##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2009
 or
 o
    
    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
  Delaware
    
    46-0371161(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 3900
West Innovation Street, Sioux Falls, South Dakota 57107
 (605) 988-1000
 (Former name, former address and former fiscal year, if changed since last report)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




---



##### 



LodgeNet Interactive Corporation and Subsidiaries
 Index
 PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets (Unaudited) as of September 30, 2009 and December 31, 2008
    
    
    3Consolidated Statements of Operations (Unaudited) for
the Three and Nine Months Ended September 30, 2009 and 2008
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended September 30, 2009 and 2008
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    21Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    47Item 4  Controls and Procedures
    
    
    48Part II. Other InformationItem 1  Legal Proceedings
    
    
    49Item 1A  Risk Factors
    
    
    49Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    49Item 3  Defaults Upon Senior Securities
    
    
    49Item 4  Submission of Matters to a Vote of Security Holders
    
    
    49Item 5  Other Information
    
    
    49Item 6  Exhibits
    
    
    49Signatures
    
    
    50EX-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 SubsidiariesConsolidated Balance Sheets (Unaudited)
 September 30,
    
    
    December 31,2009
    
    
    2008AssetsCurrent assets:Cash and cash equivalents
    
    $
    26,102
    
    
    $
    10,800Accounts receivable, net
    
    
    59,991
    
    
    
    63,620Other current assets
    
    
    9,108
    
    
    
    9,107Total current assets
    
    
    95,201
    
    
    
    83,527Property and equipment, net
    
    
    220,341
    
    
    
    273,830Debt issuance costs, net
    
    
    6,684
    
    
    
    9,117Intangible assets, net
    
    
    108,272
    
    
    
    115,134Goodwill
    
    
    100,081
    
    
    
    100,081Other assets
    
    
    11,013
    
    
    
    8,097Total assets
    
    $
    541,592
    
    
    $
    589,786Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    43,218
    
    
    $
    44,291Other current liability
    
    
    
    
    
    
    1,446Current maturities of long-term debt
    
    
    6,429
    
    
    
    7,597Accrued expenses
    
    
    21,490
    
    
    
    23,870Deferred revenue
    
    
    14,704
    
    
    
    17,168Total current liabilities
    
    
    85,841
    
    
    
    94,372Long-term debt
    
    
    489,527
    
    
    
    580,923Other long-term liabilities
    
    
    35,183
    
    
    
    43,239Total liabilities
    
    
    610,551
    
    
    
    718,534Commitments 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, 2009 (liquidation preference of $1,000 per
share or $57,500,000 total); none issued or outstanding at December 31, 2008
    
    
    1
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized;
22,537,664 and 22,664,164 shares outstanding at September 30, 2009
and December 31, 2008, respectively
    
    
    226
    
    
    
    227Treasury stock, at cost: 0 and 180,000 shares at September 30, 2009
and December 31, 2008, respectively
    
    
    
    
    
    
    (2,825
    )Additional paid-in capital
    
    
    380,266
    
    
    
    329,740Accumulated deficit
    
    
    (420,293
    )
    
    
    (416,056
    )Accumulated other comprehensive loss
    
    
    (29,159
    )
    
    
    (39,834
    )Total stockholders deficiency
    
    
    (68,959
    )
    
    
    (128,748
    )Total liabilities and stockholders deficiency
    
    $
    541,592
    
    
    $
    589,786
  Page 3




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##### Table of Contents



LodgeNet Interactive Corporation and SubsidiariesConsolidated Statements of Operations (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Hospitality
    
    $
    118,298
    
    
    $
    132,476
    
    
    $
    360,213
    
    
    $
    401,963Other
    
    
    2,824
    
    
    
    2,844
    
    
    
    10,983
    
    
    
    10,492Total revenues
    
    
    121,122
    
    
    
    135,320
    
    
    
    371,196
    
    
    
    412,455Direct costs and operating expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately below):Hospitality
    
    
    67,184
    
    
    
    71,487
    
    
    
    202,893
    
    
    
    215,020Other
    
    
    2,164
    
    
    
    2,546
    
    
    
    8,200
    
    
    
    8,123Operating expenses:System operations
    
    
    10,852
    
    
    
    14,888
    
    
    
    32,194
    
    
    
    45,115Selling, general and administrative
    
    
    11,183
    
    
    
    12,484
    
    
    
    33,014
    
    
    
    41,285Depreciation and amortization
    
    
    24,228
    
    
    
    29,046
    
    
    
    77,590
    
    
    
    94,648Restructuring charge
    
    
    128
    
    
    
    323
    
    
    
    311
    
    
    
    3,142Other operating expense (income)
    
    
    89
    
    
    
    (79
    )
    
    
    (86
    )
    
    
    (947
    )Total direct costs and operating expenses
    
    
    115,828
    
    
    
    130,695
    
    
    
    354,116
    
    
    
    406,386Income from operations
    
    
    5,294
    
    
    
    4,625
    
    
    
    17,080
    
    
    
    6,069Other income and (expenses):Interest expense
    
    
    (9,521
    )
    
    
    (10,543
    )
    
    
    (29,214
    )
    
    
    (31,999
    )Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    9,292
    
    
    
    Loss on early retirement of debt
    
    
    (683
    )
    
    
    (76
    )
    
    
    (1,224
    )
    
    
    (155
    )Other income (expense)
    
    
    166
    
    
    
    (10
    )
    
    
    486
    
    
    
    (23
    )Loss before income taxes
    
    
    (4,744
    )
    
    
    (6,004
    )
    
    
    (3,580
    )
    
    
    (26,108
    )Provision for income taxes
    
    
    (238
    )
    
    
    (274
    )
    
    
    (657
    )
    
    
    (642
    )Net loss
    
    
    (4,982
    )
    
