##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
  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, 2010
  [     ]
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 0-22334
 LodgeNet Interactive Corporation
  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
 Former name, former address and former fiscal year, if changed since last report
 X
 
  Large accelerated filer ___
    
    Accelerated filer X
    
    Non-accelerated filer ___ (Do not check if a smaller reporting company)
    
    Smaller reporting company ___
 X




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##### 



LodgeNet Interactive Corporation and Subsidiaries
 Index
 PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets (Unaudited) as of September 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations (Unaudited) for 

the Three and Nine Months Ended September 30, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for 

the Nine Months Ended September 30, 2010 and 2009
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition 

and Results of Operations
    
    
    19Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    41Item 4  Controls and Procedures
    
    
    42Part II. Other InformationItem 1  Legal Proceedings
    
    
    43Item 1A  Risk Factors
    
    
    43Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 3  Defaults Upon Senior Securities
    
    
    44Item 5  Other Information
    
    
    44Item 6  Exhibits
    
    
    44Signatures
    
    
    45EX-31.1EX-31.2EX-32
 
   Page 2




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##### Table of Contents



Part I  Financial Information
 
 Item 1  Financial Statements
 LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Balance Sheets

(Unaudited)
  September 30,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash
    
    $
    8,110
    
    
    $
    17,011Accounts receivable, net
    
    
    53,369
    
    
    
    51,706Other current assets
    
    
    10,917
    
    
    
    9,189Total current assets
    
    
    72,396
    
    
    
    77,906Property and equipment, net
    
    
    165,662
    
    
    
    206,663Debt issuance costs, net
    
    
    4,127
    
    
    
    6,005Intangible assets, net
    
    
    100,572
    
    
    
    106,041Goodwill
    
    
    100,081
    
    
    
    100,081Other assets
    
    
    12,043
    
    
    
    11,658Total assets
    
    $
    454,881
    
    
    $
    508,354Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    59,466
    
    
    $
    40,040Current maturities of long-term debt
    
    
    5,046
    
    
    
    6,101Accrued expenses
    
    
    19,764
    
    
    
    19,137Deferred revenue
    
    
    18,146
    
    
    
    17,531Total current liabilities
    
    
    102,422
    
    
    
    82,809Long-term debt
    
    
    385,406
    
    
    
    463,845Other long-term liabilities
    
    
    21,495
    
    
    
    32,687Total liabilities
    
    
    509,323
    
    
    
    579,341Commitments and contingenciesStockholders deficiency:Preferred stock, $.01 par value, 5,000,000 shares authorized;
Series B cumulative perpetual convertible, 10%, 57,500 issued and
outstanding at September 30, 2010 and December 31, 2009,
respectively
(liquidation preference of $1,000 per share or $57,500,000 total)
    
    
    1
    
    
    
    1Common stock, $.01 par value, 50,000,000 shares authorized; 
25,088,414 and 22,537,664 shares outstanding at September 30, 2010
and December 31, 2009, respectively
    
    
    252
    
    
    
    225Additional paid-in capital
    
    
    389,939
    
    
    
    379,223Accumulated deficit
    
    
    (433,532)
    
    
    
    (426,211)Accumulated other comprehensive loss
    
    
    (11,102)
    
    
    
    (24,225)Total stockholders deficiency
    
    
    (54,442)
    
    
    
    (70,987)Total liabilities and stockholders deficiency
    
    $
    454,881
    
    
    $
    508,354
  Page 3




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Operations

(Unaudited)
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Revenues:Hospitality and Advertising Services
    
    $
    111,524
    
    
    $
    119,955
    
    
    $
    338,681
    
    
    $
    365,329Healthcare
    
    
    2,270
    
    
    
    1,167
    
    
    
    6,236
    
    
    
    5,867Total revenues
    
    
    113,794
    
    
    
    121,122
    
    
    
    344,917
    
    
    
    371,196Direct costs and operating expenses:Direct costs (exclusive of
operating expenses and
depreciation and amortization shown
separately below):Hospitality and Advertising
Services
    
    
    63,180
    
    
    
    68,644
    
    
    
    190,622
    
    
    
    207,307Healthcare
    
    
    1,100
    
    
    
    563
    
    
    
    3,170
    
    
    
    2,953Operating expenses:System operations
    
    
    10,674
    
    
    
    10,852
    
    
    
    31,816
    
    
    
    32,194Selling, general and administrative
    
    
    11,797
    
    
    
    11,324
    
    
    
    36,226
    
    
    
    33,847Depreciation and amortization
    
    
    20,141
    
    
    
    24,228
    
    
    
    63,238
    
    
    
    77,590Restructuring charge
    
    
    101
    
    
    
    128
    
    
    
    343
    
    
    
    311Other operating (income) expense
    
    
    (3)
    
    
    
    89
    
    
    
    2
    
    
    
    (86)Total direct costs and
operating expenses
    
    
    106,990
    
    
    
    115,828
    
    
    
    325,417
    
    
    
    354,116Income from operations
    
    
    6,804
    
    
    
    5,294
    
    
    
    19,500
    
    
    
    17,080Other income and (expenses):Interest expense
    
    
    (8,120)
    
    
    
    (9,521)
    
