008Domestic
    
    $
    (12,512
    )
    
    $
    (11,401
    )
    
    $
    (48,578
    )Foreign
    
    
    1,661
    
    
    
    2,009
    
    
    
    1,009Total
    
    $
    (10,851
    )
    
    $
    (9,392
    )
    
    $
    (47,569
    )
  2010
    
    
    2009
    
    
    2008Federal income tax (benefit) computed at
statutory rate (35%)
    
    $
    (3,798
    )
    
    $
    (3,287
    )
    
    $
    (16,652
    )State income taxes, net of federal benefit
    
    
    463
    
    
    
    353
    
    
    
    466Impairment charge
    
    
    
    
    
    
    479
    
    
    
    3,924Other non-deductible items
    
    
    384
    
    
    
    60
    
    
    
    124Other
    
    
    
    
    
    
    
    
    
    
    Net change to valuation allowance, excluding
change due to acquisitions
    
    
    3,785
    
    
    
    3,158
    
    
    
    12,987Provision for income taxes
    
    $
    834
    
    
    $
    763
    
    
    $
    849
 F - 29




---



##### Table of Contents



2010
    
    
    2009
    
    
    2008Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    713
    
    
    
    543
    
    
    
    642Foreign
    
    
    121
    
    
    
    220
    
    
    
    207834
    
    
    
    763
    
    
    
    849Deferred:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total income tax expense
    
    $
    834
    
    
    $
    763
    
    
    $
    849
  2010
    
    
    2009
    
    
    2008Deferred tax assets:Tax net operating loss and tax credit
carryforwards
    
    $
    227,804
    
    
    $
    220,979
    
    
    $
    204,466Capital loss carryforwards
    
    
    
    
    
    
    
    
    
    
    Reserves and accruals
    
    
    3,195
    
    
    
    2,320
    
    
    
    2,854Net deferred revenue
    
    
    7,356
    
    
    
    5,766
    
    
    
    5,753Book over tax depreciation/amortization
    
    
    
    
    
    
    
    
    
    
    Other tax assets
    
    
    9,811
    
    
    
    10,690
    
    
    
    9,457Valuation allowance
    
    
    (237,848
    )
    
    
    (221,665
    )
    
    
    (201,104
    )Total deferred tax assets
    
    
    10,318
    
    
    
    18,090
    
    
    
    21,426Deferred tax liabilities:Reserves and accruals
    
    
    
    
    
    
    
    
    
    
    Tax over book depreciation/amortization
    
    
    (10,318
    )
    
    
    (18,090
    )
    
    
    (21,426
    )Total deferred tax liabilities
    
    
    (10,318
    )
    
    
    (18,090
    )
    
    
    (21,426
    )Net deferred tax liability
    
    $
    
    
    
    $
    
    
    
    $
    
    F - 30




---



##### Table of Contents



Beginning
    
    
    
    
    
    
    
    
    
    
    EndingBalance
    
    
    Additions
    
    
    Deductions
    
    
    BalanceYear Ended December 31, 2009:Uncertain Tax Benefit
    
    $
    581
    
    
    $
    
    
    
    $
    (19
    )
    
    $
    562Year Ended December 31, 2010:Uncertain Tax Benefit
    
    $
    562
    
    
    $
    
    
    
    $
    (72
    )
    
    $
    490
  Note 16  Segment Information
   F - 31




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##### Table of Contents



2010
    
    
    2009
    
    
    2008Total revenue:Hospitality
    
    $
    433,787
    
    
    $
    469,743
    
    
    $
    519,922Advertising Services
    
    
    9,867
    
    
    
    6,915
    
    
    
    7,888Healthcare
    
    
    8,518
    
    
    
    7,834
    
    
    
    6,069Total
    
    $
    452,172
    
    
    $
    484,492
    
    
    $
    533,879Operating profit:Hospitality
    
    $
    128,879
    
    
    $
    146,714
    
    
    $
    167,104Advertising Services
    
    
    769
    
    
    
    (2,894
    )
    
    
    (3,412
    )Healthcare
    
    
    2,070
    
    
    
    1,903
    
    
    
    957Operating profit
    
    
    131,718
    
    
    
    145,723
    
    
    
    164,649Corporate
    
    
    (24,672
    )
    
    
    (23,245
    )
    
    
    (30,365
    )Depreciation and amortization
    
    
    (83,236
    )
    
    
    (100,309
    )
    
    
    (124,060
    )Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    (11,212
    )Restructuring charge
    
    
    (421
    )
    
    
    (603
    )
    
    
    (5,047
    )Other operating income
    
    
    21
    
    
    
    126
    
    
    
    964Interest expense
    
    
    (33,537
    )
    
    
    (38,092
    )
    
    
    (42,551
    )Gain on extinguishment of debt
    
    
    
    
    
    
    9,292
    
    
    
    1,446Loss on early retirement of debt
    
    
    (1,050
    )
    
    
    (1,537
    )
    
    
    (448
    )Other income (expense)
    
    
    326
    
    
    
    (747
    )
    
    
    (945
    )Loss before income taxes
    
    $
    (10,851
    )
    
    $
    (9,392
    )
    
    $
    (47,569
    )Capital expenditures:Hospitality
    
    $
    16,834
    
    
    $
    17,433
    
    
    $
    53,422Advertising Services
    
    
    166
    
    
    
    214
    
    
    
    169Healthcare
    
    
    247
    
    
    
    249
    
    
    
    207Corporate
    
    
    4,578
    
    
    