    
    (6,278
    )
    
    
    (4,237
    )
    
    
    (26,750
    )Preferred stock dividends
    
    
    (1,645
    )
    
    
    
    
    
    
    (1,677
    )
    
    
    Net loss attributable to common stockholders
    
    $
    (6,627
    )
    
    $
    (6,278
    )
    
    $
    (5,914
    )
    
    $
    (26,750
    )Net loss per common share (basic and diluted)
    
    $
    (0.30
    )
    
    $
    (0.28
    )
    
    $
    (0.26
    )
    
    $
    (1.19
    )Weighted average shares outstanding (basic and diluted)
    
    
    22,458,587
    
    
    
    22,296,886
    
    
    
    22,431,867
    
    
    
    22,397,466
  Page 4




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##### Table of Contents



LodgeNet Interactive Corporation and SubsidiariesConsolidated Statements of Cash Flows (Unaudited)
 Nine Months Ended September 30,2009
    
    
    2008Operating activities:Net loss
    
    $
    (4,237
    )
    
    $
    (26,750
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    77,590
    
    
    
    94,648Gain on extinguishment of debt (non-cash)
    
    
    (9,292
    )
    
    
    Unrealized loss on derivative instruments
    
    
    412
    
    
    
    Loss on early retirement of debt
    
    
    1,224
    
    
    
    155Share-based compensation
    
    
    1,331
    
    
    
    1,735Gain due to insurance proceeds
    
    
    
    
    
    
    (815
    )Insurance proceeds related to business interruption
    
    
    
    
    
    
    815Other, net
    
    
    (675
    )
    
    
    (32
    )Change in operating assets and liabilities:Accounts receivable, net
    
    
    3,998
    
    
    
    2,195Other current assets
    
    
    13
    
    
    
    946Accounts payable
    
    
    (1,270
    )
    
    
    (1,617
    )Accrued expenses and deferred revenue
    
    
    (5,364
    )
    
    
    (8,580
    )Other
    
    
    (2,005
    )
    
    
    691Net cash provided by operating activities
    
    
    61,725
    
    
    
    63,391Investing activities:Property and equipment additions
    
    
    (15,441
    )
    
    
    (53,428
    )Net cash used for investing activities
    
    
    (15,441
    )
    
    
    (53,428
    )Financing activities:Repayment of long-term debt
    
    
    (63,768
    )
    
    
    (14,698
    )Payment of capital lease obligations
    
    
    (1,148
    )
    
    
    (1,066
    )Borrowings on revolving credit facility
    
    
    
    
    
    
    30,000Repayments of revolving credit facility
    
    
    
    
    
    
    (30,000
    )Purchase of long-term debt
    
    
    (23,685
    )
    
    
    Proceeds from investment in long-term debt
    
    
    3,814
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (4,662
    )Proceeds from issuance of preferred stock, net of offering costs
    
    
    53,696
    
    
    
    Net cash used for financing activities
    
    
    (31,091
    )
    
    
    (20,426
    )Effect of exchange rates on cash
    
    
    109
    
    
    
    (189
    )Increase (decrease) in cash and cash equivalents
    
    
    15,302
    
    
    
    (10,652
    )Cash and cash equivalents at beginning of period
    
    
    10,800
    
    
    
    25,569Cash and cash equivalents at end of period
    
    $
    26,102
    
    
    $
    14,917
  Page 5




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##### Table of Contents



LodgeNet Interactive Corporation and SubsidiariesNotes to Consolidated Financial Statements (Unaudited)
        September 30,
    
    
    December 31,2009
    
    
    2008Land, building and equipment
    
    $
    110,687
    
    
    $
    111,870Hotel systems:Installed system costs
    
    
    634,844
    
    
    
    636,986Customer acquisition costs
    
    
    55,855
    
    
    
    58,995System components
    
    
    31,398
    
    
    
    31,409Software costs
    
    
    36,106
    
    
    
    35,522Total
    
    
    868,890
    
    
    
    874,782Less  depreciation and amortization
    
    
    (648,549
    )
    
    
    (600,952
    )Property and equipment, net
    
    $
    220,341
    
    
    $
    273,830
 Page 6




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##### Table of Contents



Hospitality
    
    
    Other
    
    
    TotalBalance as of December 31, 2008Goodwill
    
    $
    92,614
    
    
    $
    18,679
    
    
    $
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )92,614
    
    
    
    7,467
    
    
    
    100,081Activity during the period
    
    
    
    
    
    
    
    
    
    
    Balance as of September 30, 2009Goodwill
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )$
    92,614
    
    
    $
    7,467
    
    
    $
    100,081
   September 30, 2009
    
    
    December 31, 2008Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and relationships
    
    $
    120,315
    
    
    $
    (16,042
    )
    
    $
    120,315
    
    
    $
    (11,274
    )Other acquired intangibles
    
    
    12,884
    
    
    
    (11,873
    )
    
    
    12,984
    
    
    
    (11,079
    )Tradenames
    
    
    3,079
    
    
    
    (1,492
    )
    
    
    3,042
    
    
    
    (1,079
    )Acquired patents
    
    
    5,148
    
    
    
    (3,747
    )
    
    
    5,100
    
    
    
    (2,875
    )$
    141,426
    
    
    $
    (33,154
    )
    
    $
    141,441
    
    
    $
    (26,307
    )
  Page 7




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##### Table of Contents



Page 8




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Basic EPS:Net loss
    
    $
    (4,982
    )
    
    $
    (6,278
    )
    
    $
    (4,237
    )
    
    $
    (26,750
    )Preferred stock dividends
    
    
    (1,645
    )
    
    
    
    
    
    
    (1,677
    )
    
    
    $
    (6,627
    )
    
    $
    (6,278
    )
    
    $
    (5,914
    )
    
