UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended June 30, 2010
or
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number 0-22334
LodgeNet Interactive Corporation
(Exact name of registrant as specified in its charter)
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Delaware
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46-0371161
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification Number)
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3900 West Innovation Street, Sioux Falls, South Dakota 57107
(Address of Principal Executive Offices) (ZIP code)
(605) 988-1000
(Registrants telephone number,
including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
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Smaller reporting company
o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o
No
þ
At August 3, 2010, there were 25,088,164 shares outstanding of the Registrants common stock, $0.01
par value.
LodgeNet Interactive Corporation and Subsidiaries
Index
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As used herein (unless the context otherwise requires) LodgeNet and/or the Registrant, as well
as the terms we, us and our refer to LodgeNet Interactive Corporation (f/k/a LodgeNet
Entertainment Corporation) and its consolidated subsidiaries.
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LodgeNet, LodgeNetRX, On Command, The Hotel Networks and the LodgeNet logo are trademarks
or registered trademarks of LodgeNet Interactive Corporation. All rights reserved. All other
trademarks or service marks used herein are the property of their respective owners.
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Page 2
Part I Financial Information
Item 1 Financial Statements
LodgeNet Interactive Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollar amounts in thousands, except share data)
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June 30,
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December 31,
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2010
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2009
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Assets
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Current assets:
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Cash
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$
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8,767
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$
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17,011
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Accounts receivable, net
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52,810
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51,706
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Other current assets
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9,012
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9,189
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Total current assets
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70,589
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77,906
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Property and equipment, net
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177,123
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206,663
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Debt issuance costs, net
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4,569
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6,005
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Intangible assets, net
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101,877
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106,041
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Goodwill
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100,081
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100,081
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Other assets
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12,214
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11,658
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Total assets
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$
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466,453
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$
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508,354
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Liabilities and Stockholders Deficiency
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Current liabilities:
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Accounts payable
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$
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55,521
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$
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40,040
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Current maturities of long-term debt
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5,284
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6,101
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Accrued expenses
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18,436
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19,137
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Deferred revenue
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18,245
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17,531
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Total current liabilities
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97,486
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82,809
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Long-term debt
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399,631
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463,845
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Other long-term liabilities
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25,232
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32,687
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Total liabilities
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522,349
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579,341
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Commitments and contingencies
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Stockholders deficiency:
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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)
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1
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1
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Common stock, $.01 par value, 50,000,000 shares authorized;
25,088,039 and 22,537,664 shares outstanding at June 30, 2010
and December 31, 2009, respectively
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252
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225
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Additional paid-in capital
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390,980
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379,223
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Accumulated deficit
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(431,858
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)
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(426,211
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)
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Accumulated other comprehensive loss
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(15,271
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)
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(24,225
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)
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Total stockholders deficiency
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(55,896
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)
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(70,987
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)
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Total liabilities and stockholders deficiency
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$
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466,453
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$
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508,354
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The accompanying notes are an integral part of these consolidated financial statements.
Page 3
LodgeNet Interactive Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollar amounts in thousands, except share data)
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Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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Revenues:
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Hospitality and Advertising Services
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$
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111,658
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$
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119,572
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$
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227,157
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$
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245,374
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Healthcare
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1,413
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2,409
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3,966
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4,699
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Total revenues
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113,071
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121,981
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231,123
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250,073
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Direct costs and operating expenses:
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Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately
below):
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Hospitality and Advertising Services
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62,181
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66,869
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127,442
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138,663
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Healthcare
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724
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1,437
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2,070
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2,390
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Operating expenses:
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System operations
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10,627
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11,016
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21,142
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21,342
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Selling, general and administrative
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12,314
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11,705
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24,429
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22,523
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Depreciation and amortization
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20,925
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26,258
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43,097
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53,363
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Restructuring charge
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239
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75
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242
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181
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Other operating (income) expense
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(45
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)
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6
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(176
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)
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Total direct costs and operating expenses
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107,010
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117,315
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218,428
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238,286
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Income from operations
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6,061
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4,666
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12,695
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11,787
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Other income and (expenses):
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Interest expense
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(8,712
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)
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(9,812
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)
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(17,395
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)
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(19,693
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)
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(Loss) gain on extinguishment of debt
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(4
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)
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9,292
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Loss on early retirement of debt
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(267
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)
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(760
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)
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(541
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)
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Other income
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|
2
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|
144
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|
227
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|
|
319
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|
|
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(Loss) income before income taxes
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(2,916
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)
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(5,006
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)
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(5,233
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)
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1,164
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Provision for income taxes
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(229
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)
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(207
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)
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(414
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)
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(419
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)
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Net (loss) income
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(3,145
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)
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(5,213
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)
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(5,647
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)
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|
745
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Preferred stock dividends
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(1,437
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)
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(32
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)
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(2,875
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)
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(32
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)
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Net (loss) income attributable to common stockholders
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$
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(4,582
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)
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|
$
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(5,245
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)
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|
$
|
(8,522
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)
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|
$
|
713
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|
|
|
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|
|
|
|
|
|
|
|
|
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|
|
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Net (loss) income per common share (basic)
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$
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(0.18
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)
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$
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(0.23
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)
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$
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(0.36
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)
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$
|
0.03
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|
|
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Net (loss) income per common share (diluted)
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$
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(0.18
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)
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$
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(0.23
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)
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$
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(0.36
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)
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$
|
0.03
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|
|
|
|
|
|
|
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|
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Weighted average shares outstanding (basic)
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24,996,955
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22,432,311
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23,877,958
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|
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22,418,286
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Weighted average shares outstanding (diluted)
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24,996,955
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22,432,311
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23,877,958
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22,590,161
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The accompanying notes are an integral part of these consolidated financial statements.
Page 4
LodgeNet Interactive Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)
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Six Months Ended June 30,
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2010
|
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|
2009
|
|
Operating activities:
|
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|
|
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Net (loss) income
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$
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(5,647
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)
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|
$
|
745
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|
Adjustments to reconcile net (loss) income to
net cash provided
by operating activities:
|
|
|
|
|
|
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Depreciation and amortization
|
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|
43,097
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|
|
|
53,363
|
|
Gain on extinguishment of debt (non-cash)
|
|
|
|
|
|
|
(9,292
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)
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Unrealized loss on derivative instruments
|
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|
1,469
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|
|
|
321
|
|
Loss on early retirement of debt
|
|
|
760
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|
|
|
541
|
|
Share-based compensation and restricted stock
|
|
|
960
|
|
|
|
942
|
|
Other, net
|
|
|
153
|
|
|
|
(357
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
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Accounts receivable, net
|
|
|
(1,091
|
)
|
|
|
3,994
|
|
Other current assets
|
|
|
26
|
|
|
|
75
|
|
Accounts payable
|
|
|
15,715
|
|
|
|
(2,494
|
)
|
Accrued expenses and deferred revenue
|
|
|
445
|
|
|
|
(6,115
|
)
|
Other
|
|
|
(773
|
)
|
|
|
(600
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)
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
55,114
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|
|
|
41,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
Property and equipment additions
|
|
|
(8,954
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)
|
|
|
(10,971
|
)
|
|
|
|
|
|
|
|
Net cash used for investing activities
|
|
|
(8,954
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)
|
|
|
(10,971
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)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Financing activities:
|
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|
|
|
|
|
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Repayment of long-term debt
|
|
|
(68,636
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)
|
|
|
(9,676
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)
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Payment of capital lease obligations
|
|
|
(559
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)
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|
|
(854
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)
|
Borrowings on revolving credit facility
|
|
|
8,000
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|
|
|
|
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Repayments of revolving credit facility
|
|
|
(8,000
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)
|
|
|
|
|
Purchase of long-term debt
|
|
|
|
|
|
|
(23,685
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)
|
Proceeds from investment in long-term debt
|
|
|
4,007
|
|
|
|
656
|
|
Proceeds from issuance of common stock, net of
offering costs
|
|
|
13,658
|
|
|
|
|
|
Proceeds from issuance of preferred stock, net
of offering costs
|
|
|
|
|
|
|
53,717
|
|
Payment of dividends to preferred shareholders
|
|
|
(2,875
|
)
|
|
|
|
|
Exercise of stock options
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by financing activities
|
|
|
(54,364
|
)
|
|
|
20,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rates on cash
|
|
|
(40
|
)
|
|
|
49
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash
|
|
|
(8,244
|
)
|
|
|
50,359
|
|
Cash at beginning of period
|
|
|
17,011
|
|
|
|
10,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
8,767
|
|
|
$
|
61,159
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Page 5
LodgeNet Interactive Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 Basis of Presentation
The accompanying consolidated financial statements as of June 30, 2010, and for the three and six
month periods ended June 30, 2010 and 2009, have been prepared by us, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (the Commission). The
information furnished in the accompanying consolidated financial statements reflects all
adjustments, consisting of normal recurring adjustments, which, in our opinion, are necessary for a
fair statement of such financial statements.
Certain information and footnote disclosures, normally included in annual financial statements
prepared in accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to the rules and regulations of the Commission. Although we believe the
disclosures are adequate to make the information presented herein not misleading, it is recommended
these unaudited consolidated financial statements be read in conjunction with the more detailed
information contained in our Annual Report on Form 10-K for 2009, as filed with the Commission.
The results of operations for the three and six month periods ended June 30, 2010 and 2009 are not
necessarily indicative of the results of operations for the full year due to inherent seasonality
within the business, among other factors.
The consolidated financial statements include the accounts of LodgeNet Interactive Corporation and
its subsidiaries. All significant inter-company accounts and transactions have been eliminated in
consolidation.
Certain amounts reported in previous periods have been reclassified to conform to the current
presentation of revenue and related direct costs and operating expenses.
Note 2 Property and Equipment, Net
Property and equipment was comprised as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Land, building and equipment
|
|
$
|
113,306
|
|
|
$
|
111,777
|
|
Hotel systems:
|
|
|
|
|
|
|
|
|
Installed system costs
|
|
|
612,153
|
|
|
|
630,651
|
|
Customer acquisition costs
|
|
|
55,937
|
|
|
|
55,889
|
|
System components
|
|
|
32,836
|
|
|
|
31,832
|
|
Software costs
|
|
|
37,453
|
|
|
|
36,497
|
|
|
|
|
|
|
|
|
Total
|
|
|
851,685
|
|
|
|
866,646
|
|
Less depreciation and
amortization
|
|
|
(674,562
|
)
|
|
|
(659,983
|
)
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
177,123
|
|
|
$
|
206,663
|
|
|
|
|
|
|
|
|
Note 3 Goodwill and Other Intangible Assets
We have three reporting units, Hospitality, Advertising Services and Healthcare, for which only the
Hospitality and Advertising Services units have goodwill.
Goodwill represents the excess of cost over the fair value of net assets acquired. In 2007, we
recorded goodwill in connection with the acquisitions of StayOnline, On Command and minority
interest of The Hotel Networks. The product lines of both StayOnline and On Command shared the
same operating and economic characteristics as our
pre-acquisition product lines, and were integrated into the Hospitality operating segment. The
Hospitality operating segment is one reporting unit due to the fact its components are similar and
share similar characteristics.
Page 6
Our goodwill is not amortized; rather, it is tested for impairment at least annually or if there is
a triggering event
which indicates the carrying value may not be recoverable. We perform our
goodwill impairment test for each reporting unit annually during the fourth quarter. Impairment
testing is not required for our finite-life intangibles unless there is a triggering event or
change in circumstances which indicate the carrying value may not be recoverable, such as a
significant deterioration in market conditions. During the second quarter of 2010, we did not
encounter events or circumstances which could trigger an impairment of our goodwill or intangible
assets.
The carrying amount of goodwill by reportable segment was as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
|
|
|
|
|
Hospitality
|
|
|
Services
|
|
|
Total
|
|
Balance as of December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
92,614
|
|
|
$
|
18,679
|
|
|
$
|
111,293
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(11,212
|
)
|
|
|
(11,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,614
|
|
|
|
7,467
|
|
|
|
100,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
92,614
|
|
|
|
18,679
|
|
|
|
111,293
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(11,212
|
)
|
|
|
(11,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
92,614
|
|
|
$
|
7,467
|
|
|
$
|
100,081
|
|
|
|
|
|
|
|
|
|
|
|
We have intangible assets consisting of certain acquired technology, patents, trademarks, hotel
contracts, customer relationships, studio agreements and licensee fees. These intangible assets
have been deemed to have finite useful lives and are amortized over their current estimated useful
lives, ranging from three to twenty years. We review the intangible assets for impairment when
triggering events occur or change in circumstances, such as a significant deterioration in market
conditions, warrant modifications to the carrying amount of the assets.
We have the following intangible assets (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Assets 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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We recorded consolidated amortization expense of $4.2 million and $4.7 million, respectively, for
the six months ended June 30, 2010 and 2009. We estimate total amortization expense for the six
months remaining in 2010 and
the years ending December 31, as follows (dollar amounts in millions): 2010 $3.9; 2011 $7.1;
2012 $6.6; 2013 $6.4; 2014 $6.3 and 2015 $6.2. Actual amounts may change from such
estimated amounts due to additional intangible asset acquisitions, potential impairment,
accelerated amortization or other events.
Page 7
Note 4 Earnings Per Share Computation
We follow Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC)
Topic 260, Earnings Per Share (EPS), which requires the computation and disclosure of two EPS
amounts, basic and diluted. Basic EPS is computed based on the weighted average number of common
shares actually outstanding during the period. Diluted EPS is computed based on the weighted
average number of common shares outstanding plus all potentially dilutive common shares outstanding
during the period. Potential common shares which have an anti-dilutive effect are excluded from
diluted earnings per share.
Effective January 1, 2009, we adopted additional provisions of FASB ASC Topic 260, which provide
that unvested share-based payment awards which contain non-forfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. We determined our
outstanding shares of non-vested restricted stock are participating securities.
