Note 12 — Stock Option Plans

Pursuant to the Chapter 11 filing, all stock options and restricted stock awards will be canceled.

The LodgeNet Interactive Corporation 2003 Stock Option and Incentive Plan (the “2003 Plan”) provides for the award of incentive stock options, non-qualified stock options, restricted stock, stock appreciation rights and phantom stock units. The stockholders approved and adopted this plan at the 2003 Annual Meeting and approved an amendment to the plan at the Annual Meeting in May of 2006. In September of 2012, the Company adopted the 2012 CEO Equity Incentive Plan (the “2012 CEO Equity Plan”). The 2012 CEO Equity Plan provides for the award of incentive stock options, non-qualified stock options and restricted stock for the purpose of attracting, retaining and rewarding a chief executive officer. As of December 31, 2012, under the 2003 Plan there were 3,500,000 shares authorized and 872,846 shares available for grant and under the 2012 CEO Equity Plan there were 1,100,000 shares authorized and 550,000 shares available for grant. In addition to the stock option and restricted stock awards currently outstanding under the 2003 Plan and the 2012 CEO Equity Plan, we have stock options outstanding under previously approved plans, which are inactive.

Certain officers, directors and key employees have been awarded restricted stock and options to purchase common stock of LodgeNet under the 2003 Plan, 2012 CEO Equity Plan and other prior plans. Stock options issued under the plans have an exercise price equal to the fair market value, as defined by the terms of the plan, on the date of grant. The stock options become exercisable in accordance with vesting schedules determined by the Compensation Committee of the Board of Directors, and expire ten years after the date of grant. Restrictions applicable to restricted stock lapse based either on performance or service conditions, as determined by the Compensation Committee of the Board of Directors.

We measure and recognize compensation expense for all stock-based awards based on estimated fair values, net of estimated forfeitures. Share-based compensation expense recognized in 2012, 2011 and 2010 includes compensation cost for all share-based payments based on the grant-date fair value estimated in accordance with the provisions of FASB ASC Topic 718, “Compensation — Stock Compensation.”

The following amounts were recognized in our Consolidated Statements of Operations for share-based compensation plans for the years ended December 31 (dollar amounts in thousands):

	2012		2011		2010
Compensation cost:
Stock options	$	594	$	1,142	$	1,281
Restricted stock	684		476		481
Total share-based compensation expense	$	1,278	$	1,618	$	1,762

For the years ended December 31, 2012, 2011 and 2010, the cash received from stock option exercises was nominal. As part of our change in executive structure, $787,000 of accelerated stock option compensation cost was recorded as restructuring charges. Due to our net operating loss tax position, we did not recognize a tax benefit from options exercised under the share-based payment arrangements. The amounts presented in the table above are included as non-cash compensation in our cash flow from operating activities.

Stock Options

For the year ended December 31, 2012, under the 2003 Plan we granted 217,500 stock options to certain officers and employees and under the 2012 CEO Equity Plan we granted 550,000 stock options to our chief executive officer. In 2012, we did not grant stock options to non-employee directors of the Company. Under all plans, the valuation methodology used to determine the fair value of the options issued during the year was the Black-Scholes-Merton option-pricing model. The Black-Scholes-Merton model requires the use of exercise behavior data and the use of a number of assumptions, including volatility of the stock price, the weighted average risk-free interest rate and the weighted average expected life of the options. We do not pay dividends; therefore, the dividend rate variable in the Black-Scholes-Merton model is zero.

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of our stock options and is calculated by using the average monthly yield equivalent to the option’s expected term.

The volatility assumption is measured as the fluctuation or movement of the Company’s stock price over a time period corresponding to the expected life of the option. We calculate volatility as the annualized standard deviation of the natural logarithms of relative stock prices over the option’s expected term and is based on monthly historical stock prices through the month preceding the grant date.

The expected life of stock options granted to employees and non-employee directors represents the weighted average period those options are expected to remain outstanding and is based on analysis of historical behavior of employees and non-employee director option holders.

Share-based compensation expense recognized in our results for the years ended December 31, 2012, 2011 and 2010 is based on awards ultimately expected to vest and has been reduced for estimated forfeitures. Our forfeiture rates were estimated based on our historical experience.

