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EXCEL - IDEA: XBRL DOCUMENT - LODGENET INTERACTIVE CORP | Financial_Report.xls |
EX-32 - EX-32 - LODGENET INTERACTIVE CORP | c64647exv32.htm |
EX-31.2 - EX-31.2 - LODGENET INTERACTIVE CORP | c64647exv31w2.htm |
EX-31.1 - EX-31.1 - LODGENET INTERACTIVE CORP | c64647exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2011
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 0-22334
LodgeNet Interactive Corporation
(Exact name of registrant as specified in its charter)
Delaware | 46-0371161 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
3900 West Innovation Street, Sioux Falls, South Dakota 57107
(Address of Principal Executive Offices) (ZIP code)
(Address of Principal Executive Offices) (ZIP code)
(605) 988-1000
(Registrants telephone number,
including area code)
(Registrants telephone number,
including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No___
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files).
Yes X No___
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer ___ | Accelerated filer X | Non-accelerated filer ___ | Smaller reporting company ___ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes___No X
At August 1, 2011, there
were 25,209,580 shares outstanding of the Registrants common stock, $0.01
par value.
LodgeNet Interactive Corporation and Subsidiaries
Index
Page | ||||||||
No. | ||||||||
Part I. Financial Information |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
20 | ||||||||
45 | ||||||||
45 | ||||||||
Part II. Other Information |
||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
46 | ||||||||
47 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
As used herein (unless the context otherwise requires) LodgeNet and/or the Registrant, as well
as the terms we, us and our, refer to LodgeNet Interactive Corporation (f/k/a LodgeNet
Entertainment Corporation) and its consolidated subsidiaries.
LodgeNet, On Command, The Hotel Networks, eSuite and the LodgeNet logo are trademarks or
registered trademarks of LodgeNet Interactive Corporation. All rights reserved. All other
trademarks or service marks used herein are the property of their respective owners.
Page 2
Table of Contents
Part I Financial Information
Item 1 Financial Statements
LodgeNet Interactive Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands, except share data)
(Unaudited) | (Audited) | |||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 14,479 | $ | 8,381 | ||||
Accounts receivable, net |
45,687 | 49,332 | ||||||
Other current assets |
12,038 | 12,728 | ||||||
Total current assets |
72,204 | 70,441 | ||||||
Property and equipment, net |
133,814 | 156,917 | ||||||
Debt issuance costs, net |
5,146 | 3,681 | ||||||
Intangible assets, net |
95,240 | 99,005 | ||||||
Goodwill |
100,081 | 100,081 | ||||||
Other assets |
12,742 | 13,881 | ||||||
Total assets |
$ | 419,227 | $ | 444,006 | ||||
Liabilities and Stockholders Deficiency |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 56,228 | $ | 60,303 | ||||
Current maturities of long-term debt |
10,522 | 4,807 | ||||||
Accrued expenses |
19,593 | 22,327 | ||||||
Fair value of derivative instruments |
- | 10,353 | ||||||
Deferred revenue |
17,910 | 23,168 | ||||||
Total current liabilities |
104,253 | 120,958 | ||||||
Long-term debt |
357,512 | 368,832 | ||||||
Other long-term liabilities |
8,335 | 8,565 | ||||||
Total liabilities |
470,100 | 498,355 | ||||||
Commitments and contingencies |
||||||||
Stockholders deficiency: |
||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized;
Series B cumulative perpetual convertible, 10%, 57,500 issued and
outstanding at June 30, 2011 and December 31, 2010, respectively
(liquidation preference of $1,000 per share or $57,500,000 total) |
1 | 1 | ||||||
Common stock, $.01 par value, 50,000,000 shares authorized;
25,209,580 and 25,088,539 shares outstanding at June 30, 2011
and December 31, 2010, respectively |
252 | 251 | ||||||
Additional paid-in capital |
386,961 | 388,961 | ||||||
Accumulated deficit |
(441,728 | ) | (437,896 | ) | ||||
Accumulated other comprehensive income (loss) |
3,641 | (5,666 | ) | |||||
Total stockholders deficiency |
(50,873 | ) | (54,349 | ) | ||||
Total liabilities and stockholders deficiency |
$ | 419,227 | $ | 444,006 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Page 3
Table of Contents
LodgeNet Interactive Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
(Dollar amounts in thousands, except share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues: |
||||||||||||||||
Hospitality and Advertising Services |
$ | 103,389 | $ | 111,658 | $ | 209,223 | $ | 227,157 | ||||||||
Healthcare |
3,246 | 1,413 | 5,140 | 3,966 | ||||||||||||
Total revenues |
106,635 | 113,071 | 214,363 | 231,123 | ||||||||||||
Direct costs and operating expenses: |
||||||||||||||||
Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately below): |
||||||||||||||||
Hospitality and Advertising Services |
58,580 | 62,181 | 117,939 | 127,442 | ||||||||||||
Healthcare |
1,527 | 724 | 2,450 | 2,070 | ||||||||||||
Operating expenses: |
||||||||||||||||
System operations |
9,733 | 10,627 | 19,801 | 21,142 | ||||||||||||
Selling, general and administrative |
10,839 | 12,314 | 20,528 | 24,429 | ||||||||||||
Depreciation and amortization |
17,783 | 20,925 | 37,423 | 43,097 | ||||||||||||
Restructuring charge |
3 | 239 | 1,164 | 242 | ||||||||||||
Other operating (income) expense |
(8 | ) | - | (21 | ) | 6 | ||||||||||
Total direct costs and operating expenses |
98,457 | 107,010 | 199,284 | 218,428 | ||||||||||||
Income from operations |
8,178 | 6,061 | 15,079 | 12,695 | ||||||||||||
Other income and (expenses): |
||||||||||||||||
Interest expense |
(10,962 | ) | (8,712 | ) | (18,633 | ) | (17,395 | ) | ||||||||
Loss on early retirement of debt |
- | (267 | ) | (158 | ) | (760 | ) | |||||||||
Other (expense) income |
(3 | ) | 2 | 315 | 227 | |||||||||||
Loss before income taxes |
(2,787 | ) | (2,916 | ) | (3,397 | ) | (5,233 | ) | ||||||||
Provision for income taxes |
(137 | ) | (229 | ) | (435 | ) | (414 | ) | ||||||||
Net loss |
(2,924 | ) | (3,145 | ) | (3,832 | ) | (5,647 | ) | ||||||||
Preferred stock dividends |
(1,437 | ) | (1,437 | ) | (2,875 | ) | (2,875 | ) | ||||||||
Net loss attributable to common stockholders |
$ | (4,361 | ) | $ | (4,582 | ) | $ | (6,707 | ) | $ | (8,522 | ) | ||||
Net loss per common share (basic and diluted) |
$ | (0.17 | ) | $ | (0.18 | ) | $ | (0.27 | ) | $ | (0.36 | ) | ||||
Weighted average shares outstanding (basic and diluted) |
25,063,669 | 24,996,955 | 25,050,469 | 23,877,958 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
Page 4
Table of Contents
LodgeNet Interactive Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(Dollar amounts in thousands)
Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (3,832 | ) | $ | (5,647 | ) | ||
Adjustments to reconcile net loss to net cash provided
by operating activities: |
||||||||
Depreciation and amortization |
37,423 | 43,097 | ||||||
Unrealized (gain) loss on derivative instruments |
(1,511 | ) | 1,469 | |||||
Loss on early retirement of debt |
158 | 760 | ||||||
Share-based compensation and restricted stock |
869 | 960 | ||||||
Other, net |