Page 8
The following table reflects the calculation of weighted average basic and fully diluted shares for
the periods ended June 30. Dollar amounts are in thousands, except share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,145
|
)
|
|
$
|
(5,213
|
)
|
|
$
|
(5,647
|
)
|
|
$
|
745
|
|
Preferred stock dividends
|
|
|
(1,437
|
)
|
|
|
(32
|
)
|
|
|
(2,875
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,582
|
)
|
|
$
|
(5,245
|
)
|
|
$
|
(8,522
|
)
|
|
$
|
713
|
|
(Loss) income allocated to participating
securities (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(4,582
|
)
|
|
$
|
(5,245
|
)
|
|
$
|
(8,522
|
)
|
|
$
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic
earnings per common share
|
|
|
24,996,955
|
|
|
|
22,432,311
|
|
|
|
23,877,958
|
|
|
|
22,418,286
|
|
Basic earnings per share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(3,145
|
)
|
|
$
|
(5,213
|
)
|
|
$
|
(5,647
|
)
|
|
$
|
745
|
|
Preferred stock dividends
|
|
|
(1,437
|
)
|
|
|
(32
|
)
|
|
|
(2,875
|
)
|
|
|
(32
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(4,582
|
)
|
|
$
|
(5,245
|
)
|
|
$
|
(8,522
|
)
|
|
$
|
713
|
|
(Loss) income allocated to participating
securities (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income available to common stockholders
|
|
$
|
(4,582
|
)
|
|
$
|
(5,245
|
)
|
|
$
|
(8,522
|
)
|
|
$
|
711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic
earnings per common share
|
|
|
24,996,955
|
|
|
|
22,432,311
|
|
|
|
23,877,958
|
|
|
|
22,418,286
|
|
Dilutive effect of potential shares (2)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
171,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted
earnings per common share
|
|
|
24,996,955
|
|
|
|
22,432,311
|
|
|
|
23,877,958
|
|
|
|
22,590,161
|
|
Diluted earnings per share
|
|
$
|
(0.18
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potential 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
Note 5 Accrued Expenses
Accrued expenses were comprised as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Property, sales and other taxes
|
|
$
|
6,182
|
|
|
$
|
6,933
|
|
Compensation
|
|
|
6,318
|
|
|
|
4,360
|
|
Interest
|
|
|
23
|
|
|
|
92
|
|
Programming related
|
|
|
1,351
|
|
|
|
2,510
|
|
Restructuring and reorganization
|
|
|
580
|
|
|
|
758
|
|
Preferred stock dividends
|
|
|
1,437
|
|
|
|
1,437
|
|
Other
|
|
|
2,545
|
|
|
|
3,047
|
|
|
|
|
|
|
|
|
|
|
$
|
18,436
|
|
|
$
|
19,137
|
|
|
|
|
|
|
|
|
Note 6 Long-term Debt and Credit Facilities
Long-term debt was comprised as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Bank Credit Facility:
|
|
|
|
|
|
|
|
|
Bank term loan
|
|
$
|
403,369
|
|
|
$
|
467,998
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
1,546
|
|
|
|
1,948
|
|
|
|
|
|
|
|
|
|
|
|
404,915
|
|
|
|
469,946
|
|
Less current maturities
|
|
|
(5,284
|
)
|
|
|
(6,101
|
)
|
|
|
|
|
|
|
|
|
|
$
|
399,631
|
|
|
$
|
463,845
|
|
|
|
|
|
|
|
|
Bank Credit Facility
¾
In April 2007, we entered into a $675.0 million bank Credit Facility,
comprised of a $625.0 million term loan, which matures in April 2014, and a $50.0 million revolving
Credit Facility, which matures in April 2013. The term loan originally required quarterly
repayments of $1,562,500, which began September 30, 2007. The required quarterly payments have
been adjusted for the reduction in principal as a result of our early repayments against the loan,
resulting in a quarterly payment requirement of $1,104,072. The term loan bears interest at our
option of (1) the banks base rate plus a margin of 1.00% or (2) LIBOR plus a margin of 2.00%. The
agreement provides that when our consolidated leverage ratio is below 3.25 times, the term loan
bears interest at our option of (1) the banks base rate plus a margin of 0.75% or (2) LIBOR plus a
margin of 1.75%. The term loan is collateralized by substantially all of the assets of the
Company. The Credit Facility includes terms and conditions which require compliance with the
leverage and interest coverage covenants. As of June 30, 2010, our consolidated leverage ratio was
3.52 compared to the maximum allowable ratio of 3.75 and our consolidated interest coverage ratio
was 3.21 compared to the minimum allowable ratio of 3.00. Our maximum consolidated leverage ratio
will be 3.50 starting in the third quarter of 2010 to maturity in 2014. Our minimum consolidated
interest coverage ratio will continue to be 3.00 to maturity in 2014. The Credit Facility also
requires we notify the agent upon the occurrence of a Material Adverse Effect prior to any draw
on the Companys revolving Credit Facility, as such terms are defined and used within our bank
Credit Facility. However, under the Credit Facility, the provision of such a notice is not an
event
of default, but if such an event occurred, it could restrict the Companys ability to obtain
additional financing under the revolving Credit Facility. The Credit Facility also stipulates we
enter into hedge agreements to provide at least 50% of the outstanding term loan into a fixed
interest rate for a period not less than two years. We have entered into fixed rate swap
agreements for $437.5 million of the outstanding term loan, with fixed interest rates ranging from
4.97% to 5.09% (see Note 14). The term loan interest rate as of June 30, 2010 was 2.54%. The
all-in weighted average interest rate for the quarter ended June 30, 2010 was 7.28%, which includes
both the term loan interest rate and the difference in the swaps fixed interest rate versus LIBOR.
As of June 30, 2010, we were in compliance with all financial covenants required of our bank
Credit Facility.
Page 10
Our ability to remain in compliance with those covenants will depend on our ability to
generate sufficient Adjusted Operating Cash Flow (a term defined in our Credit Facility), to manage
our level of capital investment and to continue to reduce our debt. We continue taking actions
within our control to reduce our debt and remain in compliance with our debt covenants. The
actions within our control include our prudent management of capital investment and operating costs
and exploring other alternatives, which may include seeking an amendment to our Credit Facility,
raising additional capital or reductions in our operating expenses. Our ability to continue to
comply with these covenants is subject to the general economic climate and business conditions
beyond our control. Although there are signs of stabilization in certain sectors of the economy,
the uncertainties impacting travel and lodging, in addition to the constraints in the credit
markets, consumer conservatism and other market dynamics, may continue to negatively impact our
planned results and required covenants. If we are not able to remain in compliance with the debt
covenants, it will likely have a significant, unfavorable impact on our business and financial
condition and we may need to amend the Credit Facility to seek a waiver of the covenants. An
amendment to the Credit Facility may significantly increase our interest costs, add upfront fees or
modify other terms less favorable to us than we currently have in our Credit Facility. In the
event our lenders will not amend or waive the covenants, the debt would be due and we would need to
seek alternative financing. We cannot provide assurance we would be able to obtain alternative
financing. If we were not able to secure alternative financing, this would have a substantial
adverse impact on the Company.
During the first quarter of 2010, we made an additional prepayment of $44.0 million on the term
loan, in addition to the required payment of $1.3 million, and we wrote off $0.5 million of related
debt issuance costs. In March 2010, we received net proceeds of $13.7 million from a common stock
offering, which were used as part of our additional prepayment on the term loan. The common stock
offering is discussed in more detail in Note 16. During the second quarter of 2010, we made an
additional prepayment of $22.2 million on the term loan, in addition to the required payment of
$1.2 million, and we wrote off $0.3 million of related debt issuance costs. As a result of our
previous repayments, our required quarterly payments have been reduced to $1.1 million, effective
September 2010.
In March 2009, in addition to the required quarterly payment of $1.5 million, we prepaid $6.7
million on the term loan, and acquired, through our wholly-owned subsidiary, $31.5 million of
outstanding debt as part of our debt reduction initiative. We recorded a gain on the
extinguishment of debt of $9.3 million and wrote off $0.5 million of related debt issuance costs.
In June 2009, we made our required quarterly payment of $1.5 million and received net proceeds of
$53.7 million from our preferred stock offering. We used $27.7 million of those proceeds to make
an additional prepayment on the term loan in July 2009. The preferred stock offering is discussed
in more detail in Note 15. We did not make any additional prepayments in the second quarter of
2009.
The Credit Facility provides for the issuance of letters of credit up to $15.0 million, subject to
customary terms and conditions. As of June 30, 2010, we had outstanding letters of credit totaling
$395,000, which reduce amounts available under the revolver. During the second quarter of 2010, we
borrowed $8.0 million under the revolving portion of the Credit Facility and repaid the entire
amount as of June 30, 2010.
Capital Leases
As of June 30, 2010, we have total capital lease obligations of $1.5 million. We
acquired approximately $156,000 of equipment under capital lease arrangements during the six months
ended June 30, 2010. Our capital lease obligations consist primarily of vehicles used in our field
service operations.
As of June 30, 2010, long-term debt has the following scheduled maturities for the six months
remaining in 2010 and the full years ending December 31, 2011 and after (dollar amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
Long-term debt
|
|
$
|
2,208
|
|
|
$
|
4,416
|
|
|
$
|
4,416
|
|
|
$
|
4,416
|
|
|
$
|
387,913
|
|
Capital leases
|
|
|
516
|
|
|
|
743
|
|
|
|
329
|
|
|
|
56
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,724
|
|
|
|
5,159
|
|
|
|
4,745
|
|
|
|
4,472
|
|
|
|
387,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amount representing
interest on capital leases
|
|
|
(45
|
)
|
|
|
(51
|
)
|
|
|
(16
|
)
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,679
|
|
|
$
|
5,108
|
|
|
$
|
4,729
|
|
|
$
|
4,469
|
|
|
$
|
387,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We do not utilize special purpose entities or off-balance sheet financial arrangements.
Page 11
Note 7 Comprehensive Income
FASB ASC Topic 220, Comprehensive Income, provides standards for reporting and disclosure of
comprehensive income and its components. Comprehensive income reflects the changes in equity
during a period from transactions related to our interest rate swap arrangements and foreign
currency translation adjustments. Comprehensive income was as follows for the periods ended June
30 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Net (loss) income
|
|
$
|
(3,145
|
)
|
|
$
|
(5,213
|
)
|
|
$
|
(5,647
|
)
|
|
$
|
745
|
|
Foreign currency translation adjustment
|
|
|
(546
|
)
|
|
|
1,430
|
|
|
|
50
|
|
|
|
679
|
|
Unrealized gain on interest rate swap agreements
|
|
|
5,808
|
|
|
|
5,182
|
|
|
|
8,904
|
|
|
|
7,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
2,117
|
|
|
$
|
1,399
|
|
|
$
|
3,307
|
|
|
$
|
9,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of accumulated other comprehensive loss as shown on our Consolidated Balance Sheets
were as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
Unrealized loss on interest rate swap agreements
|
|
$
|
(17,719
|
)
|
|
$
|
(26,623
|
)
|
Foreign currency translation adjustment
|
|
|
2,448
|
|
|
|
2,398
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(15,271
|
)
|
|
$
|
(24,225
|
)
|
|
|
|
|
|
|
|
Note 8 Statements of Cash Flows
Cash is comprised of demand deposits. Cash paid for interest was $16.0 million and $19.4 million,
respectively, for the six months ended June 30, 2010 and 2009. Cash paid for taxes was $0.5
million and $0.7 million for the six months ended June 30, 2010 and 2009, respectively.
Note 9 Share-Based Compensation
We account for our stock option and incentive plans under the recognition and measurement
provisions of FASB ASC Topic 718, Compensation Stock Compensation, which require the
measurement and recognition of compensation expense for all stock-based awards based on estimated
fair values, net of estimated forfeitures. Share-based compensation expense recognized in the
three and six months ended June 30, 2010 and 2009 includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested, as of January 1, 2006 and (b)
compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of this Topic.
The following amounts were recognized in our Consolidated Statements of Operations for share-based
compensation plans for the periods ended June 30 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Compensation cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
366
|
|
|
$
|
348
|
|
|
$
|
678
|
|
|
$
|
519
|
|
Restricted stock
|
|
|
282
|
|
|
|
322
|
|
|
|
282
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share based compensation expense
|
|
$
|
648
|
|
|
$
|
670
|
|
|
$
|
960
|
|
|
$
|
942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 12
For the six months ended June 30, 2010, cash received from stock option exercises was $41,000
and in 2009, there was no cash received from stock option exercises. Due to our net operating loss
tax position, we did not recognize a tax benefit from options exercised under the share-based
payment arrangements. The amounts presented in the table above are included as non-cash
compensation in our cash flow from operating activities.
Stock Options
For the three months ended June 30, 2010, we granted 35,000 stock options to non-employee directors
of the Company, and we granted 30,000 stock options to certain officers. The valuation methodology
used to determine the fair value of the options issued during the year was the Black-Scholes-Merton
option-pricing model. The Black-Scholes-Merton model requires the use of exercise behavior data
and the use of a number of assumptions, including volatility of the stock price, the weighted
average risk-free interest rate and the weighted average expected life of the options. We do not
pay dividends on our common stock; therefore, the dividend rate variable in the
Black-Scholes-Merton model is zero.
Restricted Stock
For the three months ended June 30, 2010, we awarded 66,500 shares of time-based restricted stock
to our non-employee directors and 20,000 shares of time-based restricted stock to certain officers,
both grants pursuant to our 2003 Stock Option and Incentive Plan. The shares awarded to our
non-employee directors vested 50% at the date of grant and will vest 50% on the one year
anniversary of the date of grant. The shares awarded to certain officers will vest over four years
from the date of grant, with 50% vested at the end of year three and 50% vested at the end of year
four. The fair value of the restricted stock is equal to the fair market value, as defined by the
terms of the 2003 Plan, on the date of grant and is amortized ratably over the vesting period. In
the second quarter of 2010, we did not issue any performance-based restricted stock.
