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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[  X  ]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011

or

[      ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                          to                         

Commission File Number 0-22334

LodgeNet Interactive Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   46-0371161

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

3900 West Innovation Street, Sioux Falls, South Dakota 57107

(Address of Principal Executive Offices)                    (ZIP code)

(605) 988-1000

(Registrant’s telephone number,

including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

Indicate 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  X  No        

Indicate 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   X    No     

Indicate 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. (Check one):

Large accelerated filer               Accelerated filer              Non-accelerated filer                   Smaller reporting company    

                          (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 Exchange Act).  Yes        No  X  

At October 31, 2011, there were 25,271,984 shares outstanding of the Registrant’s common stock, $0.01 par value.


Table of Contents

LodgeNet Interactive Corporation and Subsidiaries

Index

 

        

Page

No.

 
Part I.  Financial Information   

Item 1 — Financial Statements:

  
 

Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and
December  31, 2010 (Audited)

     3   
 

Consolidated Statements of Operations (Unaudited) for
the Three and Nine Months Ended September  30, 2011 and 2010

     4   
 

Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended September  30, 2011 and 2010

     5   
 

Notes to Consolidated Financial Statements (Unaudited).

     6   

Item  2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     20   

Item 3 — Quantitative and Qualitative Disclosures About Market Risk.

     44   

Item 4 — Controls and Procedures

     44   
Part II.  Other Information   

Item 1 — Legal Proceedings.

     45   

Item 1A — Risk Factors.

     45   

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

     45   

Item 3 — Defaults Upon Senior Securities.

     45   

Item 5 — Other Information.

     45   

Item 6 — Exhibits

     45   

Signatures

     46   

 

 

As used herein (unless the context otherwise requires) “LodgeNet” and/or the “Registrant,” as well as the terms “we,” “us” and “our,” refer to LodgeNet Interactive Corporation (f/k/a LodgeNet Entertainment Corporation) and its consolidated subsidiaries.

“LodgeNet,” “On Command,” “The Hotel Networks,” “eSuite,” “Envision” and the LodgeNet logo are trademarks or registered trademarks of LodgeNet Interactive Corporation. All rights reserved. All other trademarks or service marks used herein are the property of their respective owners.

 

Page 2


Table of Contents

Part I — Financial Information

Item 1 — Financial Statements

LodgeNet Interactive Corporation and Subsidiaries

Consolidated Balance Sheets

(Dollar amounts in thousands, except share data)

 

000000000 000000000
     (Unaudited)
September 30,
2011
     (Audited)
December 31,
2010
 
Assets      

Current assets:

     

Cash

     $ 17,772           $ 8,381     

Accounts receivable, net

     44,921           49,332     

Other current assets

     11,796           12,728     
  

 

 

    

 

 

 

Total current assets

     74,489           70,441     

Property and equipment, net

     124,051           156,917     

Debt issuance costs, net

     4,681           3,681     

Intangible assets, net

     93,457           99,005     

Goodwill

     100,081           100,081     

Other assets

     12,209           13,881     
  

 

 

    

 

 

 

Total assets

     $     408,968           $     444,006     
  

 

 

    

 

 

 
Liabilities and Stockholders’ Deficiency      

Current liabilities:

     

Accounts payable

     $ 49,129           $ 60,303     

Current maturities of long-term debt

     10,456           4,807     

Accrued expenses

     20,308           22,327     

Fair value of derivative instruments

     -           10,353     

Deferred revenue

     17,031           23,168     
  

 

 

    

 

 

 

Total current liabilities

     96,924           120,958     

Long-term debt

     355,149           368,832     

Other long-term liabilities

     7,945           8,565     
  

 

 

    

 

 

 

Total liabilities

     460,018           498,355     
  

 

 

    

 

 

 

Commitments and contingencies

     

Stockholders’ deficiency:

     

Preferred stock, $.01 par value, 5,000,000 shares authorized;
Series B cumulative perpetual convertible, 10%, 57,500 issued and outstanding at September 30, 2011 and December 31, 2010, respectively (liquidation preference of $1,000 per share or $57,500,000 total)

     1           1     

Common stock, $.01 par value, 50,000,000 shares authorized;
25,209,580 and 25,088,539 shares outstanding at September 30, 2011 and December 31, 2010, respectively

     252           251     

Additional paid-in capital

     385,847           388,961     

Accumulated deficit

     (439,684)          (437,896)    

Accumulated other comprehensive income (loss)

     2,534           (5,666)    
  

 

 

    

 

 

 

Total stockholders’ deficiency

     (51,050)          (54,349)    
  

 

 

    

 

 

 

Total liabilities and stockholders’ deficiency

     $ 408,968           $ 444,006     
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 3


Table of Contents

LodgeNet Interactive Corporation and Subsidiaries

Consolidated Statements of Operations

Consolidated Statements of Operations (Unaudited)

(Dollar amounts in thousands, except share data)

 

0000000000 0000000000 0000000000 0000000000
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2011     2010     2011     2010  

Revenues:

       

Hospitality and Advertising Services

    $ 104,199          $ 111,524          $ 313,423          $ 338,681     

Healthcare

    2,648          2,270          7,788          6,236     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    106,847          113,794          321,211          344,917     
 

 

 

   

 

 

   

 

 

   

 

 

 

Direct costs and operating expenses:

       

Direct costs (exclusive of operating expenses and depreciation and amortization shown separately below):

       

Hospitality and Advertising Services

    58,615          63,180          176,555          190,622     

Healthcare

    1,421          1,100          3,871          3,170     

Operating expenses:

       

System operations

    9,768          10,674          29,569          31,816     

Selling, general and administrative

    10,326          11,797          30,854          36,226     

Depreciation and amortization

    17,075          20,141          54,499          63,238     

Restructuring charge

    732          101          1,896          343     

Other operating expense (income)

    31          (3)         9          2     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total direct costs and operating expenses

    97,968          106,990          297,253          325,417     
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    8,879          6,804          23,958          19,500     

Other income and (expenses):

       

Interest expense

    (6,379)         (8,120)         (25,012)         (25,515)    

Loss on early retirement of debt

    -          (137)         (158)         (898)    

Other (expense) income

    (166)         5          149          232     
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    2,334          (1,448)         (1,063)         (6,681)    

Provision for income taxes

    (290)         (226)         (725)         (640)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    2,044          (1,674)         (1,788)         (7,321)    

Preferred stock dividends

    (1,437)         (1,437)         (4,312)         (4,312)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

    $ 607          $ (3,111)         $ (6,100)         $ (11,633)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share (basic)

    $ 0.02          $ (0.12)         $ (0.24)         $ (0.48)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share (diluted)

    $ 0.02          $ (0.12)         $ (0.24)         $ (0.48)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding (basic)

    25,209,580          25,022,118          25,061,417          24,263,536     
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding (diluted)

    25,407,404          25,022,118          25,061,417          24,263,536     
 

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 4


Table of Contents

LodgeNet Interactive Corporation and Subsidiaries

Consolidated Statements of Cash Flows

Consolidated Statements of Cash Flows (Unaudited)

(Dollar amounts in thousands)

 

00000000 00000000
     Nine Months Ended September 30,  
     2011      2010  

Operating activities:

     

Net loss

     $ (1,788)          $ (7,321)    

Adjustments to reconcile net loss to net cash provided by operating activities:

     

Depreciation and amortization

     54,499           63,238     

Unrealized (gain) loss on derivative instruments

     (1,511)          1,688     

Loss on early retirement of debt

     158           898     

Share-based compensation and restricted stock

     1,192           1,348     

Other, net

     461           265     

Change in operating assets and liabilities:

     

Accounts receivable, net

     2,600           (1,564)    

Other current assets

     831           (1,906)    

Accounts payable

     (11,078)          19,668     

Accrued expenses and deferred revenue

     (5,053)          662     

Other

     709           (1,838)    
  

 

 

    

 

 

 

Net cash provided by operating activities

     41,020           75,138     
  

 

 

    

 

 

 

Investing activities:

     

Property and equipment additions

     (16,712)          (13,703)    
  

 

 

    

 

 

 

Net cash used for investing activities

     (16,712)          (13,703)    
  

 

 

    

 

 

 

Financing activities:

     

Repayment of long-term debt

     (8,025)          (83,740)    

Payment of capital lease obligations

     (564)          (804)    

Borrowings on revolving credit facility

     60,000           25,000     

Repayments of revolving credit facility

     (60,000)          (25,000)    

Debt issuance costs

     (2,438)          -     

Proceeds from investment in long-term debt

     469           4,889     

Proceeds from issuance of common stock, net of offering costs

     -           13,658     

Payment of dividends to preferred shareholders

     (4,312)          (4,312)    

Exercise of stock options

     7           49     
  

 

 

    

 

 

 

Net cash used for financing activities

     (14,863)          (70,260)    
  

 

 

    

 

 

 

Effect of exchange rates on cash

     (54)          (76)    
  

 

 

    

 

 

 

Increase (decrease) in cash

     9,391           (8,901)    

Cash at beginning of period

     8,381           17,011     
  

 

 

    

 

 

 

Cash at end of period

     $ 17,772           $ 8,110     
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

LodgeNet Interactive Corporation and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

Note 1 — Basis of Presentation

The accompanying consolidated financial statements as of September 30, 2011, and for the three and nine month periods ended September 30, 2011 and 2010, have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). The information furnished in the accompanying consolidated financial statements reflects all adjustments, consisting of normal recurring adjustments, which, in our opinion, are necessary for a fair statement of such financial statements.

Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to the rules and regulations of the Commission. Although we believe the disclosures are adequate to make the information presented herein not misleading, it is recommended these unaudited consolidated financial statements be read in conjunction with the more detailed information contained in our Annual Report on Form 10-K for 2010, as filed with the Commission. The results of operations for the three and nine month periods ended September 30, 2011 and 2010 are not necessarily indicative of the results of operations for the full year due to inherent seasonality within the business, among other factors.

The consolidated financial statements include the accounts of LodgeNet Interactive Corporation and its subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Note 2 — Property and Equipment, Net

Property and equipment was comprised as follows (dollar amounts in thousands):

 

000000000 000000000
     September 30,
2011
     December 31,
2010
 

Land, building and equipment

     $ 114,281           $ 115,031     

Hotel systems

     631,634           726,638     
  

 

 

    

 

 

 

Total

     745,915           841,669     

Less - depreciation and amortization

     (621,864)          (684,752)    
  

 

 

    

 

 

 

Property and equipment, net

     $         124,051           $         156,917     
  

 

 

    

 

 

 

Note 3 — Goodwill and Other Intangible Assets

Goodwill represents the excess of cost over the fair value of net assets acquired. In 2007, we recorded goodwill in connection with the acquisitions of StayOnline, On Command and The Hotel Networks. The product lines of both StayOnline and On Command shared the same operating and economic characteristics as our pre-acquisition product lines, and were integrated into the Hospitality operating segment.

 

Page 6


Table of Contents

Per Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Intangibles – Goodwill and Other,” our goodwill is not amortized; rather, it is tested for impairment annually or if there is a triggering event which indicates the carrying value may not be recoverable. Effective January 1, 2011, we adopted FASB Accounting Standards Update (“ASU”) No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts,” which is now codified under FASB ASC Topic 350. This ASU provides that reporting units with zero or negative carrying amounts are required to perform Step 2 of the goodwill impairment test if it is more likely than not a goodwill impairment exists. In considering whether it is more likely than not that an impairment loss exists, a company is required to evaluate qualitative factors, including the same factors presented in existing guidance which would trigger an interim impairment test of goodwill. Factors include a significant deterioration in market conditions, unanticipated competition, loss of key personnel and an anticipated sale of a reporting unit. If an entity determines it is more likely than not that an impairment exists, Step 2 of the impairment test must be performed for that reporting unit or units. Step 2 involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill. An impairment loss results if the amount of recorded goodwill exceeds the implied goodwill.

Impairment testing is not required for our finite-life intangibles unless there is a triggering event or change in circumstances which indicate the carrying value may not be recoverable, such as a significant deterioration in market conditions.

During the third quarter of 2011, we did not encounter events or circumstances which could trigger an impairment of our goodwill or intangible assets, and the adoption of the additional provisions of FASB ASC Topic 350, as noted above, has not had an impact on our consolidated financial position, results of operations or cash flows. We perform our annual goodwill impairment test for each reporting unit during the fourth quarter.