262 | 153 | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable, net |
2,166 | (1,091 | ) | |||||
Other current assets |
632 | 26 | ||||||
Accounts payable |
(4,126 | ) | 15,715 | |||||
Accrued expenses and deferred revenue |
(4,953 | ) | 445 | |||||
Other |
526 | (773 | ) | |||||
Net cash provided by operating activities |
27,614 | 55,114 | ||||||
Investing activities: |
||||||||
Property and equipment additions |
(10,595 | ) | (8,954 | ) | ||||
Net cash used for investing activities |
(10,595 | ) | (8,954 | ) | ||||
Financing activities: |
||||||||
Repayment of long-term debt |
(5,525 | ) | (68,636 | ) | ||||
Payment of capital lease obligations |
(407 | ) | (559 | ) | ||||
Borrowings on revolving credit facility |
45,000 | 8,000 | ||||||
Repayments of revolving credit facility |
(45,000 | ) | (8,000 | ) | ||||
Debt issuance costs |
(2,444 | ) | - | |||||
Proceeds from investment in long-term debt |
323 | 4,007 | ||||||
Proceeds from issuance of common
stock, net of offering costs |
- | 13,658 | ||||||
Payment of dividends to preferred shareholders |
(2,875 | ) | (2,875 | ) | ||||
Exercise of stock options |
7 | 41 | ||||||
Net cash used for financing activities |
(10,921 | ) | (54,364 | ) | ||||
Effect of exchange rates on cash |
- | (40 | ) | |||||
Increase (decrease) in cash |
6,098 | (8,244 | ) | |||||
Cash at beginning of period |
8,381 | 17,011 | ||||||
Cash at end of period |
$ | 14,479 | $ | 8,767 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
Page 5
Table of Contents
LodgeNet Interactive Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
Note 1 Basis of Presentation
The accompanying consolidated financial statements as of June 30, 2011, and for the three and six
month periods ended June 30, 2011 and 2010, have been prepared by us, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (the Commission). The
information furnished in the accompanying consolidated financial statements reflects all
adjustments, consisting of normal recurring adjustments, which, in our opinion, are necessary for a
fair statement of such financial statements.
Certain information and footnote disclosures, normally included in annual financial statements
prepared in accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to the rules and regulations of the Commission. Although we believe the
disclosures are adequate to make the information presented herein not misleading, it is recommended
these unaudited consolidated financial statements be read in conjunction with the more detailed
information contained in our Annual Report on Form 10-K for 2010, as filed with the Commission.
The results of operations for the three and six month periods ended June 30, 2011 and 2010 are not
necessarily indicative of the results of operations for the full year due to inherent seasonality
within the business, among other factors.
The consolidated financial statements include the accounts of LodgeNet Interactive Corporation and
its subsidiaries. All significant inter-company accounts and transactions have been eliminated in
consolidation.
Note 2 Property and Equipment, Net
Property and equipment was comprised as follows (dollar amounts in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Land, building and equipment |
$ | 113,131 | $ | 115,031 | ||||
Hotel systems |
666,703 | 726,638 | ||||||
Total |
779,834 | 841,669 | ||||||
Less - depreciation and amortization |
(646,020 | ) | (684,752 | ) | ||||
Property and equipment, net |
$ | 133,814 | $ | 156,917 | ||||
Note 3 Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the fair value of net assets acquired. In 2007, we
recorded goodwill in connection with the acquisitions of StayOnline, On Command and The Hotel
Networks. The product lines of both StayOnline and On Command shared the same operating and
economic characteristics as our pre-acquisition product lines, and were integrated into the
Hospitality operating segment.
Page 6
Table of Contents
Per Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic
350, Intangibles Goodwill and Other, our goodwill is not amortized; rather, it is tested for
impairment annually or if there is a triggering event which indicates the carrying value may not be
recoverable. Effective January 1, 2011, we adopted FASB Accounting Standards Update (ASU) No.
2010-28, When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or
Negative Carrying Amounts, which is now codified under FASB ASC Topic 350. This ASU provides that
reporting units with zero or negative carrying amounts are required to perform Step 2 of the
goodwill impairment test if it is more likely than not a goodwill impairment exists. In
considering whether it is more likely than not that an impairment loss exists, a company is
required to evaluate qualitative factors, including the same factors presented in existing guidance
which would trigger an interim impairment test of goodwill. Factors include a significant
deterioration in market conditions, unanticipated competition, loss of key personnel and an
anticipated sale of a reporting unit. If an entity determines it is more likely than not that an
impairment exists, Step 2 of the impairment test must be performed for that reporting unit or
units. Step 2 involves allocating the fair value of the reporting unit to each asset and
liability, with the excess being implied goodwill. An impairment loss results if the amount of
recorded goodwill exceeds the implied goodwill.
Impairment testing is not required for our finite-life intangibles unless there is a triggering
event or change in circumstances which indicate the carrying value may not be recoverable, such as
a significant deterioration in market conditions.
During the second quarter of 2011, we did not encounter events or circumstances which could trigger
an impairment of our goodwill or intangible assets, and the adoption of the additional provisions
of FASB ASC Topic 350 has not had an impact on our consolidated financial position, results of
operations or cash flows. We perform our annual goodwill impairment test for each reporting unit
during the fourth quarter.
The carrying amount of goodwill by reportable segment was as follows (dollar amounts in thousands):
Advertising | ||||||||||||
Hospitality | Services | Total | ||||||||||
Balance as of December 31, 2010 |
||||||||||||
Goodwill |
$ | 92,614 | $ | 18,679 | $ | 111,293 | ||||||
Accumulated impairment losses |
- | (11,212 | ) | (11,212 | ) | |||||||
92,614 | 7,467 | 100,081 | ||||||||||
Activity during the period |
- | - | - | |||||||||
Balance as of June 30, 2011 |
||||||||||||
Goodwill |
92,614 | 18,679 | 111,293 | |||||||||
Accumulated impairment losses |
- | (11,212 | ) | (11,212 | ) | |||||||
$ | 92,614 | $ | 7,467 | $ | 100,081 | |||||||
We have intangible assets consisting of certain acquired technology, patents, trademarks, hotel
contracts, customer relationships, studio agreements and licensee fees. These intangible assets
have been deemed to have finite useful lives and are amortized over their current estimated useful
lives, ranging from 2 to 20 years. We review the intangible assets for impairment when triggering
events occur or a change in circumstances, such as a significant deterioration in market
conditions, warrant modifications to the carrying amount of the assets.
