##### 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 June 30, 2010
 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  (Registrants telephone number,
including area code)
 (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




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##### 



LodgeNet Interactive Corporation and Subsidiaries
 Index
 PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets (Unaudited) as of June 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations (Unaudited) for
the Three and Six Months Ended June 30, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended June 30, 2010 and 2009
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations.
    
    
    20Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 4  Controls and Procedures
    
    
    44Part II. Other InformationItem 1  Legal Proceedings
    
    
    45Item 1A  Risk Factors
    
    
    45Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3  Defaults Upon Senior Securities
    
    
    45Item 5  Other Information
    
    
    46Item 6  Exhibits
    
    
    46Signatures
    
    
    47EX-31.1EX-31.2EX-32
  
 As used herein (unless the context otherwise requires) LodgeNet and/or the Registrant, as well
as the terms we, us and our refer to LodgeNet Interactive Corporation (f/k/a LodgeNet
Entertainment Corporation) and its consolidated subsidiaries.LodgeNet, LodgeNetRX, On Command, The Hotel Networks and the LodgeNet logo are trademarks
or registered trademarks of LodgeNet Interactive Corporation. All rights reserved. All other
trademarks or service marks used herein are the property of their respective owners. Page 2




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##### Table of Contents



Part I  Financial Information
 
 Item 1  Financial Statements
 LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Balance Sheets (Unaudited)
 June 30,
    
    
    December 31,2010
    
    
    2009AssetsCurrent assets:Cash
    
    $
    8,767
    
    
    $
    17,011Accounts receivable, net
    
    
    52,810
    
    
    
    51,706Other current assets
    
    
    9,012
    
    
    
    9,189Total current assets
    
    
    70,589
    
    
    
    77,906Property and equipment, net
    
    
    177,123
    
    
    
    206,663Debt issuance costs, net
    
    
    4,569
    
    
    
    6,005Intangible assets, net
    
    
    101,877
    
    
    
    106,041Goodwill
    
    
    100,081
    
    
    
    100,081Other assets
    
    
    12,214
    
    
    
    11,658Total assets
    
    $
    466,453
    
    
    $
    508,354Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    55,521
    
    
    $
    40,040Current maturities of long-term debt
    
    
    5,284
    
    
    
    6,101Accrued expenses
    
    
    18,436
    
    
    
    19,137Deferred revenue
    
    
    18,245
    
    
    
    17,531Total current liabilities
    
    
    97,486
    
    
    
    82,809Long-term debt
    
    
    399,631
    
    
    
    463,845Other long-term liabilities
    
    
    25,232
    
    
    
    32,687Total liabilities
    
    
    522,349
    
    
    
    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 June 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;
25,088,039 and 22,537,664 shares outstanding at June 30, 2010
and December 31, 2009, respectively
    
    
    252
    
    
    
    225Additional paid-in capital
    
    
    390,980
    
    
    
    379,223Accumulated deficit
    
    
    (431,858
    )
    
    
    (426,211
    )Accumulated other comprehensive loss
    
    
    (15,271
    )
    
    
    (24,225
    )Total stockholders deficiency
    
    
    (55,896
    )
    
    
    (70,987
    )Total liabilities and stockholders deficiency
    
    $
    466,453
    
    
    $
    508,354
  Page 3




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Operations (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenues:Hospitality and Advertising Services
    
    $
    111,658
    
    
    $
    119,572
    
    
    $
    227,157
    
    
    $
    245,374Healthcare
    
    
    1,413
    
    
    
    2,409
    
    
    
    3,966
    
    
    
    4,699Total revenues
    
    
    113,071
    
    
    
    121,981
    
    
    
    231,123
    
    
    
    250,073Direct costs and operating expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately
below):Hospitality and Advertising Services
    
    
    62,181
    
    
    
    66,869
    
    
    
    127,442
    
    
    
    138,663Healthcare
    
    
    724
    
    
    
    1,437
    
    
    
    2,070
    
    
    
    2,390Operating expenses:System operations
    
    
    10,627
    
    
    
    11,016
    
    
    
    21,142
    
    
    
    21,342Selling, general and administrative
    
    
    12,314
    
    
    
    11,705
    
    
    
    24,429
    
    
    
    22,523Depreciation and amortization
    
    
    20,925
    
    
    
    26,258
    
    
    