    
    
    (25,515)
    
    
    
    (29,214)Gain on extinguishment of debt
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    9,292Loss on early retirement of debt
    
    
    (137)
    
    
    
    (683)
    
    
    
    (898)
    
    
    
    (1,224)Other income
    
    
    5
    
    
    
    166
    
    
    
    232
    
    
    
    486Loss before income taxes
    
    
    (1,448)
    
    
    
    (4,744)
    
    
    
    (6,681)
    
    
    
    (3,580)Provision for income taxes
    
    
    (226)
    
    
    
    (238)
    
    
    
    (640)
    
    
    
    (657)Net loss
    
    
    (1,674)
    
    
    
    (4,982)
    
    
    
    (7,321)
    
    
    
    (4,237)Preferred stock dividends
    
    
    (1,437)
    
    
    
    (1,645)
    
    
    
    (4,312)
    
    
    
    (1,677)Net loss attributable to common
stockholders
    
    $
    (3,111)
    
    
    $
    (6,627)
    
    
    $
    (11,633)
    
    
    $
    (5,914)Net loss per common share (basic and
diluted)
    
    $
    (0.12)
    
    
    $
    (0.30)
    
    
    $
    (0.48)
    
    
    $
    (0.26)Weighted average shares outstanding
(basic and diluted)
    
    
    25,022,118
    
    
    
    22,458,587
    
    
    
    24,263,536
    
    
    
    22,431,867
  Page 4




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
(Unaudited)
  Nine Months Ended September 30,2010
    
    2009Operating activities:Net loss
    
    $
    (7,321)
    
    
    $
    (4,237)Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    63,238
    
    
    
    77,590Gain on extinguishment of debt (non-cash)
    
    
    -
    
    
    
    (9,292)Unrealized loss on derivative instruments
    
    
    1,688
    
    
    
    412Loss on early retirement of debt
    
    
    898
    
    
    
    1,224Share-based compensation and restricted stock
    
    
    1,348
    
    
    
    1,331Other, net
    
    
    265
    
    
    
    (675)Change in operating assets and liabilities:Accounts receivable, net
    
    
    (1,564)
    
    
    
    3,998Other current assets
    
    
    (1,906)
    
    
    
    13Accounts payable
    
    
    19,668
    
    
    
    (1,270)Accrued expenses and deferred revenue
    
    
    662
    
    
    
    (5,364)Other
    
    
    (1,838)
    
    
    
    (2,005)Net cash provided by operating activities
    
    
    75,138
    
    
    
    61,725Investing activities:Property and equipment additions
    
    
    (13,703)
    
    
    
    (15,441)Net cash used for investing activities
    
    
    (13,703)
    
    
    
    (15,441)Financing activities:Repayment of long-term debt
    
    
    (83,740)
    
    
    
    (63,768)Payment of capital lease obligations
    
    
    (804)
    
    
    
    (1,148)Borrowings on revolving credit facility
    
    
    25,000
    
    
    
    -Repayments of revolving credit facility
    
    
    (25,000)
    
    
    
    -Purchase of long-term debt
    
    
    -
    
    
    
    (23,685)Proceeds from investment in long-term debt
    
    
    4,889
    
    
    
    3,814Proceeds from issuance of common stock, net of offering costs
    
    
    13,658
    
    
    
    -Proceeds from issuance of preferred stock, net of offering costs
    
    
    -
    
    
    
    53,696Payment of dividends to preferred shareholders
    
    
    (4,312)
    
    
    
    -Exercise of stock options
    
    
    49
    
    
    
    -Net cash used for financing activities
    
    
    (70,260)
    
    
    
    (31,091)Effect of exchange rates on cash
    
    
    (76)
    
    
    
    109(Decrease) increase in cash
    
    
    (8,901)
    
    
    
    15,302Cash at beginning of period
    
    
    17,011
    
    
    
    10,800Cash at end of period
    
    $
    8,110
    
    
    $
    26,102
  Page 5




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements (Unaudited)
        September 30,
    
    
    December 31,2010
    
    
    2009Land, building and equipment
    
    $
    114,405
    
    
    $
    111,777Hotel systems
    
    
    730,107
    
    
    
    754,869Total
    
    
    844,512
    
    
    
    866,646Less - depreciation and amortization
    
    
    (678,850)
    
    
    
    (659,983)Property and equipment, net
    
    $
    165,662
    
    
    $
    206,663
    Page 6




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##### Table of Contents



AdvertisingHospitality
    
    Services
    
    TotalBalance as of December 31, 2009Goodwill
    
    $
    92,614
    
    
    $
    18,679
    
    
    $
    111,293Accumulated impairment losses
    
    
    -
    
    
    
    (11,212)
    
    
    
    (11,212)Activity during the period
    
    
    -
    
    
    
    -
    
    
    
    -Balance as of September 30, 2010
    
    $
    92,614
    
    
    $
    7,467
    
    
    $
    100,081
   September 30, 2010
    
    December 31, 2009Carrying
    
    Accumulated
    
    Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationAssets subject to amortization:Acquired contracts and
relationships
    
    $
    120,315
    
    
    $
    (22,371)
    