Note 10 Restructuring
As a result of our previous restructuring initiatives related to our post acquisition activities,
and the uncertain economy, we incurred $239,000 and $242,000 of costs during the three and six
months ended June 30, 2010, respectively, and $75,000 and $181,000 of costs during the three and
six months ended June 30, 2009, respectively. All costs are included in operating expenses on the
Consolidated Statements of Operations.
We estimate additional expenses charged to restructuring over the next twelve to eighteen months,
primarily recurring facilities expenses related to the post acquisition restructuring and reduction
in force initiatives noted above, will be in the range of $100,000 to $500,000. Additional
accruals and cash payments related to the restructuring activities are dependent upon execution of
additional subleasing arrangements or reduction in force, which could change our expense estimates.
The above restructuring activities primarily occurred within our Hospitality and Advertising
Services business. Liabilities associated with our restructuring activities to date, along with
charges to expense and cash payments, were as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of closing
|
|
|
|
|
|
|
Severance and
|
|
|
redundant
|
|
|
|
|
|
|
other benefit
|
|
|
acquired
|
|
|
|
|
|
|
related costs
|
|
|
facilities
|
|
|
Total
|
|
December 31, 2009 balance
|
|
$
|
336
|
|
|
$
|
422
|
|
|
$
|
758
|
|
Charges to expense
|
|
|
199
|
|
|
|
43
|
|
|
|
242
|
|
Cash payments
|
|
|
(198
|
)
|
|
|
(222
|
)
|
|
|
(420
|
)
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 balance
|
|
$
|
337
|
|
|
$
|
243
|
|
|
$
|
580
|
|
|
|
|
|
|
|
|
|
|
|
Page 13
Note 11 Fair Value Measurements
We follow the fair value measurement and disclosure provisions of FASB ASC Topic 820, Fair Value
Measurements and Disclosures, relating to financial and nonfinancial assets and liabilities. The
fair value of an asset or liability is the price that would be received to sell that asset or paid
to transfer that liability in an orderly transaction occurring in the principal market (or most
advantageous market in the absence of a principal market) for such asset or liability. FASB ASC
Topic 820 includes a fair value hierarchy, which is intended to increase consistency and
comparability in fair value measurements and related disclosures. The fair value hierarchy is
based on inputs to valuation techniques, which are used to measure fair value and which are either
observable or unobservable. Observable inputs reflect assumptions market participants would use in
pricing an asset or liability based on market data obtained from independent sources, while
unobservable inputs reflect a reporting entitys pricing based upon their own market assumptions.
The fair value hierarchy consists of the following three levels:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market
data.
Level 3: Unobservable inputs that are not corroborated by market data.
Financial Assets and Financial Liabilities
The estimated carrying and fair values of our
financial instruments in the financial statements are as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
Interest rate swaps liability position
|
|
$
|
19,188
|
|
|
$
|
19,188
|
|
|
$
|
26,623
|
|
|
$
|
26,623
|
|
Long-term debt
|
|
$
|
404,915
|
|
|
$
|
367,281
|
|
|
$
|
469,946
|
|
|
$
|
421,976
|
|
The fair value of our long-term debt is estimated based on current interest rates for similar
debt of the same remaining maturities and quoted market prices, except for capital leases, which
are reported at carrying value. For our capital leases, the carrying value approximates the fair
value. The fair value of the interest rate swaps (used for purposes other than trading) is the
estimated amount we would have to pay to terminate the swap agreement at the reporting date.
The fair value of our long-term debt is strictly hypothetical and not indicative of what we are
required to pay under the terms of our debt instruments. The fair value of the swap agreements is
recognized in other long-term liabilities. Changes in fair value are recognized in other
comprehensive income (loss) if the hedge is effective. We plan to hold the swap agreements to
maturity. As a result of our additional payments on the Credit Facility, a portion of our swap
arrangements was rendered ineffective (see Note 14).
The following table summarizes the valuation of our financial instruments by the fair value
hierarchy described above as of the valuation date listed (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
Total
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Fair Value
|
|
|
Identical Asset
|
|
|
Inputs
|
|
|
Inputs
|
|
|
|
Measurement
|
|
|
(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
|
|
|
$
|
|
|
Page 14
We estimated the fair value of the interest rate swaps based on mid-market data from a third
party provider. We periodically review and validate this data on an independent basis. The fair
value determination also included consideration of nonperformance risk, which did not have a
material impact on the fair value at June 30, 2010.
Nonfinancial Assets and Nonfinancial Liabilities
Certain assets and liabilities measured
at fair value on a non-recurring basis could include nonfinancial assets and nonfinancial
liabilities measured at fair value in the goodwill impairment tests and intangible assets and other
nonfinancial long-lived assets measured at fair value for impairment assessment. There was no
triggering event which warranted an evaluation of impairment; therefore, there were no nonfinancial
assets or liabilities measured at fair value on a non-recurring basis during the six months ended
June 30, 2010.
Note 12 Market Conditions
Due to current economic conditions, our business could be adversely impacted by conditions
affecting the lodging industrys performance. Our results are closely linked to the performance of
the lodging industry, where occupancy rates may fluctuate as a result of various factors. The
percentage of occupied rooms that buy movies and other services at the property also varies over
time with general economic conditions, including, but not limited to, consumer sentiment, and other
factors. Reduction in hotel occupancy, resulting from the general economic environment or other
changes in market conditions, such as a recession or significant slow-down in economic activity, or
significant international crises, could adversely impact our business, financial condition and
results of operations. The overall travel industry can be, and has been in the past, adversely
affected by weaker general economic climates, geopolitical instability and concerns about public
health. Factors such as the cost of fuel, airline fares and other economic conditions which result
in a decrease in business or leisure travel can affect hotel occupancy and the demand for some of
our products and services. Also, our goodwill and intangible assets may be impaired if market
conditions deteriorate.
Note 13 Segment Information
We operate in three reportable segments, Hospitality, Advertising Services and Healthcare. We
identify our segments based upon the products and services delivered and the nature of our customer
base receiving those products and services. The Hospitality business distributes entertainment,
media and connectivity services to the hospitality industry. Our Advertising Services business
generates revenue from the sale of advertising-based media services within our hospitality customer
base, utilizing the same server based technology or by the delivery of advertising using 10
television programming channels. Our Healthcare business generates revenue from the sale of
interactive system hardware, software licenses, installation services and related programming and
support agreements to the healthcare market.
Our Hospitality and Advertising Services businesses provide a variety of services to hotels and/or
the respective hotels guests. The products can include interactive video-on-demand programming,
music, games, cable television programming, Internet services or advertising services, and have an
analogous consumer base. All products and services are delivered through a proprietary system
platform utilizing satellite delivery technology, and are geared towards the hotels and their
guests.
Previously, our Advertising Services and Healthcare segments had been presented as Other, in one
aggregated reportable segment based on relative size. Revenue and operating profit amounts
reported in previous periods have been reclassified to conform to the current presentation.
Page 15
Financial information related to our reportable segments for the three and six months ended June 30
is as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitality
|
|
$
|
109,074
|
|
|
$
|
117,873
|
|
|
$
|
222,233
|
|
|
$
|
241,915
|
|
Advertising Services
|
|
|
2,584
|
|
|
|
1,699
|
|
|
|
4,924
|
|
|
|
3,459
|
|
Healthcare
|
|
|
1,413
|
|
|
|
2,409
|
|
|
|
3,966
|
|
|
|
4,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
113,071
|
|
|
$
|
121,981
|
|
|
$
|
231,123
|
|
|
$
|
250,073
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitality
|
|
$
|
32,864
|
|
|
$
|
37,352
|
|
|
$
|
67,358
|
|
|
$
|
77,054
|
|
Advertising Services
|
|
|
212
|
|
|
|
(782
|
)
|
|
|
(10
|
)
|
|
|
(1,504
|
)
|
Healthcare
|
|
|
262
|
|
|
|
427
|
|
|
|
607
|
|
|
|
1,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit
|
|
|
33,338
|
|
|
|
36,997
|
|
|
|
67,955
|
|
|
|
76,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
(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
|
)
|
|
|
176
|
|
Interest expense
|
|
|
(8,712
|
)
|
|
|
(9,812
|
)
|
|
|
(17,395
|
)
|
|
|
(19,693
|
)
|
(Loss) gain on extinguishment of debt
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
9,292
|
|
Loss on early retirement of debt
|
|
|
(267
|
)
|
|
|
|
|
|
|
(760
|
)
|
|
|
(541
|
)
|
Other income
|
|
|
2
|
|
|
|
144
|
|
|
|
227
|
|
|
|
319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
(2,916
|
)
|
|
$
|
(5,006
|
)
|
|
$
|
(5,233
|
)
|
|
$
|
1,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 14 Derivative Information
Effective January 1, 2009, we adopted provisions of FASB ASC Topic 815, Derivatives and Hedging
Activities. This guidance requires additional disclosures regarding a companys derivative
instruments and hedging activities by requiring disclosure of the fair values of derivative
instruments and their gains and losses in a tabular format. It also requires disclosure of
derivative features which are credit risk-related, as well as cross-referencing within the notes to
the financial statements to enable financial statement users to locate important information about
derivative instruments, financial performance and cash flows.
We are required by our Credit Facility to convert 50% of the outstanding term loan into a fixed
interest rate for a period not less than two years. Our objective of entering into hedge
transactions (or interest rate swaps) using derivative financial instruments is to reduce the
variability of cash flows associated with variable-rate loans and comply with the terms of our
Credit Facility. As changes in interest rates impact future interest payments, the hedges provide
an offset to the rate changes. As of June 30, 2010, we had entered into fixed rate swap agreements
for $437.5 million at an average interest rate of 5.05%.
In April 2007, we entered into interest rate swap agreements with notional values of $312.5
million, at a fixed rate of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which
expire in June 2011. These swap arrangements effectively change the underlying debt from a
variable interest rate to a fixed interest rate for the term of the swap agreements. All of the
swap agreements have been issued by Credit Suisse International. The swap agreements were
designated as, and met the criteria for, cash flow hedges and are not considered speculative in
nature.
Page 16
Our additional payments on the Credit Facility rendered a portion of the $125.0 million
notional amount swap, entered into in April 2007 and expiring in June 2011, ineffective. The
ineffective portion of the change in fair value of this cash flow hedge was a loss of $0.8 million
and $1.5 million for the three and six months ended June 30, 2010, respectively, and was recognized
in interest expense in our Consolidated Statements of Operations. The charge is a non-cash charge
and does not impact the amount of cash interest paid during the quarter.
A summary of the aggregate contractual or notional amounts, balance sheet location and estimated
fair values of our derivative financial instruments as of June 30, 2010 is as follows (dollar
amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual/
|
|
|
|
|
|
Estimated Fair
|
|
|
Notional
|
|
Balance Sheet
|
|
Value
|
|
|
Amount
|
|
Location
|
|
Asset
|
|
(Liability)
|
Interest rate swaps
|
|
$
|
437,500
|
|
|
Other long-term liabilities
|
|
$
|
|
|
|
$
|
(19,188
|
)
|
The unrecognized loss for all cash flow hedges included in accumulated other comprehensive
loss at June 30, 2010 and December 31, 2009 was $17.7 million, which is net of the $1.5 million
ineffective portion charged to interest expense, and $26.6 million, respectively.
A summary of the effect of cash flow hedges on our financial statements for the three and six
months ended June 30 is as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Portion
|
|
|
|
|
|
|
|
|
Income Statement
|
|
|
|
|
|
|
|
|
|
|
Location of
|
|
|
|
|
|
|
Amount of
|
|
Swap Interest
|
|
Swap Interest
|
|
|
|
|
Gain (Loss)
|
|
Reclassified From
|
|
Reclassified From
|
|
|
|
|
Recognized
|
|
Accumulated
|
|
Accumulated
|
|
Ineffective Portion
|
|
|
in Other
|
|
Other
|
|
Other
|
|
Income
|
|
|
Type of Cash
|
|
Comprehensive
|
|
Comprehensive
|
|
Comprehensive
|
|
Statement
|
|
Amount
|
Flow Hedge
|
|
Income
|
|
Income
|
|
Income
|
|
Location
|
|
Recognized
|
Three Months Ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(138
|
)
|
|
Interest expense
|
|
$
|
4,999
|
|
|
Interest expense
|
|
$
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(326
|
)
|
|
Interest expense
|
|
$
|
5,323
|
|
|
Interest expense
|
|
$
|
811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(2,037
|
)
|
|
Interest expense
|
|
$
|
9,559
|
|
|
Interest expense
|
|
$
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
(3,142
|
)
|
|
Interest expense
|
|
$
|
10,577
|
|
|
Interest expense
|
|
$
|
1,469
|
|
Note 15 Perpetual Preferred Stock
In June 2009, we completed our offering of 57,500 shares (inclusive of the initial purchasers
option to purchase the additional 7,500 shares), bringing the total aggregate liquidation
preference of the preferred stock sold to $57.5 million.
Subject to the declaration of dividends by our Board of Directors, cumulative dividends on the
preferred stock will be paid at a rate of 10% per annum of the $1,000 liquidation preference per
share, starting from the date of original
issue, June 29, 2009. Dividends accumulate quarterly in arrears on each January 15, April 15, July
15 and October 15, beginning on October 15, 2009. Payments must come from funds legally available
for dividend payments.
Page 17
Dividends were declared on the preferred stock by our Board of Directors on July 7, 2010. As of
June 30, 2010, we had $1.4 million of unpaid dividends. The dividends were recorded as a reduction
to additional paid-in capital, due to our accumulated deficit balance. The dividends were paid on
July 15, 2010.
Note 16 Common Stock Offering
In March 2010, we entered into an agreement to sell 2,160,000 shares of our common stock, $0.01 par
value per share, to Craig-Hallum Capital Group LLC (Underwriter), for resale to the public at a
price per share of $6.00, less an underwriting discount of $0.36 per share. The Underwriter had an
option to purchase up to 324,000 additional shares of common stock at the same price per share to
cover overallotments. We completed our offering of 2,484,000 shares (inclusive of the
Underwriters option to purchase the additional 324,000 shares), bringing the total aggregate
common stock sold to $14.9 million. Net proceeds from the issuance of common stock were $13.7
million, with offering and related costs totaling $1.2 million.