    43,097
    
    
    
    53,363Restructuring charge
    
    
    239
    
    
    
    75
    
    
    
    242
    
    
    
    181Other operating (income) expense
    
    
    
    
    
    
    (45
    )
    
    
    6
    
    
    
    (176
    )Total direct costs and operating expenses
    
    
    107,010
    
    
    
    117,315
    
    
    
    218,428
    
    
    
    238,286Income from operations
    
    
    6,061
    
    
    
    4,666
    
    
    
    12,695
    
    
    
    11,787Other income and (expenses):Interest expense
    
    
    (8,712
    )
    
    
    (9,812
    )
    
    
    (17,395
    )
    
    
    (19,693
    )(Loss) gain on extinguishment of debt
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    9,292Loss on early retirement of debt
    
    
    (267
    )
    
    
    
    
    
    
    (760
    )
    
    
    (541
    )Other income
    
    
    2
    
    
    
    144
    
    
    
    227
    
    
    
    319(Loss) income before income taxes
    
    
    (2,916
    )
    
    
    (5,006
    )
    
    
    (5,233
    )
    
    
    1,164Provision for income taxes
    
    
    (229
    )
    
    
    (207
    )
    
    
    (414
    )
    
    
    (419
    )Net (loss) income
    
    
    (3,145
    )
    
    
    (5,213
    )
    
    
    (5,647
    )
    
    
    745Preferred stock dividends
    
    
    (1,437
    )
    
    
    (32
    )
    
    
    (2,875
    )
    
    
    (32
    )Net (loss) income attributable to common stockholders
    
    $
    (4,582
    )
    
    $
    (5,245
    )
    
    $
    (8,522
    )
    
    $
    713Net (loss) income per common share (basic)
    
    $
    (0.18
    )
    
    $
    (0.23
    )
    
    $
    (0.36
    )
    
    $
    0.03Net (loss) income per common share (diluted)
    
    $
    (0.18
    )
    
    $
    (0.23
    )
    
    $
    (0.36
    )
    
    $
    0.03Weighted average shares outstanding (basic)
    
    
    24,996,955
    
    
    
    22,432,311
    
    
    
    23,877,958
    
    
    
    22,418,286Weighted average shares outstanding (diluted)
    
    
    24,996,955
    
    
    
    22,432,311
    
    
    
    23,877,958
    
    
    
    22,590,161
  Page 4




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LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows (Unaudited)
  Six Months Ended June 30,2010
    
    
    2009Operating activities:Net (loss) income
    
    $
    (5,647
    )
    
    $
    745Adjustments to reconcile net (loss) income to
net cash provided
by operating activities:Depreciation and amortization
    
    
    43,097
    
    
    
    53,363Gain on extinguishment of debt (non-cash)
    
    
    
    
    
    
    (9,292
    )Unrealized loss on derivative instruments
    
    
    1,469
    
    
    
    321Loss on early retirement of debt
    
    
    760
    
    
    
    541Share-based compensation and restricted stock
    
    
    960
    
    
    
    942Other, net
    
    
    153
    
    
    
    (357
    )Change in operating assets and liabilities:Accounts receivable, net
    
    
    (1,091
    )
    
    
    3,994Other current assets
    
    
    26
    
    
    
    75Accounts payable
    
    
    15,715
    
    
    
    (2,494
    )Accrued expenses and deferred revenue
    
    
    445
    
    
    
    (6,115
    )Other
    
    
    (773
    )
    
    
    (600
    )Net cash provided by operating activities
    
    
    55,114
    
    
    
    41,123Investing activities:Property and equipment additions
    
    
    (8,954
    )
    
    
    (10,971
    )Net cash used for investing activities
    
    
    (8,954
    )
    
    
    (10,971
    )Financing activities:Repayment of long-term debt
    
    
    (68,636
    )
    
    
    (9,676
    )Payment of capital lease obligations
    
    
    (559
    )
    
    
    (854
    )Borrowings on revolving credit facility
    
    
    8,000
    
    
    
    Repayments of revolving credit facility
    
    
    (8,000
    )
    
    
    Purchase of long-term debt
    
    
    
    
    
    
    (23,685
    )Proceeds from investment in long-term debt
    
    
    4,007
    
    
    
    656Proceeds from issuance of common stock, net of
offering costs
    
    
    13,658
    
    
    