The carrying amount of goodwill by reportable segment was as follows (dollar amounts in thousands):

 

0000000 0000000 0000000
     Hospitality      Advertising
Services
     Total  

Balance as of December 31, 2010

        

Goodwill

     $ 92,614           $     18,679           $     111,293     

Accumulated impairment losses

     -           (11,212)          (11,212)    
  

 

 

    

 

 

    

 

 

 
     92,614           7,467           100,081     

Activity during the period

     -           -           -     
  

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2011

        

Goodwill

     92,614           18,679           111,293     

Accumulated impairment losses

     -           (11,212)          (11,212)    
  

 

 

    

 

 

    

 

 

 
     $         92,614           $     7,467           $     100,081     
  

 

 

    

 

 

    

 

 

 

We have intangible assets consisting of certain acquired technology, patents, trademarks, hotel contracts, customer relationships, studio agreements and licensee fees. These intangible assets have been deemed to have finite useful lives and are amortized over their current estimated useful lives, ranging from 2 to 20 years. We review the intangible assets for impairment when triggering events occur or a change in circumstances, such as a significant deterioration in market conditions, warrant modifications to the carrying amount of the assets.

 

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We had the following intangible assets (dollar amounts in thousands):

 

    September 30, 2011     December 31, 2010  
    Carrying
Amount
    Accumulated
Amortization
    Carrying
Amount
    Accumulated
Amortization
 

Assets subject to amortization:

       

Acquired contracts and relationships

    $         120,315          $         (28,666)         $         120,315          $         (23,950)    

Other acquired intangibles

    13,987          (13,159)         13,956          (12,769)    

Tradenames

    3,142          (2,413)         3,124          (2,107)    

Acquired patents

    5,219          (4,968)         5,175          (4,739)    
 

 

 

   

 

 

   

 

 

   

 

 

 
    $         142,663          $         (49,206)         $         142,570          $         (43,565)    
 

 

 

   

 

 

   

 

 

   

 

 

 

We recorded consolidated amortization expense of $5.6 million and $6.2 million, respectively, for the nine months ended September 30, 2011 and 2010. We estimate total amortization expense for the three months remaining in 2011 and the years ending December 31 as follows (dollar amounts in millions): 2011 - $1.8; 2012 - $6.8; 2013 - $6.6; 2014 - $6.4; 2015 - $6.3 and 2016 - $6.2. Actual amounts may change from such estimated amounts due to additional intangible asset acquisitions, potential impairment, accelerated amortization or other events.

Note 4 — Earnings Per Share Computation

We follow FASB ASC Topic 260, “Earnings Per Share,” which requires the computation and disclosure of two earnings per share (“EPS”) amounts, basic and diluted. Basic EPS is computed based on the weighted average number of common shares actually outstanding during the period. Diluted EPS is computed based on the weighted average number of common shares outstanding plus all potentially dilutive common shares outstanding during the period. Potential common shares which have an anti-dilutive effect are excluded from diluted earnings per share. The provisions of FASB ASC Topic 260 also provide that unvested share-based payment awards which contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. We determined our outstanding shares of non-vested restricted stock are participating securities.

 

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The following table reflects the calculation of weighted average basic and fully diluted shares for the periods ended September 30. Dollar amounts are in thousands, except share data:

 

0000000000 0000000000 0000000000 0000000000
    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2011     2010     2011     2010  

Basic EPS:

       

Net income (loss)

    $ 2,044          $ (1,674)         $ (1,788)         $ (7,321)    

Preferred stock dividends

    (1,437)         (1,437)         (4,312)         (4,312)    
 

 

 

   

 

 

   

 

 

   

 

 

 
    $ 607          $ (3,111)         $ (6,100)         $ (11,633)    

Income (loss) allocated to participating securities (1)

    3          -          -          -     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

    $ 604          $ (3,111)         $ (6,100)         $ (11,633)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding for basic earnings per common share

    25,209,580          25,022,118          25,061,417          24,263,536     

Basic earnings per share

    $ 0.02          $ (0.12)         $ (0.24)         $ (0.48)    

Diluted EPS:

       

Net income (loss)

    $ 2,044          $ (1,674)         $ (1,788)         $ (7,321)    

Preferred stock dividends

    (1,437)         (1,437)         (4,312)         (4,312)    
 

 

 

   

 

 

   

 

 

   

 

 

 
    $ 607          $ (3,111)         $ (6,100)         $ (11,633)    

Income (loss) allocated to participating securities (1)

    3          -          -          -     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

    $ 604          $ (3,111)         $ (6,100)         $ (11,633)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding for basic earnings per common share

    25,209,580          25,022,118          25,061,417          24,263,536     

Dilutive effect of potential shares (2)

    197,824          N/A        N/A        N/A   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding for diluted earnings per common share

    25,407,404          25,022,118          25,061,417          24,263,536     

Diluted earnings per share

    $ 0.02          $ (0.12)         $ (0.24)         $ (0.48)    

Participating securities (1)

    -          65,625          126,625          65,625     

Potential dilutive common shares (2)

    17,061,292          17,119,017          17,187,917          17,119,017     

 

(1)

For the three months ended September 30, 2010 and the nine months ended September 30, 2011 and 2010, 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 three months ended September 30, 2010 and the nine months ended September 30, 2011 and 2010, 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. For the three months ended September 30, 2011, the conversion of preferred stock was not included as their inclusion would have been anti-dilutive. In addition, stock options, unvested restricted stock and warrants with exercise prices greater than the average market price of our common stock were not included in the computation of diluted earnings per share, as their inclusion would have been anti-dilutive.

 

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Note 5 — Accrued Expenses

Accrued expenses were comprised as follows (dollar amounts in thousands):

 

     September 30,
2011
    December 31,
2010
 

Property, sales and other taxes

     $ 5,987          $ 6,411     

Compensation

     5,441          4,639     

Interest

     674          208     

Programming related

     833          1,782     

Restructuring and reorganization

     781          172     

Preferred stock dividends

     1,437          1,438     

Purchase commitments

     2,772          3,414     

Other

     2,383          4,263     
  

 

 

   

 

 

 
     $         20,308          $         22,327     
  

 

 

   

 

 

 

Note 6 — Long-term Debt and Credit Facilities

Long-term debt was comprised as follows (dollar amounts in thousands):

 

     September 30,
2011
    December 31,
2010
 

Bank Credit Facility:

    

Term loan

     $ 364,954          $ 372,511     

Revolving loan commitment

     -          -     

Capital leases

     651          1,128     
  

 

 

   

 

 

 
     365,605          373,639     

Less current maturities

     (10,456)         (4,807)    
  

 

 

   

 

 

 
     $         355,149          $         368,832     
  

 

 

   

 

 

 

Bank Credit Facility — In April 2007, we entered into a $675.0 million bank Credit Facility, comprised of a $625.0 million term loan, which matures in April 2014, and a $50.0 million revolving loan commitment, which matures in April 2013. The term loan originally required quarterly repayments of $1,562,500, which began September 30, 2007. The term loan originally bore interest at our option of (1) the bank’s base rate plus a margin of 1.0% or (2) LIBOR plus a margin of 2.0%. The term loan is collateralized by substantially all of the assets of the Company.

Effective March 22, 2011, we entered into a First Amendment (the “Amendment”) to the bank Credit Facility. The Amendment modified certain terms of the Credit Facility, including an increase in the permitted consolidated leverage ratio, the creation of a specific preferred stock dividend payment basket and the potential to extend the term beyond its current expiration in April 2014. The restricted payment basket within the Amendment allows for dividend payments not to exceed $5,750,000 per year. The Amendment also reduced the commitments under the revolving loan commitment, increased the interest rate and required quarterly repayment amount and adjusted other covenants. In March 2011, the Company incurred $2.4 million of debt issuance costs related to certain fees and expenses in connection with this Amendment.

Under the Amendment, the $50.0 million revolving loan commitment was reduced to $25.0 million. The Amendment also requires us to make quarterly term loan repayments of $2.5 million, which began June 30, 2011, through December 31, 2012, and $3.75 million beginning March 31, 2013 through December 31, 2013. The amended term loan and revolving loan commitment bear interest at our option of (1) the bank’s base rate plus a margin of 4.0% or (2) LIBOR plus a margin of 5.0%. In addition, a LIBOR floor of 1.5% was established under the Amendment.

 

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The Amendment includes terms and conditions which require compliance with leverage and interest coverage covenants. As of September 30, 2011, our consolidated leverage ratio was 3.50 compared to the maximum allowable ratio of 4.00 and our consolidated interest coverage ratio was 2.69 compared to the minimum allowable ratio of 2.25. Per the Amendment, the maximum allowable consolidated leverage ratio will remain at 4.00 until September 30, 2012, when it will change to 3.75 for the quarters ending December 31, 2012 through June 30, 2013. It will then drop to 3.50 for the quarter ending September 30, 2013 until maturity. The minimum allowable consolidated interest coverage ratio will continue to be 2.25 until maturity.

The Credit Facility also requires we notify the agent upon the occurrence of a “Material Adverse Effect” prior to any draw on the Company’s revolving loan commitment, as such terms are defined and used within our bank Credit Facility. However, under the Credit Facility, the provision of such a notice is not an event of default, but if such an event occurred, it could restrict the Company’s ability to obtain additional financing under the revolving loan commitment. The original Credit Facility also stipulated we enter into hedge agreements to provide at least 50% of the outstanding term loan into a fixed interest rate for a period not less than two years. Our fixed rate swap agreements expired in June 2011 (see Note 13). The Amendment did not require us to enter into any hedge agreements. The term loan interest rate as of September 30, 2011 was 6.5%. The all-in weighted average interest rate for the quarter ended September 30, 2011 was 6.6%. As of September 30, 2011, we were in compliance with all financial covenants required by our bank Credit Facility.

Our ability to remain in compliance with those covenants will depend on our ability to generate sufficient Consolidated EBITDA (a term defined in the Amendment) and to manage our capital investment and debt levels. We continue taking actions within our control to manage our debt level and remain in compliance with our debt covenants. The actions within our control include our management of capital investment, working capital and operating costs and exploring other alternative financing. Our ability to continue to comply with our current covenants is subject to the general economic climate and business conditions beyond our control. The uncertainties impacting travel and lodging, in addition to the constraints in the credit markets, consumer conservatism and other market dynamics, including technological changes, may continue to negatively impact our planned results and required covenants. If we are not able to remain in compliance with our current debt covenants and our lenders will not amend or waive covenants with which we are not in compliance, the debt would be due, we would not be able to satisfy our financial obligations and we would need to seek alternative financing. If we were not able to secure alternative financing, this would have a substantial adverse impact on the Company and our ability to continue our operations.

During the first quarter of 2011, we made a prepayment of $2.0 million on the term loan, along with the required payment of $1.0 million. We expensed $0.2 million of debt issuance costs related to the prepayment and the Amendment described above. During the second and third quarters of 2011, we made the required payments of $2.5 million per quarter.

In the first quarter of 2010, we made our required quarterly payment of $1.3 million, prepaid a total of $44.0 million on the term loan, which included $13.7 million of net proceeds from the common stock offering, and expensed $0.5 million of related debt issuance costs. The common stock offering is discussed in more detail in Note 15. In the second quarter of 2010, we made a prepayment of $22.2 million, in addition to the $1.2 million required payment on the term loan, and expensed $0.3 million of related debt issuance costs. In the third quarter of 2010, we made our required quarterly payment of $1.1 million, prepaid $14.0 million and expensed $0.1 million of related debt issuance costs.

The Credit Facility provides for the issuance of letters of credit up to $7.5 million, subject to customary terms and conditions. Under the terms of the Amendment, this amount was reduced from $15.0 million. As of September 30, 2011, we had outstanding letters of credit totaling $325,000, which reduce amounts available under the revolving loan commitment. During the third quarter of 2011, we borrowed $15.0 million under the revolving loan commitment and repaid the entire amount during the quarter.

Capital Leases — As of September 30, 2011, we had total capital lease obligations of $0.7 million. We acquired approximately $95,000 of equipment under capital lease arrangements during the nine months ended September 30, 2011. Our capital lease obligations consist primarily of vehicles used in our field service operations.

 

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As of September 30, 2011, long-term debt had the following scheduled maturities for the three months remaining in 2011 and the full years ending December 31, 2012 and after (dollar amounts in thousands):

 

    2011     2012     2013     2014     2015  

Long-term debt

      $     2,500           $ 10,000           $   15,000           $ 337,454           $   

Capital leases

    175         366         91         51           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,675         10,366         15,091         337,505           

Less amount representing interest on capital leases

    (11)         (21)         (6)         (2)           
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
      $ 2,664           $     10,345           $ 15,085           $     337,503           $         8    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We do not utilize special purpose entities or off-balance sheet financial arrangements.