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We have the following intangible assets (dollar amounts in thousands):
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Accumulated | Carrying | Accumulated | |||||||||||||
Amount | Amortization | Amount | Amortization | |||||||||||||
Assets subject to amortization: |
||||||||||||||||
Acquired contracts and relationships |
$ | 120,315 | $ | (27,096 | ) | $ | 120,315 | $ | (23,950 | ) | ||||||
Other acquired intangibles |
13,972 | (13,044 | ) | 13,956 | (12,769 | ) | ||||||||||
Tradenames |
3,131 | (2,317 | ) | 3,124 | (2,107 | ) | ||||||||||
Acquired patents |
5,210 | (4,931 | ) | 5,175 | (4,739 | ) | ||||||||||
$ | 142,628 | $ | (47,388 | ) | $ | 142,570 | $ | (43,565 | ) | |||||||
We recorded consolidated amortization expense of $3.8 million and $4.2 million, respectively, for
the six months ended June 30, 2011 and 2010. We estimate total amortization expense for the six
months remaining in 2011 and the years ending December 31 as follows (dollar amounts in millions):
2011 - $3.6; 2012 - $6.8; 2013 - $6.5; 2014 - $6.4; 2015 - $6.3 and 2016 - $6.2. Actual amounts
may change from such estimated amounts due to additional intangible asset acquisitions, potential
impairment, accelerated amortization or other events.
Note 4 Earnings Per Share Computation
We follow FASB ASC Topic 260, Earnings Per Share, which requires the computation and disclosure
of two earning per share (EPS) amounts, basic and diluted. Basic EPS is computed based on the
weighted average number of common shares actually outstanding during the period. Diluted EPS is
computed based on the weighted average number of common shares outstanding plus all potentially
dilutive common shares outstanding during the period. Potential common shares which have an
anti-dilutive effect are excluded from diluted earnings per share. The provisions of FASB ASC
Topic 260 also provide that unvested share-based payment awards which contain non-forfeitable
rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities
and shall be included in the computation of earnings per share pursuant to the two-class method.
We determined our outstanding shares of non-vested restricted stock are participating securities.
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The following table reflects the calculation of weighted average basic and fully diluted shares for
the periods ended June 30. Dollar amounts are in thousands, except share data:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic EPS: |
||||||||||||||||
Net loss |
$ | (2,924 | ) | $ | (3,145 | ) | $ | (3,832 | ) | $ | (5,647 | ) | ||||
Preferred stock dividends |
(1,437 | ) | (1,437 | ) | (2,875 | ) | (2,875 | ) | ||||||||
$ | (4,361 | ) | $ | (4,582 | ) | $ | (6,707 | ) | $ | (8,522 | ) | |||||
Loss allocated to participating securities (1) |
| | | | ||||||||||||
Net loss available to common stockholders |
$ | (4,361 | ) | $ | (4,582 | ) | $ | (6,707 | ) | $ | (8,522 | ) | ||||
Weighted average shares outstanding for basic
earnings per common share |
25,063,669 | 24,996,955 | 25,050,469 | 23,877,958 | ||||||||||||
Basic earnings per share |
$ | (0.17 | ) | $ | (0.18 | ) | $ | (0.27 | ) | $ | (0.36 | ) | ||||
Diluted EPS: |
||||||||||||||||
Net loss |
$ | (2,924 | ) | $ | (3,145 | ) | $ | (3,832 | ) | $ | (5,647 | ) | ||||
Preferred stock dividends |
(1,437 | ) | (1,437 | ) | (2,875 | ) | (2,875 | ) | ||||||||
$ | (4,361 | ) | $ | (4,582 | ) | $ | (6,707 | ) | $ | (8,522 | ) | |||||
Loss allocated to participating securities (1) |
| | | | ||||||||||||
Net loss available to common stockholders |
$ | (4,361 | ) | $ | (4,582 | ) | $ | (6,707 | ) | $ | (8,522 | ) | ||||
Weighted average shares outstanding for basic
earnings per common share |
25,063,669 | 24,996,955 | 25,050,469 | 23,877,958 | ||||||||||||
Dilutive effect of potential shares (2) |
N/A | N/A | N/A | N/A | ||||||||||||
Weighted average shares outstanding for diluted
earnings per common share |
25,063,669 | 24,996,955 | 25,050,469 | 23,877,958 | ||||||||||||
Diluted earnings per share |
$ | (0.17 | ) | $ | (0.18 | ) | $ | (0.27 | ) | $ | (0.36 | ) | ||||
Participating securities (1) |
126,625 | 65,625 | 126,625 | 65,625 | ||||||||||||
Potential dilutive common shares (2) |
17,201,417 | 17,149,267 | 17,201,417 | 17,149,267 |
(1) | For the three and six months ended June 30, 2011 and 2010, participating securities, which
do not participate in losses, were not included in the calculations of earnings per share, as
we were in a loss position and their inclusion would have been anti-dilutive. |
|
(2) | For the three and six months ended June 30, 2011 and 2010, potential dilutive common shares,
which include stock options, unvested restricted stock, warrants and the conversion of
preferred stock, were not included in the computation of diluted earnings per share, as we
were in a loss position and their inclusion would have been anti-dilutive. |
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Note 5 Accrued Expenses
Accrued expenses were comprised as follows (dollar amounts in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Property, sales and other taxes |
$ | 5,783 | $ | 6,411 | ||||
Compensation |
5,907 | 4,639 | ||||||
Interest |
624 | 208 | ||||||
Programming related |
562 | 1,782 | ||||||
Restructuring and reorganization |
180 | 172 | ||||||
Preferred stock dividends |
1,437 | 1,438 | ||||||
Purchase commitments |
2,739 | 3,414 | ||||||
Other |
2,361 | 4,263 | ||||||
$ | 19,593 | $ | 22,327 | |||||
Note 6 Long-term Debt and Credit Facilities
Long-term debt was comprised as follows (dollar amounts in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Bank Credit Facility: |
||||||||
Term loan |
$ | 367,308 | $ | 372,511 | ||||
Revolving loan commitment |
- | - | ||||||
Capital leases |
726 | 1,128 | ||||||
368,034 | 373,639 | |||||||
Less current maturities |
(10,522 | ) | (4,807 | ) | ||||
$ | 357,512 | $ | 368,832 | |||||
Bank Credit Facility In April 2007, we entered into a $675.0 million bank Credit Facility,
comprised of a $625.0 million term loan, which matures in April 2014, and a $50.0 million revolving
loan commitment, which matures in April 2013. The term loan originally required quarterly
repayments of $1,562,500, which began September 30, 2007. The term loan originally bore interest
at our option of (1) the banks base rate plus a margin of 1.0% or (2) LIBOR plus a margin of 2.0%.
The term loan is collateralized by substantially all of the assets of the Company.
Effective March 22, 2011, we entered into a First Amendment (the Amendment) to the bank Credit
Facility. The Amendment modifies certain terms of the Credit Facility, including an increase in
the permitted consolidated leverage ratio, the creation of a specific preferred stock dividend
payment basket and the potential to extend the term beyond its current expiration in April 2014.