Note 17 Legal Proceedings
We are subject to litigation arising in the ordinary course of business. We believe the resolution
of such litigation will not have a material adverse effect upon our financial condition, results of
operations or cash flows.
On July 11, 2008, Linksmart Wireless Technology, LLC, a California limited liability company based
in Pasadena, California, filed several actions for patent infringement in the U.S. District Court
in Marshall, Texas. The suits allege the Company and numerous other defendants infringe a patent
issued on August 17, 2004 entitled User Specific Automatic Data Redirection System. All pending
cases have been consolidated. The complaint does not specify an amount in controversy. The
Company believes it does not infringe the patent in question, has filed responsive pleadings and is
vigorously defending the action. The defendants in the case have also entered into a joint defense
agreement to allow them to share information and certain costs related to the lawsuit. The suit is
in the discovery stage. The U.S. Patent and Trademark Office has undertaken a re-examination of
the patent which is the subject of this suit, and issued a preliminary finding that the patent is
invalid. On June 30, 2010, the Court, through the Magistrate Judge, issued a Memorandum Opinion
and Order (the Markman Order), which construed certain disputed terms in the patent at issue in
the case. The plaintiff and several defendants have filed objections with the Court for review of
various portions of the Order. On July 1, 2010, the Magistrate Judge issued a report and
recommendation that the Court grant the motion of the defendants for summary judgment with respect
to claims 15, 16, 17, 19, 22 and 23 of the patent on grounds that such claims in the patent are
indefinite and invalid. The plaintiff has filed objections with the Court for review of report and
recommendation regarding summary judgment.
On November 17, 2009, Nomadix, Inc., a Delaware corporation based in Newbury Park, California,
filed an action for patent infringement in the U.S. District Court for the Central District of
California in Los Angeles, California. The suit alleges the Company and its subsidiaries On
Command Corporation and LodgeNet StayOnline, Inc. infringe five patents: a patent issued October
10, 2000 entitled Nomadic Translator or Router, a patent issued on August 6, 2006 entitled
System and Method for Establishing Network Connection with Unknown User or Device, a patent
issued on June 30, 2009 entitled System and Method for Establishing Network Connection with
Unknown Network and/or User Device, a patent issued on October 21, 2003 entitled Systems and
Methods for Redirecting Users Having Transparent Computer Access to a Network Using a Gateway
Device Having Redirection Capability, and a patent issued on March 15, 2005 entitled Systems and
Methods for Integrating a Network Gateway Device with Management Systems. The complaint also
asserts claims under the above-mentioned patents and additional patents against a number of other
defendants, including Hewlett-Packard Company, Wayport, Inc., Ibahn Corporation, Guest-Tek
Interactive Entertainment Ltd. and Guest-Tek Entertainment Inc., Aruba Networks, Inc., Superclick,
Inc. and Superclick Networks, Inc. Nomadix, Inc. also filed a similar action in the same court
against SolutionInc. It is anticipated all pending cases will be consolidated. The complaint does
not specify an amount in controversy. The Company believes it does not infringe the patents in
questions, has filed responsive pleadings and is vigorously defending the action.
Page 18
Note 18 Effect of Recently Issued Accounting Standards
In October 2009, the FASB issued FASB Accounting Standard Update (ASU) No. 2009-13,
Multiple-Deliverable Revenue Arrangements, which is now codified under FASB ASC Topic 605,
Revenue Recognition. This ASU establishes a selling price hierarchy for determining the selling
price of a deliverable; eliminates the residual method of allocation and requires arrangement
consideration be allocated at the inception of the arrangement to all deliverables using the
relative selling price method; and requires a vendor determine its best estimate of selling price
in a manner consistent with that used to determine the selling price of the deliverable on a
standalone basis. The ASU also significantly expands the required disclosures related to a
vendors multiple-deliverable revenue arrangements. FASB ASU No. 2009-13 is effective on a
prospective basis for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early adoption permitted. We are evaluating the effect
from the adoption of this ASU on our current and future business models. Depending on how we sell
and deliver future systems and services, this ASU could have an effect on the timing of revenue
recognition and our consolidated results of operations or cash flows.
In October 2009, the FASB issued FASB ASU No. 2009-14, Certain Revenue Arrangements That Include
Software Elements, which is now codified under FASB ASC Topic 985, Software. This ASU changes
the accounting model for revenue arrangements which include both tangible products and software
elements, providing guidance on how to determine which software, if any, relating to the tangible
product would be excluded from the scope of the software revenue guidance. FASB ASU No. 2009-14 is
effective on a prospective basis for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are evaluating
the effect from the adoption of this ASU on our current and future business models. Depending on
how we sell and deliver future systems and services, this ASU could have an effect on the timing of
revenue recognition and our consolidated results of operations or cash flows.
In January 2010, the FASB issued FASB ASU No. 2010-06, Improving Disclosures about Fair Value
Measurements, which is now codified under FASB ASC Topic 820, Fair Value Measurements and
Disclosures. This ASU will require additional disclosures regarding transfers in and out of
Levels 1 and 2 of the fair value hierarchy, as well as a reconciliation of activity in Level 3 on a
gross basis (rather than as one net number). The ASU also provides clarification on disclosures
about the level of disaggregation for each class of assets and liabilities and on disclosures about
the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring
fair value measurements. FASB ASU No. 2010-06 is effective for interim and annual periods
beginning after December 15, 2009, except for the disclosures requiring a reconciliation of
activity in Level 3. Those disclosures will be effective for interim and annual periods beginning
after December 15, 2010. The adoption of the portion of this ASU effective after December 15, 2009
did not have an impact on our consolidated financial position, results of operations or cash flows.
The adoption of the portion of this ASU effective after December 15, 2010 will not have a material
effect on our consolidated financial position, results of operations or cash flows.
In April 2010, the FASB issued FASB ASU No. 2010-17, Milestone Method of Revenue Recognition,
which is now codified under FASB ASC Topic 605, Revenue Recognition. This ASU provides guidance
on defining a milestone and determining when it may be appropriate to apply the milestone method of
revenue recognition for research and development transactions. Consideration which is contingent
upon achievement of a milestone in its entirety can be recognized as revenue in the period in which
the milestone is achieved only if the milestone meets all criteria to be considered substantive. A
milestone should be considered substantive in its entirety, and an individual milestone may not be
bifurcated. An arrangement may include more than one milestone, and each milestone should be
evaluated individually to determine if it is substantive. FASB ASU 2010-17 was effective on a
prospective basis for milestones achieved in fiscal years (and interim periods within those years)
beginning on or after June 15, 2010, with early adoption permitted. If an entity elects early
adoption, and the period of adoption is not the beginning of its fiscal year, the entity should
apply this ASU retrospectively from the beginning of the year of adoption. Entities may also elect
to adopt the amendments retrospectively for all prior periods. We are evaluating the effect from
the adoption of this ASU on our current and future business models. Depending on how we sell and
deliver future systems and services, this ASU could have an effect on the timing of revenue
recognition and our consolidated results of operations or cash flows.
Page 19
Item 2 Managements 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
We are the largest provider of interactive media and connectivity solutions to the hospitality
industry in the United States, Canada and Mexico. We also provide interactive television solutions
in select international markets, primarily through local or regional licensees. As of June 30,
2010, we provided interactive media and connectivity solutions to approximately 1.9 million hotel
rooms. In addition, we sell and maintain interactive television systems which provide on-demand
patient education, information and entertainment to healthcare facilities throughout the United
States. As of June 30, 2010, our system was installed in 52 healthcare facilities, representing
approximately 10,900 beds.
Page 20
During the quarter, our strategic focus continued to be on driving free cash flow and reducing
debt. Free cash flow, a non-GAAP measure which we define as cash provided by operating activities
less cash used for investing activities, including growth-related capital, increased 55.7%, to 22.6
million in the current quarter compared to $14.5 million in the prior year quarter. We reduced our
long-term debt by $22.1 million, or 5.2%, during the current quarter. Quarter over quarter, other
profitability metrics also improved, including operating income increasing 29.9%, loss per share
improving 21.7% and revenue from our diversification initiatives, which focus on non-Guest
Entertainment revenue, was at 41.7% of total revenue. During the quarter, our gross profit margin
increased 40 basis points, to 44.4%. We continue to manage our business conservatively by
controlling operating expenses and capital spending and paying down our debt to position us for
long-term sustained growth. We believe our strategic initiatives are positioning us well for solid
future revenue and enhancements to shareholder value.
During the quarter, we unveiled Envision, our latest innovation delivering the high-definition
interactive platform through cloud-connected interactive television (iTV). Envision will connect
hotel guests to interactive information and entertainment, and will connect hoteliers to their
guests using one-to-one marketing applications. Our advanced interactive applications eCompendium
and eConcierge include services such as the ability of the hotel to sell, manage and post local
advertising, communicate hotel and meeting events and provide wakeup services, all through the
guest room television. Hotels can also earn revenue through new transactional apps such as
eTickets and ePurchases, designed to fulfill guest needs. The television now has the potential to
become more than just in-room entertainment; it can be a dynamic platform for hoteliers to use in
building guest relationships which will provide them value in a number of ways. We believe
Envision represents a significant revenue growth opportunity, as it enables new subscription and
transactional-based revenues.
Our total revenue for the second quarter of 2010 was $113.1 million, a decrease of $8.9 million or
7.3%, compared to the second quarter of 2009. The decrease in revenue was from Guest
Entertainment, Healthcare and System Sales and Related Services, partially offset by increases in
revenue from Advertising Services and Hotel Services.
Hospitality and Advertising Services revenue, which includes Guest Entertainment, Hotel Services,
System Sales and Related Services and Advertising Services, decreased $7.9 million or 6.6%, to
$111.7 million for the second quarter of 2010 as compared to $119.6 million for the prior year
quarter. Average monthly revenue per room generated by Hospitality and Advertising Services was
$21.22 for the second quarter of 2010, a decrease of 2.2% as compared to $21.69 per room in the
second quarter of 2009.
Guest Entertainment revenue, which includes on-demand entertainment such as movies, television
on-demand, music and games, decreased $9.0 million or 12.0%, to $66.0 million in the second quarter
of 2010. Our results continued to be driven by the conservative consumer buying pattern of
travelers, as average monthly Guest Entertainment revenue per room for the second quarter of 2010
declined 7.8% to $12.54 compared to $13.60 for the second quarter of 2009. Average monthly movie
revenue per room was $11.68 for the second quarter of 2010, an 8.5% reduction as compared to $12.77
per room in the prior year quarter. Hotel Services revenue, which includes recurring revenue from
hotels for cable television programming and broadband Internet service and support, increased $0.8
million or 2.5%, to $34.1 million during the second quarter of 2010 versus $33.3 million in the
second quarter of 2009. On a per-room basis, monthly Hotel Services revenue for the second quarter
of 2010 increased 7.3% to $6.48 compared to $6.04 for the second quarter of 2009. Monthly cable
television programming revenue per room increased 8.0% to $5.92 for the second quarter of 2010 as
compared to $5.48 for the second quarter of 2009. These increases resulted primarily from the
continued installation of high definition television systems and additional cable television
programming services. Recurring broadband Internet revenue per room was flat at $0.56 quarter over
quarter. System Sales and Related Services revenue, which includes revenue from the sales of cable
television programming equipment, broadband Internet equipment, HDTV installations and other
services to hotels, decreased $0.6 million or 6.4%, to $9.0 million during the second quarter of
2010 versus $9.6 million in the second quarter of 2009. The decrease was primarily from lower
sales and installations of broadband systems. Advertising Services revenue, generated by The Hotel
Networks (THN), our advertising services subsidiary, increased $0.9 million or 52.1%, to $2.6
million during the second quarter of 2010 compared to $1.7 million in the prior year period. This
increase was primarily the result of an increase in channel access fees and general advertising
revenue, as national advertisers expanded their ad buys on our system.
Page 21
Healthcare revenue, which includes the sale of interactive systems and services to healthcare
facilities, decreased $1.0 million or 41.3%, to $1.4 million during the second quarter of 2010
versus $2.4 million in the second quarter of 2009. During the current quarter, we installed two
facilities and 598 beds compared to five facilities and 1,107 beds in the prior year period. We
have six signed healthcare contracts in our backlog currently waiting installation.
Total direct costs (exclusive of operating expenses and depreciation and amortization discussed
separately below) were $62.9 million in the second quarter of 2010, a decrease of $5.4 million or
7.9%, as compared to $68.3 million in the second quarter of 2009. The decrease in total direct
costs was primarily due to decreased commissions and royalties of $4.4 million, which vary with
revenue. Partially offsetting the reduction was an increase in incremental cable television
programming costs of $0.6 million, which vary with the number of rooms served and the services
provided. For the second quarter of 2010, total direct costs as a percentage of revenue was 55.6%
as compared to 56.0% for the second quarter of 2009.
System operations expenses and selling, general and administrative (SG&A) expenses were $22.9
million in the second quarter of 2010 compared to $22.7 million in the prior year quarter. As a
percentage of total revenue, system operations expenses were 9.4% this quarter as compared to 9.0%
in the second quarter of 2009. Per average installed room, system operations expenses increased to
$2.02 per room per month this quarter as compared to $2.00 in the prior year quarter. The
increases in total operating expenses were primarily the result of higher legal and professional
fees, business travel costs and repairs and maintenance costs, partially offset by lower property
taxes.
Despite the revenue decline, we generated $27.0 million of cash from operating activities as
compared to $20.2 million in the second quarter of 2009. In June 2010, we made the required
quarterly payment of $1.2 million on the term loan and also made an additional payment of $22.2
million. During the second quarter of 2009, we made only the required term loan repayment of $1.5
million, and did not make any additional payments. The leverage ratio at the end of this quarter,
calculated on a consolidated debt basis, was 3.52 times versus the covenant of 3.75 times. The
increase in cash provided by operating activities was primarily due to changes in working capital.