    $
    (26,750
    )Loss allocated to participating securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss available to common stockholders
    
    $
    (6,627
    )
    
    $
    (6,278
    )
    
    $
    (5,914
    )
    
    $
    (26,750
    )Basic weighted average shares outstanding
    
    
    22,458,587
    
    
    
    22,296,886
    
    
    
    22,431,867
    
    
    
    22,397,466Less participating securities included in weighted
average shares outstanding (1)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AWeighted average shares outstanding for basic
earnings per common share
    
    
    22,458,587
    
    
    
    22,296,886
    
    
    
    22,431,867
    
    
    
    22,397,466Basic earnings per share
    
    $
    (0.30
    )
    
    $
    (0.28
    )
    
    $
    (0.26
    )
    
    $
    (1.19
    )Diluted EPS:Net loss
    
    $
    (4,982
    )
    
    $
    (6,278
    )
    
    $
    (4,237
    )
    
    $
    (26,750
    )Preferred stock dividends
    
    
    (1,645
    )
    
    
    
    
    
    
    (1,677
    )
    
    
    $
    (6,627
    )
    
    $
    (6,278
    )
    
    $
    (5,914
    )
    
    $
    (26,750
    )Loss allocated to participating securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss available to common stockholders
    
    $
    (6,627
    )
    
    $
    (6,278
    )
    
    $
    (5,914
    )
    
    $
    (26,750
    )Basic weighted average shares outstanding
    
    
    22,458,587
    
    
    
    22,296,886
    
    
    
    22,431,867
    
    
    
    22,397,466Less participating securities included in weighted
average shares outstanding (1)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AWeighted average shares outstanding for basic
earnings per common share
    
    
    22,458,587
    
    
    
    22,296,886
    
    
    
    22,431,867
    
    
    
    22,397,466Dilutive effect of potential shares (2)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/AWeighted average shares outstanding for diluted
earnings per common share
    
    
    22,458,587
    
    
    
    22,296,886
    
    
    
    22,431,867
    
    
    
    22,397,466Diluted earnings per share
    
    $
    (0.30
    )
    
    $
    (0.28
    )
    
    $
    (0.26
    )
    
    $
    (1.19
    )
 
 (1)
    
    Participating securities 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)
    
    Potential dilutive shares 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. This includes
17,029,601 shares as of September 30, 2009 and 1,711,418 shares as of September 30, 2008. Page 9




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##### Table of Contents



September 30,
    
    
    December 31,2009
    
    
    2008Property, sales and other taxes
    
    $
    8,146
    
    
    $
    8,876Compensation
    
    
    5,730
    
    
    
    7,406Interest
    
    
    72
    
    
    
    109Programming related
    
    
    1,979
    
    
    
    1,751Restructuring and reorganization
    
    
    695
    
    
    
    2,436Preferred stock dividends
    
    
    1,677
    
    
    
    Other
    
    
    3,191
    
    
    
    3,292$
    21,490
    
    
    $
    23,870
   September 30,
    
    
    December 31,2009
    
    
    2008Bank Credit Facility:Bank term loan
    
    $
    493,743
    
    
    $
    585,323Revolving credit facility
    
    
    
    
    
    
    Capital leases
    
    
    2,213
    
    
    
    3,197495,956
    
    
    
    588,520Less current maturities
    
    
    (6,429
    )
    
    
    (7,597
    )$
    489,527
    
    
    $
    580,923
 Bank Credit Facility 3⁄4
 Page 10




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##### Table of Contents



Capital Leases
  2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    ThereafterLong-term debt
    
    $
    1,341
    
    
    $
    5,364
    
    
    $
    5,364
    
    
    $
    5,364
    
    
    $
    5,365
    
    
    $
    470,945Capital leases
    
    
    321
    
    
    
    1,096
    
    
    
    693
    
    
    
    282
    
    
    
    17
    
    
    
    1,662
    
    
    
    6,460
    
    
    
    6,057
    
    
    
    5,646
    
    
    
    5,382
    
    
    
    470,945Less amount representing
interest on capital leases
    
    
    (36
    )
    
    
    (102
    )
    
    
    (46
    )
    
    
    (12
    )
    
    
    
    
    
    
    $
    1,626
    
    
    $
    6,358
    
    
    $
    6,011
    
    
    $
    5,634
    
    
    $
    5,382
    
    
    $
    470,945
  Page 11




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##### Table of Contents




    
    borrow money;
    
    pay dividends;
    
    purchase or redeem stock;
    
    repay subordinated indebtedness before its stated maturity date;
    
    make investments in third parties and extend credit outside the normal course of business;
    
    engage in transactions with affiliates;
    
    engage in sale-leaseback transactions;
    
    consummate certain asset sales;
    
    effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all or
substantially all of our assets; and
    
    create liens on our assets.
 3⁄4
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (4,982
    )
    
    $
    (6,278
    )
    
    $
    (4,237
    )
    
    $
    (26,750
    )Foreign currency translation adjustment
    
    
    580
    
    
    
    (1,053
    )
    
    
    1,259
    
    
    
    (1,520
    )Unrealized gain (loss) on interest rate swap agreements
    
    
    1,573
    
    
    
    (914
    )
    
    
    9,416
    
    
    
    (494
    )Comprehensive (loss) income
    
    $
    (2,829
    )
    
    $
    (8,245
    )
    
    $
    6,438
    
    
    $
    (28,764
    )
  September 30,
    
    
    December 31,2009
    
    
    2008Unrealized loss on interest rate swap agreements
    
    $
    (30,955
    )
    
    $
    (40,371
    )Foreign currency translation adjustment
    
    
    1,796
    
    
    
    537Accumulated other comprehensive loss
    
    $
    (29,159
    )
    