The restricted payment basket within the Amendment allows for dividend payments not to exceed
$5,750,000 per year. The Amendment also reduces the commitments under the revolving loan
commitment, increases the interest rate and required quarterly repayment amount and adjusts other
covenants. In March 2011, the Company incurred $2.4 million of debt issuance costs related to
certain fees and expenses in connection with this Amendment.
Under the Amendment, the $50.0 million revolving loan commitment has been reduced to $25.0 million.
The Amendment also requires us to make quarterly term loan repayments of $2.5 million, which began
June 30, 2011, through December 31, 2012, and $3.75 million beginning March 31, 2013 through
December 31, 2013. The amended term loan and revolving loan commitment bear interest at our option
of (1) the banks base rate plus a margin of 4.0% or (2) LIBOR plus a margin of 5.0%. In addition,
a LIBOR floor of 1.5% was established under the Amendment.
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The Amendment includes terms and conditions which require compliance with leverage and
interest coverage covenants. As of June 30, 2011, our consolidated leverage ratio was 3.49
compared to the maximum allowable ratio of 4.00 and our consolidated interest coverage ratio was
2.57 compared to the minimum allowable ratio of 2.25. Per the Amendment, the maximum allowable
consolidated leverage ratio will remain at 4.00 until September 30, 2012, when it will change to
3.75 for the quarters ending December 31, 2012 through June 30, 2013. It will then drop to 3.50
for the quarter ending September 30, 2013 until maturity. The minimum allowable consolidated
interest coverage ratio will continue to be 2.25 until maturity.
The Credit Facility also requires we notify the agent upon the occurrence of a Material Adverse
Effect prior to any draw on the Companys revolving loan commitment, as such terms are defined and
used within our bank Credit Facility. However, under the Credit Facility, the provision of such a
notice is not an event of default, but if such an event occurred, it could restrict the Companys
ability to obtain additional financing under the revolving loan commitment. The original Credit
Facility also stipulated we enter into hedge agreements to provide at least 50% of the outstanding
term loan into a fixed interest rate for a period not less than two years. Our fixed rate swap
agreements expired in June 2011 (see Note 13). The Amendment does not require us to enter into any
hedge agreements. The term loan interest rate as of June 30, 2011 was 6.5%. The all-in weighted
average interest rate for the quarter ended June 30, 2011 was 12.0%, which includes both the term
loan interest rate and the difference in the swaps fixed interest rate versus LIBOR. As of June
30, 2011, we were in compliance with all financial covenants required of our bank Credit Facility.
Our ability to remain in compliance with those covenants will depend on our ability to generate
sufficient Consolidated EBITDA (a term defined in the Amendment) and to manage our capital
investment and debt levels. We continue taking actions within our control to manage our debt level
and remain in compliance with our debt covenants. The actions within our control include our
management of capital investment, working capital and operating costs and exploring other
alternative financing. Our ability to continue to comply with our current covenants is subject to
the general economic climate and business conditions beyond our control. Although there are signs
of stabilization in certain sectors of the economy, the uncertainties impacting travel and lodging,
in addition to the constraints in the credit markets, consumer conservatism and other market
dynamics, including technological changes, may continue to negatively impact our planned results
and required covenants. If we are not able to remain in compliance with our current debt covenants
and our lenders will not amend or waive covenants with which we are not in compliance, the debt
would be due, we would not be able to satisfy our financial obligations and we would need to seek
alternative financing. If we were not able to secure alternative financing, this would have a
substantial adverse impact on the Company and our ability to continue our operations.
During the first quarter of 2011, we made a prepayment of $2.0 million on the term loan, along with
the required payment of $1.0 million. We expensed $0.2 million of debt issuance costs related to
the prepayment and the Amendment described above. During the second quarter of 2011, we made the
required payment of $2.5 million.
In the first quarter of 2010, we made our required quarterly payment of $1.3 million, prepaid a
total of $44.0 million on the term loan, which included $13.7 million of net proceeds from the
common stock offering, and expensed $0.5 million of related debt issuance costs. The common stock
offering is discussed in more detail in Note 15. In the second quarter of 2010, we made a
prepayment of $22.2 million, in addition to the $1.2 million required payment on the term loan, and
expensed $0.3 million of related debt issuance costs.
The Credit Facility provides for the issuance of letters of credit up to $7.5 million, subject to
customary terms and conditions. Under the terms of the Amendment, this amount was reduced from
$15.0 million. As of June 30, 2011, we had outstanding letters of credit totaling $325,000, which
reduce amounts available under the revolving loan commitment. During the second quarter of 2011,
we borrowed $20.0 million under the revolving loan commitment and repaid the entire amount during
the quarter.
Capital Leases As of June 30, 2011, we had total capital lease obligations of $0.7 million.
There was no equipment acquired under capital lease arrangements during the six months ended June
30, 2011. Our capital lease obligations consist primarily of vehicles used in our field service
operations.
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As of June 30, 2011, long-term debt has the following scheduled maturities for the six months
remaining in 2011 and the full years ending December 31, 2012 and after (dollar amounts in
thousands):
2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
Long-term debt |
$ | 5,000 | $ | 10,000 | $ | 15,000 | $ | 337,308 | $ | - | ||||||||||
Capital leases |
321 | 348 | 70 | 30 | 1 | |||||||||||||||
5,321 | 10,348 | 15,070 | 337,338 | 1 | ||||||||||||||||
Less amount representing interest on capital leases |
(19 | ) | (19 | ) | (4 | ) | (2 | ) | - | |||||||||||
$ | 5,302 | $ | 10,329 | $ | 15,066 | $ | 337,336 | $ | 1 | |||||||||||
We do not utilize special purpose entities or off-balance sheet financial arrangements.
Note 7 ¾ 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, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss |
$ | (2,924 | ) | $ | (3,145 | ) | $ | (3,832 | ) | $ | (5,647 | ) | ||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation adjustment |
11 | (546 | ) | 465 | 50 | |||||||||||
Changes due to cash flow hedging: |
||||||||||||||||
Amortization of unrealized loss on interest rate swaps |
4,480 | - | 4,928 | - | ||||||||||||
Change in fair value on interest rate swaps |
- | 5,808 | 3,914 | 8,904 | ||||||||||||
Other comprehensive income |
4,491 | 5,262 | 9,307 | 8,954 | ||||||||||||
Total comprehensive income |
$ | 1,567 | $ | 2,117 | $ | 5,475 | $ | 3,307 | ||||||||
Components of accumulated other comprehensive income (loss), as shown on our Consolidated
Balance Sheets, were as follows (dollar amounts in thousands):
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Unrealized loss on interest rate swap agreements |
$ | - | $ | (8,842 | ) | |||
Foreign currency translation adjustment |
3,641 | 3,176 | ||||||
Accumulated other comprehensive income (loss) |
$ | 3,641 | $ | (5,666 | ) | |||
Note 8 ¾ Statements of Cash Flows
Cash is comprised of demand deposits. Cash paid for interest was $19.7 million and $16.0 million,
respectively, for the six months ended June 30, 2011 and 2010. Cash paid for taxes was $0.4
million and $0.5 million for the six months ended June 30, 2011 and 2010, respectively.