Cash as of June 30, 2010 was $8.8 million compared to $61.2 million on June 30, 2009. The
increased balance as of June 30, 2009 was due to the net proceeds from the preferred stock offering
of $53.7 million.
Hospitality and Advertising Services Business
Our Hospitality and Advertising Services business includes television contents sold to hotels
and/or the respective hotels guests. The products can include interactive video-on-demand (VOD),
cable television programming, Internet services or advertising services, and have an analogous
consumer base. All products and services are delivered through a proprietary system platform
having related satellite communication technology, and are geared towards the hotels and their
guests.
Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and
music videos and television on-demand programming).
Our primary source of revenue is providing
in-room, interactive guest entertainment, for which the hotel guest pays on a per-view, hourly or
daily basis.
Our total guest generated revenue depends on a number of factors, including:
|
|
The number of rooms on our network.
We can increase revenue over time by increasing the
number of rooms served by our interactive television systems. Our ability to expand our room
base is dependent on a number of factors, including newly constructed hotel properties and the
attractiveness of our technology, service and support to hotels currently operating without an
interactive television system.
|
|
|
|
The occupancy rate at the property.
Our revenue also varies depending on hotel occupancy
rates, which are subject to a number of factors, including seasonality, general economic
conditions and world events, such as terrorist threats or public health issues. Occupancy
rates for the properties we serve are typically higher during the second and third quarters
due to seasonal travel patterns. We target higher occupancy properties in diverse demographic
and geographic locations in an effort to mitigate occupancy-related risks.
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Page 22
|
|
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.
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|
|
|
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.
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|
|
|
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.
|
The primary direct costs of providing Guest Entertainment are:
|
|
license fees paid to major motion picture studios, which are variable and based on a
percent of guest-generated revenue, for non-exclusive distribution rights of recently released
major motion pictures;
|
|
|
|
commissions paid to our hotel customers, which are also variable and based on a percent of
guest-generated revenue;
|
|
|
|
license fees, which are based on a percent of guest-generated revenue, for television
on-demand, music, music videos, video games and sports programming; and
|
|
|
|
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).
Another major source of our revenue is
providing cable television programming and Internet services to the lodging industry, for which the
hotel pays a fixed monthly fee.
|
|
Cable Television Programming.
We offer a wide variety of satellite-delivered cable
television programming paid for by the hotel and provided to guests at no charge. The cable
television programming is delivered via satellite, pursuant to an agreement with DIRECTV
®
, and
is distributed over the internal hotel network, and typically includes premium channels such
as HBO and Showtime, which broadcast major motion pictures and specialty programming, as well
as non-premium channels, such as CNN and ESPN. With the launch of the high-definition
configuration of our interactive television system, we also began offering high-definition
cable television programming to the extent available from broadcast sources and DIRECTV.
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Page 23
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|
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.
We also generate revenue from other products and services
within the hotel and lodging industry, including sales of Internet access and other interactive
television systems and equipment, cable television programming reception equipment, Internet
conference services, and professional services, such as design, project management and installation
services.
Advertising Services
. We deliver advertising-supported media into select hotel segments, from
which we earn revenue from the sale of television commercials, channel access or other marketing
based programs. The demographic and professional profile of the traveler within our room base
tends to have characteristics we believe may be attractive to consumer marketing organizations. By
approaching guests with relevant messaging when they are in the comfort of a hotel room, free of
distractions, advertisers have a prime opportunity to capture the attention of and connect with
these desired consumers. In addition to market demands, our revenue is also dependent on rooms
available to promote customer products and services. As of June 30, 2010 and June 30, 2009, we
provided advertising media services to approximately 1.2 million hotel rooms. We also deliver
targeted advertising to more than 360,000 hotel rooms on 10 popular satellite-delivered channels.
Key Metrics:
Rooms Served
One of the metrics we monitor within our Hospitality and Advertising Services business is the
number of rooms we serve for our various services. As of June 30, we had the following number of
rooms installed with the designated service:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2010
|
|
2009
|
Total rooms served (1)
|
|
|
1,888,287
|
|
|
|
1,956,562
|
|
Total Guest Entertainment rooms (2)
|
|
|
1,738,311
|
|
|
|
1,827,636
|
|
Total HD rooms (3)
|
|
|
246,739
|
|
|
|
210,262
|
|
Percent of Total Guest Entertainment rooms
|
|
|
14.2
|
%
|
|
|
11.5
|
%
|
Total Cable Television Programming (FTG) rooms (4)
|
|
|
1,070,081
|
|
|
|
1,104,660
|
|
Percent of Total Guest Entertainment rooms
|
|
|
61.6
|
%
|
|
|
60.4
|
%
|
Total Broadband Internet rooms (5)
|
|
|
195,294
|
|
|
|
219,260
|
|
Percent 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.
|
The
decline in Guest Entertainment rooms is driven by removal of certain
tape-based and standard-definition systems which do not meet our
economic criteria for conversion to high-definition and the
availability of new rooms through hotel construction has been reduced
due to the slower growth in the overall hotel industry.
Page 24
High Definition Room Growth
We also track the penetration of our high-definition television (HDTV) system, since rooms equipped
with HDTV services typically generate higher revenue from Guest Entertainment and Hotel Services
than rooms equipped with our standard-definition VOD systems. HDTV room growth occurs as we
install our HDTV system in newly contracted rooms and convert certain existing rooms to the HDTV
system in exchange for contract extensions. The installation of an HDTV system typically requires
a capital investment by both the Company and the hotel operator. HDTV growth has been constrained
by reduced hotel capital spending budgets given the negative impact of the economy on the
hospitality industry. The Company remains focused on continuing the rollout of high-definition
systems within the capital constraints of the hotels and the Companys conservative operating plan.
We installed our systems in the following number of net new rooms and had the following total
rooms installed as of June 30:
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|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2010
|
|
2009
|
Net new HDTV rooms for the three months ended
|
|
|
6,592
|
|
|
|
10,747
|
|
Net new HDTV rooms for the six months ended
|
|
|
14,988
|
|
|
|
18,546
|
|
Total HDTV rooms installed
|
|
|
246,739
|
|
|
|
210,262
|
|
HDTV rooms as a percent of total Guest Entertainment rooms
|
|
|
14.2
|
%
|
|
|
11.5
|
%
|
HDTV rooms, including new installations and major upgrades, are equipped with high-definition
capabilities.
Capital Investment Per Installed Room
The average investment per room associated with an installation can fluctuate due to the type of
interactive television system installed, engineering efforts, component costs, product
segmentation, cost of assembly and installation, average property size, certain fixed costs and
hotel capital contributions. The following table sets forth our average installation and
conversion investment cost per room during the periods ended:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Years Ended
|
|
|
June 30,
|
|
June 30,
|
|
December 31,
|
|
December 31,
|
|
|
2010
|
|
2009
|
|
2009
|
|
2008
|
Average cost per HD room new installation
|
|
$
|
269
|
|
|
$
|
320
|
|
|
$
|
339
|
|
|
$
|
398
|
|
Average cost per HD room conversion
|
|
$
|
186
|
|
|
$
|
266
|
|
|
$
|
241
|
|
|
$
|
320
|
|
The decrease in the average cost per new and converted HD rooms from 2008 to 2010 was
primarily driven by a larger average room size for properties installed, lower component and
overhead costs and hotels contributing a greater share of total installation costs through
purchases of systems and equipment.
Page 25
Average Revenue Per Room
We monitor the average revenue we generate per Hospitality and Advertising Services room. Guest
Entertainment revenue can fluctuate based on several factors, including occupancy, consumer
sentiment, mix of travelers, the availability of high definition and alternative programming, the
popularity of movie content, the mix of services purchased and the overall economic environment.
During the quarter, occupancy increased approximately 7.9% as compared to the second quarter of
2009. Hotel Services revenue can fluctuate based on the percentage of our hotels purchasing cable
television programming services from us, the type of services provided at each site, as well as the
number of hotels purchasing broadband service and support from us. System Sales and Related
Services revenue can fluctuate based on the number of system and equipment sales, including
broadband system sales. Advertising Services revenue can fluctuate based on the demand for
advertising and the performance of products and services sold to business and leisure travelers, as
well as the number of rooms available to promote within. The following table sets forth the
components of our Hospitality and Advertising Services revenue per room for the three and six
months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Average monthly revenue per room:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitality and Advertising Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guest Entertainment
|
|
$
|
12.54
|
|
|
$
|
13.60
|
|
|
$
|
12.76
|
|
|
$
|
13.66
|
|
Hotel Services
|
|
|
6.48
|
|
|
|
6.04
|
|
|
|
6.48
|
|
|
|
5.98
|
|
System Sales and Related Services
|
|
|
1.71
|
|
|
|
1.74
|
|
|
|
1.76
|
|
|
|
2.18
|
|
Advertising Services
|
|
|
0.49
|
|
|
|
0.31
|
|
|
|
0.47
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Hospitality and Advertising Services revenue per room
|
|
$
|
21.22
|
|
|
$
|
21.69
|
|
|
$
|
21.47
|
|
|
$
|
22.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Costs
Guest Entertainment direct costs vary based on content license fees, the mix of Guest Entertainment
products purchased and the commission earned by the hotel. Hotel Services direct costs include the
cost of cable television programming and the cost of broadband Internet support services. The cost
of System Sales and Related Services primarily includes the cost of the systems and equipment sold
to hotels. Advertising Services direct costs include the cost of developing and distributing
programming. The overall direct cost margin primarily varies based on the composition of revenue.
The following table sets forth our Hospitality and Advertising Services direct expenses per room
for the three and six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Direct costs per room:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitality and Advertising Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guest Entertainment
|
|
$
|
4.78
|
|
|
$
|
5.42
|
|
|
$
|
4.99
|
|
|
$
|
5.46
|
|
Hotel Services
|
|
|
5.63
|
|
|
|
5.22
|
|
|
|
5.61
|
|
|
|
5.23
|
|
System Sales and Related Services
|
|
|
1.15
|
|
|
|
1.21
|
|
|
|
1.18
|
|
|
|
1.54
|
|
Advertising Services
|
|
|
0.26
|
|
|
|
0.28
|
|
|
|
0.26
|
|
|
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Hospitality and Advertising Services direct costs per room
|
|
$
|
11.82
|
|
|
$
|
12.13
|
|
|
$
|
12.04
|
|
|
$
|
12.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The average direct cost per Guest Entertainment room varies with revenue and, from 2009 to
2010, was driven by the amount of commissions earned by the hotels and a change in the mix of
products purchased.
Page 26
Healthcare Business
The healthcare market in the United States consists of approximately 900,000 hospital beds across
5,900 facilities. We believe most hospitals currently do not have any form of interactive
television services. The main interests in interactive television services include driving patient
satisfaction; providing robust patient education with comprehensive reporting; and operation
efficiencies and cost savings for automating processes, such as integrated food ordering. Our
Healthcare revenue is generated through a variety of services and solutions provided to care
facilities, including:
|
|
revenue generated from the sale of the interactive system hardware, software license and
installation services;
|
|
|
|
revenue from the sale and installation of 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.
|
As of June 30, 2010, we have equipped 52 healthcare facilities, or approximately 10,900 beds, with
these services and solutions to improve the overall patient experience, as compared to 39
properties or approximately 8,500 beds as of June 30, 2009.
General Operations
Total Operating Expenses
We also monitor and manage the operating expenses per room. System operations expenses consist of
costs directly related to the operation and maintenance of systems at hotel sites. Selling,
general and administrative expenses (SG&A) primarily include payroll costs, share based
compensation, engineering development costs and legal, marketing, professional and compliance
costs. The following table sets forth the components of our operating expenses per room for the
three and six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Systems operations expenses
|
|
$
|
2.02
|
|
|
$
|
2.00
|
|
|
$
|
2.00
|
|
|
$
|
1.93
|
|
SG&A expenses
|
|
|
2.34
|
|
|
|
2.12
|
|
|
|
2.31
|
|
|
|
2.03
|
|
Depreciation and amortization (D&A)
|
|
|
3.98
|
|
|
|
4.77
|
|
|
|
4.07
|
|
|
|
4.81
|
|
Restructuring charge
|
|
|
0.05
|
|
|
|
|
|
|
|
0.02
|
|
|
|
0.02
|
|
Other operating income, net
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.39
|
|
|
$
|
8.88
|
|
|
$
|
8.40
|
|
|
$
|
8.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems 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
To supplement our consolidated financial statements presented in accordance with accounting
principles generally accepted in the United States (GAAP), we use free cash flow, a non-GAAP
measure derived from results based on GAAP. The presentation of this additional information is not
meant to be considered superior to, in isolation of, or as a substitute for, results prepared in
accordance with GAAP.
Page 27
We define free cash flow, a non-GAAP measure, as cash provided by operating activities less cash
used for certain investing activities, including growth related capital. Free cash flow is a key
liquidity measure, but should not be construed as an alternative to cash flows from operating
activities or as a measure of our profitability or performance. We provide information about free
cash flow because we believe it is a useful way for us, and our investors, to measure our ability
to satisfy cash needs, including interest payments on our debt, taxes and capital expenditures.
GAAP requires us to provide information about cash flow generated from operations. Our definition
of free cash flow does not take into account our debt service requirements or other commitments.
Accordingly, free cash flow is not necessarily indicative of amounts of cash which may be available
to us for discretionary purposes. Our method of computing free cash flow may not be comparable to
other similarly titled measures of other companies.
Free Cash Flow
One of our goals is to increase the level of free cash flow we generate. We manage our free cash
flow by seeking to maximize the amount of cash we generate from our operations and managing the
level of our investment activity. During the first half of 2010, we allocated a substantial
portion of our cash flow from operations to the repayment of debt and used the balance of the cash
flow for capital expenditures. We can manage capital expenditures by reducing the per-room
installation cost of a room and by varying the number of rooms we install in any given period.