    
    $
    120,315
    
    
    $
    (17,629)Other acquired intangibles
    
    
    13,570
    
    
    
    (12,629)
    
    
    
    12,884
    
    
    
    (12,130)Tradenames
    
    
    3,106
    
    
    
    (1,991)
    
    
    
    3,094
    
    
    
    (1,626)Acquired patents
    
    
    5,155
    
    
    
    (4,583)
    
    
    
    5,142
    
    
    
    (4,009)$
    142,146
    
    
    $
    (41,574)
    
    
    $
    141,435
    
    
    $
    (35,394)
    Page 7




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Basic EPS:Net loss
    
    $
    (1,674
    )
    
    $
    (4,982
    )
    
    $
    (7,321
    )
    
    $
    (4,237
    )Preferred stock dividends
    
    
    (1,437
    )
    
    
    (1,645
    )
    
    
    (4,312
    )
    
    
    (1,677
    )$
    (3,111
    )
    
    $
    (6,627
    )
    
    $
    (11,633
    )
    
    $
    (5,914
    )Loss allocated to participating securities (1)
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Net loss available to common stockholders
    
    $
    (3,111
    )
    
    $
    (6,627
    )
    
    $
    (11,633
    )
    
    $
    (5,914
    )Weighted average shares outstanding for basic 
earnings per common share
    
    
    25,022,118
    
    
    
    22,458,587
    
    
    
    24,263,536
    
    
    
    22,431,867Basic earnings per share
    
    $
    (0.12
    )
    
    $
    (0.30
    )
    
    $
    (0.48
    )
    
    $
    (0.26
    )Diluted EPS:Net loss
    
    $
    (1,674
    )
    
    $
    (4,982
    )
    
    $
    (7,321
    )
    
    $
    (4,237
    )Preferred stock dividends
    
    
    (1,437
    )
    
    
    (1,645
    )
    
    
    (4,312
    )
    
    
    (1,677
    )$
    (3,111
    )
    
    $
    (6,627
    )
    
    $
    (11,633
    )
    
    $
    (5,914
    )Loss allocated to participating securities (1)
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Net loss available to common stockholders
    
    $
    (3,111
    )
    
    $
    (6,627
    )
    
    $
    (11,633
    )
    
    $
    (5,914
    )Weighted average shares outstanding for basic 
earnings per common share
    
    
    25,022,118
    
    
    
    22,458,587
    
    
    
    24,263,536
    
    
    
    22,431,867Dilutive effect of potential shares (2)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AWeighted average shares outstanding for diluted 
earnings per common share
    
    
    25,022,118
    
    
    
    22,458,587
    
    
    
    24,263,536
    
    
    
    22,431,867Diluted earnings per share
    
    $
    (0.12
    )
    
    $
    (0.30
    )
    
    $
    (0.48
    )
    
    $
    (0.26
    )Potential dilutive common shares (2)
    
    
    17,119,017
    
    
    
    17,029,601
    
    
    
    17,119,017
    
    
    
    17,029,601
 (1)
    
    For the three and nine months ended September 30, 2010 and the three and nine months ended
September 30, 2009, 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 and nine months ended September 30, 2010 and the three and nine months ended
September 30, 2009, potential dilutive common shares, which include stock options, unvested
restricted stock 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. Page 8




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##### Table of Contents



September 30,
    
    
    December 31,2010
    
    2009Property, sales and other taxes
    
    $
    6,222
    
    
    $
    6,933Compensation
    
    
    5,581
    
    
    
    4,360Interest
    
    
    77
    
    
    
    92Programming related
    
    
    2,189
    
    
    
    2,510Restructuring and reorganization
    
    
    305
    
    
    
    758Preferred stock dividends
    
    
    1,437
    
    
    
    1,437Other
    
    
    3,953
    
    
    
    3,047$
    19,764
    
    
    $
    19,137
   September 30,
    
    
    December 31,2010
    
    2009Bank Credit Facility:Bank term loan
    
    $
    389,147
    
    
    $
    467,998Revolving credit facility
    
    
    -
    
    
    
    -Capital leases
    
    
    1,305
    
    
    
    1,948390,452
    
    
    
    469,946Less current maturities
    
    
    (5,046
    )
    
    
    (6,101
    )$
    385,406
    
    
    $
    463,845
 Bank Credit Facility 3⁄4
 Page 9




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##### Table of Contents



Capital Leases
  2010
    
    2011
    
    2012
    
    2013
    
    2014Long-term debt
    
    $
    1,068
    
    
    $
    4,272
    
    
    $
    4,272
    
    
    $
    4,272
    
    
    $
    375,263Capital leases
    
    
    247
    
    
    
    745
    
    
    
    331
    
    
    
    56
    
    
    
    181,315
    
    
    
    5,017
    
    
    
    4,603
    
    
    
    4,328
    
    
    
    375,281Less amount
representing
interest on capital
leases
    
    
    (21
    )
    
    
    (51
    )
    
    
    (16
    )
    
    
    (3
    )
    
    
    (1
    )$
    1,294
    
    
    $
    4,966
    
    
    $
    4,587
    
    
    $
    4,325
    
    
    $
    375,280
  Page 10




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##### Table of Contents



3⁄4
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Net loss
    
    $
    (1,674
    )
    