    Proceeds from issuance of preferred stock, net
of offering costs
    
    
    
    
    
    
    53,717Payment of dividends to preferred shareholders
    
    
    (2,875
    )
    
    
    Exercise of stock options
    
    
    41
    
    
    
    Net cash (used for) provided by financing activities
    
    
    (54,364
    )
    
    
    20,158Effect of exchange rates on cash
    
    
    (40
    )
    
    
    49(Decrease) increase in cash
    
    
    (8,244
    )
    
    
    50,359Cash at beginning of period
    
    
    17,011
    
    
    
    10,800Cash at end of period
    
    $
    8,767
    
    
    $
    61,159
  Page 5




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LodgeNet Interactive Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements (Unaudited)
        June 30,
    
    
    December 31,2010
    
    
    2009Land, building and equipment
    
    $
    113,306
    
    
    $
    111,777Hotel systems:Installed system costs
    
    
    612,153
    
    
    
    630,651Customer acquisition costs
    
    
    55,937
    
    
    
    55,889System components
    
    
    32,836
    
    
    
    31,832Software costs
    
    
    37,453
    
    
    
    36,497Total
    
    
    851,685
    
    
    
    866,646Less  depreciation and
amortization
    
    
    (674,562
    )
    
    
    (659,983
    )Property and equipment, net
    
    $
    177,123
    
    
    $
    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
    )92,614
    
    
    
    7,467
    
    
    
    100,081Activity during the period
    
    
    
    
    
    
    
    
    
    
    Balance as of June 30, 2010Goodwill
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Accumulated impairment losses
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )$
    92,614
    
    
    $
    7,467
    
    
    $
    100,081
   June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and
relationships
    
    $
    120,315
    
    
    $
    (20,792
    )
    
    $
    120,315
    
    
    $
    (17,629
    )Other acquired intangibles
    
    
    12,884
    
    
    
    (12,477
    )
    
    
    12,884
    
    
    
    (12,130
    )Tradenames
    
    
    3,103
    
    
    
    (1,875
    )
    
    
    3,094
    
    
    
    (1,626
    )Acquired patents
    
    
    5,146
    
    
    
    (4,427
    )
    
    
    5,142
    
    
    
    (4,009
    )$
    141,448
    
    
    $
    (39,571
    )
    
    $
    141,435
    
    
    $
    (35,394
    )
  Page 7




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Page 8




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Basic EPS:Net (loss) income
    
    $
    (3,145
    )
    
    $
    (5,213
    )
    
    $
    (5,647
    )
    
    $
    745Preferred stock dividends
    
    
    (1,437
    )
    
    
    (32
    )
    
    
    (2,875
    )
    
    
    (32
    )$
    (4,582
    )
    
    $
    (5,245
    )
    
    $
    (8,522
    )
    
    $
    713(Loss) income allocated to participating
securities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Net (loss) income available to common stockholders
    
    $
    (4,582
    )
    
    $
    (5,245
    )
    
    $
    (8,522
    )
    
    $
    711Weighted average shares outstanding for basic
earnings per common share
    
    
    24,996,955
    
    
    
    22,432,311
    
    
    
    23,877,958
    
    
    
    22,418,286Basic earnings per share
    
    $
    (0.18
    )
    
    $
    (0.23
    )
    
    $
    (0.36
    )
    
    $
    0.03Diluted EPS:Net (loss) income
    
    $
    (3,145
    )
    
    $
    (5,213
    )
    
    $
    (5,647
    )
    
    $
    745Preferred stock dividends
    
    
    (1,437
    )
    
    
    (32
    )
    
    
    (2,875
    )
    
    
    (32
    )$
    (4,582
    )
    
    $
    (5,245
    )
    
    $
    (8,522
    )
    
    $
    713(Loss) income allocated to participating
securities (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Net (loss) income available to common stockholders
    
    $
    (4,582
    )
    
    $
    (5,245
    )
    
    $
    (8,522
    )
    
    $
    711Weighted average shares outstanding for basic
earnings per common share
    
    
    24,996,955
    
    
    
    22,432,311
    
    
    
    23,877,958
    
    
    
    22,418,286Dilutive effect of potential shares (2)
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    171,875Weighted average shares outstanding for diluted
earnings per common share
    
    
    24,996,955
    
    
    
    22,432,311
    
    
    
    23,877,958
    
    
    