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Note 9 Share-Based Compensation
We account for our stock option and incentive plans under the recognition and measurement
provisions of FASB ASC Topic 718, Compensation Stock Compensation, which require the
measurement and recognition of compensation expense for all stock-based awards based on estimated
fair values, net of estimated forfeitures. Share-based compensation expense recognized in the
three and six months ended June 30, 2011 and 2010 includes compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in
accordance with the provisions of this Topic.
The following amounts were recognized in our Consolidated Statements of Operations for share-based
compensation plans for the periods ended June 30 (dollar amounts in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Compensation cost: |
||||||||||||||||
Stock options |
$ | 264 | $ | 366 | $ | 578 | $ | 678 | ||||||||
Restricted stock |
191 | 282 | 291 | 282 | ||||||||||||
Total share-based compensation expense |
$ | 455 | $ | 648 | $ | 869 | $ | 960 | ||||||||
For the six months ended June 30, 2011 and 2010, cash received from stock option exercises was
$7,000 and $41,000, respectively. Due to our net operating loss tax position, we did not recognize
a tax benefit from options exercised under the share-based payment arrangements. The amounts
presented in the table above are included as non-cash compensation in our cash flow from operating
activities.
Stock Options
For the three months ended June 30, 2011, we did not grant any stock options to officers or
employees; however, we did grant 35,000 stock options to non-employee directors of the Company.
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, 2011, we awarded 66,500 shares of time-based restricted stock
to our non-employee directors and 25,000 shares of time-based restricted stock to certain officers,
both grants pursuant to our 2003 Stock Option 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 50% in April
2012 and 50% in April 2013. 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 2011, we did not issue any performance-based
restricted stock.
Note 10 Restructuring
In January 2011, we initiated a reduction in force program to gain operating efficiencies by
reorganizing departments and reducing layers of management. The reduction in force program reduced
our workforce by approximately 7%. As a result of this action and our previous restructuring and
reduction in force initiatives, we incurred nominal costs during the three months ended June 30,
2011 and $1.2 million of costs during the six months ended June 30, 2011, of which the entire $1.2
million was related to our Hospitality and Advertising Services businesses. During the three and
six months ended June 30, 2010, we incurred $0.2 million of costs. All costs are included in
operating expenses on the Consolidated Statements of Operations.
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Liabilities associated with our restructuring activities to date, along with charges to expense and
cash payments, were as follows (dollar amounts in thousands):
Cost of closing | ||||||||||||
Severance and | redundant | |||||||||||
other benefit | acquired | |||||||||||
related costs | facilities | Total | ||||||||||
December 31, 2010 balance |
$ | 35 | $ | 137 | $ | 172 | ||||||
Charges to expense |
1,102 | 62 | 1,164 | |||||||||
Cash payments |
(1,010 | ) | (146 | ) | (1,156 | ) | ||||||
June 30, 2011 balance |
$ | 127 | $ | 53 | $ | 180 | ||||||
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.
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 ¾ The estimated carrying and fair values of our
financial instruments in the financial statements are as follows (dollar amounts in thousands):
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Interest rate swaps - liability position |
$ | - | $ | - | $ | 10,353 | $ | 10,353 | ||||||||
Long-term debt |
$ | 368,034 | $ | 353,342 | $ | 373,639 | $ | 349,426 |
The fair value of our long-term debt is estimated based on current interest rates for similar
debt of the same remaining maturities and quoted market prices, except for capital leases, which
are reported at carrying value. For our capital leases, the carrying value approximates the fair
value. The fair value of the interest rate swaps (used for purposes other than trading) was the
estimated amount we would have had 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 was
recognized in our current liabilities. Changes in fair value are recognized in other comprehensive
income (loss) if the hedge is effective and in interest expense if the hedge is ineffective.
For the year ended December 31, 2010, the total fair value amount of $10.4 million for our interest
rate swaps was included in Level 2 of the fair value hierarchy, as described above. There was no
fair value measurement for the six months ended June 30, 2011, as our interest rate swap
arrangements expired effective June 30, 2011.
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We estimated the fair value of the interest rate swaps based on mid-market data from a third party
provider. We periodically 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.
Nonfinancial Assets and Nonfinancial Liabilities ¾ 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, 2011.
Note 12 Segment Information
We operate in three reportable segments, Hospitality, Advertising Services and Healthcare. We
organize and manage our segments based upon the products and services delivered and the nature of
our customer base receiving those products and services. The Hospitality business distributes
entertainment, media and connectivity services to the hospitality industry. Our Advertising
Services business generates revenue from the sale of advertising-based media services within our
hospitality customer base, utilizing the same server-based technology or by the delivery of
advertising using 10 television programming channels. Our Healthcare business generates revenue
from the sale of interactive system hardware, software licenses, installation services and related
programming and support agreements to the healthcare market.
Our Hospitality and Advertising Services businesses provide a variety of interactive and media
network solutions to hotels and/or the respective hotels guests. The products can include
interactive video-on-demand programming, music, games, cable television programming, Internet
services or advertising services, and have an analogous consumer base. All products and services
are delivered through a proprietary system platform utilizing satellite delivery technology, and
are geared towards the hotels and their guests.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies, except certain expenses are not allocated to the segments. These
unallocated expenses are corporate overhead, depreciation and amortization expenses, restructuring
charges, other operating income (expense), interest expense, loss on the early retirement of debt,
other income (expense) and income tax expense. We evaluate segment performance based upon
operating profit and loss before the aforementioned expenses.
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Financial information related to our reportable segments for the three and six months ended June 30
is as follows (dollar amounts in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Total revenues: |
||||||||||||||||
Hospitality |
$ | 101,134 | $ | 109,074 | $ | 204,434 | $ | 222,233 | ||||||||
Advertising Services |
2,255 | 2,584 | 4,789 | 4,924 | ||||||||||||
Healthcare |
3,246 | 1,413 | 5,140 | 3,966 | ||||||||||||
Total |
$ | 106,635 | $ | 113,071 | $ | 214,363 | $ | 231,123 | ||||||||
Operating profit: |
||||||||||||||||
Hospitality |
$ | 29,551 | $ | 32,864 | $ | 60,689 | $ | 67,358 | ||||||||
Advertising Services |
191 | 212 | 731 | (10 | ) | |||||||||||
Healthcare |
945 | 262 | 1,388 | 607 | ||||||||||||
Operating profit |
30,687 | 33,338 | 62,808 | 67,955 | ||||||||||||
Corporate |
(4,731 | ) | (6,113 | ) | (9,163 | ) | (11,915 | ) | ||||||||
Depreciation and amortization |
(17,783 | ) | (20,925 | ) | (37,423 | ) | (43,097 | ) | ||||||||
Restructuring charge |
(3 | ) | (239 | ) | (1,164 | ) | (242 | ) | ||||||||
Other operating income (expense) |
8 | - | 21 | (6 | ) | |||||||||||
Interest expense |
(10,962 | ) | (8,712 | ) | (18,633 | ) | (17,395 | ) | ||||||||
Loss on early retirement of debt |
- | (267 | ) | (158 | ) | (760 | ) | |||||||||
Other (expense) income |
(3 | ) | 2 | 315 | 227 | |||||||||||
Loss before income taxes |
$ | (2,787 | ) | $ | (2,916 | ) | $ | (3,397 | ) | $ | (5,233 | ) | ||||
Note 13 Derivative Information
We follow the provisions of FASB ASC Topic 815, Derivatives and Hedging Activities, which
establish accounting and disclosure standards regarding a companys derivative instruments and
hedging activities.