    $
    (4,982
    )
    
    $
    (7,321
    )
    
    $
    (4,237
    )Foreign currency translation adjustment
    
    
    307
    
    
    
    580
    
    
    
    357
    
    
    
    1,259Unrealized gain on interest rate swap
agreements
    
    
    3,862
    
    
    
    1,573
    
    
    
    12,766
    
    
    
    9,416Comprehensive income (loss)
    
    $
    2,495
    
    
    $
    (2,829
    )
    
    $
    5,802
    
    
    $
    6,438Components of accumulated other comprehensive loss, as shown on our Consolidated Balance Sheets,
were as follows (dollar amounts in thousands):September 30,
    
    
    December 31,2010
    
    2009Unrealized loss on interest rate swap
agreements
    
    $
    (13,857
    )
    
    $
    (26,623
    )Foreign currency translation adjustment
    
    
    2,755
    
    
    
    2,398Accumulated other comprehensive loss
    
    $
    (11,102
    )
    
    $
    (24,225
    )
 3⁄4
     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Compensation cost:Stock options
    
    $
    298
    
    
    $
    266
    
    
    $
    975
    
    
    $
    785Restricted stock
    
    
    91
    
    
    
    123
    
    
    
    373
    
    
    
    546Total share based compensation expense
    
    $
    389
    
    
    $
    389
    
    
    $
    1,348
    
    
    $
    1,331
 Page 11




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##### Table of Contents



Stock Options
  Restricted Stock
      Cost of closingSeverance and
    
    
    redundantother benefit
    
    
    acquiredrelated costs
    
    facilities
    
    TotalDecember 31, 2009 balance
    
    $
    336
    
    
    $
    422
    
    
    $
    758Charges to expense
    
    
    311
    
    
    
    32
    
    
    
    343Cash payments
    
    
    (497
    )
    
    
    (299
    )
    
    
    (796
    )September 30, 2010 balance
    
    $
    150
    
    
    $
    155
    
    
    $
    305
 Page 12




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##### Table of Contents



Financial Assets and Financial Liabilities 3⁄4
 September 30, 2010
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    Value
    
    Amount
    
    ValueInterest rate swaps
- liability
position
    
    $
    15,545
    
    
    $
    15,545
    
    
    $
    26,623
    
    
    $
    26,623Long-term debt
    
    $
    390,452
    
    
    $
    370,995
    
    
    $
    469,946
    
    
    $
    421,976
    Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantTotal
    
    
    Markets for
    
    
    Observable
    
    
    UnobservableFair Value
    
    
    Identical Asset
    
    
    Inputs
    
    
    InputsMeasurement
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Year Ended December 31, 2009:Interest rate swaps - liability position
    
    $
    26,623
    
    
    $
    -
    
    
    $
    26,623
    
    
    $
    -Nine Months Ended September 30, 2010:Interest rate swaps - liability position
    
    $
    15,545
    
    
    $
    -
    
    
    $
    15,545
    
    
    $
    -
 Page 13




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Nonfinancial Assets and Nonfinancial Liabilities 3⁄4
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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Total revenues:Hospitality
    
    $
    109,330
    
    
    $
    118,298
    
    
    $
    331,563
    
    
    $
    360,213Advertising Services
    
    
    2,194
    
    
    
    1,657
    
    
    
    7,118
    
    
    
    5,116Healthcare
    
    
    2,270
    
    
    
    1,167
    
    
    
    6,236
    
    
    
    5,867Total
    
    $
    113,794
    
    
    $
    121,122
    
    
    $
    344,917
    
    
    $
    371,196Operating profit:Hospitality
    
    $
    32,563
    
    
    $
    36,101
    
    
    $
    99,921
    
    
    $
    113,155Advertising Services
    
    
    79
    
    
    
    (738)
    
    
    
    69
    
    
    
    (2,242)Healthcare
    
    
    808
    
    
    
    178
    
    
    
    1,416
    
    
    
    1,323Operating profit
    
    
    33,450
    
    
    
    35,541
    
    
    
    101,406
    
    
    
    112,236Corporate
    
    
    (6,407)
    
    
    
    (5,802)
    
    
    
    (18,323)
    
    
    
    (17,341)Depreciation and amortization
    
    
    (20,141)
    
    
    
    (24,228)
    
    
    
    (63,238)
    
    
    
    (77,590)Restructuring charge
    
    
    (101)
    
    
    
    (128)
    
    
    
    (343)
    
    
    
    (311)Other operating income (expense)
    
    
    3
    
    
    
    (89)
    
    
    
    (2)
    
    
    
    86Interest expense
    
    
    (8,120)
    
    
    
    (9,521)
    
    
    
    (25,515)
    
    
    
    (29,214)Gain on extinguishment of debt
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    9,292Loss on early retirement of debt
    
    
    (137)
    
    
    
    (683)
    
    
    
    (898)
    
    
    
    (1,224)Other income
    
    
    5
    
    
    
    166
    
    
    
    232
    
    
    
    486Loss before income taxes
    
    $
    (1,448)
    
    
    $
    (4,744)
    
    
    $
    (6,681)
    
    
    $
    (3,580)
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Contractual/
    
    
    