    22,590,161Diluted earnings per share
    
    $
    (0.18
    )
    
    $
    (0.23
    )
    
    $
    (0.36
    )
    
    $
    0.03Potential dilutive common shares (2)
    
    
    17,149,267
    
    
    
    17,054,776
    
    
    
    17,149,267
    
    
    
    16,732,942
 
 (1)
    
    For the three and six months ended June 30, 2010 and the three months ended June 30, 2009,
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)
    
    For the three and six months ended June 30, 2010 and the three months ended June 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.
For the six months ended June 30, 2009, potential common shares, which include stock options
with exercise prices greater than the average market price of our common stock, and potential
common shares from the conversion of preferred stock were excluded from the diluted earnings
per share calculation, as their inclusion would have been anti-dilutive. Page 9




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##### Table of Contents



June 30,
    
    
    December 31,2010
    
    
    2009Property, sales and other taxes
    
    $
    6,182
    
    
    $
    6,933Compensation
    
    
    6,318
    
    
    
    4,360Interest
    
    
    23
    
    
    
    92Programming related
    
    
    1,351
    
    
    
    2,510Restructuring and reorganization
    
    
    580
    
    
    
    758Preferred stock dividends
    
    
    1,437
    
    
    
    1,437Other
    
    
    2,545
    
    
    
    3,047$
    18,436
    
    
    $
    19,137
   June 30,
    
    
    December 31,2010
    
    
    2009Bank Credit Facility:Bank term loan
    
    $
    403,369
    
    
    $
    467,998Revolving credit facility
    
    
    
    
    
    
    Capital leases
    
    
    1,546
    
    
    
    1,948404,915
    
    
    
    469,946Less current maturities
    
    
    (5,284
    )
    
    
    (6,101
    )$
    399,631
    
    
    $
    463,845
 Bank Credit Facility 3⁄4
 Page 10




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##### Table of Contents



Capital Leases
  2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014Long-term debt
    
    $
    2,208
    
    
    $
    4,416
    
    
    $
    4,416
    
    
    $
    4,416
    
    
    $
    387,913Capital leases
    
    
    516
    
    
    
    743
    
    
    
    329
    
    
    
    56
    
    
    
    182,724
    
    
    
    5,159
    
    
    
    4,745
    
    
    
    4,472
    
    
    
    387,931Less amount representing
interest on capital leases
    
    
    (45
    )
    
    
    (51
    )
    
    
    (16
    )
    
    
    (3
    )
    
    
    (1
    )$
    2,679
    
    
    $
    5,108
    
    
    $
    4,729
    
    
    $
    4,469
    
    
    $
    387,930
  Page 11




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net (loss) income
    
    $
    (3,145
    )
    
    $
    (5,213
    )
    
    $
    (5,647
    )
    
    $
    745Foreign currency translation adjustment
    
    
    (546
    )
    
    
    1,430
    
    
    
    50
    
    
    
    679Unrealized gain on interest rate swap agreements
    
    
    5,808
    
    
    
    5,182
    
    
    
    8,904
    
    
    
    7,843Comprehensive income
    
    $
    2,117
    
    
    $
    1,399
    
    
    $
    3,307
    
    
    $
    9,267
  June 30,
    
    
    December 31,2010
    
    
    2009Unrealized loss on interest rate swap agreements
    
    $
    (17,719
    )
    
    $
    (26,623
    )Foreign currency translation adjustment
    
    
    2,448
    
    
    
    2,398Accumulated other comprehensive loss
    
    $
    (15,271
    )
    
    $
    (24,225
    )
      Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Compensation cost:Stock options
    
    $
    366
    
    
    $
    348
    
    
    $
    678
    
    
    $
    519Restricted stock
    
    
    282
    
    
    
    322
    
    
    
    282
    
    
    
    423Total share based compensation expense
    
    $
    648
    
    
    $
    670
    
    
    $
    960
    
    
    $
    942
 Page 12




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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
    
    
    199
    
    
    
    43
    
    
    
    242Cash payments
    
    
    (198
    )
    
    
    (222
    )
    
    
    (420
    )June 30, 2010 balance
    
    $
    337
    
    
    $
    243
    
    
    $
    580
 Page 13




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##### Table of Contents



Financial Assets and Financial Liabilities 
 June 30, 2010
    
    
    December 31, 2009Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueInterest rate swaps  liability position
    