    $
    (39,834
    )
 3⁄4
  Page 12




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Compensation cost (benefit):Stock options
    
    $
    266
    
    
    $
    275
    
    
    $
    785
    
    
    $
    875Non-vested shares
    
    
    123
    
    
    
    267
    
    
    
    546
    
    
    
    860Total share based compensation expense
    
    $
    389
    
    
    $
    542
    
    
    $
    1,331
    
    
    $
    1,735
  Stock Options
  Page 13




---



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Non-Vested Shares (Restricted Stock)
       12/31/08
    
    
    Charges to
    
    
    Cash
    
    
    9/30/09Balance
    
    
    Expense
    
    
    Payments
    
    
    BalanceSeverance and other benefit related costs
    
    $
    1,996
    
    
    $
    (377
    )
    
    $
    (1,461
    )
    
    $
    158Cost of closing redundant acquired facilities
    
    
    440
    
    
    
    688
    
    
    
    (591
    )
    
    
    537Total
    
    $
    2,436
    
    
    $
    311
    
    
    $
    (2,052
    )
    
    $
    695
 Page 14




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##### Table of Contents



Financial Assets and Financial Liabilities 3⁄4
 September 30, 2009
    
    December 31, 2008Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueInterest rate swaps  liability position
    
    $
    31,367
    
    
    $
    31,367
    
    
    $
    40,371
    
    
    $
    40,371Long-term debt
    
    $
    495,956
    
    
    $
    444,113
    
    
    $
    588,520
    
    
    $
    295,858
    Total
    
    Quoted Prices inFair Value
    
    Active Markets for
    
    Significant Other
    
    SignificantMeasurement
    
    Identical Asset
    
    Observable Inputs
    
    Unobservable InputsSeptember 30, 2009
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Interest
rate swaps 
liability
position
    
    $
    31,367
    
    
    $
    
    
    
    $
    31,367
    
    
    $
    
  Page 15




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Nonfinancial Assets and Nonfinancial Liabilities 3⁄4
      Page 16




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Total revenues:Hospitality
    
    $
    118,298
    
    
    $
    132,476
    
    
    $
    360,213
    
    
    $
    401,963Other
    
    
    2,824
    
    
    
    2,844
    
    
    
    10,983
    
    
    
    10,492Total
    
    $
    121,122
    
    
    $
    135,320
    
    
    $
    371,196
    
    
    $
    412,455Loss before income taxes:Hospitality
    
    $
    36,101
    
    
    $
    41,812
    
    
    $
    113,155
    
    
    $
    128,460Other
    
    
    (560
    )
    
    
    (1,067
    )
    
    
    (919
    )
    
    
    (1,507
    )Operating profit
    
    
    35,541
    
    
    
    40,745
    
    
    
    112,236
    
    
    
    126,953Corporate
    
    
    (5,802
    )
    
    
    (6,830
    )
    
    
    (17,341
    )
    
    
    (24,041
    )Depreciation and amortization
    
    
    (24,228
    )
    
    
    (29,046
    )
    
    
    (77,590
    )
    
    
    (94,648
    )Restructuring charge
    
    
    (128
    )
    
    
    (323
    )
    
    
    (311
    )
    
    
    (3,142
    )Other operating (expense) income
    
    
    (89
    )
    
    
    79
    
    
    
    86
    
    
    
    947Interest expense
    
    
    (9,521
    )
    
    
    (10,543
    )
    
    
    (29,214
    )
    
    
    (31,999
    )Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    9,292
    
    
    
    Loss on early retirement of debt
    
    
    (683
    )
    
    
    (76
    )
    
    
    (1,224
    )
    
    
    (155
    )Other income (expense)
    
    
    166
    
    
    
    (10
    )
    
    
    486
    
    
    
    (23
    )Loss before income taxes
    
    $
    (4,744
    )
    
    $
    (6,004
    )
    
    $
    (3,580
    )
    
    $
    (26,108
    )
    Page 17




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Contractual/
    
    
    
    
    
    Estimated FairNotional
    
    Balance Sheet
    
    ValueAmount
    
    Location
    
    Asset
    
    (Liability)Interest rate swaps
    
    $
    537,500
    
    
    Other long-term liabilities
    
    $
    
    
    
    $
    (31,367
    )
   Effective PortionIncome StatementLocation of
    
    HedgeAmount of
    
    Gain (Loss)
    
    Gain (Loss)
    
    Ineffective PortionGain (Loss)
    
    Reclassified From
    
    Reclassified From
    
    IncomeRecognized
    
    Accumulated
    
    Accumulated
    
    Statementin Other
    
    Other
    
    Other
    
    Location of
    
    HedgeType of Cash
    
    Comprehensive
    
    Comprehensive
    
    Comprehensive
    
    Gain (Loss)
    
    Gain (Loss)Flow Hedge
    
    Income
    
    Income
    
    Income
    
    Recognized
    
    RecognizedThree Months Ended
September 30, 2009:Interest rate swaps
    
    $
    7,417
    
    
    Interest expense
    
    $
    (5,844
    )
    
    Interest expense
    
    $
    (91
    )Nine Months Ended
September 30, 2009:Interest rate swaps
    
    $
    24,756
    
    
    Interest expense
    
    $
    (15,340
    )
    
    Interest expense
    
    $
    (412
    )
 3⁄4
   Page 18




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3⁄4
   Page 19




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TM
    Page 20




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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, 2008 and filed on March 13, 2009, in any prospectus supplement or any
report or document incorporated herein by reference, such factors include, among others, the
following:
 Ø
    
    the effects of economic conditions, including general financial conditions (including
those represented recently by liquidity crises, government bailouts and assistance plans,
bank failures and recessionary threats and developments);Ø
    
    the economic condition of the lodging industry, which can be particularly affected by
the financial conditions referenced above, as well as by 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 customers and property owners;Ø
    
    the availability of capital to finance growth;Ø
    
    the impact of covenants contained in our credit agreement, compliance with which could
adversely affect capital available for other business purposes, 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
 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 popularity, timeliness and amount of content offered at the hotel.Our revenues vary,
to a certain degree, with the number, timeliness and popularity of movie content available for
viewing. Historically, a decrease in the availability of popular movie content has adversely
impacted revenue. Although not completely within our control, we seek to program and promote
the most popular available movie content and other content to maximize revenue and
profitability.
 Page 23