    
    
    Estimated FairNotional
    
    Balance Sheet
    
    ValueAmount
    
    Location
    
    Asset
    
    (Liability)Interest rate swaps
    
    $
    437,500
    
    
    Other long-term liabilities
    
    $
    -
    
    
    $
    (15,545)
   Effective PortionIncome StatementLocation ofAmount of
    
    Swap Interest
    
    Swap InterestGain (Loss)
    
    Reclassified From
    
    Reclassified FromRecognized
    
    Accumulated
    
    Accumulated
    
    Ineffective Portionin Other
    
    Other
    
    Other
    
    IncomeType of Cash
    
    Comprehensive
    
    Comprehensive
    
    Comprehensive
    
    Statement
    
    AmountFlow Hedge
    
    Income
    
    Income
    
    Income
    
    Location
    
    RecognizedThree Months Ended September 30, 2009:Interest rate swaps
    
    $
    (4,431
    )
    
    Interest expense
    
    $
    5,913
    
    
    Interest expense
    
    $
    91Three Months Ended September 30, 2010:Interest rate swaps
    
    $
    (1,469
    )
    
    Interest expense
    
    $
    5,112
    
    
    Interest expense
    
    $
    219Nine Months Ended September 30, 2009:Interest rate swaps
    
    $
    (6,404
    )
    
    Interest expense
    
    $
    15,408
    
    
    Interest expense
    
    $
    412Nine Months Ended September 30, 2010:Interest rate swaps
    
    $
    (4,555
    )
    
    Interest expense
    
    $
    15,633
    
    
    Interest expense
    
    $
    1,688
 3⁄4
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3⁄4
  3⁄4
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3⁄4
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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 that could cause the actual results, performance or
achievements to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. In addition to the risks and
uncertainties discussed elsewhere in this Report and in Item 1A of our most recent Annual Report on
Form 10-K for the year ended December 31, 2009 and filed on March 12, 2010, in any prospectus
supplement or any report or document incorporated herein by reference, such factors include, among
others, the following:
 Ø
    
    the effects of general economic and financial conditions;Ø
    
    the economic condition of the hospitality industry, which can be particularly affected
by general economic and financial conditions, as well as by factors such as high gas
prices, levels of unemployment, consumer confidence, acts or threats of terrorism and
public health issues;Ø
    
    decreases in hotel occupancy, whether related to economic conditions or other causes;Ø
    
    competition from providers of similar services and from alternative sources;Ø
    
    changes in demand for our products and services;Ø
    
    programming costs, availability, timeliness and quality;Ø
    
    technological developments by competitors;Ø
    
    developmental costs, difficulties and delays;Ø
    
    relationships with clients and property owners;Ø
    
    the impact of covenants contained in our credit agreement, compliance with which could
adversely affect capital available to finance growth, and the violation of which would
constitute an event of default;Ø
    
    the impact of governmental regulations;Ø
    
    potential effects of litigation;Ø
    
    risks of expansion into new markets and territories;Ø
    
    risks related to the security of our data systems; andØ
    
    other factors detailed, from time to time, in our filings with the Securities and Exchange Commission.
 Executive Overview
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Hospitality and Advertising Services Business
  Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and
music videos and television on-demand programming).
  
    
    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.
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
    
    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 nearly 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 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.
    
    The availability of alternative programming. We compete directly for customers with a
variety of other interactive service providers, including other interactive television service
providers, cable television companies, direct broadcast satellite companies, television
networks and programmers, Internet service providers and portals, technology consulting and
service firms, companies offering web sites which provide on-demand movies, rental companies
providing DVDs which can be viewed in properly equipped hotel rooms or on other portable
viewing devices and hotels which offer in-room laptops with Internet access or other types of
Internet access systems. We also compete, in varying degrees, with other leisure-time
activities, such as movie theaters, the Internet, radio, print media, personal computers and
other alternative sources of entertainment and information.
    
    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.
  
    
    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
    
    one-time license fees paid for independent films, most of which are non-rated and intended
for mature audiences.
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Hotel Services (includes revenue from hotels for services such as television channels and recurring
broadband Internet service and support to the hotels).
 
    
    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 Access, Service and Support.We also design, install and operate wired
and wireless broadband Internet access 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. 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.
 Advertising Services
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Key Metrics:
 Rooms Served
  September 30,2010
    
    2009Total rooms served (1)
    
    
    1,852,161
    
    
    
    1,934,229Total Guest Entertainment rooms (2)
    
    
    1,706,884
    
    
    
    1,807,933Total HD rooms (3)
    
    
    254,233
    
    
    
    221,633Percent of Total Guest Entertainment rooms
    
    
    14.9%
    
    
    
    12.3%Total Cable Television Programming (FTG) rooms (4)
    
    
    1,051,264
    
    
    
    1,095,719Percent of Total Guest Entertainment rooms
    
    
    61.6%
    
    
    
    60.6%Total Broadband Internet rooms (5)
    
    
    185,153
    
    
    
    206,914Percent of Total rooms served
    
    
    10.0%
    
    
    
    10.7%
 (1)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees.(2)
    
    Guest Entertainment rooms, of which 87.0% are digital, receive one or more Guest
Entertainment services, such as movies, video games, music or other interactive and
advertising services.(3)
    