    $
    19,188
    
    
    $
    19,188
    
    
    $
    26,623
    
    
    $
    26,623Long-term debt
    
    $
    404,915
    
    
    $
    367,281
    
    
    $
    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
    
    
    $
    Six Months Ended June 30, 2010:Interest rate swaps  liability position
    
    $
    19,188
    
    
    $
    
    
    
    $
    19,188
    
    
    $
    
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Nonfinancial Assets and Nonfinancial Liabilities 
       Page 15




---



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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Total revenues:Hospitality
    
    $
    109,074
    
    
    $
    117,873
    
    
    $
    222,233
    
    
    $
    241,915Advertising Services
    
    
    2,584
    
    
    
    1,699
    
    
    
    4,924
    
    
    
    3,459Healthcare
    
    
    1,413
    
    
    
    2,409
    
    
    
    3,966
    
    
    
    4,699Total
    
    $
    113,071
    
    
    $
    121,981
    
    
    $
    231,123
    
    
    $
    250,073Operating profit:Hospitality
    
    $
    32,864
    
    
    $
    37,352
    
    
    $
    67,358
    
    
    $
    77,054Advertising Services
    
    
    212
    
    
    
    (782
    )
    
    
    (10
    )
    
    
    (1,504
    )Healthcare
    
    
    262
    
    
    
    427
    
    
    
    607
    
    
    
    1,145Operating profit
    
    
    33,338
    
    
    
    36,997
    
    
    
    67,955
    
    
    
    76,695Corporate
    
    
    (6,113
    )
    
    
    (6,043
    )
    
    
    (11,915
    )
    
    
    (11,540
    )Depreciation and amortization
    
    
    (20,925
    )
    
    
    (26,258
    )
    
    
    (43,097
    )
    
    
    (53,363
    )Restructuring charge
    
    
    (239
    )
    
    
    (75
    )
    
    
    (242
    )
    
    
    (181
    )Other operating income (expense)
    
    
    
    
    
    
    45
    
    
    
    (6
    )
    
    
    176Interest expense
    
    
    (8,712
    )
    
    
    (9,812
    )
    
    
    (17,395
    )
    
    
    (19,693
    )(Loss) gain on extinguishment of debt
    
    
    
    
    
    
    (4
    )
    
    
    
    
    
    
    9,292Loss on early retirement of debt
    
    
    (267
    )
    
    
    
    
    
    
    (760
    )
    
    
    (541
    )Other income
    
    
    2
    
    
    
    144
    
    
    
    227
    
    
    
    319Income (loss) before income taxes
    
    $
    (2,916
    )
    
    $
    (5,006
    )
    
    $
    (5,233
    )
    
    $
    1,164
     Page 16




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Contractual/
    
    
    
    
    
    Estimated FairNotional
    
    Balance Sheet
    
    ValueAmount
    
    Location
    
    Asset
    
    (Liability)Interest rate swaps
    
    $
    437,500
    
    
    Other long-term liabilities
    
    $
    
    
    
    $
    (19,188
    )
   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 June 30, 2009:Interest rate swaps
    
    $
    (138
    )
    
    Interest expense
    
    $
    4,999
    
    
    Interest expense
    
    $
    321Three Months Ended June 30, 2010:Interest rate swaps
    
    $
    (326
    )
    
    Interest expense
    
    $
    5,323
    
    
    Interest expense
    
    $
    811Six Months Ended June 30, 2009:Interest rate swaps
    
    $
    (2,037
    )
    
    Interest expense
    
    $
    9,559
    
    
    Interest expense
    
    $
    321Six Months Ended June 30, 2010:Interest rate swaps
    
    $
    (3,142
    )
    
    Interest expense
    
    $
    10,577
    
    
    Interest expense
    
    $
    1,469
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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:
 
    
    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);
    
    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;
    
    decreases in hotel occupancy, whether related to economic conditions or other causes;
    
    competition from providers of similar services and from alternative sources;
    
    changes in demand for our products and services;
    
    programming costs, availability, timeliness and quality;
    
    technological developments by competitors;
    
    developmental costs, difficulties and delays;
    
    relationships with clients and property owners;
    
    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;
    
    the impact of governmental regulations;
    
    potential effects of litigation;
    
    risks of expansion into new markets and territories;
    
    risks related to the security of our data systems; and
    
    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 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, the deteriorating 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.
 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.
 Page 23