Levels of free cash flow are set forth in the following table (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
Cash provided by operating activities
|
|
$
|
27,016
|
|
|
$
|
20,176
|
|
|
$
|
55,114
|
|
|
$
|
41,123
|
|
Property and equipment additions
|
|
|
(4,429
|
)
|
|
|
(5,670
|
)
|
|
|
(8,954
|
)
|
|
|
(10,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,587
|
|
|
$
|
14,506
|
|
|
$
|
46,160
|
|
|
$
|
30,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Capital Resources
During the first six months of 2010, cash provided by operating activities was $55.1 million. For
the first six months of 2010, we used $9.0 million of the cash we generated for property and
equipment additions, including growth-related capital. During the same period, we made additional
payments of $66.2 million against the Term B portion of our Credit Facility, in addition to the
required quarterly payments of $2.4 million. We also used $2.9 million for preferred stock
dividends. During the first six months of 2009, cash provided by operating activities was $41.1
million. For the first six months of 2009, we used cash for property and equipment additions,
including growth-related capital, of $11.0 million. During the same period, we made an additional
payment of $6.7 million against the Term B portion of our Credit Facility, in addition to the
required quarterly payments of $3.0 million. We did not make a preferred stock dividend payment.
The increase in cash provided by operating activities for the first six months of 2010 compared to
the first six months of 2009 was primarily due to changes in working capital. Cash as of June 30,
2010 was $8.8 million versus $17.0 million as of December 31, 2009.
In March 2010, we entered into an agreement to sell 2,160,000 shares of our common stock to the
underwriter, for resale to the public. The underwriter had an option to purchase up to 324,000
additional shares of common stock to cover overallotments. We completed our offering of 2,484,000
shares (inclusive of the underwriters option to purchase the additional 324,000 shares), bringing
the total aggregate common stock sold to $14.9 million. Net proceeds from the issuance of common
stock were $13.7 million, with offering and related costs totaling $1.2 million. The net proceeds
of $13.7 million were used to reduce our debt in the near-term.
Page 28
Our principal sources of liquidity are our cash from operations, our cash on hand and the $50.0
million revolver portion of our Credit Facility, which matures in 2013. We believe our cash on
hand, operating cash flow, borrowing available under the Credit Facility and availability under the
shelf registration will be sufficient to fund our business and comply with our financing
obligations. During 2010, we plan to continue to allocate a substantial portion of our cash flow
from operations to the repayment of debt and use the balance of the cash flow for capital
expenditures. As of June 30, 2010, working capital was $(26.9) million, compared to $(4.9) million
at December 31, 2009.
The collectability of our receivables is reasonably assured, as supported by our broad customer
base. Our interactive hotel base is well diversified in terms of (i) location; (ii) demographics;
and (iii) customer contracts. We provide our services to various hotel chains, ownership groups
and management companies. In accordance with our hotel contracts, monies collected by the hotel
for interactive television services are held in trust on our behalf, thereby limiting our risk from
hotel bankruptcies.
In order to fund our acquisitions of On Command and StayOnline, in April 2007 we entered into a
$675.0 million bank Credit Facility, comprised of a $625.0 million term loan, which matures in
April 2014, and a $50.0 million revolving Credit Facility, which matures in April 2013. The
required quarterly payments are currently $1.1 million, and will be adjusted for any additional
reduction in principal as a result of our early repayments against the loan. For the second
quarter of 2010, the adjusted quarterly payment requirement was $1.2 million. The term loan bears
interest at our option of (1) the banks base rate plus a margin of 1.00% or (2) LIBOR plus a
margin of 2.00%. The agreement provides that when our consolidated leverage ratio is below 3.25
times, the term loan bears interest at our option of (1) the banks base rate plus a margin of
0.75% or (2) LIBOR plus a margin of 1.75%. The term loan is collateralized by substantially all of
the assets of the Company. The Credit Facility includes terms and conditions which require
compliance with leverage and interest coverage covenants. The Credit Facility also stipulates we
enter into hedge agreements to provide at least 50% of the outstanding term loan into a fixed
interest rate for a period not less than two years. We have entered into fixed rate swap
agreements for $437.5 million of the outstanding term loan, with fixed interest rates ranging from
4.97% to 5.09% (see Note 14 to the financial statements). The term loan interest rate as of June
30, 2010 was 2.54%. The all-in weighted average interest rate for the quarter ended June 30, 2010
was 7.28%, which includes both the term loan interest rate and the difference in the swaps fixed
interest rate versus LIBOR. As of June 30, 2010, we were in compliance with all financial
covenants required of our bank Credit Facility.
Our leverage and interest coverage ratios were as follows for the periods ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
Actual consolidated leverage ratio (1) (3)
|
|
|
3.52
|
|
|
|
4.19
|
|
Maximum per covenant
|
|
|
3.75
|
|
|
|
4.25
|
|
|
|
|
|
|
|
|
|
|
Actual consolidated interest coverage ratio (2) (3)
|
|
|
3.21
|
|
|
|
3.20
|
|
Minimum 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.
|
We do not utilize special purpose entities or off balance sheet financial arrangements.
Page 29
Our debt covenant ratios will change in future periods as follows:
|
|
|
|
|
|
|
Q3 2010
|
|
|
to maturity
|
Maximum consolidated leverage ratio
|
|
|
3.50
|
|
|
|
|
|
|
Minimum consolidated interest coverage ratio
|
|
|
3.00
|
|
In order to continue operating efficiently and expand our business, we must remain in compliance
with covenants outlined in our Credit Facility. Our ability to remain in compliance with those
covenants will depend on our ability to generate sufficient Adjusted Operating Cash Flow (as
defined in the Credit Facility), to manage our level of capital investment and to continue to
reduce our debt. We continue taking actions within our control to reduce our debt and remain in
compliance with our debt covenants. The actions within our control include our prudent management
of capital investment and operating costs and exploring other alternatives, which may include
seeking an amendment to our Credit Facility, raising additional capital or reductions in our
operating expenses. We believe we are balancing the interest of our customers and our Company by
reducing our capital investments, reducing our operating cost structure and aggressively reducing
the level of debt. We achieved a consolidated leverage ratio of 3.52 compared to the maximum
allowable ratio of 3.75 for the second quarter of 2010. Our ability to continue to comply with
these covenants is subject to the general economic climate and business conditions beyond our
control. We are committed to reducing our debt and are taking actions to remain in compliance with
our debt covenants. Our ability to comply with these covenants depends on achieving our planned
operating results and making further debt reductions. Although there are signs of stabilization in
certain sectors of the economy, the uncertainties impacting travel and lodging, in addition to the
constraints in the credit markets, consumer conservatism and other market dynamics, may continue to
negatively impact our planned results and required covenants. If we are not able to remain in
compliance with the debt covenants, it will likely have a significant, unfavorable impact on our
business and financial condition and we may need to amend the Credit Facility to seek a waiver of
the covenants. An amendment to the Credit Facility may significantly increase our interest costs,
add upfront fees or modify other terms less favorable to us than we currently have in our Credit
Facility. In the event our lenders will not amend or waive the covenants, the debt would be due
and we would need to seek alternative financing. We cannot provide assurance we would be able to
obtain alternative financing. If we were not able to secure alternative financing, this would have
a substantial adverse impact on the Company.
The Credit Facility also requires we notify the agent upon the occurrence of a Material Adverse
Effect prior to any draw on the Companys revolving Credit Facility, as such terms are defined and
used within our bank Credit Facility. However, under the Credit Facility, the provision of such a
notice is not an event of default, but if such an event occurred, it could restrict the Companys
ability to obtain additional financing under the revolving Credit Facility. As of June 30, 2010,
we are not aware of any events which would qualify under the Material Adverse Effect under the
Credit Facility. The total amount of long-term debt outstanding, including the current portion, as
of June 30, 2010 was $404.9 million versus $469.9 million as of December 31, 2009.
In April 2007, we entered into interest rate swap agreements with notional values of $312.5
million, at a fixed rate of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which
expire in June 2011. These swap arrangements effectively change the underlying debt from a
variable interest rate to a fixed interest rate for the term of the swap agreements. The swap
agreements were designated as, and met the criteria for, cash flow hedges and are not considered
speculative in nature. A portion of the $125.0 million notional amount swap, entered into in April
2007 and expiring in June 2011, was rendered ineffective due to the additional payments on our term
loan. The ineffective portion of the change in fair value of this cash flow hedge was a loss of
$0.8 million and $1.5 million for the three and six months ended June 30, 2010, respectively, and
was recognized in interest expense in our Consolidated Statements of Operations. All of the swap
agreements have been issued by Credit Suisse International.
The Credit Facility provides for the issuance of letters of credit up to $15.0 million, subject to
customary terms and conditions. As of June 30, 2010, we had outstanding letters of credit totaling
$395,000.
Page 30
Obligations and commitments as of June 30, 2010 were as follows (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
|
Less than
|
|
|
2 3
|
|
|
4 5
|
|
|
Over
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
Contractual 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 period
|
|
|
|
|
|
|
|
Less than
|
|
|
2 3
|
|
|
4 5
|
|
|
Over
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
Other 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
Our quarterly operating results are subject to fluctuation, depending upon hotel occupancy rates
and other factors, including travel patterns and the economy. Our hotel customers typically
experience higher occupancy rates during the second and third quarters, due to seasonal travel
patterns and, accordingly, we historically have higher revenue and cash flow in those quarters.
However, quarterly revenue can be affected by the availability of popular content during those
quarters and by consumer purchasing behavior. We have no control over when new content is released
or how popular it will be, or the effect of economic conditions on consumer behavior.
Market Conditions
Due to current economic conditions, our business could be adversely impacted by conditions
affecting the lodging industrys performance. Our results are closely linked to the performance of
the lodging industry, where occupancy rates may fluctuate as a result of various factors. The
percentage of occupied rooms that buy movies and other services at the property also varies over
time with general economic conditions, including, but not limited to, consumer sentiment, and other
factors. Reduction in hotel occupancy, resulting from the general economic environment or other
changes in market conditions, such as a recession or significant slow-down in economic activity, or
significant international crises, could adversely impact our business, financial condition and
results of operations. The overall travel industry can be, and has been in the past, adversely
affected by weaker general economic climates, geopolitical instability and concerns about public
health. Factors such as the cost of fuel, airline fares and other economic conditions which result
in a decrease in business or leisure travel can affect hotel occupancy and the demand for some of
our products and services. Also, our goodwill and intangible assets may be impaired if market
conditions deteriorate.
Page 31
Discussion and Analysis of Results of Operations
Three Months Ended June 30, 2010 and 2009
Revenue Analysis.
Total revenue for the second quarter of 2010 was $113.1 million, a decrease of
$8.9 million or 7.3%, compared to the second quarter of 2009. The decrease in revenue was from a
decrease in Guest Entertainment, Healthcare and System Sales and Related Services revenue,
partially offset by increases in revenue from Advertising Services and Hotel Services. The
following table sets forth the components of our revenue (dollar amounts in thousands) for the
quarter ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
of Total
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitality and Advertising Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guest 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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitality and Advertising Services revenue, which includes Guest Entertainment, Hotel Services,
System Sales and Related Services and Advertising Services, decreased $7.9 million or 6.6%, to
$111.7 million in the second quarter of 2010 compared to $119.6 million in the second quarter of
2009. Average monthly Hospitality and Advertising Services revenue per room was $21.22 in the
second quarter of 2010, a decrease of 2.2% as compared to $21.69 in the prior year quarter. The
following table sets forth information with respect to revenue per Hospitality and Advertising
Services room for the quarter ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Average monthly revenue per room:
|
|
|
|
|
|
|
|
|
Hospitality and Advertising Services
|
|
|
|
|
|
|
|
|
Guest Entertainment
|
|
$
|
12.54
|
|
|
$
|
13.60
|
|
Hotel Services
|
|
|
6.48
|
|
|
|
6.04
|
|
System Sales and Related Services
|
|
|
1.71
|
|
|
|
1.74
|
|
Advertising Services
|
|
|
0.49
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
Total Hospitality and Advertising Services revenue per room
|
|
$
|
21.22
|
|
|
$
|
21.69
|
|
|
|
|
|
|
|
|
Guest Entertainment revenue, which includes on-demand entertainment such as movies, television
on-demand, music and games, decreased $9.0 million or 12.0%, to $66.0 million in the second quarter
of 2010 as compared to $75.0 million in the prior year quarter. On a per-room basis, monthly Guest
Entertainment revenue for the second quarter of 2010 declined 7.8%, to $12.54 compared to $13.60
for the second quarter of 2009. This change in revenue per room continues to be driven by the
conservative consumer buying pattern of travelers. Average monthly movie revenue per room was
$11.68 for the second quarter of 2010, an 8.5% reduction as compared to $12.77 per room in the
prior year quarter. Non-movie Guest Entertainment revenue per room increased 3.6% to $0.86 in the
second quarter of 2010, driven by an increase in television on-demand programming.
Page 32
Hotel Services revenue, which includes recurring revenue from hotels for cable television
programming and broadband Internet service and support, increased $0.8 million or 2.5%, to $34.1
million during the second quarter of 2010 versus $33.3 million in the second quarter of 2009. On a
per-room basis, monthly Hotel Services revenue for the second quarter of 2010 increased 7.3%, to
$6.48 compared to $6.04 for the second quarter of 2009. Monthly cable television programming
revenue per room increased 8.0%, to $5.92 for the second quarter of 2010 as compared to $5.48 for
the second quarter of 2009. These increases resulted primarily from the continued installation of
high definition television systems and additional cable television programming services. Recurring
broadband Internet revenue per room was flat at $0.56 quarter over quarter.
System Sales and Related Services revenue includes the sale of cable television programming
equipment, broadband Internet equipment, HDTV installations and other services to hotels. For the
second quarter of 2010, revenue decreased $0.6 million or 6.4%, to $9.0 million as compared to $9.6
million for the second quarter of 2009. The decrease was primarily from lower sales and
installations of broadband systems.