    HD rooms are equipped with high-definition capabilities.(4)
    
    Cable television programming (FTG) rooms receive basic or premium cable television
programming.(5)
    
    Represents rooms receiving high-speed Internet service.
  High Definition Room Growth
  September 30,2010
    
    2009Net new HDTV rooms for the three months ended
    
    
    7,494
    
    
    
    11,371Net new HDTV rooms for the nine months ended
    
    
    22,482
    
    
    
    29,917
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Capital Investment Per Installed Room
  Three Months Ended
    
    Years EndedSeptember 30,
    
    September 30,
    
    December 31,
    
    December 31,2010
    
    2009
    
    2009
    
    2008Average cost per HD room  new installation
    
    $
    206
    
    
    $
    237
    
    
    $
    339
    
    
    $
    398Average cost per HD room  conversion
    
    $
    186
    
    
    $
    217
    
    
    $
    241
    
    
    $
    320
  Average Revenue Per Room
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.53
    
    
    $
    14.01
    
    
    $
    12.68
    
    
    $
    13.77Hotel Services
    
    
    6.56
    
    
    
    6.00
    
    
    
    6.51
    
    
    
    5.99System Sales and Related Services
    
    
    2.04
    
    
    
    1.69
    
    
    
    1.85
    
    
    
    2.02Advertising Services
    
    
    0.42
    
    
    
    0.30
    
    
    
    0.45
    
    
    
    0.31Total Hospitality and Advertising Services revenue per room
    
    $
    21.55
    
    
    $
    22.00
    
    
    $
    21.49
    
    
    $
    22.09
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Direct Costs
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Direct costs per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    4.99
    
    
    $
    5.76
    
    
    $
    4.99
    
    
    $
    5.56Hotel Services
    
    
    5.70
    
    
    
    5.30
    
    
    
    5.64
    
    
    
    5.25System Sales and Related Services
    
    
    1.28
    
    
    
    1.26
    
    
    
    1.21
    
    
    
    1.45Advertising Services
    
    
    0.24
    
    
    
    0.27
    
    
    
    0.26
    
    
    
    0.27Total Hospitality and Advertising Services direct costs per room
    
    $
    12.21
    
    
    $
    12.59
    
    
    $
    12.10
    
    
    $
    12.53
  Healthcare Business
  
    
    revenue generated from the sale of the interactive system hardware, software license and
installation services;
    
    revenue from the sale and installation of DIRECTV satellite 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, DIRECTV
satellite equipment and interactive systems; and
    
    revenue generated from cable plant design, modification and installation, as well as
television installation services.
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General Operations
 Total Operating Expenses
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Systems operations expenses
    
    $
    2.06
    
    
    $
    1.99
    
    
    $
    2.02
    
    
    $
    1.95SG&A expenses (1)
    
    
    2.28
    
    
    
    2.08
    
    
    
    2.30
    
    
    
    2.05Depreciation and amortization (D&A)
    
    
    3.90
    
    
    
    4.44
    
    
    
    4.02
    
    
    
    4.69Restructuring charge
    
    
    0.01
    
    
    
    0.03
    
    
    
    0.02
    
    
    
    0.02Other operating expense (income), net
    
    
    -
    
    
    
    0.02
    
    
    
    -
    
    
    
    (0.01
    )$
    8.25
    
    
    $
    8.56
    
    
    $
    8.36
    
    
    $
    8.70Systems operations as a percent of total revenue
    
    
    9.4%
    
    
    
    9.0%
    
    
    
    9.2%
    
    
    
    8.7%SG&A as a percent of total revenue
    
    
    10.4%
    
    
    
    9.3%
    
    
    
    10.5%
    
    
    
    9.1%D&A as a percent of total revenue
    
    
    17.7%
    
    
    
    20.0%
    
    
    
    18.4%
    
    
    
    20.9%Total operating expenses as a percent of total revenue
    
    
    37.5%
    
    
    
    38.5%
    
    
    
    38.2%
    
    
    
    38.7%
 (1)
    
    SG&A expenses include debt issuance costs of $0.5 million related to financing options
explored during the third quarter of 2010.
 Special Note Regarding the Use of Non-GAAP Financial Information
   Free Cash Flow
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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2010
    
    2009
    
    2010
    
    2009Cash provided by operating activities
    
    $
    20,024
    
    
    $
    20,602
    
    
    $
    75,138
    
    
    $
    61,725Property and equipment additions
    
    
    (4,749
    )
    
    
    (4,470
    )
    
    
    (13,703
    )
    
    
    (15,441
    )$
    15,275
    
    
    $
    16,132
    
    
    $
    61,435
    
    
    $
    46,284
 Liquidity and Capital Resources
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2010
    
    2009Actual consolidated leverage ratio (1) (3)
    
    
    3.47
    
    
    
    3.92Maximum per covenant
    
    
    3.50
    
    
    
    4.00Actual consolidated interest coverage ratio (2) (3)
    
    
    3.23
    
    
    
    3.18Minimum per covenant
    
    
    3.00
    
    
    
    2.75
 (1)
    