Note 7 — Comprehensive Income

FASB ASC Topic 220, “Comprehensive Income,” provides standards for reporting and disclosure of comprehensive income and its components. Comprehensive income reflects the changes in equity during a period from transactions related to our interest rate swap arrangements and foreign currency translation adjustments. Comprehensive income was as follows for the periods ended September 30 (dollar amounts in thousands):

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2011     2010     2011     2010  

Net income (loss)

    $         2,044          $         (1,674)         $         (1,788)       $ (7,321)    

Other comprehensive (loss) income:

       

Foreign currency translation adjustment

    (1,107)         307          (642)         357     

Changes due to cash flow hedging:

       

Amortization of unrealized loss on interest rate swaps

    -          -          4,928          -     

Change in fair value on interest rate swaps

    -          3,862          3,914          12,766     
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

    (1,107)         4,169          8,200          13,123     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

    $ 937          $         2,495          $ 6,412          $         5,802     
 

 

 

   

 

 

   

 

 

   

 

 

 

Components of accumulated other comprehensive income (loss), as shown on our Consolidated Balance Sheets, were as follows (dollar amounts in thousands):

 

    September 30,
2011
    December 31,
2010
 

Unrealized loss on interest rate swap agreements

    $ -          $ (8,842)    

Foreign currency translation adjustment

    2,534          3,176     
 

 

 

   

 

 

 

Accumulated other comprehensive income (loss)

    $         2,534          $         (5,666)    
 

 

 

   

 

 

 

Note 8 — Statements of Cash Flows

Cash is comprised of demand deposits. Cash paid for interest was $26.1 million and $23.8 million, respectively, for the nine months ended September 30, 2011 and 2010. Cash paid for taxes was $0.6 million and $0.9 million for the nine months ended September 30, 2011 and 2010, respectively.

 

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Note 9 — Share-Based Compensation

We account for our stock option and incentive plans under the recognition and measurement provisions of FASB ASC Topic 718, “Compensation – Stock Compensation,” which require the measurement and recognition of compensation expense for all stock-based awards based on estimated fair values, net of estimated forfeitures. Share-based compensation expense recognized in the three and nine months ended September 30, 2011 and 2010 includes compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of this Topic.

The following amounts were recognized in our Consolidated Statements of Operations for share-based compensation plans for the periods ended September 30 (dollar amounts in thousands):

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2011     2010     2011     2010  

Compensation cost:

       

Stock options

    $ 233          $ 298          $ 812          $ 975     

Restricted stock

    91          91          380          373     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total share-based compensation expense

    $         324          $         389          $         1,192          $         1,348     
 

 

 

   

 

 

   

 

 

   

 

 

 

For the nine months ended September 30, 2011 and 2010, cash received from stock option exercises was $7,000 and $49,000, respectively. 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 three months ended September 30, 2011, we did not grant any stock options to non-employee directors of the Company or to certain officers and employees.

Restricted Stock

For the three months ended September 30, 2011, we did not award any shares of time-based or performance-based restricted stock to our non-employee directors or certain officers and employees.

Note 10 — Restructuring

In 2011, we initiated a program to gain operating efficiencies by reorganizing departments, reducing layers of management and refocusing on organizational initiatives. The program reduced our workforce by approximately 7%. As a result of this action and our previous restructuring and reduction in force initiatives, we incurred $0.7 million of costs during the three months ended September 30, 2011 and $1.9 million of costs during the nine months ended September 30, 2011, of which the entire $1.9 million was related to our Hospitality and Advertising Services businesses. During the three and nine months ended September 30, 2010, we incurred $0.1 million and $0.3 million of costs, respectively. All such costs are included in operating expenses on the Consolidated Statements of Operations.

 

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Liabilities associated with our restructuring activities to date, along with charges to expense and cash payments, were as follows (dollar amounts in thousands):

 

Cost of closing Cost of closing Cost of closing
    Severance and
other benefit
related costs
    Cost of closing
redundant
acquired
facilities
    Total  

December 31, 2010 balance

    $ 35          $ 137          $ 172     

Charges to expense

    1,831          65          1,896     

Cash payments

    (1,130)         (157)         (1,287)    
 

 

 

   

 

 

   

 

 

 

September 30, 2011 balance

    $ 736          $ 45          $ 781     
 

 

 

   

 

 

   

 

 

 

Note 11 — Fair Value Measurements

We follow the fair value measurement and disclosure provisions of FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” relating to financial and nonfinancial assets and liabilities. The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. FASB ASC Topic 820 includes a fair value hierarchy, which is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques, which are used to measure fair value and which are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources, while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

Financial Assets and Financial Liabilities — The estimated carrying and fair values of our financial instruments in the financial statements were as follows (dollar amounts in thousands):

 

    September 30, 2011     December 31, 2010  
    Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 

Interest rate swaps - liability position

    $ -          $ -          $ 10,353          $ 10,353     

Long-term debt

    $         365,605          $         316,336          $         373,639          $         349,426     

The fair value of our long-term debt is estimated based on current interest rates for similar debt of the same remaining maturities and quoted market prices, except for capital leases, which are reported at carrying value. For our capital leases, the carrying value approximates the fair value.

The fair value of our long-term debt is strictly hypothetical and not indicative of what we are required to pay under the terms of our debt instruments. The fair value of the swap agreements was recognized in our current liabilities. Changes in fair value are recognized in other comprehensive income (loss) if the hedge is effective and in interest expense if the hedge is ineffective.

For the year ended December 31, 2010, the total fair value amount of $10.4 million for our interest rate swaps was included in Level 2 of the fair value hierarchy, as described above. There was no fair value measurement for the nine months ended September 30, 2011, as our interest rate swap arrangements expired effective June 30, 2011.

 

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We estimated the fair value of the interest rate swaps based on mid-market data from a third party provider. We periodically reviewed and validated this data on an independent basis. The fair value determination also included consideration of nonperformance risk, which did not have a material impact on the fair value.

Nonfinancial Assets and Nonfinancial Liabilities — Certain assets and liabilities measured at fair value on a non-recurring basis could include nonfinancial assets and nonfinancial liabilities measured at fair value in the goodwill impairment tests and intangible assets and other nonfinancial long-lived assets measured at fair value for impairment assessment. There was no triggering event which warranted an evaluation of impairment; therefore, there were no nonfinancial assets or liabilities measured at fair value on a non-recurring basis during the nine months ended September 30, 2011.

Note 12 — Segment Information

We operate in three reportable segments, Hospitality, Advertising Services and Healthcare. We organize and manage our segments based upon the products and services delivered and the nature of our customer base receiving those products and services. The Hospitality business distributes entertainment, media and connectivity services to the hospitality industry. Our Advertising Services business generates revenue from the sale of advertising-based media services within our hospitality customer base, utilizing the same server-based technology or by the delivery of advertising using 10 television programming channels. Our Healthcare business generates revenue from the sale of interactive system hardware, software licenses, installation services and related programming and support agreements to the healthcare market.

Our Hospitality and Advertising Services businesses provide a variety of interactive and media network solutions to hotels and/or the respective hotels’ guests. The products can include interactive video-on-demand programming, music, games, cable television programming, Internet services or advertising services, and have an analogous consumer base. All products and services are delivered through a proprietary system platform utilizing satellite delivery technology, and are geared towards the hotels and their guests.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies, except certain expenses are not allocated to the segments. These unallocated expenses are corporate overhead, depreciation and amortization expenses, restructuring charges, other operating income (expense), interest expense, loss on the early retirement of debt, other income (expense) and income tax expense. We evaluate segment performance based upon operating profit and loss before the aforementioned expenses.

 

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Financial information related to our reportable segments for the three and nine months ended September 30 was as follows (dollar amounts in thousands):

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2011     2010     2011     2010  

Total revenues:

       

Hospitality

    $         101,833          $         109,330          $         306,259          $ 331,563     

Advertising Services

    2,366          2,194          7,164          7,118     

Healthcare

    2,648          2,270          7,788          6,236     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 106,847          $ 113,794          $ 321,211          $ 344,917     
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit:

       

Hospitality

    $ 30,550          $ 32,563          $ 91,231          $ 99,921     

Advertising Services

    430          79          1,170          69     

Healthcare

    439          808          1,827          1,416     
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

    31,419          33,450          94,228          101,406     

Corporate

    (4,702)         (6,407)         (13,866)         (18,323)    

Depreciation and amortization

    (17,075)         (20,141)         (54,499)         (63,238)    

Restructuring charge

    (732)         (101)         (1,896)         (343)    

Other operating (expense) income

    (31)         3          (9)         (2)    

Interest expense

    (6,379)         (8,120)         (25,012)         (25,515)    

Loss on early retirement of debt

    -          (137)         (158)         (898)    

Other (expense) income

    (166)         5          149          232     
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    $ 2,334          $ (1,448)         $ (1,063)         $         (6,681)    
 

 

 

   

 

 

   

 

 

   

 

 

 

Note 13 — Derivative Information

We follow the provisions of FASB ASC Topic 815, “Derivatives and Hedging Activities,” which establish accounting and disclosure standards regarding a company’s derivative instruments and hedging activities.

We were required by our original Credit Facility to convert 50% of the outstanding term loan into a fixed interest rate for a period not less than two years. Our objective of entering into hedge transactions (or interest rate swaps) using derivative financial instruments was to reduce the variability of cash flows associated with variable-rate loans and comply with the terms of our Credit Facility. As changes in interest rates impact future interest payments, the hedges provided an offset to the rate changes. The swap agreements expired in June 2011. The Amendment to our Credit Facility did not require us to enter into any hedge agreements.

In April 2007, we entered into interest rate swap agreements with notional values of $312.5 million, at a fixed rate of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which expired in June 2011. These swap arrangements effectively changed the underlying debt from a variable interest rate to a fixed interest rate for the term of the swap agreements. All of the swap agreements were issued by Credit Suisse International. The swap agreements were designated as, and met the criteria for, cash flow hedges and were not considered speculative in nature.

 

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With our amended Credit Facility, our interest rate swaps ceased to be effective and hedge accounting was discontinued effective March 22, 2011 and going forward, primarily related to the LIBOR floor of 1.5% as established under the Amendment. As a result, our deferred losses of $4,928,000 recorded in other comprehensive income were frozen and were amortized into earnings over the original remaining term of the hedged transaction. All subsequent changes in the fair value of the swaps were recorded directly to interest expense. For the nine months ended September 30, 2011, we recorded a loss of $4,928,000 related to amortization of our deferred losses and a gain of $6,439,000 related to the change in fair value of the interest rate swaps. The net amount of $1,511,000 is a non-cash gain and did not impact the amount of cash interest paid during the period.

A summary of the aggregate contractual or notional amounts, balance sheet location and estimated fair values of our derivative financial instruments were as follows (dollar amounts in thousands):

 

    Contractual/
Notional
Amount
        Balance Sheet    
Location
  Estimated Fair
Value
 
          Asset             (Liability)      

Year ended December 31, 2010:

       

Interest rate swaps

    $         437,500        Current liabilities     $ -          $         (10,353)    

Nine months ended September 30, 2011:

       
    $ -        -     $         -          $   

A summary of the effect of cash flow hedges on our financial statements for the three and nine months ended September 30 was as follows (dollar amounts in thousands):

 

    Effective Portion        

Type of Cash

Flow Hedge

  Amount of
Gain  (Loss)
Recognized
in Other
Comprehensive
Income
    Income Statement
Location of
Swap Interest
Reclassified From
Accumulated

Other
Comprehensive
Income
  Swap Interest
Reclassified  From
Accumulated
Other
Comprehensive
Income
   

 

 

Ineffective Portion

 
        Income
Statement
Location
  Amount
Recognized
 

Three Months Ended September 30, 2010:

         

Interest rate swaps

    $ (1,414)       Interest expense     $         5,057        Interest expense     $ 219     

Three Months Ended September 30, 2011:

         

Interest rate swaps

    $ -        Interest expense     $ -        Interest expense     $ -     

Nine Months Ended September 30, 2010:

         

Interest rate swaps

    $         (4,497)       Interest expense     $ 15,575        Interest expense     $         1,688     

Nine Months Ended September 30, 2011:

         

Interest rate swaps

    $ (89)       Interest expense     $ 4,672        Interest expense     $ (1,511)    

Note 14 — Perpetual Preferred Stock

In June 2009, we completed our offering of 57,500 shares (inclusive of the initial purchaser’s option to purchase the additional 7,500 shares), bringing the total aggregate liquidation preference of the preferred stock sold to $57.5 million.

 

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Subject to the declaration of dividends by our Board of Directors, cumulative dividends on the preferred stock will be paid at a rate of 10% per annum of the $1,000 liquidation preference per share, starting from the date of original issue, June 29, 2009. Dividends accumulate quarterly in arrears on each January 15, April 15, July 15 and October 15, beginning on October 15, 2009. Dividend payments not to exceed $5,750,000 in any fiscal year are allowable under the restricted payment basket as defined within the Amendment to our Credit Facility.

Dividends were declared on the preferred stock by our Board of Directors. We had $1.4 million of unpaid dividends as of September 30, 2011. The dividends were recorded as a reduction to additional paid-in capital, due to our accumulated deficit balance. These dividends were paid on October 15, 2011.