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##### Table of Contents




    
    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 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 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, companies offering web sites
which provide on-demand movies, rental companies which provide videocassettes and DVDs that
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, during
the last half of 2008 and the first nine months of 2009, the deteriorating economic conditions
did have a significant, negative impact on our revenue levels. As economic conditions improve
in the future, guest purchase activity may increase to 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.
 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
distributed to approximately 61% of our guest rooms over the internal hotel network, and
typically includes premium channels such as HBO, Showtime and The Disney Channel, 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.
 Page 24




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##### Table of Contents




    
    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 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 existing
hotel customer relationships and our nationwide field service network.
 System Sales and Related Services.
 Key Metrics:
 Special Note Regarding the Use of Non-GAAP Financial Information
   Page 25




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##### Table of Contents



Rooms Served
  September 30,2009
    
    2008Total rooms served (1)
    
    
    1,934,229
    
    
    
    1,970,752Total Guest Entertainment rooms (2) (8)
    
    
    1,807,933
    
    
    
    1,862,885Total Cable Television Programming (FTG) rooms (3) (8)
    
    
    1,095,719
    
    
    
    1,098,687Total THN SuperBlock rooms (4) (8)
    
    
    370,583
    
    
    
    362,325Total THN VOD rooms (5) (8)
    
    
    1,156,175
    
    
    
    533,458Total Broadband Internet rooms (6) (8)
    
    
    206,914
    
    
    
    227,880Net new Guest Entertainment rooms for the three months ended (7)
    
    
    (19,703
    )
    
    
    9,167Net new Guest Entertainment rooms for the nine months ended (7)
    
    
    (58,420
    )
    
    
    27,367
 
 (1)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees.(2)
    
    Guest Entertainment rooms are equipped with our interactive television systems. Digital
rooms were 84.6% of total Guest Entertainment rooms as of September 30, 2009.(3)
    
    Cable television programming (FTG) rooms receive basic or premium television programming.(4)
    
    Includes rooms receiving satellite-delivered television channels.(5)
    
    Includes rooms receiving server-based channels.(6)
    
    Represents rooms receiving high-speed Internet service.(7)
    
    Amounts shown are net of de-installations during the period. The gross number of new rooms
installed was 5,174 and 15,917 for the three months ended September 30, 2009 and 2008,
respectively, and 16,252 and 47,924 for the nine months ended September 30, 2009 and 2008,
respectively.(8)
    
    Included in total rooms served.  High Definition Room Growth
  September 30,2009
    
    2008Net new HDTV rooms for the three months ended
    
    
    11,371
    
    
    
    26,206Net new HDTV rooms for the nine months ended
    
    
    29,917
    
    
    
    76,848Total HDTV rooms installed
    
    
    221,633
    
    
    
    163,768HDTV rooms as a percent of total Guest Entertainment rooms
    
    
    12.3
    %
    
    
    8.8
    %
  Page 26




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##### Table of Contents



Capital Investment Per Installed Room
  Three Months Ended
    
    Years EndedSeptember 30,
    
    September 30,
    
    December 31,
    
    December 31,2009
    
    2008
    
    2008
    
    2007Average cost
per room  new installation
    
    $
    234
    
    
    $
    400
    
    
    $
    389
    
    
    $
    399Average cost
per room  conversion
    
    $
    205
    
    
    $
    298
    
    
    $
    295
    
    
    $
    309Average cost
per HD room  new installation
    
    $
    237
    
    
    $
    400
    
    
    $
    398
    
    
    $
    460Average cost
per HD room  conversion
    
    $
    217
    
    
    $
    299
    
    
    $
    320
    
    
    $
    329
  Average Revenue Per Room
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Average monthly revenue per room:HospitalityGuest Entertainment
    
    $
    14.01
    
    
    $
    16.85
    
    
    $
    13.77
    
    
    $
    17.25Hotel Services
    
    
    5.98
    
    
    
    5.52
    
    
    
    5.97
    
    
    
    5.40System Sales and Related Services
    
    
    1.71
    
    
    
    1.42
    
    
    
    2.04
    
    
    
    1.41Total Hospitality revenue per room
    
    $
    21.70
    
    
    $
    23.79
    
    
    $
    21.78
    
    
    $
    24.06
 Direct Costs
  Page 27




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Three Months Ended
    
    
    Three Months EndedSeptember 30, 2009
    
    
    September 30, 2008Percent
    
    
    
    
    
    
    Percentof Related
    
    
    
    
    
    
    of RelatedAmount
    
    
    Revenue
    
    
    Amount
    
    
    RevenueDirect costs per room:HospitalityGuest Entertainment
    
    $
    5.76
    
    
    
    41.1
    %
    
    $
    6.78
    
    
    
    40.2
    %Hotel Services
    
    
    5.28
    
    
    
    88.4
    %
    
    
    5.07
    
    
    
    91.8
    %System Sales and Related Services
    
    
    1.28
    
    
    
    74.8
    %
    
    
    0.99
    
    
    
    70.0
    %Total Hospitality Direct Costs per room
    
    $
    12.32
    
    
    
    56.8
    %
    
    $
    12.84
    
    
    
    54.0
    %
  Healthcare
  
    
    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.
 Sales and Installation
  2009
    