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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 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
 Key Metrics:
 Rooms Served
  June 30,2010
    
    2009Total rooms served (1)
    
    
    1,888,287
    
    
    
    1,956,562Total Guest Entertainment rooms (2)
    
    
    1,738,311
    
    
    
    1,827,636Total HD rooms (3)
    
    
    246,739
    
    
    
    210,262Percent of Total Guest Entertainment rooms
    
    
    14.2
    %
    
    
    11.5
    %Total Cable Television Programming (FTG) rooms (4)
    
    
    1,070,081
    
    
    
    1,104,660Percent of Total Guest Entertainment rooms
    
    
    61.6
    %
    
    
    60.4
    %Total Broadband Internet rooms (5)
    
    
    195,294
    
    
    
    219,260Percent of Total rooms served
    
    
    10.3
    %
    
    
    11.2
    %
 
 (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 86.5% 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.  Page 24




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High Definition Room Growth
  June 30,2010
    
    2009Net new HDTV rooms for the three months ended
    
    
    6,592
    
    
    
    10,747Net new HDTV rooms for the six months ended
    
    
    14,988
    
    
    
    18,546Total HDTV rooms installed
    
    
    246,739
    
    
    
    210,262HDTV rooms as a percent of total Guest Entertainment rooms
    
    
    14.2
    %
    
    
    11.5
    %
  Capital Investment Per Installed Room
  Three Months Ended
    
    Years EndedJune 30,
    
    June 30,
    
    December 31,
    
    December 31,2010
    
    2009
    
    2009
    
    2008Average cost per HD room  new installation
    
    $
    269
    
    
    $
    320
    
    
    $
    339
    
    
    $
    398Average cost per HD room  conversion
    
    $
    186
    
    
    $
    266
    
    
    $
    241
    
    
    $
    320
  Page 25




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Average Revenue Per Room
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.54
    
    
    $
    13.60
    
    
    $
    12.76
    
    
    $
    13.66Hotel Services
    
    
    6.48
    
    
    
    6.04
    
    
    
    6.48
    
    
    
    5.98System Sales and Related Services
    
    
    1.71
    
    
    
    1.74
    
    
    
    1.76
    
    
    
    2.18Advertising Services
    
    
    0.49
    
    
    
    0.31
    
    
    
    0.47
    
    
    
    0.31Total Hospitality and Advertising Services revenue per room
    
    $
    21.22
    
    
    $
    21.69
    
    
    $
    21.47
    
    
    $
    22.13
 Direct Costs
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Direct costs per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    4.78
    
    
    $
    5.42
    
    
    $
    4.99
    
    
    $
    5.46Hotel Services
    
    
    5.63
    
    
    
    5.22
    
    
    
    5.61
    
    
    
    5.23System Sales and Related Services
    
    
    1.15
    
    
    
    1.21
    
    
    
    1.18
    
    
    
    1.54Advertising Services
    
    
    0.26
    
    
    
    0.28
    
    
    
    0.26
    
    
    
    0.28Total Hospitality and Advertising Services direct costs per room
    
    $
    11.82
    
    
    $
    12.13
    
    
    $
    12.04
    
    
    $
    12.51
  Page 26




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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.
  General Operations
 Total Operating Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Systems operations expenses
    
    $
    2.02
    
    
    $
    2.00
    
    
    $
    2.00
    
    
    $
    1.93SG&A expenses
    
    
    2.34
    
    
    
    2.12
    
    
    
    2.31
    
    
    
    2.03Depreciation and amortization (D&A)
    
    
    3.98
    
    
    
    4.77
    
    
    
    4.07
    
    
    
    4.81Restructuring charge
    
    
    0.05
    
    
    
    
    
    
    
    0.02
    
    
    
    0.02Other operating income, net
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )$
    8.39
    
    
    $
    8.88
    
    
    $
    8.40
    
    
    $
    8.77Systems operations as a percent of total revenue
    
    
    9.4
    %
    
    
    9.0
    %
    
    
    9.1
    %
    
    
    8.5
    %SG&A as a percent of total revenue
    
    
    10.9
    %
    
    
    9.6
    %
    
    
    10.6
    %
    
    
    9.0
    %D&A as a percent of total revenue
    
    
    18.5
    %
    
    
    21.5
    %
    
    
    18.6
    %
    
    
    21.4
    %Total operating expenses as a percent of total
revenue
    
    
    39.0
    %
    
    
    40.1
    %
    
    
    38.5
    %
    
    
    38.9
    %
 Special Note Regarding the Use of Non-GAAP Financial Information
  Page 27