Note 15 — Common Stock Offering

In March 2010, we entered into an agreement to sell 2,160,000 shares of our common stock, $0.01 par value per share, to Craig-Hallum Capital Group LLC (Underwriter), for resale to the public at a price per share of $6.00, less an underwriting discount of $0.36 per share. The Underwriter had an option to purchase up to 324,000 additional shares of common stock at the same price per share to cover overallotments. We completed our offering of 2,484,000 shares (inclusive of the Underwriter’s option to purchase the additional 324,000 shares), bringing the total aggregate common stock sold to $14.9 million. Net proceeds from the issuance of common stock were $13.7 million, with offering and related costs totaling $1.2 million.

Note 16 — Legal Proceedings

We are subject to litigation arising in the ordinary course of business. We believe the resolution of such litigation will not have a material adverse effect upon our financial condition, results of operations or cash flows.

On July 11, 2008, Linksmart Wireless Technology, LLC, a California limited liability company based in Pasadena, California, filed actions for patent infringement in the U.S. District Court in Marshall, Texas, against the Company and numerous other defendants, which allege infringement of a patent issued on August 17, 2004 entitled “User Specific Automatic Data Redirection System.” On October 26, 2010, the Court issued an order staying the cases pending the final determination in the Patent Office re-examination proceeding. No material events occurred in this action during the period ended September 30, 2011. Please refer to the description of this matter as contained in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 14, 2011.

Note 17 — Effect of Recently Issued Accounting Standards

In May 2011, the FASB issued FASB ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” which is now codified under FASB ASC Topic 820, “Fair Value Measurement.” This new guidance provides common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles (“GAAP”) and International Financial Reporting Standards (“IFRSs”). Certain fair value measurement principles were clarified or amended in this ASU, such as the application of the highest and best use and valuation premise concepts. New and revised disclosure requirements include: quantitative information about significant unobservable inputs used for all Level 3 fair value measurements and a description of the valuation processes in place, as well as a qualitative discussion about the sensitivity of recurring Level 3 fair value measurements; public companies will need to disclose any transfers between Level 1 and Level 2 fair value measurements on a gross basis, including the reason(s) for those transfers; a requirement regarding disclosure on the highest and best use of a nonfinancial asset; and a requirement that all fair value measurements be categorized in the fair value hierarchy with disclosure of that categorization. FASB ASU No. 2011-04 will be effective on a prospective basis for public companies during interim and annual periods beginning after December 15, 2011. Early adoption by public companies is not permitted. We do not expect the adoption of this ASU to have an impact on our consolidated financial position, results of operations or cash flows.

 

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In June 2011, the FASB issued FASB ASU No. 2011-05, “Presentation of Comprehensive Income,” which is now codified under FASB ASC Topic 220, “Comprehensive Income.” This ASU gives entities two options for presenting the total of comprehensive income, the components of net income and the components of other comprehensive income. The first option is a single, continuous statement of comprehensive income. The second option is two separate, but consecutive statements. In either option, the following must be presented: each component of and a total of net income; each component of and a total of other comprehensive income; and a total of comprehensive income. The new guidance eliminates the option to present the components of other comprehensive income as a part of the statement of changes in stockholders’ equity. This ASU does not change the items which must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. FASB ASU No. 2011-05 should be applied retrospectively, and for public companies is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. We are evaluating the disclosure options, and do not expect the adoption of this ASU to have an impact on our consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued FASB ASU No. 2011-08, “Testing Goodwill for Impairment,” which is now codified under FASB ASC Topic 350, “Intangibles – Goodwill and Other.” This new guidance allows an entity to first assess qualitative factors to evaluate if the existence of events or circumstances leads to a determination it is necessary to perform the current two-step test. After assessing the totality of events or circumstances, if it is determined it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. Otherwise, the entity is required to perform Step 1 of the impairment test. An entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to Step 1 of the two-step impairment test, and then resume performing the qualitative assessment in any subsequent period. Reporting units with zero or negative carrying amounts continue to be required to perform a qualitative assessment in place of Step 1 of the impairment test. The new guidance includes examples of events and circumstances an entity should consider in its evaluation of whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, such as macroeconomic conditions; industry and market considerations; cost factors; overall financial performance; and other relevant entity-specific events. The examples of events and circumstances included in this ASU supersede the previous examples entities should have considered. FASB ASU No. 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, even if an entity’s annual test date is before the issuance date of September 15, 2011, provided the entity has not yet performed its 2011 annual impairment test or issued its financial statements. We do not expect the adoption of this ASU to have an impact on our consolidated financial position, results of operations or cash flows.

 

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Item 2 — 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.

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 elsewhere in this Report and in Item 1A of our most recent Annual Report on Form 10-K for the year ended December 31, 2010 and filed on March 14, 2011, 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; and

  Ø  

other factors detailed, from time to time, in our filings with the Securities and Exchange Commission.

These forward-looking statements speak only as of the date of this 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.

Executive Overview

We are the largest provider of interactive media and connectivity solutions to the hospitality industry in the United States, Canada and Mexico. Our primary offerings include guest-paid entertainment, such as on-demand movies, and hotel-paid services, including cable television programming and Internet access services. As of September 30, 2011, we provided interactive and media networks and connectivity solutions to approximately 1.7 million hotel rooms in North America and, primarily through local or regional licensees, select international markets. In addition, we also have a growing presence in the healthcare market, where we sell and maintain interactive television systems which provide on-demand patient education, information and entertainment to healthcare facilities throughout the United States. As of September 30, 2011, our systems were installed in 63 healthcare facilities, representing approximately 14,900 beds, and we had an additional seven facilities under contract.

 

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Our total revenue for the third quarter of 2011 was $106.8 million, a decrease of $6.9 million or 6.1%, compared to the third quarter of 2010. Guest Entertainment revenue decreased $8.1 million, offset in part by a $1.2 million increase in revenue from non-Guest Entertainment products and services. The decrease in Guest Entertainment revenue was driven by a 7.8% reduction in the average number of Guest Entertainment rooms served period over period and a 5.2% decline in Guest Entertainment revenue per room. The rooms removed from our base during the quarter generated approximately 37% lower revenue than our average rooms. The majority of these rooms did not switch to a different interactive television provider, but were smaller hotels which chose to limit their media offering to only free television content. Guest Entertainment revenue per room benefited from an increase in the sale of theatrical movies due to our VOD 2.0 marketing initiative and more popular Hollywood content. This improvement was offset by a decline in revenue from non-theatrical movies, music, television on-demand programming, games and television Internet access.

Hospitality and Advertising Services revenue per room was 1.3% higher this quarter compared to the prior year third quarter, driven by a 10.4% increase in revenue per room from non-Guest Entertainment sources. Launched in June 2011, our VOD 2.0 initiative is now in over 1.1 million rooms and is attracting new buyers and increasing Hollywood movie revenue per room with its marketing and tiered pricing. Hotel Services revenue was $33.6 million in the current quarter and, on a per-room basis, increased 7.2% quarter over quarter, driven primarily by price increases on cable television programming. System Sales and Related Services revenue per room improved 19.1%, related to programming fees, equipment sales and fees related to the early termination of a group of limited service hotels which elected to only provide free television content, offset by revenue from a HDTV equipment conversion contract in the prior year.

Our Healthcare subsidiary generated $2.6 million of revenue during the third quarter of 2011, an increase of $0.4 million or 16.7%, driven by an increase in the number of beds receiving our recurring services as well as higher revenue on current quarter system sales and installations. The backlog of healthcare installations includes seven facilities.

During the quarter, we upgraded or installed approximately 8,800 rooms with high definition interactive systems. These additional rooms brought us to over 290,000 HD rooms installed at the end of the third quarter, representing 19.0% of our guest entertainment room base. The HD platform continues to generate over 60% more revenue per room versus our analog base. In addition, the average cost to install a HD room has declined 29.3% quarter over quarter, to $135 per room, due to lower component and overhead costs and an increase in average hotel size. As of September 30, 2011, our Envision platform was installed in over 5,000 rooms. This enhanced interactive HD system, launched earlier in the year, allows hotels to leverage the HDTV system to deliver customized branding messages, generate incremental cash flows and improve the overall guest experience.

Our total direct costs decreased $4.3 million or 6.6% period over period, to $60.0 million in the third quarter of 2011 as compared to $64.3 million in the third quarter of 2010. The decrease in total direct costs was driven by lower sales volume in Guest Entertainment and Hotel Services. Connectivity costs were also lower as a result of bandwidth re-provisioning and renegotiating certain supplier agreements. Advertising Services fixed costs remained stable quarter over quarter. Gross margins increased, to 43.8% for the third quarter of 2011 compared to 43.5% for the prior year period, primarily due to improving cable television programming margins and contract termination fees.

System operations expenses and selling, general and administrative (“SG&A”) expenses decreased $2.4 million or 10.6% quarter over quarter, to $20.1 million in the third quarter of 2011 compared to $22.5 million in the prior year quarter. Factors driving the improvement period over period include reduced system repair costs, professional services expenses, property taxes and administrative labor from workforce reductions done in the beginning of the year. Depreciation and amortization expenses decreased 15.2%, to $17.1 million in the third quarter of 2011 versus $20.1 million in the third quarter of 2010. The decline was due to assets becoming fully depreciated, lower cost systems being installed and the reduction in capital investment levels over the past years. As a result of the factors noted above, operating income increased 30.5% to $8.9 million in the third quarter of 2011 compared to $6.8 million in the prior year quarter.

 

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We generated $13.4 million of cash from operating activities as compared to $20.0 million in the third quarter of 2010. The reduction in 2011 cash flow was driven by a $7.2 million change in working capital as accounts payable balances returned to more normalized levels. Cash used for capital investments was $6.1 million in the third quarter of 2011. In September 2011, we made the required quarterly payment of $2.5 million on our term loan.

Hospitality and Advertising Services Businesses

Our Hospitality and Advertising Services businesses include television content sold to hotels and/or the respective hotels’ guests. The products can include interactive video-on-demand (VOD), cable television programming, Internet services or advertising services, and have an analogous consumer base. All products and services are delivered through a proprietary system platform having related satellite communication technology, and are geared towards the hotels and their guests.

Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and music videos and television on-demand programming).    One of our main sources of revenue, generating 53.1% of total revenue for the quarter ended September 30, 2011, is providing in-room, interactive guest entertainment, for which the hotel guest pays on a per-view, hourly or daily basis.

Our total guest-generated revenue depends on a number of factors, including:

 

 

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.

 

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.

 

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:

   

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 typically more than 60% higher than our analog rooms.

   

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.

   

The effectiveness of our VOD 2.0 initiative.    VOD 2.0 is our new movie merchandising approach, offering Hollywood movies starting at $4.99; an improved user interface and navigational experiences for hotel guests; and enhanced merchandising and marketing of the latest content in our exclusive hotel window. By increasing browsing activity, attracting new buyers and lifting buy rates, we can improve theatrical movie revenue per room.

   

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.

 

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The availability of alternative programming and devices.    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, such as iPods®, cell phones and iPads® 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.

   

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.

The primary direct costs of providing Guest Entertainment are:

 

 

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;

 

commissions paid to our hotel customers, which are also variable and based on a percent of guest-generated revenue;

 

license fees, which are based on a percent of guest-generated revenue, for television on-demand, music, music videos, video games and sports programming; and

 

fixed monthly Internet connectivity costs.

Hotel Services (includes revenue from hotels for services such as television channels and recurring broadband Internet service and support to the hotels).    Another major source of our revenue is providing cable television programming and Internet services to the lodging industry, for which the hotel pays a fixed monthly fee.

 

 

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.

 

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.    We also generate revenue from other products and services within the hotel and lodging industry, including sales of broadband Internet and other interactive television systems, programming and equipment, cable television programming and programming reception equipment, Internet conference services and professional services, such as network design, project management and installation services.

 

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Advertising Services.    We deliver advertising-supported media into select hotel segments, from which we earn revenue from the sale of television commercials, channel access or other marketing-based programs. The demographic and professional profile of the traveler within our room base tends to have characteristics we believe are attractive to consumer marketing organizations. By approaching guests with relevant messaging when they are in the comfort of a hotel room, free of distractions, advertisers have a prime opportunity to capture the attention of and connect with these desired consumers. In addition to market demands, our revenue is also dependent on rooms available to promote customer products and services. As of September 30, 2011, we provided advertising media services to approximately 1.1 million hotel rooms. We also deliver targeted advertising and services to 335,000 hotel rooms on 10 popular satellite-delivered analog channels. As our hotel customers upgrade to high-definition signals, we believe our existing analog system will be less attractive both to hoteliers and to advertisers. It is our intention to transition this service to a 20 channel, high definition platform capable of inserting targeted advertising into an existing nationwide direct-broadcast satellite signal. This transition will enable us to deliver our advertising content in a more cost effective manner across a much larger segment of our existing room base. The Company’s new high definition platform will have the scale to attract national advertisers and will also have the ability to target specific designated market areas and zip codes. Longer term, we believe our new advertising platform will have the potential to significantly enhance our ability to monetize the advertising value of our extensive room base and valuable guest demographic.