    Our maximum consolidated leverage ratio is the total amount of all indebtedness of the
Company, determined on a consolidated basis in accordance with GAAP, divided by operating
income exclusive of depreciation and amortization and adjusted (plus or minus) for certain
other miscellaneous cash items, non-cash items and non-recurring items, as defined by the
terms of the bank Credit Facility.(2)
    
    Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous
cash items, non-cash items and non-recurring items divided by interest expense, as defined by
the terms of the bank Credit Facility.(3)
    
    Maximum consolidated leverage ratio and minimum consolidated interest coverage ratios are
defined terms of the bank Credit Facility and are presented here to demonstrate compliance
with the covenants in our Credit Facility, as noncompliance with such covenants would have a
material adverse effect on us.
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Payments due by periodLess than
    
    2  3
    
    4  5
    
    OverTotal
    
    1 year
    
    years
    
    years
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    390,452
    
    
    $
    5,046
    
    
    $
    9,047
    
    
    $
    376,359
    
    
    $
    -Interest on bank term loan (1)
    
    
    33,026
    
    
    
    9,721
    
    
    
    18,647
    
    
    
    4,658
    
    
    
    -Interest on derivative instruments (net)
    
    
    15,805
    
    
    
    15,805
    
    
    
    -
    
    
    
    -
    
    
    
    -Operating lease payments
    
    
    3,464
    
    
    
    1,738
    
    
    
    1,466
    
    
    
    260
    
    
    
    -Purchase obligations (2)
    
    
    5,996
    
    
    
    3,747
    
    
    
    1,768
    
    
    
    360
    
    
    
    121Minimum royalties and commissions (3)
    
    
    2,042
    
    
    
    1,892
    
    
    
    150
    
    
    
    -
    
    
    
    -Total contractual obligations
    
    $
    450,785
    
    
    $
    37,949
    
    
    $
    31,078
    
    
    $
    381,637
    
    
    $
    121Amount of commitment expiration per periodLess than
    
    2  3
    
    4  5
    
    OverTotal
    
    1 year
    
    years
    
    years
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    395
    
    
    $
    395
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled debt amortization.(2)
    
    Consists of open purchase orders and commitments.(3)
    
    In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content.
 Seasonality
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Discussion and Analysis of Results of Operations
Three Months Ended September 30, 2010 and 2009
 Revenue Analysis.
 2010
    
    2009Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesRevenues:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    64,833
    
    
    
    57.0%
    
    
    $
    76,369
    
    
    
    63.1%Hotel Services
    
    
    33,951
    
    
    
    29.8%
    
    
    
    32,699
    
    
    
    27.0%System Sales and Related Services
    
    
    10,546
    
    
    
    9.3%
    
    
    
    9,230
    
    
    
    7.6%Advertising Services
    
    
    2,194
    
    
    
    1.9%
    
    
    
    1,657
    
    
    
    1.4%Total Hospitality and Advertising Services
    
    
    111,524
    
    
    
    98.0%
    
    
    
    119,955
    
    
    
    99.1%Healthcare
    
    
    2,270
    
    
    
    2.0%
    
    
    
    1,167
    
    
    
    0.9%$
    113,794
    
    
    
    100.0%
    
    
    $
    121,122
    
    
    
    100.0%
  2010
    
    2009Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.53
    
    
    $
    14.01Hotel Services
    
    
    6.56
    
    
    
    6.00System Sales and Related Services
    
    
    2.04
    
    
    
    1.69Advertising Services
    
    
    0.42
    
    
    
    0.30Total Hospitality and Advertising Services revenue per room
    
    $
    21.55
    
    
    $
    22.00
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Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 Operating Expenses.
 2010
    
    2009Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesOperating expenses:System operations
    
    $
    10,674
    
    
    
    9.4%
    
    
    $
    10,852
    
    
    
    9.0%Selling, general and administrative
    
    
    11,797
    
    
    
    10.4%
    
    
    
    11,324
    
    
    
    9.3%Depreciation and amortization
    
    
    20,141
    
    
    
    17.7%
    
    
    
    24,228
    
    
    
    20.0%Restructuring charge
    
    
    101
    
    
    
    0.0%
    
    
    
    128
    
    
    
    0.1%Other operating (income) expense
    
    
    (3
    )
    
    
    0.0%
    
    
    
    89
    
    
    
    0.1%Total operating expenses
    
    $
    42,710
    
    
    
    37.5%
    
    
    $
    46,621
    
    
    
    38.5%
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Operating Income.
 Interest Expense.
 Loss on Early Retirement of Debt .
 Taxes.
 Net Loss.
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Discussion and Analysis of Results of Operations
Nine Months Ended September 30, 2010 and 2009
 Revenue Analysis.
 2010
    
    2009Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesRevenues:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    199,879
    
    
    
    58.0%
    
    
    $
    227,838
    
    
    
    61.4%Hotel Services
    
    
    102,562
    
    
    
    29.7%
    
    
    
    98,963
    
    
    
    26.6%System Sales and Related Services
    
    
    29,122
    
    
    
    8.4%
    
    
    
    33,412
    
    
    
    9.0%Advertising Services
    
    
    7,118
    
    
    
    2.1%
    
    
    
    5,116
    
    
    