We were required by our original Credit Facility to convert 50% of the outstanding term loan into a
fixed interest rate for a period not less than two years. Our objective of entering into hedge
transactions (or interest rate swaps) using derivative financial instruments was to reduce the
variability of cash flows associated with variable-rate loans and comply with the terms of our
Credit Facility. As changes in interest rates impact future interest payments, the hedges provided
an offset to the rate changes. The swap agreements expired in June 2011. The Amendment to our
Credit Facility does not require us to enter into any hedge agreements.
In April 2007, we entered into interest rate swap agreements with notional values of $312.5
million, at a fixed rate of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which
expired in June 2011. These swap arrangements effectively changed the underlying debt from a
variable interest rate to a fixed interest rate for the term of the swap agreements. All of the
swap agreements were issued by Credit Suisse International. The swap agreements were designated
as, and met the criteria for, cash flow hedges and were not considered speculative in nature.
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With our amended Credit Facility, our interest rate swaps ceased to be effective and hedge
accounting was discontinued effective March 22, 2011 and going forward, primarily related to the
LIBOR floor of 1.5% as established under the Amendment. As a result, our deferred losses of
$4,928,000 recorded in other comprehensive income were frozen and were amortized into earnings over
the original remaining term of the hedged transaction. All subsequent changes in the fair value of
the swaps were recorded directly to interest expense. We recorded a loss of $4,480,000 related to
the amortization in the second quarter of 2011. In addition, we recorded a gain of $5,246,000
related to the change in fair value of the interest rate swaps. The net amount of $766,000 is a
non-cash gain and did not impact the amount of cash interest paid during the quarter. For the six
months ended June 30, 2011, we recorded a loss of $4,928,000 related to amortization of our
deferred losses and a gain of $6,439,000 related to the change in fair value of the interest rate
swaps. The net amount of $1,511,000 is a non-cash gain and did not impact the amount of cash
interest paid during the period.
A summary of the aggregate contractual or notional amounts, balance sheet location and estimated
fair values of our derivative financial instruments are as follows (dollar amounts in thousands):
Contractual/ | Estimated Fair | |||||||||||||
Notional | Balance Sheet | Value | ||||||||||||
Amount | Location | Asset | (Liability) | |||||||||||
Year ended December 31, 2010: |
||||||||||||||
Interest rate swaps |
$ | 437,500 | Current liabilities | $ | - | $ | (10,353 | ) | ||||||
Six months ended June 30, 2011: |
||||||||||||||
$ | - | - | $ | - | $ | - |
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, 2010: |
||||||||||||||||||||
Interest rate swaps |
$ | (268 | ) | Interest expense | $ | 5,265 | Interest expense | $ | 811 | |||||||||||
Three Months Ended June 30, 2011: |
||||||||||||||||||||
Interest rate swaps |
$ | - | Interest expense | $ | - | Interest expense | $ | (766 | ) | |||||||||||
Six Months Ended June 30, 2010: |
||||||||||||||||||||
Interest rate swaps |
$ | (3,083 | ) | Interest expense | $ | 10,518 | Interest expense | $ | 1,469 | |||||||||||
Six Months Ended June 30, 2011: |
||||||||||||||||||||
Interest rate swaps |
$ | (89 | ) | Interest expense | $ | 4,672 | Interest expense | $ | (1,511 | ) |
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Note 14 ¾ 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.
Dividend payments not to exceed $5,750,000 in any fiscal year are allowable under the restricted
payment basket as defined within the Amendment to our Credit Facility.
Dividends were declared on the preferred stock by our Board of Directors and, as of June 30, 2011,
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. These dividends were paid on July 15,
2011.
Note 15 ¾ 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 16 ¾ Legal Proceedings
We are subject to litigation arising in the ordinary course of business. We believe the resolution
of such litigation will not have a material adverse effect upon our financial condition, results of
operations or cash flows.
On July 11, 2008, Linksmart Wireless Technology, LLC, a California limited liability company based
in Pasadena, California, filed actions for patent infringement in the U.S. District Court in
Marshall, Texas, against the Company and numerous other defendants, which allege infringement of a
patent issued on August 17, 2004 entitled User Specific Automatic Data Redirection System. On
October 26, 2010, the Court issued an order staying the cases pending the final determination in
the Patent Office re-examination proceeding. No material events occurred in this action during the
six months ended June 30, 2011. Please refer to the description of this matter as contained in the
Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March
14, 2011.
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Note 17 ¾ Effect of Recently Issued Accounting Standards
In May 2011, the FASB issued FASB ASU No. 2011-04, Amendments to Achieve Common Fair Value
Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which is now codified under FASB
ASC Topic 820, Fair Value Measurement. This amendment provides common requirements for measuring
fair value and for disclosing information about fair value measurements in accordance with U.S.
generally accepted accounting principles (GAAP) and International Financial Reporting Standards
(IFRSs). Currently, the U.S. GAAP valuation premise incorporates two approaches for determining
the highest and best use of an asset: in-use and in-exchange. These terms will be eliminated and
instead a description of the objectives of the valuation premise will be used. The ASU also
clarifies that the principal market is the market with the greatest volume and level of activity
for the asset or liability (in existing U.S. GAAP, the principal market is the market where the
reporting entity transacts with the greatest volume and level of activity for the asset or
liability), as well as clarifying the principal market is presumed to be the market in which the
reporting entity normally transacts. In the absence of a principal market for the asset or
liability, a reporting entity should determine the most advantageous market. The amendments also
change existing U.S. GAAP by limiting the concepts of the valuation premise and highest and best
use to measuring the fair value of nonfinancial assets only. New and revised disclosure
requirements include: quantitative information about significant unobservable inputs used for all
Level 3 fair value measurements and a description of the valuation processes in place, as well as a
qualitative discussion about the sensitivity of recurring Level 3 fair value measurements; public
companies will need to disclose any transfers between Level 1 and Level 2 fair value measurements
on a gross basis, including the reason(s) for those transfers (current U.S. GAAP requires
disclosure for significant transfers only); a requirement regarding disclosure on the highest and
best use of a nonfinancial asset (if the highest and best use of a nonfinancial asset differs from
its current use, the entity will be required to disclose the reason(s) why the assets is being used
differently); and a requirement that all fair value measurements be categorized in the fair value
hierarchy with disclosure of that categorization. FASB ASU No. 2011-04 will be effective on a
prospective basis for public companies during interim and annual periods beginning after December
15, 2011. Early adoption by public companies is not permitted. We do not expect the adoption of
this ASU to have an impact on our consolidated financial position, results of operations or cash
flows.