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Free Cash Flow
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Cash provided by operating activities
    
    $
    27,016
    
    
    $
    20,176
    
    
    $
    55,114
    
    
    $
    41,123Property and equipment additions
    
    
    (4,429
    )
    
    
    (5,670
    )
    
    
    (8,954
    )
    
    
    (10,971
    )$
    22,587
    
    
    $
    14,506
    
    
    $
    46,160
    
    
    $
    30,152
 Liquidity and Capital Resources
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2010
    
    2009Actual consolidated leverage ratio (1) (3)
    
    
    3.52
    
    
    
    4.19Maximum per covenant
    
    
    3.75
    
    
    
    4.25Actual consolidated interest coverage ratio (2) (3)
    
    
    3.21
    
    
    
    3.20Minimum 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.  Page 29




---



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Q3 2010to maturityMaximum consolidated leverage ratio
    
    
    3.50Minimum consolidated interest coverage ratio
    
    
    3.00
     Page 30




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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)
    
    $
    404,915
    
    
    $
    5,284
    
    
    $
    9,473
    
    
    $
    390,158
    
    
    $
    Interest on bank term loan (1)
    
    
    40,436
    
    
    
    10,972
    
    
    
    21,461
    
    
    
    8,003
    
    
    
    Interest on derivative instruments (net)
    
    
    20,022
    
    
    
    20,022
    
    
    
    
    
    
    
    
    
    
    
    Operating lease payments
    
    
    3,800
    
    
    
    1,919
    
    
    
    1,520
    
    
    
    361
    
    
    
    Purchase obligations (2)
    
    
    6,276
    
    
    
    4,136
    
    
    
    1,732
    
    
    
    408
    
    
    
    Minimum royalties and commissions (3)
    
    
    1,241
    
    
    
    1,028
    
    
    
    213
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    476,690
    
    
    $
    43,361
    
    
    $
    34,399
    
    
    $
    398,930
    
    
    $
    
 Amount of commitment expiration per periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    395
    
    
    $
    395
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled debt amortization.(2)
    
    Consists of open purchase orders and commitments, 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. Seasonality
  Market Conditions
  Page 31




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Discussion and Analysis of Results of Operations
Three Months Ended June 30, 2010 and 2009
 Revenue Analysis.
 2010
    
    
    2009Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    65,963
    
    
    
    58.3
    %
    
    $
    74,980
    
    
    
    61.5
    %Hotel Services
    
    
    34,125
    
    
    
    30.2
    %
    
    
    33,292
    
    
    
    27.3
    %System Sales and Related Services
    
    
    8,986
    
    
    
    8.0
    %
    
    
    9,601
    
    
    
    7.8
    %Advertising Services
    
    
    2,584
    
    
    
    2.3
    %
    
    
    1,699
    
    
    
    1.4
    %Total Hospitality and Advertising Services
    
    
    111,658
    
    
    
    98.8
    %
    
    
    119,572
    
    
    
    98.0
    %Healthcare
    
    
    1,413
    
    
    
    1.2
    %
    
    
    2,409
    
    
    
    2.0
    %$
    113,071
    
    
    
    100.0
    %
    
    $
    121,981
    
    
    
    100.0
    %
  2010
    
    
    2009Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.54
    
    
    $
    13.60Hotel Services
    
    
    6.48
    
    
    
    6.04System Sales and Related Services
    
    
    1.71
    
    
    
    1.74Advertising Services
    
    
    0.49
    
    
    
    0.31Total Hospitality and Advertising Services revenue per room
    
    $
    21.22
    
    
    $
    21.69
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Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
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Operating Expenses.
 2010
    
    
    2009Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    10,627
    
    
    
    9.4
    %
    
    $
    11,016
    
    
    
    9.0
    %Selling, general and administrative
    
    
    12,314
    
    
    
    10.9
    %
    
    
    11,705
    
    
    
    9.6
    %Depreciation and amortization
    
    
    20,925
    
    
    
    18.5
    %
    
    
    26,258
    
    
    