Advertising Services revenue consists of revenue generated by The Hotel Networks (THN), our
advertising services subsidiary. For the second quarter of 2010, revenue increased $0.9 million or
52.1%, to $2.6 million as compared to $1.7 million in the prior year period. This increase was
primarily the result of increased channel access fees and general advertising revenue, as national
advertisers expanded their ad buys on our system.
Healthcare revenue includes the sale of interactive systems and services to healthcare facilities.
Healthcare revenue decreased $1.0 million or 41.3%, to $1.4 million in the second quarter of 2010
as compared to $2.4 million for the second quarter of 2009. During the current quarter, we
installed 598 beds and two facilities compared to 1,107 beds and five facilities during the prior
year period. We have six signed healthcare contracts in our backlog currently waiting
installation.
Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
Total direct costs decreased $5.4 million or 7.9%, to $62.9 million in the
second quarter of 2010 as compared to $68.3 million in the second quarter of 2009. Total direct
costs were 55.6% of revenue for the second quarter of 2010 as compared to 56.0% in the second
quarter of 2009. Direct costs related to the Hospitality and Advertising Services business, which
includes Guest Entertainment, Hotel Services, System Sales and Related Services and Advertising
Services, were $62.2 million for the second quarter of 2010 compared to $66.9 million for the prior
year quarter. The decrease in total direct costs was primarily related to decreases in commissions
and royalties, which vary with revenue. The decrease was offset, in part, by an increase in
incremental cable television programming costs, which vary with the number of rooms served and the
services provided.
Page 33
Operating Expenses.
The following table sets forth information in regard to operating expenses for
the quarter ended June 30 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
of Total
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
Operating 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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System operations expenses decreased $0.4 million or 3.5%, to $10.6 million in the second quarter
of 2010 as compared to $11.0 million in the second quarter of 2009. The decrease was primarily the
result of lower property taxes. As a percentage of total revenue, system operations expenses
increased to 9.4% this quarter as compared to 9.0% in the second quarter of 2009. Per average
installed room, system operations expenses also increased, to $2.02 per room per month compared to
$2.00 in the prior year quarter.
Selling, general and administrative (SG&A) expenses increased $0.6 million or 5.2%, to $12.3
million in the current quarter as compared to $11.7 million in the second quarter of 2009. As a
percentage of revenue, SG&A expenses were 10.9% in the current quarter as compared to 9.6% in the
prior year quarter. SG&A expenses per average installed room were $2.34 for the current quarter as
compared to $2.12 in the second quarter of 2009. The increases resulted from higher legal and
professional fees, business travel costs and repairs and maintenance costs.
Depreciation and amortization expenses were $20.9 million in the second quarter of 2010 as compared
to $26.3 million in the second quarter of 2009. The decline was due to assets becoming fully
depreciated and the reduction in capital investments over the past two years. As a percentage of
revenue, depreciation and amortization expenses were 18.5% in the second quarter of 2010 compared
to 21.5% in the second quarter of 2009.
We continue to incur nominal costs related to our post acquisition restructuring and workforce
reduction initiatives. During the current quarter, we incurred costs of $239,000. During the
second quarter of 2009, we had costs of $75,000 related to post acquisition restructuring
activities.
Operating Income.
As a result of the factors described above, operating income increased to $6.1
million in the second quarter of 2010 compared to $4.7 million in the second quarter of 2009.
Interest Expense.
Interest
expense was $8.7 million in the current quarter versus $9.8 million in
the second quarter of 2009. The decrease resulted from the change in
the average outstanding balance under the Credit Facility, to $428.8 million in the second quarter of 2010 from $545.8 million in the second quarter of
2009. The interest rate was 7.3% for the second quarter of 2010 versus 6.8% for
the second quarter of 2009. Interest expense for the second quarter of 2010 included $0.8 million
of non-cash interest charges related to our interest rate swap position, compared to $0.3 million
in the second quarter of 2009.
Loss on Early Retirement of Debt
.
During the second quarter of 2010, we made additional
prepayments on the term loan totaling $22.2 million, and wrote off $0.3 million of unamortized debt
issuance costs. During the second quarter of 2009, we did not make any additional prepayments on
our term loan.
Other Income.
In the second quarter of 2010, we recorded a total of $2,000 of other income,
including interest income. In the second quarter of 2009, we recorded a total of $144,000 of other
income, including interest income.
Page 34
Taxes.
For the second quarter of 2010, we incurred state franchise taxes of $229,000. For the
second quarter of 2009, we incurred state franchise taxes of $207,000.
Net Loss.
As a result of the factors described above, net loss was $(3.1) million for the second
quarter of 2010 compared to net loss of $(5.2) million in the prior year quarter.
Page 35
Discussion and Analysis of Results of Operations
Six Months Ended June 30, 2010 and 2009
Revenue Analysis.
Total revenue for the first six months of 2010 was $231.1 million, a decrease of
$19.0 million or 7.6%, compared to the first six months of 2009. The decrease in revenue was from
a decrease in Guest Entertainment, System Sales and Related Services and Healthcare revenue,
partially offset by increases in revenue from Hotel Services and Advertising Services. The
following table sets forth the components of our revenue (dollar amounts in thousands) for the six
months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
of Total
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitality and Advertising Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guest 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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitality and Advertising Services revenue, which includes Guest Entertainment, Hotel Services,
System Sales and Related Services and Advertising Services, decreased $18.2 million or 7.4%, to
$227.2 million in the first half of 2010 compared to $245.4 million in the first half of 2009.
Average monthly Hospitality and Advertising Services revenue per room was $21.47 in the first six
months of 2010, a decrease of 3.0% as compared to $22.13 in the prior year period. The following
table sets forth information with respect to revenue per Hospitality and Advertising Services room
for the six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
Average monthly revenue per room:
|
|
|
|
|
|
|
|
|
Hospitality and Advertising Services
|
|
|
|
|
|
|
|
|
Guest Entertainment
|
|
$
|
12.76
|
|
|
$
|
13.66
|
|
Hotel Services
|
|
|
6.48
|
|
|
|
5.98
|
|
System Sales and Related Services
|
|
|
1.76
|
|
|
|
2.18
|
|
Advertising Services
|
|
|
0.47
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
Total Hospitality and Advertising Services revenue per room
|
|
$
|
21.47
|
|
|
$
|
22.13
|
|
|
|
|
|
|
|
|
Guest Entertainment revenue, which includes on-demand entertainment such as movies, television
on-demand, music and games, decreased $16.5 million or 10.8%, to $135.0 million in the first six
months of 2010 as compared to $151.5 million in the prior year period. On a per-room basis,
monthly Guest Entertainment revenue for the first half of 2010 declined 6.6%, to $12.76 compared to
$13.66 for the first half of 2009. This change in revenue per room continues to be driven by the
conservative consumer buying pattern of travelers. Average monthly movie revenue per room was
$11.92 for the first half of 2010, a 7.2% reduction as compared to $12.85 per room in the prior
year period. Non-movie Guest Entertainment revenue per room increased 3.7% to $0.84 in the first
six months of 2010, driven by an increase in television on-demand programming.
Page 36
Hotel Services revenue, which includes recurring revenue from hotels for cable television
programming and broadband Internet service and support, increased $2.3 million or 3.5%, to $68.6
million during the first half of 2010 versus $66.3 million in the first half of 2009. On a
per-room basis, monthly Hotel Services revenue for the first six months of 2010 increased 8.4%, to
$6.48 compared to $5.98 for the first six months of 2009. Monthly cable television programming
revenue per room increased 9.0%, to $5.92 for the first six months of 2010 as compared to $5.43 for
the first six months of 2009. These increases resulted primarily from the continued installation
of high definition television systems and additional cable television programming services.
Recurring broadband Internet revenue per room was $0.56 for the first half of 2010 as compared to
$0.55 for the first half of 2009.
System Sales and Related Services revenue includes the sale of cable television programming
equipment, broadband Internet equipment, HDTV installations and other services to hotels. For the
first half of 2010, revenue decreased $5.6 million or 23.2%, to $18.6 million as compared to $24.2
million for the first half of 2009. This decrease was due in part to the completion of a material
HDTV equipment conversion contract in the first quarter of 2009, which contributed approximately
$4.2 million of revenue, as well as lower sales and installations of broadband systems in 2010.
Advertising Services revenue consists of revenue generated by The Hotel Networks (THN), our
advertising services subsidiary. For the first six months of 2010, revenue increased $1.4 million
or 42.4%, to $4.9 million as compared to $3.5 million in the prior year period. This increase was
primarily the result of increased channel access fees.
Healthcare revenue includes the sale of interactive systems and services to healthcare facilities.
Healthcare revenue decreased $0.7 million or 15.6%, to $4.0 million in the first six months of 2010
as compared to $4.7 million for the first six months of 2009. During the current period, we
installed 1,733 beds and 7 facilities compared to 1,998 beds and 11 facilities during the prior
year period. We have six signed healthcare contracts in our backlog currently waiting
installation.
Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
Total direct costs decreased $11.6 million or 8.2%, to $129.5 million in the
first half of 2010 as compared to $141.1 million in the first half of 2009. Total direct costs
were 56.0% of revenue for the first half of 2010 as compared to 56.4% in the first half of 2009.
Direct costs related to the Hospitality and Advertising Services business, which includes Guest
Entertainment, Hotel Services, System Sales and Related Services and Advertising Services, were
$127.4 million for the first six months of 2010 compared to $138.7 million for the prior year
period. The decrease in total direct costs was primarily related to decreases in commissions and
royalties, as well as system and equipment costs, which all vary with revenue. The decreases were
offset, in part, by an increase in incremental cable television programming costs, which vary with
the number of rooms served and the services provided.
Page 37
Operating Expenses.
The following table sets forth information in regard to operating expenses for
the six months ended June 30 (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
|
of Total
|
|
|
|
|
|
|
of Total
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
Operating 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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System operations expenses decreased $0.2 million or 0.9%, to $21.1 million in the first half of
2010 as compared to $21.3 million in the first half of 2009. The decrease resulted from lower
property taxes, partially offset by higher fuel costs and payroll-related costs. As a percentage
of total revenue, system operations expenses increased to 9.1% this period as compared to 8.5% in
the first half of 2009. Per average installed room, system operations expenses also increased, to
$2.00 per room per month compared to $1.93 in the prior year period.
Selling, general and administrative (SG&A) expenses increased $1.9 million or 8.5%, to $24.4
million in the current period as compared to $22.5 million in the first six months of 2009. As a
percentage of revenue, SG&A expenses were 10.6% in the current period as compared to 9.0% in the
prior year period. SG&A expenses per average installed room were $2.31 for the current period as
compared to $2.03 in the first half of 2009. The increases resulted from higher legal and
professional fees, business travel costs and repairs and maintenance costs.
Depreciation and amortization expenses were $43.1 million in the first six months of 2010 as
compared to $53.4 million in the first six months of 2009. The decline was due to assets becoming
fully depreciated and the reduction in capital investments over the past two years. As a
percentage of revenue, depreciation and amortization expenses were 18.6% in the first six months of
2010 compared to 21.4% in the first six months of 2009.
We continue to incur nominal costs related to our post acquisition restructuring and workforce
reduction initiatives. During the current period, we incurred costs of $242,000. During the first
half of 2009, we had costs of $181,000 related to post acquisition restructuring activities.
Operating Income.
As a result of the factors described above, operating income increased to $12.7
million in the first half of 2010 compared to $11.8 million in the first half of 2009.
Interest Expense.
Interest expense was $17.4 million in the current period versus $19.7 million in
the first half of 2009. The decrease resulted from the change in the
average outstanding balance under our Credit Facility,
to $448.0 million in the first half of 2010 from $565.2 million in the first half of 2009. The
interest rate increased to 7.1% for the first half of 2010 versus 6.7% for the
first half of 2009. Interest expense for the first six months of 2010 included $1.5 million of
non-cash interest charges related to our interest rate swap position, compared to $0.3 million for
the first six months of 2009.
Loss on Early Retirement of Debt
.
During the first six months of 2010, we made additional
prepayments on the term loan totaling $66.2 million, and wrote off $0.8 million of unamortized debt
issuance costs. During the first six months of 2009, we prepaid $6.7 million on our term loan. As
a result of the prepayment and our debt reduction plan, we wrote off $0.5 million of unamortized
debt issuance costs.
Page 38
Gain on Extinguishment of Debt.
During the first half of 2009, as part of our debt reduction plan,
we acquired, through a wholly-owned subsidiary, as a permitted investment under our Credit
Facility, $31.5 million of outstanding debt at an average of 70.5% of par value and recorded a gain
on the extinguishment of the debt of $9.3 million.
Other Income.
In the first half of 2010, we recorded a total of $227,000 of other income,
including interest income. In the first half of 2009, we recorded a total of $319,000 of other
income, including interest income.
Taxes.
For the first six months of 2010, we incurred state franchise taxes of $414,000. For the
first six months of 2009, we incurred state franchise taxes of $419,000.
Net (Loss) Income.
As a result of the factors described above, net loss was $(5.6) million for the
first half of 2010 compared to net income of $0.7 million in the prior year period.
Page 39
Critical Accounting Policies
Managements discussion and analysis of financial condition and results of operations are based
upon our financial statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. Our primary cost drivers are predetermined
rates, such as hotel commissions, license fees paid for major motion pictures and other content or
one-time fixed fees for independent films and cable television programming costs. However, the
preparation of financial statements requires us to make estimates and assumptions which affect the
reported amounts of assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. We base our estimates on historical experience and on various other
assumptions we believe to be reasonable based upon the available information. The following
critical policies relate to the more significant judgments and estimates used in the preparation of
the financial statements:
Revenue Recognition
We recognize revenue from various sources as follows:
|
|
Guest Entertainment Services.
Our primary source of revenue is from providing in-room,
interactive television services to the lodging industry, which the hotel guest typically
purchases on a per-view, hourly or daily basis. These services include on-demand movies,
on-demand games, music and music videos, Internet on television and television on-demand. We
recognize revenue from the sale of these guest entertainment services in the period in which
such services are sold to the hotel guest and when collection is reasonably assured.