In June 2011, the FASB issued FASB ASU No. 2011-05, Presentation of Comprehensive Income, which
is now codified under FASB ASC Topic 220, Comprehensive Income. This ASU gives entities two
options for presenting the total of comprehensive income, the components of net income and the
components of other comprehensive income. The first option is a single, continuous statement of
comprehensive income. The second option is two separate, but consecutive statements. In either
option, each component of net income, along with total net income; each component of other
comprehensive income, along with a total of other comprehensive income; and a total of
comprehensive income must be presented. The amendments eliminate the option to present the
components of other comprehensive income as a part of the statement of changes in stockholders
equity. This ASU does not change the items which must be reported in other comprehensive income or
when an item of other comprehensive income must be reclassified to net income. FASB ASU No.
2011-05 should be applied retrospectively, and for public companies is effective for fiscal years,
and interim periods within those years, beginning after December 15, 2011. Early adoption is
permitted. We are evaluating the disclosure options, and do not expect the adoption of this ASU to
have an impact on our consolidated financial position, results of operations or cash flows.
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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 which could cause the actual results, performance or
achievements to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. In addition to the risks and
uncertainties discussed elsewhere in this Report and in Item 1A of our most recent Annual Report on
Form 10-K for the year ended December 31, 2010 and filed on March 14, 2011, in any prospectus
supplement or any report or document incorporated herein by reference, such factors include, among
others, the following:
Ø | the effects of general economic and financial conditions; |
||
Ø | the economic condition of the hospitality industry, which can be particularly affected
by general economic and financial conditions, as well as by factors such as high gas
prices, levels of unemployment, consumer confidence, acts or threats of terrorism and
public health issues; |
||
Ø | decreases in hotel occupancy, whether related to economic conditions or other causes; |
||
Ø | competition from providers of similar services and from alternative sources; |
||
Ø | changes in demand for our products and services; |
||
Ø | programming costs, availability, timeliness and quality; |
||
Ø | technological developments by competitors; |
||
Ø | developmental costs, difficulties and delays; |
||
Ø | relationships with clients and property owners; |
||
Ø | the impact of covenants contained in our credit agreement, compliance with which could
adversely affect capital available to finance growth, and the violation of which would
constitute an event of default; |
||
Ø | changes to government laws and regulations and industry compliance standards; |
||
Ø | potential effects of litigation; |
||
Ø | risks of expansion into new markets and territories; |
||
Ø | risks related to the security of our data systems; and |
||
Ø | other factors detailed, from time to time, in our filings with the Securities and Exchange Commission. |
These forward-looking statements speak only as of the date of this report. We expressly disclaim
any obligation or undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is based.
Executive Overview
We are the largest provider of interactive media and connectivity solutions to the hospitality
industry in the United States, Canada and Mexico. Our primary offerings include guest-paid
entertainment, such as on-demand movies, and hotel-paid services, including cable television
programming and Internet access services. As of June 30, 2011, we provided interactive and media
networks and connectivity solutions to approximately 1.8 million hotel rooms in North America
and, primarily through local or regional licensees, select
international markets. In
addition, we also have a growing presence in the healthcare market, where we sell and maintain
interactive television systems which provide on-demand patient education, information and
entertainment to healthcare facilities throughout the United States. As of June 30, 2011, our
systems were installed in 60 healthcare facilities, representing approximately 13,700 beds, and we
had an additional 10 facilities under contract.
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We
continued diversifying our revenue base, reducing our cost structure,
introducing innovations
and accelerating the
rollout of our high definition systems during the second quarter of 2011. Revenue from non-Guest
Entertainment sources comprised 46.8% of total second quarter 2011 revenue, with
non-Guest Entertainment
revenue per room
increasing 9.8% over the prior year quarter. We also reduced operating expenses by 10.3% over the
second quarter of last year, as we continue to improve our cost structure yet still invest in new
product development and the rollout of our Envision platform. As a result, our total operating
income increased 34.9% over the prior year period. We also installed more than 12,000
high-definition interactive television rooms during the quarter, an increase over the approximately
2,900 rooms installed during the first quarter of 2011. The average cost per HD room installation
was $140 during the current quarter, or 32.4% less than during the prior year second quarter. With
capital investment per room declining and the generation of strong cash flow from HD rooms, we
believe we are well-situated to accelerate growth investments in our leading hotel partners as the
hospitality industry continues the rollout of HD systems within the capital and operating plans of
hotels.
The
following initiatives reflect the ongoing execution of our strategic
growth plans and position us to continue diversifying our revenue
streams:
| The
rollout of Envision, our next-generation, cloud-connected interactive television platform,
is proceeding in accordance with our expectations,
and we were serving almost 3,800 rooms in nine hotels at
the end of the current quarter. This new product provides hoteliers new ways to
interact with guests and for the guests to access information about flights, area
restaurants and other consumer information through interactive
applications.
|
|
| In June 2011, we launched our VOD 2.0
initiative. This software enhancement introduced tiered movie pricing for our Hollywood content,
with movies starting at $4.99; improved user interface and navigational experiences for our hotel
guests; and enhanced merchandising and marketing of the latest
content in our exclusive hotel
window.
|
|
| The recent creation of our Healthcare subsidiary reflects our confidence in the growth
potential of this business, and we expect it will improve our ability to participate in government-related
healthcare programs by providing an independent and focused approach to assisting hospitals and
healthcare providers in complying with the extensive and constantly evolving federal mandates. Our
interactive systems continue to gain traction in the healthcare sector, as they deliver
cost-effective solutions which can lead to increased patient satisfaction, improved clinical outcomes
and increased operational efficiencies.
|
Our total revenue for the second quarter of 2011 was $106.6 million, a decrease of $6.4 million or
5.7%, compared to the second quarter of 2010. The decrease in revenue was primarily from Guest
Entertainment and Advertising Services revenues, partially offset by increases in revenue from
Healthcare, System Sales and Related Services and Hotel Services. The decrease in Guest
Entertainment revenue was driven by a 6.8% reduction in the average number of Guest Entertainment
rooms period over period and a 7.8% decline in Guest Entertainment
revenue per room, including decreases in movie, television on-demand
programming, music and television Internet revenue. We experienced a
9.8% increase in revenue per room from non-Guest Entertainment
sources, although Hospitality and Advertising
Services revenue per room was 0.6% less this quarter compared to the prior year second quarter.
Hotel Services revenue was $34.2 million in the current quarter and, on a per-room basis, increased
7.7% quarter over quarter, driven primarily by cable television programming. System Sales and
Related Services revenue per room improved 22.2%, due in part to increases in the sale of high
definition equipment and installation sales. Our Healthcare subsidiary generated $3.2 million of
revenue during the second quarter of 2011, an increase of $1.8 million, driven by higher revenue on
system sales, installation and other services. The backlog of healthcare installations includes 10
facilities.