    21.5
    %Restructuring charge
    
    
    239
    
    
    
    0.2
    %
    
    
    75
    
    
    
    0.0
    %Other operating income
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    0.0
    %Total operating expenses
    
    $
    44,105
    
    
    
    39.0
    %
    
    $
    49,009
    
    
    
    40.1
    %
     Operating Income.
 Interest Expense.
 Loss on Early Retirement of Debt .
 Other Income.
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Taxes.
 Net Loss.
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Discussion and Analysis of Results of Operations
Six Months Ended June 30, 2010 and 2009
 Revenue Analysis.
 2010
    
    
    2009Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    135,045
    
    
    
    58.4
    %
    
    $
    151,468
    
    
    
    60.6
    %Hotel Services
    
    
    68,612
    
    
    
    29.7
    %
    
    
    66,264
    
    
    
    26.5
    %System Sales and Related Services
    
    
    18,576
    
    
    
    8.1
    %
    
    
    24,183
    
    
    
    9.6
    %Advertising Services
    
    
    4,924
    
    
    
    2.1
    %
    
    
    3,459
    
    
    
    1.4
    %Total Hospitality and Advertising Services
    
    
    227,157
    
    
    
    98.3
    %
    
    
    245,374
    
    
    
    98.1
    %Healthcare
    
    
    3,966
    
    
    
    1.7
    %
    
    
    4,699
    
    
    
    1.9
    %$
    231,123
    
    
    
    100.0
    %
    
    $
    250,073
    
    
    
    100.0
    %
  2010
    
    
    2009Average monthly revenue per room:Hospitality and Advertising ServicesGuest Entertainment
    
    $
    12.76
    
    
    $
    13.66Hotel Services
    
    
    6.48
    
    
    
    5.98System Sales and Related Services
    
    
    1.76
    
    
    
    2.18Advertising Services
    
    
    0.47
    
    
    
    0.31Total Hospitality and Advertising Services revenue per room
    
    $
    21.47
    
    
    $
    22.13
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Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
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Operating Expenses.
 2010
    
    
    2009Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    21,142
    
    
    
    9.1
    %
    
    $
    21,342
    
    
    
    8.5
    %Selling, general and administrative
    
    
    24,429
    
    
    
    10.6
    %
    
    
    22,523
    
    
    
    9.0
    %Depreciation and amortization
    
    
    43,097
    
    
    
    18.6
    %
    
    
    53,363
    
    
    
    21.4
    %Restructuring charge
    
    
    242
    
    
    
    0.2
    %
    
    
    181
    
    
    
    0.1
    %Other operating expense (income)
    
    
    6
    
    
    
    0.0
    %
    
    
    (176
    )
    
    
    (0.1
    )%Total operating expenses
    
    $
    88,916
    
    
    
    38.5
    %
    
    $
    97,233
    
    
    
    38.9
    %
     Operating Income.
 Interest Expense.
 Loss on Early Retirement of Debt .
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Gain on Extinguishment of Debt.
 Other Income.
 Taxes.
 Net (Loss) Income.
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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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##### 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
    
    4  7System components
    
    5  7Software costs
    
    1 1/2  5Other equipment
    
    3  10
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Intangible Assets.
 YearsHotel contracts and relationships
    
    10  20Tradenames
    
    7Acquired technologies and patents
    
    5Content agreements and relationships
    
    4
 Allowance for System Removal.
 Goodwill Impairment.
    Recent Accounting Developments
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Item 3   Quantitative and Qualitative Disclosures About Market Risk
   Carrying
    
    
    FairAmount
    
    
    ValueBank Credit Facility:Bank term loan
    
    $
    403,369
    
    
    $
    365,735Capital leases
    
    
    1,546
    
    
    
    1,546$
    404,915
    
    
    $
    367,281
   Economic Condition.
 
 Item 4   Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting
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##### 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
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##### Table of Contents



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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##### Table of Contents



Signatures
  LodgeNet Interactive Corporation(Registrant)Date: August 6, 2010
    
    /s/ Scott C. PetersenScott C. PetersenPresident, Chief Executive Officer and
Chairman of the Board of Directors

(Principal Executive Officer)Date: August 6, 2010
    
    /s/ Frank P. ElsenbastFrank P. ElsenbastSenior Vice President, Chief Financial Officer
(Principal Financial & Accounting Officer)
 Page 47