The weighted average fair value of options granted and the assumptions used in the Black-Scholes-Merton model during the years ended December 31 are set forth in the table below:

	2012		2011		2010
Weighted average fair value of options granted	$	1.01	$	3.32	$	4.23

Dividend yield	0.0%		0.0%		0.0%
Weighted average risk-free interest	3.5%		4.0%		4.2%
Weighted average expected volatility	105.0%		94.0%		93.0%
Weighted average expected life – employee	5.50 years		5.50 years		5.25 years
Weighted average expected life – officers	6.00 years		6.00 years		5.75 years
Weighted average expected life – non-employee director	8.25 years		8.25 years		8.00 years

The following is a summary of the stock option activity for the years ended December 31:

				Weighted
		Weighted		Average
		Average		Remaining	Aggregate
		Exercise		Term	Intrinsic
	Options	Price		in Years	Value
Outstanding, December 31, 2009	1,682,300	$	14.48
Granted	391,500	5.50
Exercised	(17,000)	2.65
Forfeited/canceled	(394,050)	16.59
Outstanding, December 31, 2010	1,662,750	11.99
Granted	247,500	4.23
Exercised	(13,000)	0.70
Forfeited/canceled	(339,325)	17.28
Outstanding, December 31, 2011	1,557,925	9.70
Granted	767,500	1.25
Exercised	(14,875)	0.70
Forfeited/canceled	(285,175)	10.93
Outstanding, December 31, 2012	2,025,375	$	6.39	6.4	$	-

Options exercisable, December 31, 2012	1,113,670	$	10.15	4.2	$	-

The aggregate intrinsic value in the table above represents the difference between the closing stock price on December 31, 2012 and the exercise price, multiplied by the number of in-the-money options which would have been received by the option holders had all option holders exercised their options on December 31, 2012. The total intrinsic value of options exercised for the years ended December 31, 2012, 2011 and 2010 was nominal.

The fair value of options vested during the years ended December 31, 2012, 2011 and 2010 was approximately $1,456,000, $1,344,000 and $1,145,000, respectively.

For the year ended December 31, 2012, 231,676 vested options to purchase shares with a weighted average exercise price of $12.58 expired. The remaining outstanding share options expire in 2013 through 2022. For the year ended December 31, 2011, 261,575 vested option to purchases shares with a weighted average exercise price of $17.53 expired, and for the year ended December 31, 2010, 281,550 vested options to purchase shares with a weighted average exercise price of $20.65 expired.

Restricted Stock

For the years ended December 31, 2012, 2011 and 2010, we awarded 60,000, 81,250 and 20,000 shares of time-based restricted stock, respectively, to certain officers pursuant to our 2003 Stock Option and Incentive Plan. The shares vest over four years from the date of grant, with 50% vested at the end of year three and 50% at the end of year four. The fair value of the restricted stock is equal to the fair market value, as defined by the terms of the 2003 Plan, on the date of grant and is amortized ratably over the vesting period. For the year ended December 31, 2012, we awarded 550,000 shares of time-based restricted stock pursuant to our 2012 CEO Equity Incentive Plan, however those shares were rescinded in 2012.

For the years ended December 31, 2012, 2011 and 2010, we awarded 287,600, 66,500 and 76,000 shares of time-based restricted stock, respectively, to our non-employee directors pursuant to our 2003 Stock Option and Incentive Plan. The shares vested 50% at the date of grant and 50% on the one-year anniversary of the date of grant. The fair value of the restricted stock is equal to the fair market value, as defined by the terms of the 2003 Plan, on the date of grant and is amortized 50% at the date of grant and 50% ratably over the one year vesting period.

We recorded the following amounts in our Consolidated Statements of Operations related to restricted stock for the years ended December 31 (dollar amounts in thousands):

	2012		2011		2010
Compensation cost – restricted stock:
Time-based vesting	$	684	$	476	$	481
Performance-based vesting	-		-		-
Total share-based compensation expense – restricted stock	$	684	$	476	$	481

A summary of the status of restricted stock and changes as of December 31, 2012 is set forth below:

	Time-Based			Performance-Based
		Weighted			Weighted
		Average			Average
	Restricted	Grant-date		Restricted	Grant-date
	Stock	Fair Value		Stock	Fair Value
Outstanding, beginning of period	141,000	$	5.12	625	$	31.10
Granted	897,600	0.96		-	-
Vested	(243,800)	2.92		-	-
Forfeited/canceled	(585,850)	0.46		-	-
Outstanding, end of period	208,950	$	2.87	625	$	31.10

Unrecognized Compensation Expense

As of December 31, 2012, unrecorded compensation costs related to awards issued under our various share-based compensation plans were as follows (dollar amounts in thousands):

			Weighted average
	December 31,		recognition period
	2012		(months)
Unrecognized compensation cost:
Stock options, net of expected forfeitures	$	852	28.9
Restricted stock - time-based vesting	297		13.2
Restricted stock - performance-based vesting	-		-
Total unrecognized compensation cost	$	1,149