    2008Systems sold (1)
    
    
    53
    
    
    
    36Beds sold
    
    
    11,344
    
    
    
    8,115Systems installed (2)
    
    
    39
    
    
    
    23Beds installed
    
    
    8,402
    
    
    
    5,886
 
 (1)
    
    Systems sold on a cumulative basis.(2)
    
    Systems installed with active service and maintenance agreements.  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2009
    
    2008
    
    2009
    
    2008Interactive systems installed
during the period
    
    
    1
    
    
    
    1
    
    
    
    12
    
    
    
    4Beds installed during the period (1)
    
    
    539
    
    
    
    425
    
    
    
    2,155
    
    
    
    1,552
 
 (1)
    
    Includes bed additions during the period.  Page 28




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Advertising and Media Services
  General Operations
 Total Operating Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Systems operations expenses
    
    $
    1.99
    
    
    $
    2.67
    
    
    $
    1.95
    
    
    $
    2.70SG&A expenses
    
    
    2.05
    
    
    
    2.24
    
    
    
    2.00
    
    
    
    2.47Depreciation and amortization (D&A)
    
    
    4.03
    
    
    
    4.75
    
    
    
    4.27
    
    
    
    5.16Amortization of acquired intangibles
    
    
    0.41
    
    
    
    0.47
    
    
    
    0.42
    
    
    
    0.50Restructuring charge
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.02
    
    
    
    0.19Other operating expense (income), net
    
    
    0.02
    
    
    
    (0.01
    )
    
    
    (0.01
    )
    
    
    (0.05
    )$
    8.53
    
    
    $
    10.18
    
    
    $
    8.65
    
    
    $
    10.97Systems operations as a percent of total revenue
    
    
    9.0
    %
    
    
    11.0
    %
    
    
    8.7
    %
    
    
    10.9
    %SG&A as a percent of total revenue
    
    
    9.2
    %
    
    
    9.2
    %
    
    
    8.9
    %
    
    
    10.0
    %D&A as a percent of total revenue
    
    
    18.2
    %
    
    
    19.5
    %
    
    
    19.0
    %
    
    
    20.9
    %Amortization of acquired intangibles as a percent of total revenue
    
    
    1.8
    %
    
    
    1.9
    %
    
    
    1.9
    %
    
    
    2.0
    %Total operating expenses as a percent of total revenue
    
    
    38.4
    %
    
    
    41.9
    %
    
    
    38.5
    %
    
    
    44.4
    %
 Free Cash Flow
  Page 29




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Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Cash provided by operating activities (1)
    
    $
    20,602
    
    
    $
    20,947
    
    
    $
    61,725
    
    
    $
    63,391Property and equipment additions
    
    
    (4,470
    )
    
    
    (14,705
    )
    
    
    (15,441
    )
    
    
    (53,428
    )$
    16,132
    
    
    $
    6,242
    
    
    $
    46,284
    
    
    $
    9,963
 
 (1)
    
    Cash provided by operating activities for the three months ended September 30, 2009 included
$0.2 million of cash used for restructuring and reorganization related activities. The three
months ended September 30, 2008 included $1.1 million of cash used for restructuring and
integration related activities. The nine months ended September 30, 2009 included $2.1
million of cash used for restructuring and reorganization related activities, while the nine
months ended September 30, 2008 included $8.8 million used for restructuring and integration
related activities.  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Expansion capital investment (1)
    
    $
    1,112
    
    
    $
    5,994
    
    
    $
    5,016
    
    
    $
    17,512Renewal investment (2)
    
    
    1,373
    
    
    
    3,875
    
    
    
    4,076
    
    
    
    15,468Corporate capital and minor extensions (3)
    
    
    1,985
    
    
    
    4,836
    
    
    
    6,349
    
    
    
    20,448$
    4,470
    
    
    $
    14,705
    
    
    $
    15,441
    
    
    $
    53,428
 
 (1)
    
    Capital investment to install newly contracted rooms with our digital or HDTV system.(2)
    
    Capital investment to convert rooms to our digital or HDTV system in exchange for long-term
contract extensions.(3)
    
    Capital investment for corporate infrastructure, including computers, equipment, software
development, minor system upgrades and system components. Liquidity and Capital Resources
  Page 30




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2009
    
    2008Actual consolidated leverage ratio (1) (3)
    
    
    3.92
    
    
    
    4.38Maximum per covenant
    
    
    4.00
    
    
    
    4.50Actual consolidated interest coverage ratio (2) (3)
    
    
    3.18
    
    
    
    3.21Minimum per covenant
    
    
    2.75
    
    
    
    2.50
 
 (1)
    
    Our maximum consolidated leverage ratio is the total amount of all indebtedness of the
Company, determined on a consolidated basis in accordance with GAAP, divided by operating
income exclusive of depreciation and amortization and adjusted (plus or minus) for certain
other miscellaneous cash items, non-cash items and non-recurring items, as defined by the
terms of the bank Credit Facility.(2)
    
    Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous
cash items, non-cash items and non-recurring items divided by interest expense, as defined by
the terms of the bank Credit Facility.(3)
    
    Maximum consolidated leverage ratio and minimum consolidated interest coverage ratios are
defined terms of the bank Credit Facility and are presented here to demonstrate compliance
with the covenants in our Credit Facility, as noncompliance with such covenants would have a
material adverse effect on us. Page 31




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##### Table of Contents



Q3 2010Q1 2010
    
    to maturityMaximum consolidated leverage ratio
    
    
    3.75
    
    
    
    3.50Minimum consolidated interest coverage ratio
    
    
    3.00
    
    
    
    3.00
    Page 32




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##### Table of Contents



Payments due by periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    495,956
    
    
    $
    6,429
    
    
    $
    11,837
    
    
    $
    477,690
    
    
    $
    Interest on bank term loan (1)
    