Persuasive evidence of a purchase exists through a guest buy transaction recorded on our
system. No future performance obligations exist with respect to these types of services once
they have been provided to the hotel guest. The prices related to our products or services
are fixed or determinable prior to delivery of the products or services.
|
|
|
Cable Television Programming Services.
We generate revenue from the sale of basic and
premium cable television programming to individual hotels. In contrast to Guest Entertainment
services, where the hotel guest is charged directly for the service, we charge the hotel for
our cable television programming services. We recognize revenue from the sale of cable
television programming services in the period in which such services are sold and when
collection is reasonably assured. We establish the prices charged to each hotel and no future
performance obligations exist on programming which has been provided to the hotel. Persuasive
evidence of an arrangement exists through our long-term contract with each hotel. We also
have advance billings from one month to three months for certain basic and premium programming
services where the revenue is deferred and recognized in the periods which services are
provided.
|
|
|
Broadband Service and Support.
We provide ongoing maintenance, service and call center
support services to hotel properties installed by us and also to hotel properties installed by
other providers. In addition, we provide, in some cases, the hotel property with the portal
to access the Internet. We receive monthly service fees from such hotel properties for our
maintenance services and Internet access. We recognize the service fee ratably over the term
of the contract. The prices for these services are fixed and determinable prior to delivery
of the service. The fair value of these services is known due to objective and reliable
evidence from contracts and 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.
|
Page 40
|
|
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.
|
Page 41
Allowance for Doubtful Accounts.
We determine the estimate of the allowance for doubtful accounts
considering several factors, including historical experience, aging of the accounts receivable, bad
debt recoveries and contract terms between the hotel and us. In accordance with our hotel
contracts, monies collected by the hotel for interactive television services are held in trust on
our behalf. Collectability is reasonably assured as supported by our credit check process, nominal
write-off history and broad customer base. Our interactive hotel base is well diversified in terms
of (i) location; (ii) demographics; and (iii) customer contracts. If the financial condition of a
hotel chain or group of hotels were to deteriorate and reduce the ability to remit our monies, we
may be required to increase our allowance by recording additional bad debt expense.
Allowance for Excess or Obsolete System Components.
We regularly evaluate component levels to
ascertain build requirements based on our backlog and service requirements based on our current
installed base. When a certain system component becomes obsolete due to technological changes and
it is determined the component cannot be utilized within our current installed base, we record a
provision through depreciation for excess and obsolete components based on estimated forecasts of
product demand and service requirements. Additionally, we have components held primarily for
resale, and if the component is not an active item for our assembly or service inventory, we record
a provision through the cost of sales related to that product. We make every effort to ensure the
accuracy of our forecasts of service requirements and future production; however, any significant
unanticipated changes in demand or technological advances could have an impact on the value of
system components and reported operating results.
Long-Lived Assets.
We review the carrying value of long-lived assets, such as property and
equipment and intangible assets, whenever events or circumstances indicate the carrying value of an
asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the
carrying value, an impairment loss is recognized to reduce the carrying value of the asset to its
estimated fair value.
Property and Equipment.
Our property and equipment is stated at cost, net of accumulated
depreciation and amortization. Installed Guest Entertainment and free-to-guest systems consist of
equipment and related costs of installation, including certain payroll costs, sales commissions and
customer acquisition costs. Maintenance costs, which do not significantly extend the useful lives
of the respective assets, and repair costs are charged to Guest Entertainment operations as
incurred. We begin depreciating Guest Entertainment and free-to-guest systems when such systems
are installed and activated. Depreciation of other equipment begins when such equipment is placed
in service. We attribute no salvage value to equipment, and depreciation and amortization are
computed using the straight-line method over the following useful lives:
|
|
|
|
|
Years
|
Buildings
|
|
30
|
Hotel systems:
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|
|
Installed system costs
|
|
2 7
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Customer acquisition costs
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|
4 7
|
System components
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|
5 7
|
Software costs
|
|
1
1
/
2
5
|
Other equipment
|
|
3 10
|
Page 42
Intangible Assets.
In accordance with FASB ASC Topics 350, Intangibles Goodwill and Other, and
360, Property, Plant, and Equipment, we evaluate the remaining useful lives of our intangible
assets with finite lives, and review for impairment when triggering events occur or change in
circumstances warrant modifications to the carrying amount of the assets. These triggering events
or circumstances include a significant deterioration in market conditions. We periodically
evaluate the reasonableness of the useful lives of the intangible assets:
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|
|
|
|
Years
|
Hotel contracts and relationships
|
|
10 20
|
Tradenames
|
|
7
|
Acquired technologies and patents
|
|
5
|
Content agreements and relationships
|
|
4
|
Allowance for System Removal.
We de-install properties through the course of normal operations due
to a number of factors, including: poor revenue performance, hotel bankruptcy or collection issues,
hotel closings and change in service provider. We regularly evaluate our backlog of properties
scheduled for de-installation and record a provision for estimated system removal costs. The costs
incurred as a result of de-installation include the labor to de-install the system, as well as
unamortized installation costs. Over the last five years, de-installation activity was in a range
from 3% to 6% of our installed room base.
Goodwill Impairment.
We account for goodwill and other intangible assets under FASB ASC Topic 350,
Intangibles Goodwill and Other. Under FASB ASC Topic 350, purchased goodwill is not amortized;
rather, it is tested for impairment at least annually. We perform our goodwill impairment test for
each reporting unit annually during the fourth quarter. Impairment testing could occur more
frequently if there is a triggering event or change in circumstances which indicate the carrying
value may not be recoverable, such as a significant deterioration in market conditions. We did not
encounter such triggering events during the second quarter of 2010.
We have three reporting units, Hospitality, Advertising Services and Healthcare, for which only the
Hospitality and Advertising Services units have goodwill. FASB ASC Topic 350 requires a two-step
impairment test for goodwill. The first step is to compare the carrying amount of the reporting
units net assets to the fair value of the reporting unit. We estimate fair value by utilizing a
discounted cash flow analysis based on key assumptions and estimates. We then reconcile the
aggregate reporting units fair values to our indicated market capitalization. Key assumptions
used to determine fair value include projections of revenue and cost data, capital spending, growth
and operating earnings, factored for the economic deterioration and expected timing of a recovery
from the business downturn. Certain costs within the reporting units are fixed in nature;
therefore, changes in revenue which exceed or fall below the fixed cost threshold would have an
effect on cash flow and recoverability of goodwill.
If the fair value of the reporting unit exceeds the carrying value, no further evaluation is
required and no impairment loss is recognized. If the carrying amount exceeds the fair value, then
the second step must be completed, which involves allocating the fair value of the reporting unit
to each asset and liability, with the excess being implied goodwill. An impairment loss occurs if
the amount of the recorded goodwill exceeds the implied goodwill. We are required to record such
impairment losses as a component of income from continuing operations.
The determination of fair value requires us to make significant estimates and assumptions. These
estimates may differ from actual results due to inherent uncertainty, such as deterioration in
market conditions, prohibiting expected revenue recovery levels. Our revenue is closely linked to
the performance of products and services sold to business and leisure travelers. A significant
slow-down in economic activities could adversely impact our business, financial condition, results
of operations and cash flows. Consequently, our goodwill may be impaired if the market conditions
deteriorate or the capital market erodes. We believe there are no current impacts to our reporting
units.
Recent Accounting Developments
See Note 18 to the financial statements.
Page 43
Item 3 Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including potential losses resulting from adverse changes
in interest rates and foreign currency exchange rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes.
At June 30, 2010, we had debt totaling $404.9 million as follows (dollar amounts in thousands):
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|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
Bank Credit Facility:
|
|
|
|
|
|
|
|
|
Bank term loan
|
|
$
|
403,369
|
|
|
$
|
365,735
|
|
Capital leases
|
|
|
1,546
|
|
|
|
1,546
|
|
|
|
|
|
|
|
|
|
|
$
|
404,915
|
|
|
$
|
367,281
|
|
|
|
|
|
|
|
|
The fair value of our long-term debt is estimated based on current interest rates for similar debt
of the same remaining maturities and quoted market prices, except for capital leases, which are
reported at carrying value. For our capital leases, the carrying value approximates the fair
value. In addition, the fair value of our long-term debt is strictly hypothetical and not
indicative of what we are required to pay under the terms of our debt instruments.
We have two interest rate swap agreements, with notional values of $312.5 million, at a fixed rate
of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which expire in June 2011. The
term loan interest rate as of June 30, 2010 was 2.54%, and the capital lease interest rate was
7.34%. Our all-in weighted average interest rate, which includes both the term loan interest rate
and the difference in the swaps fixed interest rate versus LIBOR, for the quarter ended June 30,
2010 was 7.28%, compared to 6.83% for the quarter ended June 30, 2009. After giving effect to the
interest rate swap arrangements, we had fixed rate debt of $404.9 million and no variable rate
debt, as the total swap amount was greater than our term loan amount at June 30, 2010. For fixed
rate debt, interest rate fluctuations affect the fair market value but do not impact earnings or
cash flows, if effective. Conversely, for variable rate debt, interest rate fluctuations generally
do not affect the fair market value but do impact future earnings and cash flows, assuming other
factors are held constant. There would be no impact on earnings and cash flow for the next year
resulting from a one percentage point increase to interest rates, assuming other variables remain
constant.
Economic Condition.
Our results are closely connected to the performance of the lodging industry,
where occupancy rates may fluctuate resulting from various factors. Reduction in hotel occupancy
resulting from business, general economic, or other events, such as a recession in the United
States, significant international crises, acts of terrorism, war or public health issues, could
adversely impact our business, financial condition and results of operations. The overall travel
industry can be, and has been in the past, adversely affected by weaker general economic climates,
geopolitical instability and concerns about public health.
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures.
Based on their evaluation as of the end of the
period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer have concluded the disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure information
required to be disclosed by us in reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Additionally, our disclosure controls and
procedures were also effective in ensuring information required to be disclosed in our Exchange Act
reports is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
. There was no change in our internal control
over financial reporting during the second quarter of 2010 which has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Page 44
Part II Other Information
Item 1 Legal Proceedings
We are subject to litigation arising in the ordinary course of business. As of the date hereof, we
believe the resolution of such litigation will not have a material adverse effect upon our
financial condition, results of operations or cash flows.
On July 11, 2008, Linksmart Wireless Technology, LLC, a California limited liability company based
in Pasadena, California, filed several actions for patent infringement in the U.S. District Court
in Marshall, Texas. The suits allege the Company and numerous other defendants infringe a patent
issued on August 17, 2004 entitled User Specific Automatic Data Redirection System. All pending
cases have been consolidated. The complaint does not specify an amount in controversy. The
Company believes it does not infringe the patent in question, has filed responsive pleadings and is
vigorously defending the action. The defendants in the case have also entered into a joint defense
agreement to allow them to share information and certain costs related to the lawsuit. The suit is
in the discovery stage. The U.S. Patent and Trademark Office has undertaken a re-examination of
the patent which is the subject of this suit, and issued a preliminary finding that the patent is
invalid. On June 30, 2010, the Court, through the Magistrate Judge, issued a Memorandum Opinion
and Order (the Markman Order), which construed certain disputed terms in the patent at issue in
the case. The plaintiff and several defendants have filed objections with the Court for review of
various portions of the Order. On July 1, 2010, the Magistrate Judge issued a report and
recommendation that the Court grant the motion of the defendants for summary judgment with respect
to claims 15, 16, 17, 19, 22 and 23 of the patent on grounds that such claims in the patent are
indefinite and invalid. The plaintiff has filed objections with the Court for review of report and
recommendation regarding summary judgment.
On November 17, 2009, Nomadix, Inc., a Delaware corporation based in Newbury Park, California,
filed an action for patent infringement in the U.S. District Court for the Central District of
California in Los Angeles, California. The suit alleges the Company and its subsidiaries On
Command Corporation and LodgeNet StayOnline, Inc. infringe five patents: a patent issued October
10, 2000 entitled Nomadic Translator or Router, a patent issued on August 6, 2006 entitled
System and Method for Establishing Network Connection with Unknown User or Device, a patent
issued on June 30, 2009 entitled System and Method for Establishing Network Connection with
Unknown Network and/or User Device, a patent issued on October 21, 2003 entitled Systems and
Methods for Redirecting Users Having Transparent Computer Access to a Network Using a Gateway
Device Having Redirection Capability, and a patent issued on March 15, 2005 entitled Systems and
Methods for Integrating a Network Gateway Device with Management Systems. The complaint also
asserts claims under the above-mentioned patents and additional patents against a number of other
defendants, including Hewlett-Packard Company, Wayport, Inc., Ibahn Corporation, Guest-Tek
Interactive Entertainment Ltd. and Guest-Tek Entertainment Inc., Aruba Networks, Inc., Superclick,
Inc. and Superclick Networks, Inc. Nomadix, Inc. also filed a similar action in the same court
against SolutionInc. It is anticipated all pending cases will be consolidated. The complaint does
not specify an amount in controversy. The Company believes it does not infringe the patents in
questions, has filed responsive pleadings and is vigorously defending the action.
Item 1A
Risk Factors
No material change.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3 Defaults Upon Senior Securities
Not applicable.
Page 45
Item 5 Other Information
Not applicable.
Item 6 Exhibits
|
|
|
31.1
|
|
Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer
|
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|
|
32
|
|
Section 1350 Certifications
|
Page 46
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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LodgeNet Interactive Corporation
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(Registrant)
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|
Date: August 6, 2010
|
|
/s/ Scott C. Petersen
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|
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Scott C. Petersen
|
|
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|
|
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
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|
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Date: August 6, 2010
|
|
/s/ Frank P. Elsenbast
|
|
|
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|
|
|
|
|
Frank P. Elsenbast
|
|
|
|
|
Senior Vice President, Chief Financial Officer
(Principal Financial & Accounting Officer)
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Page 47
Lodgenet Interactive Corp. (MM) (NASDAQ:LNET)
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