    1.4%Total Hospitality and Advertising Services
    
    
    338,681
    
    
    
    98.2%
    
    
    
    365,329
    
    
    
    98.4%Healthcare
    
    
    6,236
    
    
    
    1.8%
    
    
    
    5,867
    
    
    
    1.6%$
    344,917
    
    
    
    100.0%
    
    
    $
    371,196
    
    
    
    100.0%
  2010
    
    2009Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.68
    
    
    $
    13.77Hotel Services
    
    
    6.51
    
    
    
    5.99System Sales and Related Services
    
    
    1.85
    
    
    
    2.02Advertising Services
    
    
    0.45
    
    
    
    0.31Total Hospitality and Advertising Services revenue per room
    
    $
    21.49
    
    
    $
    22.09
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Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 Operating Expenses.
 2010
    
    2009Percent
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    of TotalAmount
    
    Revenues
    
    Amount
    
    RevenuesOperating expenses:System operations
    
    $
    31,816
    
    
    
    9.2%
    
    
    $
    32,194
    
    
    
    8.7%Selling, general and administrative
    
    
    36,226
    
    
    
    10.5%
    
    
    
    33,847
    
    
    
    9.1%Depreciation and amortization
    
    
    63,238
    
    
    
    18.4%
    
    
    
    77,590
    
    
    
    20.9%Restructuring charge
    
    
    343
    
    
    
    0.1%
    
    
    
    311
    
    
    
    0.0%Other operating expense (income)
    
    
    2
    
    
    
    0.0%
    
    
    
    (86)
    
    
    
    0.0%Total operating expenses
    
    $
    131,625
    
    
    
    38.2%
    
    
    $
    143,856
    
    
    
    38.7%
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Operating Income.
 Interest Expense.
 Loss on Early Retirement of Debt .
 Gain on Extinguishment of Debt.
 Taxes.
 Net Loss.
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Critical Accounting Policies
  Revenue Recognition 
 
    
    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 stand-alone sales. Under the service agreement, which includes
maintenance and Internet access, we recognize revenue ratably over the term of the maintenance
and service contract, typically three years.
    
    Broadband System Sales.We provide broadband through the sale and installation of
equipment. Revenue from the sale and installation of this equipment is recognized when the
equipment is installed. The delivery and installation of the equipment are concurrent. In
addition, this equipment, which can be acquired from other manufacturers or retailers, has
stand-alone value to the customer. The software used within these systems can also be
supplied by other vendors unrelated to us. Equipment prices are fixed and determinable prior
to delivery and are based on objective and reliable sales evidence from a stand-alone basis.
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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 recognized 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. Historically, revenue
from the sale and installation of our interactive system was recognized ratably over the
one-year maintenance period after the equipment is installed. The contracted system hardware,
installation and maintenance elements were not separable during this start-up phase due to
insufficient vendor specific objective evidence (VSOE) of fair value. The package price of
the interactive system and related maintenance is fixed and determinable prior to delivery.
Upon completion of the initial year, the support arrangement, which includes interactive
content, software maintenance and system services, is renewable and is recognized ratably over
the term of the related contract. The hospital is under no obligation to contract with us for
the support arrangement. They may contract with other providers and utilize the equipment and
software installed by us. In the fourth quarter of 2007, we attained 100% renewal activity
for maintenance services, therefore establishing VSOE of the fair value of maintenance
services. Effective in the fourth quarter of 2007, the entire selling price of the
interactive system is recognized upon installation using the residual method.
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Allowance for Doubtful Accounts.
 Allowance for Excess or Obsolete System Components.
 Long-Lived Assets.
 Property and Equipment.
 YearsBuildings
    
    
    30Hotel systems
    
    
    1 1/2  7Other equipment
    
    
    3  10
 Intangible Assets.
 YearsHotel contracts and relationships
    
    
    10  20Tradenames
    
    
    7Acquired technologies, rights and patents
    
    
    2  10Content agreements and relationships
    
    
    4
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Allowance for System Removal.
 Goodwill Impairment.
    Recent Accounting Developments
  
 Item 3  Quantitative and Qualitative Disclosures About Market Risk
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Carrying
    
    FairAmount
    
    ValueBank Credit Facility:Bank term loan
    
    $
    389,147
    
    
    $
    369,690Capital leases
    
    
    1,305
    
    
    
    1,305$
    390,452
    
    
    $
    370,995
   Economic Condition.
 
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting
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Part II  Other Information
 
 Item 1  Legal Proceedings
    
 Item 1ARisk Factors
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We operate in a very competitive business environment and competition could reduce our revenue and
our cash flow.
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  
 Item 5  Other Information
  
 Item 6  Exhibits
 31.1
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer31.2
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer32
    
    Section 1350 Certifications
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Signatures
  LodgeNet Interactive Corporation(Registrant)Date: November 5, 2010
    
    
    
    / s / Scott C. PetersenScott C. PetersenPresident, Chief Executive Officer
and 
Chairman of the Board of Directors
(Principal Executive Officer)Date: November 5, 2010
    
    
    
    / s / Frank P. ElsenbastFrank P. ElsenbastSenior Vice President, Chief Financial Officer(Principal Financial & Accounting Officer)
 Page 45