Key Metrics:

Rooms Served

One of the metrics we monitor within our Hospitality and Advertising Services businesses is the number of rooms we serve with our various services. As of September 30, we had the following number of rooms installed with the designated service:

 

    September 30,  
    2011     2010  

Total rooms served (1)

            1,693,745                 1,852,161    

Total Guest Entertainment rooms (2)

    1,551,204         1,706,884    

Total HD rooms (3)

    294,396         254,233    

Percent of Total Guest Entertainment rooms

    19.0%         14.9%    

Total Cable Television Programming (FTG) rooms (4)

    960,965         1,051,264    

Percent of Total Guest Entertainment rooms

    61.9%         61.6%    

 

(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 89.7% were digital as of September 30, 2011, 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.

 

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High Definition Room Growth

We also track the penetration of our high-definition television (“HDTV”) system, since rooms equipped with HDTV services typically generate higher revenue from Guest Entertainment and Hotel Services than rooms equipped with our standard-definition VOD systems. HDTV room growth occurs as we install our HDTV system in newly contracted rooms or convert certain existing rooms to the HDTV system in exchange for contract extensions. The installation of a HDTV system typically requires a capital investment by both the Company and the hotel operator. HDTV growth has been constrained by reduced hotel capital spending budgets, given the negative impact of the economy on the hospitality industry. We are prepared to increase capital investment levels and work jointly with our best hotel customers to continue the rollout of high-definition systems within the operating and capital plans of the hotels and the Company. We installed our HDTV systems in the following number of net new rooms as of September 30:

 

    September 30,  
    2011     2010  

Net new HDTV rooms for the three months ended

    8,801         7,494    

Net new HDTV rooms for the nine months ended

            24,043                 22,482    

HDTV rooms, including new installations and major upgrades, are equipped with high-definition capabilities.

Capital Investment Per Installed Room

The average investment per room associated with an installation can fluctuate due to engineering efforts, component costs, product segmentation, cost of assembly and installation, average number of rooms for properties installed, certain fixed costs and hotel capital contributions. The following table sets forth our average installation cost per room during the periods ended:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
          2011                     2010                     2011                     2010          

Average cost per installed HD room

    $ 135          $ 191          $ 144          $ 211     

The decrease in the average cost per HD room from 2010 to 2011 was primarily driven by lower component, installation and other related costs and a larger average number of rooms for properties installed.

 

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Average Revenue Per Room

We monitor the average revenue we generate per Hospitality and Advertising Services room. Guest Entertainment revenue can fluctuate based on several factors, including occupancy, consumer sentiment, mix of travelers, the availability of high definition and alternative programming, the popularity of movie content, the mix of services purchased and the overall economic environment. Hotel Services revenue can fluctuate based on the percentage of our hotels purchasing cable television programming services from us, the type of services provided at each site, as well as the number of hotels purchasing broadband service and support from us. System Sales and Related Services revenue can fluctuate based on the number of system and equipment sales, including broadband system sales. Advertising Services revenue can fluctuate based on the demand for advertising and the performance of products and services sold to business and leisure travelers, as well as the number of rooms available to promote within. The following table sets forth the components of our Hospitality and Advertising Services revenue per room for the three and nine months ended September 30:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
          2011                 2010                 2011                 2010        

Average monthly revenue per room:

       

Hospitality and Advertising Services

       

Guest Entertainment

    $ 11.88         $ 12.53         $ 11.74         $ 12.68    

Non-Guest Entertainment

       

Hotel Services

    7.03         6.56         6.98         6.51    

System Sales and Related Services

    2.43         2.04         2.15         1.85    

Advertising Services

    0.50         0.42         0.49         0.45    
 

 

 

   

 

 

   

 

 

   

 

 

 
    9.96         9.02         9.62         8.81    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Hospitality and Advertising Services revenue per room

    $ 21.84         $ 21.55         $ 21.36         $ 21.49    
 

 

 

   

 

 

   

 

 

   

 

 

 

Our diversified revenue initiatives, including Hotel Services, Systems Sales and Related Services and Advertising Services, increased to $9.96 per room for the current quarter, a 10.4% increase from the prior year quarter. Quarter over quarter, Guest Entertainment revenue per room decreased 5.2% to $11.88. For the nine months ended September 30, 2011, revenue from diversified initiatives increased to $9.62 per room, a 9.2% increase from the prior year period. During the same period, Guest Entertainment revenue per room decreased 7.4% to $11.74. Total Non-Guest Entertainment revenue, including Healthcare, comprised 46.9% of total revenue during the third quarter of 2011 and 46.3% of total revenue for the nine months ended September 30, 2011.

 

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Average Direct Costs Per Room

Guest Entertainment direct costs vary based on content license fees, the mix of Guest Entertainment products purchased and the commission earned by the hotel. Hotel Services direct costs include the cost of cable television programming and the cost of broadband Internet support services. The cost of System Sales and Related Services primarily includes the cost of the systems and equipment sold to hotels. Advertising Services direct costs include the cost of developing and distributing programming. The overall direct cost margin primarily varies based on the composition of revenue. The following table sets forth our Hospitality and Advertising Services direct costs per room for the three and nine months ended September 30:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
        2011             2010             2011             2010      

Average monthly direct costs per room:

       

Hospitality and Advertising Services

       

Guest Entertainment

    $ 4.84         $ 4.99         $ 4.61         $ 4.99    

Hotel Services

    5.79         5.70         5.79         5.64    

System Sales and Related Services

    1.39         1.28         1.37         1.21    

Advertising Services

    0.27         0.24         0.26         0.26    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Hospitality and Advertising Services direct costs per room

    $ 12.29         $ 12.21         $ 12.03         $ 12.10    
 

 

 

   

 

 

   

 

 

   

 

 

 

Healthcare Business

The healthcare market in the United States consists of over 940,000 hospital beds across 5,800 facilities. We believe most hospitals currently do not have any form of interactive television services. The primary reasons hospitals purchase interactive television systems are to increase patient satisfaction, to improve clinical outcomes and to increase operational efficiencies. Our Healthcare revenue is generated through a variety of services and solutions provided to care facilities, including:

 

 

revenue generated from the sale of the interactive system hardware, software license and installation services;

 

revenue from the sale and installation of satellite television equipment and related programming;

 

revenue from recurring support agreements for interactive content, software maintenance and technical field service support, including service agreements covering cable plant, satellite television equipment and interactive systems; and

 

revenue generated from cable plant design, modification and installation, as well as television installation services.

As of September 30, these services and solutions were installed as follows:

 

          2011                 2010                 Change                 % Change        

Systems installed

    63          53          10          18.9%     

Beds served

    14,887          11,488          3,399          29.6%     

 

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General Operations

Total Operating Expenses

System operations expenses consist of costs directly related to the operation and maintenance of systems at hotel sites. Selling, general and administrative expenses (“SG&A”) primarily include payroll costs, share-based compensation, engineering development costs and legal, marketing, professional and compliance costs. The following table sets forth the components of our operating expenses per room for the three and nine months ended September 30:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
          2011                 2010                 2011                 2010        

Systems operations expenses

    $ 2.05         $ 2.06         $ 2.02         $ 2.02    

SG&A expenses

    2.16         2.28         2.10         2.30    

Depreciation and amortization (D&A)

    3.58         3.90         3.71         4.02    

Restructuring charge

    0.15         0.01         0.13         0.02    

Other operating expense, net

    0.01         -            -            -       
 

 

 

   

 

 

   

 

 

   

 

 

 
    $ 7.95         $ 8.25         $ 7.96         $ 8.36    
 

 

 

   

 

 

   

 

 

   

 

 

 

Systems operations as a percent of total revenue

    9.1%         9.4%         9.2%         9.2%    

SG&A as a percent of total revenue

    9.7%         10.4%         9.6%         10.5%    

D&A as a percent of total revenue

    16.0%         17.7%         17.0%         18.4%    

Total operating expenses as a percent of total revenue

    35.5%         37.5%         36.3%         38.2%    

Special Note Regarding the Use of Non-GAAP Financial Information

To supplement our consolidated financial statements presented in accordance with accounting principles generally accepted in the United States (“GAAP”), we use free cash flow, a non-GAAP measure derived from results based on GAAP. The presentation of this additional information is not meant to be considered superior to, in isolation of or as a substitute for results prepared in accordance with GAAP.

We define free cash flow, a non-GAAP measure, as cash provided by operating activities less cash used for certain investing activities. Free cash flow is a key liquidity measure, but should not be construed as an alternative to cash flows from operating activities or as a measure of our profitability or performance. We provide information about free cash flow because we believe it is a useful way for us, and our investors, to measure our ability to satisfy cash needs, including interest payments on our debt, taxes and capital expenditures. GAAP requires us to provide information about cash flow generated from operations. Our definition of free cash flow does not take into account our debt service requirements or other commitments. Accordingly, free cash flow is not necessarily indicative of amounts of cash which may be available to us for discretionary purposes. Our method of computing free cash flow may not be comparable to other similarly titled measures of other companies.

Free Cash Flow

We manage our free cash flow by seeking to maximize the amount of cash we generate from our operations and managing the level of our investment activity. In addition, we can manage capital expenditures by varying the number of rooms we install in any given period. The reduction from 2010 cash flow was driven by a $7.2 million change in working capital quarter over quarter, as accounts payable balances returned to more normalized levels.

 

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Levels of free cash flow are set forth in the following table (dollar amounts in thousands):

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
          2011                 2010                 2011                 2010        

Cash provided by operating activities

    $ 13,406          $ 20,024          $ 41,020          $ 75,138     

Property and equipment additions

    (6,117)         (4,749)         (16,712)         (13,703)    
 

 

 

   

 

 

   

 

 

   

 

 

 
    $ 7,289          $ 15,275          $ 24,308          $ 61,435     
 

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

During the first nine months of 2011, cash provided by operating activities was $41.0 million, and we used $16.7 million of the cash we generated for property and equipment additions. During the same period, we prepaid $2.0 million against our Credit Facility, in addition to the required payments totaling $6.0 million. We also used $4.3 million for preferred stock dividends. During the first nine months of 2010, cash provided by operating activities was $75.1 million, and we used cash for property and equipment additions of $13.7 million. During the same period, we prepaid $80.2 million against our Credit Facility, which included $13.7 million of net proceeds from the common stock offering, in addition to the required payments totaling $3.5 million. We also used $4.3 million for the preferred stock dividend payments. The decrease in cash provided by operating activities for the first nine months of 2011 compared to the first nine months of 2010 was expected, as a result of a $28.4 million change in working capital period over period. The change in working capital was due to accounts payable, with the reversal of higher accounts payable in 2010 versus 2011, as we had negotiated extended payment terms with certain vendors during 2010. Cash as of September 30, 2011 was $17.8 million versus $8.4 million as of December 31, 2010.

Our principal sources of liquidity are our cash from operations, our cash on hand and the $25.0 million revolving loan commitment, which matures in 2013. We believe our cash on hand, operating cash flow, borrowing available under the Credit Facility and, subject to market conditions and regulatory requirements, potential availability under the shelf registration will be sufficient to fund our business and comply with our financing obligations. We plan to allocate a portion of our future cash flow from operations to the expansion of our high-definition room base and to the repayment of debt, as necessary. As of September 30, 2011, working capital was negative $22.4 million, compared to negative $50.5 million at December 31, 2010.

The collectability of our receivables is reasonably assured, as supported by our broad customer base. Our interactive hotel base is well diversified in terms of location, demographics and customer contracts. We provide our services to various hotel chains, ownership groups and management companies. In accordance with our hotel contracts, monies collected by the hotel for interactive television services are held in trust on our behalf, thereby limiting our risk from hotel bankruptcies.

In April 2007, we entered into a $675.0 million bank Credit Facility, comprised of a $625.0 million term loan, which matures in April 2014, and a $50.0 million revolving loan commitment, which matures in April 2013. The term loan originally bore interest at our option of (1) the bank’s base rate plus a margin of 1.0% or (2) LIBOR plus a margin of 2.0%. The term loan is collateralized by substantially all of the assets of the Company.

Effective March 22, 2011, we entered into a First Amendment (the “Amendment”) to the bank Credit Facility. The Amendment modified certain terms of the Credit Facility, including an increase in the permitted consolidated leverage ratio, the creation of a specific preferred stock dividend payment basket and the potential to extend the term beyond its current expiration in April 2014. The restricted payment basket within the Amendment allows for dividend payments not to exceed $5,750,000 per year. The Amendment also reduced the commitments under the revolving loan commitment, increased the interest rate and required quarterly repayment amount and adjusted other covenants. In March 2011, the Company incurred $2.4 million of debt issuance costs related to certain fees and expenses in connection with this Amendment.

 

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Under the Amendment, the $50.0 million revolving loan commitment was reduced to $25.0 million. The Amendment also requires us to make quarterly term loan repayments of $2.5 million, which began June 30, 2011, through December 31, 2012, and $3.75 million beginning March 31, 2013 through December 31, 2013. The amended term loan and revolving loan commitment bear interest at our option of (1) the bank’s base rate plus a margin of 4.0% or (2) LIBOR plus a margin of 5.0%. In addition, a LIBOR floor of 1.5% was established under the Amendment.