    3,445
    
    
    
    10,609Total
    
    $
    21,825
    
    
    $
    21,341
    
    
    $
    64,407Total assets:Hospitality
    
    $
    406,085
    
    
    $
    468,609
    
    
    $
    542,862Advertising Services
    
    
    13,746
    
    
    
    11,728
    
    
    
    11,943Healthcare
    
    
    633
    
    
    
    616
    
    
    
    565Corporate
    
    
    23,542
    
    
    
    27,401
    
    
    
    34,416Total
    
    $
    444,006
    
    
    $
    508,354
    
    
    $
    589,786
 F - 32




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##### Table of Contents



2010
    
    
    2009
    
    
    2008United States
    
    $
    423,883
    
    
    $
    456,167
    
    
    $
    497,860Canada
    
    
    24,804
    
    
    
    24,992
    
    
    
    31,327Mexico
    
    
    2,414
    
    
    
    1,952
    
    
    
    2,973Other
    
    
    1,071
    
    
    
    1,381
    
    
    
    1,719Total
    
    $
    452,172
    
    
    $
    484,492
    
    
    $
    533,879
  2010
    
    
    2009
    
    
    2008United States
    
    $
    142,713
    
    
    $
    188,805
    
    
    $
    254,077Canada
    
    
    9,826
    
    
    
    13,218
    
    
    
    14,791Mexico
    
    
    4,378
    
    
    
    4,640
    
    
    
    4,962Total
    
    $
    156,917
    
    
    $
    206,663
    
    
    $
    273,830
 Note 17  Selected Quarterly Financial Data (Unaudited)
  Quarter
    
    
    Quarter
    
    
    Quarter
    
    
    QuarterEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2009Revenues
    
    $
    128,092
    
    
    $
    121,982
    
    
    $
    121,122
    
    
    $
    113,296Net income (loss)
    
    
    5,958
    
    
    
    (5,213
    )
    
    
    (4,982
    )
    
    
    (5,918
    )Net income (loss) attributable to common
stockholders
    
    
    5,958
    
    
    
    (5,245
    )
    
    
    (6,627
    )
    
    
    (7,355
    )Per common share (basic)
    
    $
    0.27
    
    
    $
    (0.23
    )
    
    $
    (0.30
    )
    
    $
    (0.33
    )Per common share (diluted)
    
    
    0.26
    
    
    
    (0.23
    )
    
    
    (0.30
    )
    
    
    (0.33
    )2010Revenues
    
    $
    118,052
    
    
    $
    113,071
    
    
    $
    113,794
    
    
    $
    107,255Net loss
    
    
    (2,502
    )
    
    
    (3,145
    )
    
    
    (1,674
    )
    
    
    (4,364
    )Net loss attributable to common stockholders
    
    
    (3,940
    )
    
    
    (4,582
    )
    
    
    (3,111
    )
    
    
    (5,802
    )Per common share (basic and diluted)
    
    $
    (0.17
    )
    
    $
    (0.18
    )
    
    $
    (0.12
    )
    
    $
    (0.23
    )
 F - 33




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
 
 Schedule II  Valuation and Qualifying Accounts
 Additions
    
    
    AdditionsBalance
    
    
    Charged to
    
    
    Related to
    
    
    
    
    
    
    BalanceBeginning
    
    
    Costs and
    
    
    Other
    
    
    
    
    
    
    End ofDescription
    
    of Period
    
    
    Expenses
    
    
    Accounts
    
    
    Deductions
    
    
    PeriodAllowances deducted from related
balance sheet accounts:Year Ended December 31, 2008:Allowance for Excess or Obsolete
System Components
    
    $
    675
    
    
    $
    513
    
    
    $
    
    
    
    $
    620
    
    
    $
    568Allowance for Doubtful Accounts
    
    
    432
    
    
    
    844
    
    
    
    
    
    
    
    723
    
    
    
    553Allowance for System Removal
    
    
    422
    
    
    
    3,157
    
    
    
    
    
    
    
    2,314
    
    
    
    1,265Deferred Tax Valuation Allowance
    
    
    197,232
    
    
    
    
    
    
    
    18,308
    
    
    
    14,436
    
    
    
    201,104Year Ended December 31, 2009:Allowance for Excess or Obsolete
System Components
    
    $
    568
    
    
    $
    776
    
    
    $
    
    
    
    $
    499
    
    
    $
    845Allowance for Doubtful Accounts
    
    
    553
    
    
    
    536
    
    
    
    
    
    
    
    437
    
    
    
    652Allowance for System Removal
    
    
    1,265
    
    
    
    2,641
    
    
    
    
    
    
    
    3,010
    
    
    
    896Deferred Tax Valuation Allowance
    
    
    201,104
    
    
    
    
    
    
    
    20,561
    
    
    
    
    
    
    
    221,665Year Ended December 31, 2010:Allowance for Excess or Obsolete
System Components
    
    $
    845
    
    
    $
    1,163
    
    
    $
    
    
    
    $
    811
    
    
    $
    1,197Allowance for Doubtful Accounts
    
    
    652
    
    
    
    636
    
    
    
    
    
    
    
    879
    
    
    
    409Allowance for System Removal
    
    
    896
    
    
    
    4,399
    
    
    
    
    
    
    
    4,301
    
    
    
    994Deferred Tax Valuation Allowance
    
    
    221,665
    
    
    
    
    
    
    
    16,183
    
    
    
    
    
    
    
    237,848
 F - 34