    
    53,508
    
    
    
    12,120
    
    
    
    23,805
    
    
    
    17,583
    
    
    
    Interest on derivative instruments (net)
    
    
    37,877
    
    
    
    22,072
    
    
    
    15,805
    
    
    
    
    
    
    
    Operating lease payments
    
    
    4,803
    
    
    
    2,317
    
    
    
    1,762
    
    
    
    629
    
    
    
    95Purchase obligations (2)
    
    
    3,371
    
    
    
    2,479
    
    
    
    892
    
    
    
    
    
    
    
    Minimum royalties and commissions (3)
    
    
    2,883
    
    
    
    2,271
    
    
    
    612
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    598,398
    
    
    $
    47,688
    
    
    $
    54,713
    
    
    $
    495,902
    
    
    $
    95
 Amount of commitment expiration per periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    427
    
    
    $
    427
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled debt amortization.(2)
    
    Consists of open purchase orders and commitments, primarily for the procurement of system
components.(3)
    
    In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. ®
 Page 33




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##### Table of Contents



Seasonality
  Market Conditions
  Page 34




---



##### Table of Contents



Discussion and Analysis of Results of Operations
Three Months Ended September 30, 2009 and 2008
 Revenue Analysis.
 2009
    
    
    2008Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:HospitalityGuest Entertainment
    
    $
    76,369
    
    
    
    63.1
    %
    
    $
    93,808
    
    
    
    69.3
    %Hotel Services
    
    
    32,617
    
    
    
    26.9
    %
    
    
    30,714
    
    
    
    22.7
    %System Sales and Related Services
    
    
    9,312
    
    
    
    7.7
    %
    
    
    7,954
    
    
    
    5.9
    %Total Hospitality
    
    
    118,298
    
    
    
    97.7
    %
    
    
    132,476
    
    
    
    97.9
    %Other
    
    
    2,824
    
    
    
    2.3
    %
    
    
    2,844
    
    
    
    2.1
    %$
    121,122
    
    
    
    100.0
    %
    
    $
    135,320
    
    
    
    100.0
    %
 Hospitality
   2009
    
    
    2008Average monthly revenue per room:Movie revenue
    
    $
    13.11
    
    
    $
    15.65Other interactive service revenue
    
    
    0.90
    
    
    
    1.20Total Guest Entertainment per room
    
    $
    14.01
    
    
    $
    16.85
   Page 35




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##### Table of Contents



2009
    
    
    2008Average monthly revenue per room:Cable television programming
    
    $
    5.47
    
    
    $
    4.99Broadband
    
    
    0.51
    
    
    
    0.53Total Hotel Services per room
    
    $
    5.98
    
    
    $
    5.52
   Other
  Direct Costs (exclusive of operating expenses and depreciation and amortization discussed separately below).
 Page 36




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##### Table of Contents



2009
    
    
    2008
    
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    57.3
    %
    
    
    54.7
    %
    
    
    2.6
    %Change drivers:HospitalityGuest Entertainment
    
    
    
    
    
    
    
    
    
    
    (2.0
    )%Hotel Services
    
    
    
    
    
    
    
    
    
    
    3.0
    %System Sales and Related Services
    
    
    
    
    
    
    
    
    
    
    1.6
    %Other
    
    
    
    
    
    
    
    
    
    
    0.0
    %2.6
    %
  Operating Expenses.
 2009
    
    
    2008Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    10,852
    
    
    
    9.0
    %
    
    $
    14,888
    
    
    
    11.0
    %Selling, general and administrative
    
    
    11,183
    
    
    
    9.2
    %
    
    
    12,484
    
    
    
    9.2
    %Depreciation and amortization
    
    
    21,992
    
    
    
    18.2
    %
    
    
    26,430
    
    
    
    19.5
    %Amortization of acquired intangibles
    
    
    2,236
    
    
    
    1.8
    %
    
    
    2,616
    
    
    
    1.9
    %Restructuring charge
    
    
    128
    
    
    
    0.1
    %
    
    
    323
    
    
    
    0.3
    %Other operating expense (income)
    
    
    89
    
    
    
    0.1
    %
    
    
    (79
    )
    
    
    0.0
    %Total operating expenses
    
    $
    46,480
    
    
    
    38.4
    %
    
    $
    56,662
    
    
    
    41.9
    %
   Page 37




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##### Table of Contents



Operating Income.
 Interest Expense.
 Loss on Early Retirement of Debt
 Other Income (Expense).
 Taxes.
 Net Loss.
 Preferred Stock Dividends.
 Net Loss Attributable to Common Stockholders.
 Page 38




---



##### Table of Contents



Discussion and Analysis of Results of Operations
Nine Months Ended September 30, 2009 and 2008
 Revenue Analysis.
 2009
    
    
    2008Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:HospitalityGuest Entertainment
    
    $
    227,838
    
    
    
    61.4
    %
    
    $
    288,218
    
    
    
    69.9
    %Hotel Services
    
    
    98,706
    
    
    
    26.6
    %
    
    
    90,207
    
    
    
    21.9
    %System Sales and Related Services
    
    
    33,669
    
    
    
    9.0
    %
    
    
    23,538
    
    
    
    5.7
    %Total Hospitality
    
    
    360,213
    
    
    
    97.0
    %
    
    
    401,963
    
    
    
    97.5
    %Other
    
    
    10,983
    
    
    
    3.0
    %
    
    
    10,492
    
    
    
    2.5
    %$
    371,196
    
    
    
    100.0
    %
    
    $
    412,455
    
    
    
    100.0
    %
 Hospitality
   2009
    
    
    2008Average monthly revenue per room:Movie revenue
    
    $
    12.93
    
    
    $
    15.98Other interactive service revenue
    
    
    0.84
    
    
    