The original Credit Facility also stipulated we enter into hedge agreements to provide at least 50% of the outstanding term loan into a fixed interest rate for a period not less than two years. The swap agreements expired in June 2011. The Amendment did not require us to enter into any hedge agreements (see Note 13 to the financial statements). The term loan interest rate as of September 30, 2011 was 6.5%. The all-in weighted average interest rate for the quarter ended September 30, 2011 was 6.6%. As of September 30, 2011, we were in compliance with all financial covenants required by our bank Credit Facility.

The Amendment includes terms and conditions which require compliance with leverage and interest coverage covenants.

Our leverage and interest coverage ratios were as follows for the periods ended September 30:

 

           2011                2010      

Actual consolidated leverage ratio (1) (3)

   3.50    3.47

Maximum per covenant

   4.00    3.50

Actual consolidated interest coverage ratio (2) (3)

   2.69    3.23

Minimum per covenant

   2.25    3.00

 

(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 and the Amendment.

(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 and preferred dividends, as defined by the terms of the bank Credit Facility and the Amendment.

(3)

Maximum consolidated leverage ratio and minimum consolidated interest coverage ratios are defined terms of the bank Credit Facility and the Amendment, and are presented here to demonstrate compliance with the covenants in the Amendment, as noncompliance with such covenants could have a material adverse effect on us.

Our debt covenant ratios will change in future periods as follows:

 

         Q4 2012        Q3 2013

 

  to maturity  

Maximum consolidated leverage ratio

   3.75    3.50

Minimum consolidated interest coverage ratio

   2.25    2.25

We do not utilize special purpose entities or off-balance sheet financial arrangements.

 

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In order to continue operating efficiently and expand our business, we must remain in compliance with covenants outlined in the Amendment. Our ability to remain in compliance with those covenants will depend on our ability to generate sufficient Consolidated EBITDA (a term defined in the Amendment) and to manage our capital investment and debt levels. We continue taking actions within our control to manage our debt level and remain in compliance with our debt covenants. The actions within our control include our management of capital investment, working capital and operating costs and exploring other alternative financing. If we are not able to remain in compliance with our current debt covenants and our lenders will not amend or waive covenants with which we are not in compliance, the debt would be due, we would not be able to satisfy our financial obligations and we would need to seek alternative financing. If we were not able to secure alternative financing, this would have a substantial adverse impact on the Company and our ability to continue our operations.

We achieved a consolidated leverage ratio of 3.50 compared to the maximum allowable ratio of 4.00 for the third quarter of 2011. Our ability to continue to comply with our current covenants is subject to the general economic climate and business conditions beyond our control. Additionally, our ability to comply with these covenants depends on achieving our planned operating results and making further debt reductions, as necessary. Although there are signs of stabilization in certain sectors of the economy, the uncertainties impacting travel and lodging, in addition to the constraints in the credit markets, consumer conservatism and other market dynamics, including technological changes, may continue to negatively impact our planned results and required covenants. If we are not able to remain in compliance with our current debt covenants, it will likely have a significant, unfavorable impact on our business and financial condition.

The Credit Facility also requires we notify the agent upon the occurrence of a “Material Adverse Effect” prior to any draw on the Company’s revolving loan commitment, as such terms are defined and used within our bank Credit Facility. However, under the Credit Facility, the provision of such a notice is not an event of default, but if such an event occurred, it could restrict the Company’s ability to obtain additional financing under the revolving loan commitment. As of September 30, 2011, we are not aware of any events which would qualify under the Material Adverse Effect clause of the Credit Facility. The total amount of long-term debt outstanding, including the current portion, as of September 30, 2011 was $365.6 million versus $373.6 million as of December 31, 2010.

In April 2007, we entered into interest rate swap agreements with notional values of $312.5 million, at a fixed rate of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which expired in June 2011. These swap arrangements effectively changed the underlying debt from a variable interest rate to a fixed interest rate for the term of the swap agreements. The swap agreements were designated as, and met the criteria for, cash flow hedges and were not considered speculative in nature. All of the swap agreements were issued by Credit Suisse International.

With our amended Credit Facility, our interest rate swaps ceased to be effective and hedge accounting was discontinued effective March 22, 2011 and going forward, primarily related to the LIBOR floor of 1.5% as established under the Amendment. As a result, our deferred losses of $4,928,000 recorded in other comprehensive income were frozen and were amortized into earnings over the original remaining term of the hedged transaction. All subsequent changes in the fair value of the swaps were recorded directly to interest expense. For the nine months ended September 30, 2011, we recorded a loss of $4,928,000 related to amortization of our deferred losses and a gain of $6,439,000 related to the change in fair value of the interest rate swaps. The net amount of $1,511,000 is a non-cash gain and did not impact the amount of cash interest paid during the period.

The Credit Facility provides for the issuance of letters of credit up to $7.5 million, subject to customary terms and conditions. Under the terms of the Amendment, this amount was reduced from $15.0 million. As of September 30, 2011, we had outstanding letters of credit totaling $325,000.

 

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Obligations and commitments as of September 30, 2011 were as follows (dollar amounts in thousands):

 

$365,605 $365,605 $365,605 $365,605 $365,605
    

 

     Payments due by period  
     Total      Less than

 

1 year

     2 – 3

 

years

     4 – 5

 

years

     Over

 

5 years

 

Contractual obligations:

              

Long-term debt(s)

     $ 365,605          $ 10,456          $ 355,122          $ 27          $   

Interest on bank term loan (1)

     62,094          25,365          36,729                    

Operating lease payments

     2,695          1,070          1,149          471            

Purchase obligations (2)

     10,007          5,016          3,136          1,805          50    

Minimum royalties and commissions (3)

     561          561                            
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

     $ 440,962          $ 42,468          $ 396,136          $ 2,303          $ 55    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

$365,605 $365,605 $365,605 $365,605 $365,605
            Amount of commitment expiration per period  
     Total      Less than

 

1 year

     2 – 3

 

years

     4 – 5

 

years

     Over

 

5 years

 

Other commercial commitments:

              

Standby letters of credit

     $ 325          $ 325          $         $         $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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.

Seasonality

Our quarterly operating results are subject to fluctuation, depending upon hotel occupancy rates and other factors, including travel patterns and the economy. Our hotel customers typically experience higher occupancy rates during the second and third quarters, due to seasonal travel patterns and, accordingly, we historically have higher revenue and cash flow in those quarters. However, quarterly revenue can be affected by the availability of popular content during those quarters and by consumer purchasing behavior. We have no control over when new content is released or how popular it will be, or the effect of economic conditions on consumer behavior.

 

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Discussion and Analysis of Results of Operations

Three Months Ended September 30, 2011 and 2010

Revenue Analysis.  Total revenue for the third quarter of 2011 was $106.8 million, a decrease of $6.9 million or 6.1%, compared to the third quarter of 2010. The decrease in revenue was from Guest Entertainment and Hotel Services revenues, partially offset by increases in revenue from System Sales and Related Services, Healthcare and Advertising Services. The following table sets forth the components of our revenue (dollar amounts in thousands) for the quarter ended September 30:

 

Amount Amount Amount Amount
     2011      2010  
         Amount          Percent
of Total
  Revenues  
         Amount          Percent
of Total
  Revenues  
 

Revenues:

           

Hospitality and Advertising Services

           

Guest Entertainment

     $ 56,691          53.1%          $ 64,833          57.0%    

Hotel Services

     33,555          31.4%          33,951          29.8%    

System Sales and Related Services

     11,587          10.8%          10,546          9.3%    

Advertising Services

     2,366          2.2%          2,194          1.9%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Hospitality and Advertising Services

     104,199          97.5%          111,524          98.0%    

Healthcare

     2,648          2.5%          2,270          2.0%    
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 106,847          100.0%          $ 113,794          100.0%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Hospitality and Advertising Services revenue, which includes Guest Entertainment, Hotel Services, System Sales and Related Services and Advertising Services, decreased $7.3 million or 6.6%, to $104.2 million in the third quarter of 2011 compared to $111.5 million in the third quarter of 2010. Average monthly Hospitality and Advertising Services revenue per room was $21.84 in the third quarter of 2011, an increase of 1.3% as compared to $21.55 in the prior year quarter. The following table sets forth information with respect to Hospitality and Advertising Services revenue per room for the quarter ended September 30:

 

           2011                  2010        

Average monthly revenue per room:

     

Hospitality and Advertising Services

     

Guest Entertainment

     $ 11.88          $ 12.53    

Hotel Services

     7.03          6.56    

System Sales and Related Services

     2.43          2.04    

Advertising Services

     0.50          0.42    
  

 

 

    

 

 

 

Total Hospitality and Advertising Services revenue per room

     $ 21.84          $ 21.55    
  

 

 

    

 

 

 

Guest Entertainment revenue, which includes on-demand entertainment such as movies, television on-demand, music and games, decreased $8.1 million or 12.6%, to $56.7 million in the third quarter of 2011 as compared to $64.8 million in the prior year quarter. The decrease in revenue resulted primarily from a 7.8% reduction in the average number of Guest Entertainment rooms served and a 5.2% decline in Guest Entertainment revenue per room. The rooms removed during the quarter generated 37% lower revenue than our average rooms. The vast majority of these rooms did not switch to a different interactive television provider, but were smaller hotels which chose to limit their media offering to only free television content. Guest Entertainment revenue per room benefited from an increase in the sale of theatrical movies due to our VOD 2.0 initiative and improving Hollywood content. This improvement was offset by a decline in revenue from non-theatrical movies, music, television on-demand programming, games and television Internet access. As a result, monthly Guest Entertainment revenue for the third quarter of 2011 declined to $11.88 compared to $12.53 for the third quarter of 2010. On a per-room basis, average monthly movie revenue per room was $11.19 for the third quarter of 2011, a 4.1% reduction as compared to $11.67 per room in the prior year quarter. Non-movie Guest Entertainment revenue per room decreased 19.8% to $0.69 in the third quarter of 2011, related to decreases in music and game revenue.

 

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Hotel Services revenue, which includes recurring revenue from hotels for cable television programming and broadband Internet service and support, decreased slightly compared to the prior year quarter, to $33.6 million in the third quarter of 2011 versus $34.0 million in the third quarter of 2010. On a per-room basis, monthly Hotel Services revenue for the third quarter of 2011 increased 7.2%, to $7.03 compared to $6.56 for the third quarter of 2010. Monthly cable television programming revenue per room increased 7.9%, to $6.44 for the third quarter of 2011 as compared to $5.97 for the third quarter of 2010. These increases resulted primarily from price increases on cable television programming over the prior year period. Recurring broadband Internet revenue per room was flat at $0.59 quarter over quarter.

System Sales and Related Services revenue includes the sale of cable television programming equipment, broadband Internet equipment, HDTV installations and other services to hotels. For the third quarter of 2011, revenue increased $1.1 million or 9.9%, to $11.6 million as compared to $10.5 million for the third quarter of 2010. The increase was the result of programming fees, equipment sales and fees related to the early termination of a group of limited service hotels which elected to only provide free television, offset by a decrease in revenue due to a HDTV equipment conversion contract in the prior year.

Advertising Services revenue consists of revenue generated by The Hotel Networks (“THN”), our advertising services subsidiary. For the third quarter of 2011, revenue increased $0.2 million or 7.8%, to $2.4 million as compared to $2.2 million in the prior year period. This increase was primarily the result of increased channel access revenue, where we provide cable channels to providers for the distribution of their programming, offset in part by decreased general advertising by national advertisers on our system.

Healthcare revenue includes the sale of interactive systems and services to healthcare facilities. Healthcare revenue increased $0.3 million or 16.7%, to $2.6 million in the third quarter of 2011 as compared to $2.3 million for the third quarter of 2010, driven by an increase in the number of beds receiving our recurring services, as well as higher revenue on current quarter system sales and installations. During the current quarter, we installed 1,148 beds and three facilities compared to 563 beds and one facility during the prior year period. We have seven signed healthcare contracts in our backlog waiting for installation.

Direct Costs (exclusive of operating expenses and depreciation and amortization discussed separately below).    Total direct costs decreased $4.3 million or 6.6%, to $60.0 million in the third quarter of 2011 as compared to $64.3 million in the third quarter of 2010. Total direct costs were 56.2% of revenue for the third quarter of 2011 as compared to 56.5% in the third quarter of 2010. Direct costs related to the Hospitality and Advertising Services businesses, which include Guest Entertainment, Hotel Services, System Sales and Related Services and Advertising Services, were $58.6 million for the third quarter of 2011 compared to $63.2 million for the prior year quarter. We had a lower sales volume in Guest Entertainment and Hotel Services, in addition to lower connectivity costs as a result of bandwidth re-provisioning and renegotiating certain supplier agreements. Advertising Services fixed costs remained stable quarter over quarter.

Operating Expenses.  The following table sets forth information in regard to operating expenses for the quarter ended September 30 (dollar amounts in thousands):

 

Amount Amount Amount Amount
     2011      2010  
         Amount          Percent
of Total
  Revenues  
         Amount          Percent
of Total
  Revenues   
 

Operating expenses:

           

System operations

     $ 9,768          9.1%          $ 10,674          9.4%    

Selling, general and administrative

     10,326          9.7%          11,797          10.4%    

Depreciation and amortization

     17,075          16.0%          20,141          17.7%    

Restructuring charge

     732          0.7%          101          0.0%    

Other operating expense (income)

     31          0.0%          (3)          0.0%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     $ 37,932          35.5%          $ 42,710          37.5%    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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System operations expenses decreased $0.9 million or 8.5%, to $9.8 million in the third quarter of 2011 as compared to $10.7 million in the third quarter of 2010. The decrease was driven by reduced system repair costs and lower property taxes. As a percentage of total revenue, system operations expenses decreased to 9.1% this quarter as compared to 9.4% in the third quarter of 2010. Per average installed room, system operations expenses also decreased, to $2.05 per room per month compared to $2.06 in the prior year quarter.

Selling, general and administrative (“SG&A”) expenses decreased $1.5 million or 12.5%, to $10.3 million in the current quarter as compared to $11.8 million in the third quarter of 2010. The decrease was a result of lower professional services and administrative labor from the workforce reductions initiated in the first quarter of 2011, as well as debt issuance costs incurred during the prior year period. As a percentage of revenue, SG&A expenses were 9.7% in the current quarter as compared to 10.4% in the prior year quarter. SG&A expenses were $2.16 per average installed room per month for the current quarter as compared to $2.28 in the third quarter of 2010.

Depreciation and amortization expenses were $17.1 million in the third quarter of 2011 as compared to $20.1 million in the third quarter of 2010. The decline was due to the reduction in capital investments over the past several years, lower cost systems being installed and certain assets becoming fully depreciated. As a percentage of revenue, depreciation and amortization expenses were 16.0% in the third quarter of 2011 compared to 17.7% in the third quarter of 2010.

In 2011, we initiated a program to gain operating efficiencies by reorganizing departments, reducing layers of management and refocusing on organizational initiatives. The program reduced our workforce by approximately 7%. As a result of this action and our previous restructuring and reduction in force initiatives, we incurred $0.7 million of costs during the three months ended September 30, 2011. During the third quarter of 2010, we had $0.1 million of costs related to restructuring and workforce reduction activities. Additional accruals and cash payments related to the restructuring activities are dependent upon reduction in force or subleasing arrangements, which could change our expense estimates.

Operating Income.  As a result of the factors described above, operating income increased to $8.9 million in the third quarter of 2011 compared to $6.8 million in the third quarter of 2010.

Interest Expense.  Interest expense was $6.4 million in the current quarter versus $8.1 million in the third quarter of 2010. The all-in weighted average interest rate was 6.6% for the third quarter of 2011 versus 7.5% for the third quarter of 2010. The decreases in our interest expense and interest rate during the third quarter of 2011 were related to a lower outstanding debt balance and the expiration of our interest rate swap commitment. The outstanding balance of our debt under the Credit Facility decreased to $365.6 million in the third quarter of 2011 from $390.5 million in the third quarter of 2010. In the third quarter of 2010, interest expense included $0.2 million of non-cash interest charges related to our interest rate swap position.

Loss on Early Retirement of Debt.  During the third quarter of 2010, we made additional prepayments on our term loan totaling $14.0 million and expensed $0.1 million of unamortized debt issuance costs. We did not make any prepayments on our term loan in the third quarter of 2011.

Taxes.  For the third quarter of 2011 and 2010, we incurred taxes of $290,000 and $226,000, respectively, primarily for state franchise taxes.

Net Income (Loss).  As a result of the factors described above, net income was $2.0 million for the third quarter of 2011 compared to net loss of $1.7 million in the prior year quarter.

 

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Discussion and Analysis of Results of Operations

Nine Months Ended September 30, 2011 and 2010

Revenue Analysis.  Total revenue for the first nine months of 2011 was $321.2 million, a decrease of $23.7 million or 6.9%, compared to the first nine months of 2010. The decrease in revenue was from Guest Entertainment and Hotel Services revenues, partially offset by increases in revenue from System Sales and Related Services, Healthcare and Advertising Services. The following table sets forth the components of our revenue (dollar amounts in thousands) for the nine months ended September 30:

 

     2011      2010  
         Amount          Percent
of Total
  Revenues  
         Amount          Percent
of Total
  Revenues  
 

Revenues:

           

Hospitality and Advertising Services

           

Guest Entertainment

     $ 172,305          53.7%          $ 199,879          58.0%    

Hotel Services

     102,406          31.9%          102,562          29.7%    

System Sales and Related Services

     31,548          9.8%          29,122          8.4%    

Advertising Services

     7,164          2.2%          7,118          2.1%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Hospitality and Advertising Services

     313,423          97.6%          338,681          98.2%    

Healthcare

     7,788          2.4%          6,236          1.8%    
  

 

 

    

 

 

    

 

 

    

 

 

 
     $ 321,211          100.0%          $ 344,917          100.0%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Hospitality and Advertising Services revenue, which includes Guest Entertainment, Hotel Services, System Sales and Related Services and Advertising Services, decreased $25.3 million or 7.5%, to $313.4 million in the first nine months of 2011 compared to $338.7 million in the first nine months of 2010. Average monthly Hospitality and Advertising Services revenue per room was $21.36 in the first nine months of 2011, a decrease of 0.6% as compared to $21.49 in the prior year period. The following table sets forth information with respect to Hospitality and Advertising Services revenue per room for the nine months ended September 30:

 

           2011                  2010        

Average monthly revenue per room:

     

Hospitality and Advertising Services

     

Guest Entertainment

     $ 11.74          $ 12.68    

Hotel Services

     6.98          6.51    

System Sales and Related Services

     2.15          1.85    

Advertising Services

     0.49          0.45    
  

 

 

    

 

 

 

Total Hospitality and Advertising Services revenue per room

     $ 21.36          $ 21.49    
  

 

 

    

 

 

 

Guest Entertainment revenue, which includes on-demand entertainment such as movies, television on-demand, music and games, decreased $27.6 million or 13.8%, to $172.3 million in the first nine months of 2011 as compared to $199.9 million in the prior year period. On a per-room basis, monthly Guest Entertainment revenue for the first nine months of 2011 declined 7.4%, to $11.74 compared to $12.68 for the first nine months of 2010. This change in revenue per room is affected by a 6.9% reduction in the average number of rooms served period over period, the mix of on-demand products purchased and the continued conservative consumer buying pattern of travelers. Average monthly movie revenue per room was $11.07 for the first nine months of 2011, a 6.5% reduction as compared to $11.84 per room in the prior year period. Non-movie Guest Entertainment revenue per room decreased 20.2% to $0.67 in the first nine months of 2011, related to decreases in television on-demand programming, music, games and television Internet revenue.

 

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Hotel Services revenue, which includes recurring revenue from hotels for cable television programming and broadband Internet service and support, decreased $0.2 million or 0.2%, to $102.4 million during the first nine months of 2011 versus $102.6 million in the first nine months of 2010. On a per-room basis, monthly Hotel Services revenue for the first nine months of 2011 increased 7.2%, to $6.98 compared to $6.51 for the first nine months of 2010. Monthly cable television programming revenue per room increased 7.4%, to $6.38 for the first nine months of 2011 as compared to $5.94 for the first nine months of 2010. These increases resulted primarily from price increases on cable television programming over the prior year period. Recurring broadband Internet revenue per room increased 5.3%, to $0.60 for the current nine months as compared to $0.57 for the prior year nine months.

System Sales and Related Services revenue includes the sale of cable television programming equipment, broadband Internet equipment, HDTV installations and other services to hotels. For the first nine months of 2011, revenue increased $2.4 million or 8.3%, to $31.5 million as compared to $29.1 million for the first nine months of 2010. The improvement was from increased incremental programming revenue, miscellaneous equipment sales and fees related to the early termination of a group of limited service hotels which elected to only provide free television, partially offset by reductions in broadband equipment sales and revenue from a HDTV equipment conversion contract in the prior year.

Advertising Services revenue consists of revenue generated by The Hotel Networks (“THN”), our advertising services subsidiary. For the first nine months of 2011, revenue increased $0.1 million or 0.6%, to $7.2 million as compared to $7.1 million in the prior year period. This increase was driven by increased channel access revenue, where we provide cable channels to providers for the distribution of their programming, offset by decreased general advertising by national advertisers on our system.

Healthcare revenue includes the sale of interactive systems and services to healthcare facilities. Healthcare revenue increased $1.6 million or 24.9%, to $7.8 million in the first nine months of 2011 as compared to $6.2 million for the first nine months of 2010, driven by an increase in the number of beds receiving recurring services and increased professional services revenue. During the current period, we installed 2,663 beds and seven facilities compared to 2,296 beds and eight facilities during the prior year period. We have seven signed healthcare contracts in our backlog waiting for installation.

Direct Costs (exclusive of operating expenses and depreciation and amortization discussed separately below).  Total direct costs decreased $13.4 million or 6.9%, to $180.4 million in the first nine months of 2011 as compared to $193.8 million in the first nine months of 2010. Total direct costs were flat at 56.2% of revenue for both the first nine months of 2011 and 2010. Direct costs related to the Hospitality and Advertising Services businesses, which include Guest Entertainment, Hotel Services, System Sales and Related Services and Advertising Services, were $176.6 million for the first nine months of 2011 compared to $190.6 million for the prior year period. This was the result of lower sales volume in Guest Entertainment and Hotel Services. Connectivity costs were also lower, as a result of bandwidth re-provisioning and renegotiating certain supplier agreements. Advertising Services also experienced lower fixed costs this period, driven by lower satellite distribution costs.

 

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Operating Expenses.    The following table sets forth information in regard to operating expenses for the nine months ended September 30 (dollar amounts in thousands):

 

     2011      2010  
         Amount          Percent
of Total
  Revenues  
         Amount          Percent
of Total
  Revenues  
 

Operating expenses:

           

System operations

     $ 29,569          9.2%          $ 31,816          9.2%    

Selling, general and administrative

     30,854          9.6%          36,226          10.5%    

Depreciation and amortization

     54,499          17.0%          63,238          18.4%    

Restructuring charge

     1,896          0.5%          343          0.1%    

Other operating expense

             0.0%                  0.0%    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     $ 116,827          36.3%          $ 131,625          38.2%    
  

 

 

    

 

 

    

 

 

    

 

 

 

System operations expenses decreased $2.2 million or 7.1%, to $29.6 million in the first nine months of 2011 as compared to $31.8 million in the first nine months of 2010. The decrease was driven by our reduction in force program initiated during the first quarter of 2011, as well as lower system repair costs and property taxes. As a percentage of total revenue, system operations expenses remained flat at 9.2% this period and the first nine months of 2010. Per average installed room, system operations expenses also remained stable, at $2.02 per room per month for both the nine months ended September 30, 2011 and 2010.

Selling, general and administrative (“SG&A”) expenses decreased $5.3 million or 14.8%, to $30.9 million in the current period as compared to $36.2 million in the same period of 2010. The decrease was also primarily a result of our reduction in force program, as noted above, our first quarter expense mitigation initiatives and lower professional fees, as well as debt issuance costs incurred during the prior year period. As a percentage of revenue, SG&A expenses were 9.6% in the current period as compared to 10.5% in the prior year period. SG&A expenses were $2.10 per average installed room per month for the current nine months as compared to $2.30 in the first nine months of 2010.

Depreciation and amortization expenses were $54.5 million in the first nine months of 2011 as compared to $63.2 million in the first nine months of 2010. The decline was due to the reduction in capital investments over the past several years, lower cost systems being installed and certain assets becoming fully depreciated. As a percentage of revenue, depreciation and amortization expenses were 17.0% in the first nine months of 2011 compared to 18.4% in the first nine months of 2010.

In 2011, we initiated a program to gain operating efficiencies by reorganizing departments, reducing layers of management and refocusing on organizational initiatives. The program reduced our workforce by approximately 7%. As a result of this action and our previous restructuring and reduction in force initiatives, we incurred $1.9 million of costs during the nine months ended September 30, 2011, of which the entire $1.9 million was related to our Hospitality and Advertising Services businesses. During the first nine months of 2010, we incurred $0.3 million of costs related to restructuring and workforce reduction activities. Additional accruals and cash payments related to the restructuring activities are dependent upon reduction in force or subleasing arrangements, which could change our expense estimates.

Operating Income.  As a result of the factors described above, operating income increased to $24.0 million in the first nine months of 2011 compared to $19.5 million in the first nine months of 2010.