    1.27Total Guest Entertainment per room
    
    $
    13.77
    
    
    $
    17.25
   Page 39




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##### Table of Contents



2009
    
    
    2008Average monthly revenue per room:Cable television programming
    
    $
    5.45
    
    
    $
    4.87Broadband
    
    
    0.52
    
    
    
    0.53Total Hotel Services per room
    
    $
    5.97
    
    
    $
    5.40
   Other
  Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 Page 40




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##### Table of Contents



2009
    
    
    2008
    
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    56.9
    %
    
    
    54.1
    %
    
    
    2.8
    %Change drivers:HospitalityGuest Entertainment
    
    
    
    
    
    
    
    
    
    
    (2.9
    )%Hotel Services
    
    
    
    
    
    
    
    
    
    
    3.3
    %System Sales and Related Services
    
    
    
    
    
    
    
    
    
    
    2.2
    %Other
    
    
    
    
    
    
    
    
    
    
    0.2
    %2.8
    %
  Operating Expenses.
 2009
    
    
    2008Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    32,194
    
    
    
    8.7
    %
    
    $
    45,115
    
    
    
    10.9
    %Selling, general and administrative
    
    
    33,014
    
    
    
    8.9
    %
    
    
    41,285
    
    
    
    10.0
    %Depreciation and amortization
    
    
    70,652
    
    
    
    19.0
    %
    
    
    86,264
    
    
    
    20.9
    %Amortization of acquired intangibles
    
    
    6,938
    
    
    
    1.9
    %
    
    
    8,384
    
    
    
    2.0
    %Restructuring charge
    
    
    311
    
    
    
    0.0
    %
    
    
    3,142
    
    
    
    0.8
    %Other operating income
    
    
    (86
    )
    
    
    0.0
    %
    
    
    (947
    )
    
    
    (0.2
    )%Total operating expenses
    
    $
    143,023
    
    
    
    38.5
    %
    
    $
    183,243
    
    
    
    44.4
    %
  Page 41




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##### Table of Contents



Operating Income.
 Interest Expense.
 Gain on Extinguishment of Debt.
 Loss on Early Retirement of Debt
 Other Income (Expense).
 Taxes.
 Net Loss.
 Page 42




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##### Table of Contents



Preferred Stock Dividends.
 Net Loss Attributable to Common Stockholders.
 Page 43




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##### Table of Contents



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.
 
    
    Television Programming Services.We generate revenue from the sale of basic and premium
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
television programming services. We recognize revenue from the sale of 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 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.
 
    
    Broadband Service and Support.We provide ongoing maintenance, service and call center
support services to hotel properties which have been 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.
 Page 44




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##### Table of Contents




    
    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.
 
    
    Master Antenna Television (MATV) Services.We generate revenues from the installation of
master antenna wiring and related infrastructure. Revenues are recognized upon completion of
the MATV installation. Prices of the services are fixed and determinable prior to delivery.
MATV equipment and services are not proprietary and can be supplied by other vendors.
 
    
    Satellite System Sales.We also generate revenues from the sale and installation of DIRECTV
satellite systems. Revenues are recognized upon installation of the satellite system. Prices
for these services are fixed and determinable prior to delivery. DIRECTV equipment and
installation services are not proprietary and can be supplied by vendors other than us.
 
    
    Other.We also generate revenue from the sale of miscellaneous system equipment, such as
in-room terminals, television remotes or other media devices, and service parts and labor.
These sales are not made under multiple element arrangements and we recognize the revenue when
the equipment is delivered or service (repair or installation) has been performed. No future
performance obligation exists on an equipment sale or on a repair service which has been
provided.
 
    
    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.
 
    
    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. The Hotel Networks, which was acquired in the On Command transaction, delivers
targeted advertising to more than 370,000 hotel rooms on 10 popular 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, which we have operating in approximately 1.2 million of our rooms today, 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.
 Page 45




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##### Table of Contents



Allowance for Doubtful Accounts.
 Allowance for Excess or Obsolete System Components.
 Long-Lived Assets.
 Property and Equipment.
 YearsBuildings
    
    30Hotel systems:Installed system costs
    
    2  7Customer acquisition costs
    
    5  7System components
    
    5  7Software costs
    
    3  5Other equipment
    
    3  10
  YearsHotel contracts and relationships
    
    10  20Tradenames
    
    7Acquired technologies and patents
    
    5Content agreements and relationships
    
    4
 Page 46




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##### Table of Contents



Allowance for System Removal.
 Goodwill and Other Intangibles Assets.
 Recent Accounting Developments
  
 Item 3  Quantitative and Qualitative Disclosures About Market Risk
  Interest.
 Carrying
    
    
    Fair
    
    
    Weighted AverageAmount
    
    
    Value
    
    
    Interest RateBank Credit Facility:Bank term loan
    
    $
    493,743
    
    
    $
    441,900
    
    
    
    2.29
    %Capital leases
    
    
    2,213
    
    
    
    2,213
    
    
    
    6.76
    %$
    495,956
    
    
    $
    444,113
    
    
    
    2.31
    %
  Page 47




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##### Table of Contents



Economic Condition.
 
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting.
 Page 48




---



##### Table of Contents



Part II  Other Information
 
 Item 1  Legal Proceedings
   
 Item 1ARisk Factors
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
  
 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
 Page 49




---



##### Table of Contents



Signatures
  LodgeNet Interactive
Corporation
(Registrant)Date:  November 6, 2009
    /s/  Scott C. PetersenScott C. PetersenPresident,
Chief Executive Officer and       Chairman of the Board of Directors

       (Principal Executive Officer)Date:  November 6, 2009
    /s/  Gary H. RitondaroGary H. RitondaroSenior Vice President, Chief Financial Officer

       (Principal Financial & Accounting Officer) Page 50