 

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Interest Expense.    Interest expense was $25.0 million in the current period versus $25.5 million in the first nine months of 2010. The all-in weighted average interest rate was 9.0% for the first nine months of 2011 versus 7.2% for the first nine months of 2010. The increase in our interest rate was related to the 6.5% interest rate on our amended Credit Facility and the quarterly payments on our interest rate swap commitments during the first and second quarters of 2011. The interest rate swaps expired effective June 30, 2011. The outstanding balance of our debt under the Credit Facility decreased to $365.6 million at September 30, 2011 from $390.5 million at September 30, 2010. Interest expense for the first nine months of 2011 included a net $1.5 million non-cash interest gain related to our interest rate swap position, including a $6.4 million gain related to the change in fair value of the swaps and $4.9 million in amortization of deferred losses frozen in other comprehensive income. In the first nine months of 2010, interest expense included $1.7 million of non-cash interest charges related to our interest rate swap position.

Loss on Early Retirement of Debt.  During the first nine months of 2011, we made additional prepayments on the term loan totaling $2.0 million and, as a result of this prepayment and the Amendment to our Credit Facility, expensed $0.2 million of unamortized debt issuance costs. During the first nine months of 2010, we made additional prepayments on our term loan totaling $80.2 million and expensed $0.9 million of unamortized debt issuance costs.

Taxes.    For the first nine months of 2011 and 2010, we incurred taxes of $725,000 and $640,000, respectively, primarily for state franchise taxes.

Net Loss.    As a result of the factors described above, net loss was $1.8 million for the first nine months of 2011 compared to net loss of $7.3 million in the prior year period.

 

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Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our primary cost drivers are predetermined rates, such as hotel commissions; license fees paid for major motion pictures and other content or one-time fixed fees for independent films; and cable television programming costs. However, the preparation of financial statements requires us to make estimates and assumptions which affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions we believe to be reasonable based upon the available information. The following critical policies relate to the more significant judgments and estimates used in the preparation of the financial statements:

Revenue Recognition — We recognize revenue from various sources as follows:

 

 

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.

 

 

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.

 

 

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 standalone 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.

 

 

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 standalone 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 standalone basis.

 

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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.

 

 

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.

 

 

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.

 

 

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. The package price of the interactive system and related maintenance is fixed and determinable prior to delivery. The entire selling price of the interactive system is recognized upon installation, and is calculated using the estimated selling price on a standalone basis. The support arrangement, which includes interactive content, software maintenance and system services, is renewable upon completion of the initial year 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.

 

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Allowance for Doubtful Accounts.    We determine the estimate of the allowance for doubtful accounts considering several factors, including historical experience, aging of the accounts receivable, bad debt recoveries and contract terms between the hotel and us. In accordance with our hotel contracts, monies collected by the hotel for interactive television services are held in trust on our behalf. Collectability is reasonably assured, as supported by our credit check process, nominal write-off history and broad customer base. Our interactive hotel base is well diversified in terms of location, demographics and customer contracts. If the financial condition of a hotel chain or group of hotels were to deteriorate and reduce the ability to remit our monies, we may be required to increase our allowance by recording additional bad debt expense.

Allowance for Excess or Obsolete System Components.  We regularly evaluate component levels to ascertain build requirements based on our backlog and service requirements based on our current installed base. When a certain system component becomes obsolete due to technological changes, and it is determined the component cannot be utilized within our current installed base, we record a provision through depreciation for excess and obsolete components, based on estimated forecasts of product demand and service requirements. Additionally, we have components held primarily for resale, and if the component is not an active item for our assembly or service inventory, we record a provision through the cost of sales related to that product. We make every effort to ensure the accuracy of our forecasts of service requirements and future production; however, any significant unanticipated changes in demand or technological advances could have an impact on the value of system components and reported operating results.

Long-Lived Assets.    We review the carrying value of long-lived assets, such as property and equipment and intangible assets, whenever events or circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized to reduce the carrying value of the asset to its estimated fair value.

Property and Equipment.  Our property and equipment is stated at cost, net of accumulated depreciation and amortization. Installed hotel systems consist of equipment and related costs of installation, including certain payroll costs, sales commissions and customer acquisition costs directly related to the successful acquisition of hotel contracts. Maintenance costs, which do not significantly extend the useful lives of the respective assets, and repair costs are charged to system operations expense as incurred. We begin depreciating hotel systems when such systems are installed and activated. Depreciation of other equipment begins when such equipment is placed in service. We attribute no salvage value to equipment, and depreciation and amortization are computed using the straight-line method over the following useful lives:

 

           Years      

Buildings

   30

Hotel systems

     1/2 – 7

Other equipment

   3 – 10

Intangible Assets.    In accordance with FASB ASC Topics 350, “Intangibles - Goodwill and Other,” and 360, “Property, Plant, and Equipment,” we evaluate the remaining useful lives of our intangible assets with finite lives, and review for impairment when triggering events occur or change in circumstances warrant modifications to the carrying amount of the assets. These triggering events or circumstances include a significant deterioration in market conditions. We periodically evaluate the reasonableness of the useful lives of the intangible assets:

 

           Years      

Hotel contracts and relationships

   10 – 20

Tradenames

   7

Acquired technologies, rights and patents

   2 – 10

Content agreements and relationships

   4

 

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Allowance for System Removal.    We de-install properties through the course of normal operations due to a number of factors, including: poor revenue performance, hotel bankruptcy or collection issues, hotel closings and change in service provider. We regularly evaluate our backlog of properties scheduled for de-installation and record a provision for estimated system removal costs. The costs incurred as a result of de-installation include the labor to de-install the system, as well as unamortized installation costs. Over the last five years, de-installation activity was in a range of 2% to 10% of our installed room base.

Goodwill Impairment.  We account for goodwill and other intangible assets under FASB ASC Topic 350, “Intangibles - Goodwill and Other.” Under FASB ASC Topic 350, purchased goodwill is not amortized; rather, it is tested for impairment annually. We perform our goodwill impairment test for each reporting unit during the fourth quarter. Impairment testing could occur more frequently if there is a triggering event or change in circumstances which indicate the carrying value may not be recoverable, such as a significant deterioration in market conditions. We did not encounter such triggering events during the third quarter of 2011.

Effective January 1, 2011, we adopted additional provisions of FASB ASC Topic 350, which provide that reporting units with zero or negative carrying amounts are required to perform Step 2 of the goodwill impairment test if it is more likely than not a goodwill impairment exists. During the third quarter of 2011, we did not encounter any events or circumstances which could trigger an impairment of our goodwill or intangible assets; therefore, this adoption has not had any impact on our consolidated financial position, results of operations or cash flows.

We operate in three reportable segments, Hospitality, Advertising Services and Healthcare, for which only Hospitality and Advertising Services have goodwill. FASB ASC Topic 350 requires a two-step impairment test for goodwill, to be performed annually or if a triggering event indicates the carrying value may not be recoverable. If there was such a triggering event, the first step would be to compare the carrying amount of the reporting unit’s net assets to the fair value of the reporting unit. Fair value measurements must take into consideration the principal or most advantageous market, the highest and best use, the valuation technique and incorporate market participant assumptions. Valuation techniques to be used to measure fair value are the market approach, income approach and/or cost approach, and must be based on market participant assumptions. We consider the income approach to be a more meaningful indicator of fair value over the use of the market and cost approaches, due to a lack of comparable companies and assets. We believe the income approach provides the best estimate of fair value, and utilize a discounted cash flow analysis based on key assumptions and estimates. We would then reconcile the aggregate reporting units’ fair values to their indicated market capitalization. Key assumptions used to determine fair value include projections of revenue and cost data, capital spending, growth and operating earnings, factored for certain economic conditions. Certain costs within the reporting units are fixed in nature; therefore, changes in revenue which exceed or fall below the fixed cost threshold would have an effect on cash flow and recoverability of goodwill.

If the fair value of the reporting unit exceeds the carrying value, no further evaluation is required and no impairment loss is recognized. If the carrying amount exceeds the fair value, then the second step must be completed, which involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill. We are required to record such impairment losses as a component of income from continuing operations.

The determination of fair value requires us to make significant estimates and assumptions. These estimates may differ from actual results due to inherent uncertainty, such as deterioration in market conditions, prohibiting expected revenue recovery levels. Our revenue is closely linked to the performance of products and services sold to business and leisure travelers. A significant slow-down in economic activities could adversely impact our business, financial condition, results of operations and cash flows. Consequently, our goodwill may be impaired if the market conditions deteriorate or the capital market erodes. We believe there are no current impacts to our reporting units.

Recent Accounting Developments

See Note 17 to the financial statements.

 

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Item 3 — Quantitative and Qualitative Disclosures About Market Risk

We are exposed to various market risks, including potential losses resulting from adverse changes in interest rates and foreign currency exchange rates. We do not enter into derivatives or other financial instruments for trading or speculative purposes.

At September 30, 2011, we had debt totaling $365.6 million as follows (dollar amounts in thousands):

 

     Carrying
    Amount     
     Fair
       Value      
 

Bank Credit Facility:

     

Term loan

     $ 364,954           $ 315,685     

Capital leases

     651           651     
  

 

 

    

 

 

 
     $       365,605           $       316,336     
  

 

 

    

 

 

 

The fair value of our long-term debt is estimated based on current interest rates for similar debt of the same remaining maturities and quoted market prices, except for capital leases, which are reported at carrying value. For our capital leases, the carrying value approximates the fair value. In addition, the fair value of our long-term debt is strictly hypothetical and not indicative of what we are required to pay under the terms of our debt instruments.

We had two interest rate swap agreements, with notional values of $312.5 million, at a fixed rate of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which expired in June 2011. The term loan interest rate as of September 30, 2011 was 6.5% and the capital lease interest rate was 7.2%. Our all-in weighted average interest rate for the quarter ended September 30, 2011 was 6.6%, compared to 7.5% for the quarter ended September 30, 2010. We had fixed rate debt of $0.6 million and variable rate debt of $365.0 million. For fixed rate debt, interest rate fluctuations affect the fair market value but do not impact earnings or cash flows. Conversely, for variable rate debt, interest rate fluctuations generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. There would be no impact on earnings and cash flow for the next year resulting from a one percentage point increase to interest rates, assuming other variables remain constant, due to our LIBOR floor of 1.5%.

Economic Condition and Consumer Confidence.    Our results are generally connected to the performance of the lodging industry, where occupancy rates may fluctuate resulting from various factors. Reduction in hotel occupancy and consumer buy rates, resulting from business, general economic or other events, such as a recession in the United States, significant international crises, acts of terrorism, war or public health issues, could adversely impact our business, financial condition and results of operations. The overall travel industry and consumer buying pattern can be, and has been in the past, adversely affected by weaker general economic climates, geopolitical instability and concerns about public health.

Item 4 — Controls and Procedures

Evaluation of Disclosure Controls and Procedures.  Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief Financial Officer have concluded the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Additionally, our disclosure controls and procedures were also effective in ensuring information required to be disclosed in our Exchange Act reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Changes in Internal Control over Financial Reporting.  There was no change in our internal control over financial reporting during the third quarter of 2011 which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II — Other Information

Item 1 — Legal Proceedings

We are subject to litigation arising in the ordinary course of business. As of the date hereof, we believe the resolution of such litigation will not have a material adverse effect upon our financial condition, results of operations or cash flows.

On July 11, 2008, Linksmart Wireless Technology, LLC, a California limited liability company based in Pasadena, California, filed actions for patent infringement in the U.S. District Court in Marshall, Texas, against the Company and numerous other defendants, which allege infringement of a patent issued on August 17, 2004 entitled “User Specific Automatic Data Redirection System.” On October 26, 2010, the Court issued an order staying the cases pending the final determination in the Patent Office re-examination proceeding. No material events occurred in this action during the period ended September 30, 2011. Please refer to the description of this matter as contained in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 14, 2011.

Item 1A Risk Factors

No material change.

Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3 — Defaults Upon Senior Securities

Not applicable.

Item 5 — Other Information

Not applicable.

Item 6 — Exhibits

 

31.1

   Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer

31.2

   Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer

32

   Section 1350 Certifications

101.INS

   XBRL Instance Document

101.SCH

   XBRL Taxonomy Extension Schema Document

101.CAL

   XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

   XBRL Taxonomy Extension Label Linkbase Document

101.PRE

   XBRL Taxonomy Extension Presentation Linkbase Document

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

LodgeNet Interactive Corporation

 

 
   

(Registrant)

 

Date: November 4, 2011

   

/ s /  Scott C. Petersen

 

 
   

Scott C. Petersen

 
   

President, Chief Executive Officer and

 
   

Chairman of the Board of Directors

 
   

(Principal Executive Officer)

 

Date: November 4, 2011

   

/ s /  Frank P. Elsenbast

 

 
   

Frank P. Elsenbast

 
   

Senior Vice President, Chief Financial Officer

 
   

(Principal Financial & Accounting Officer)

 

 

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