Our total direct costs decreased $2.8 million or 4.4% period over period, to $60.1 million in the
second quarter of 2011 as compared to $62.9 million in the second quarter of 2010. The decrease in
total direct costs was driven by lower volume in Guest Entertainment and Hotel Services, with fewer
Guest Entertainment purchases and reductions in rooms receiving Hotel Services. We continued to
recognize benefits from decreased direct costs associated with the average commission rates paid to
hotels and lower connectivity costs from bandwidth re-provisioning and renegotiating supplier
agreements. Advertising Services also experienced lower fixed costs this quarter, driven primarily
by lower satellite distribution costs versus the second quarter of 2010. Gross margins decreased
slightly, to 43.6% for the second quarter of 2011 compared to 44.4% for the prior year period, due
to the mix of products and services sold.
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System operations expenses and selling, general and administrative (SG&A) expenses decreased
$2.3 million or 10.3% quarter over quarter, to $20.6 million in the second quarter of 2011 compared
to $22.9 million in the prior year quarter. Workforce reductions completed in the first quarter of
2011, along with a decline in professional services expenses, drove the improvement. Depreciation
and amortization expenses decreased 15.0%, to $17.8 million in the second quarter of 2011 versus
$20.9 million in the second quarter of 2010. The decline was due to assets becoming fully
depreciated and the reduction in capital investment levels over the past years. As a result of the
factors noted above, operating income increased 34.9% to $8.2 million in the second quarter of 2011
compared to $6.1 million in the prior year quarter.
We generated $8.4 million of cash from operating activities as compared to $27.0 million in
the second quarter of 2010. The reduction in 2011 cash flow was driven by a $13.5 million change
in working capital as accounts payable balances returned to more normalized levels. Higher
interest payments of $3.8 million also contributed to the decline. Cash used for capital
investments was $6.0 million in the second quarter of 2011. In June 2011, we made the required
quarterly payment of $2.5 million on the term loan.
Hospitality and Advertising Services Businesses
Our Hospitality and Advertising Services businesses include television content sold to hotels
and/or the respective hotels guests. The products can include interactive video-on-demand (VOD),
cable television programming, Internet services or advertising services, and have an analogous
consumer base. All products and services are delivered through a proprietary system platform
having related satellite communication technology, and are geared towards the hotels and their
guests.
Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and
music videos and television on-demand programming). One of our main sources of revenue, generating
53.2% of total revenue for the quarter ended June 30, 2011, is providing in-room, interactive guest
entertainment, for which the hotel guest pays on a per-view, hourly or daily basis.
Our total guest-generated revenue depends on a number of factors, including:
| The number of rooms on our network. We can increase revenue over time by increasing the
number of rooms served by our interactive television systems. Our ability to expand our room
base is dependent on a number of factors, including newly constructed hotel properties and the
attractiveness of our technology, service and support to hotels currently operating without an
interactive television system. |
|
| The occupancy rate at the property. Our revenue also varies depending on hotel occupancy
rates, which are subject to a number of factors, including seasonality, general economic
conditions and world events, such as terrorist threats or public health issues. Occupancy
rates for the properties we serve are typically higher during the second and third quarters
due to seasonal travel patterns. We target higher occupancy properties in diverse demographic
and geographic locations in an effort to mitigate occupancy-related risks. |
|
| The buy rate of hotel guests. This is impacted by a number of issues, some of which are
not under our control. Specific issues impacting buy rate include: |
| The number of rooms equipped with our high-definition (HD) systems. We can increase
revenue by increasing the number of HD rooms served. Our ability to expand our HD room
base is dependent on a number of factors, including availability of capital resources from
the hotels and us to invest in HD televisions and equipment. We are focused on
accelerating the installation of our HD systems as hotels increase their purchase of HD
televisions, since the revenue generated from the digital quality experience within our
installed HD rooms is typically more than 60% higher than our analog rooms. |
||
| The popularity, timeliness and amount of content offered at the hotel. Our revenues
vary, to a certain degree, with the number, timeliness and popularity of movie content
available for viewing, and whether the content is presented in digital or analog format.
Historically, a decrease in the availability of popular movie content has adversely
impacted revenue, and the availability of high definition content has increased revenue.
Although not completely within our control, we seek to program and promote the most popular
available movie content and other content to maximize revenue and profitability. |
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| The price of the service purchased by the hotel guest. Generally, we control the prices
charged for our products and services and manage pricing in an effort to maximize revenue
and overall profitability. We establish pricing based on such things as the demographics of the property served, the
popularity of the content and overall general economic conditions. Our technology enables
us to measure the popularity of our content and make decisions to best position such content
and optimize revenue from such content. |
| The availability of alternative programming. We compete directly for customers with a
variety of other interactive service providers, including other interactive television
service providers, cable television companies, direct broadcast satellite companies,
television networks and programmers, Internet service providers and portals, technology
consulting and service firms, companies offering web sites which provide on-demand movies,
movie downloads, rental companies providing DVDs which can be viewed in properly equipped
hotel rooms or on other portable viewing devices and hotels which offer in-room laptops
with Internet access or other types of Internet access systems. We also compete, in
varying degrees, with other leisure-time activities, such as movie theaters, the Internet,
radio, print media, personal computers and other alternative sources of entertainment and
information. |
||
| Consumer sentiment. The willingness of guests to purchase our entertainment services is
also impacted by the general economic environment and its impact on consumer sentiment.
Historically, such impacts were not generally material to our revenue results; however,
since the last half of 2008, economic conditions have had a significant, negative impact on
our revenue levels. As economic conditions improve in the future, guest purchase activity
may or may not increase to the same levels previously experienced by the Company. |
The primary direct costs of providing Guest Entertainment are:
| license fees paid to major motion picture studios, which are variable and based on a
percent of guest-generated revenue, for non-exclusive distribution rights of recently released
major motion pictures; |
|
| commissions paid to our hotel customers, which are also variable and based on a percent of
guest-generated revenue; |
|
| license fees, which are based on a percent of guest-generated revenue, for television
on-demand, music, music videos, video games and sports programming; and |
|
| fixed monthly Internet connectivity costs. |
Hotel Services (includes revenue from hotels for services such as television channels and recurring
broadband Internet service and support to the hotels). Another major source of our revenue is
providing cable television programming and Internet services to the lodging industry, for which the
hotel pays a fixed monthly fee.
| Cable Television Programming. We offer a wide variety of satellite-delivered cable
television programming paid for by the hotel and provided to guests at no charge. The cable
television programming is delivered via satellite, pursuant to an agreement with DIRECTV®, and
is distributed over the internal hotel network, and typically includes premium channels such
as HBO and Showtime, which broadcast major motion pictures and specialty programming, as well
as non-premium channels, such as CNN and ESPN. With the launch of the high-definition
configuration of our interactive television system, we also began offering high-definition
cable television programming to the extent available from broadcast sources and DIRECTV. |
|
| Broadband Internet Service and Support. We also design, install and operate wired and
wireless broadband Internet systems at hotel properties. These systems control access to the
Internet, provide bandwidth management tools and allow hotels to charge guests or provide the
access as a guest amenity. Post-installation, we generate recurring revenue through the
ongoing maintenance, service and call center support services to hotel properties installed by
us and also to hotel properties installed by other providers, or through a revenue-share model
in which hotel guests pay for broadband Internet and we pay a commission to our hotel
customers. While this is a highly competitive area, we believe we have important advantages
as a result of our proactive monitoring interface with hotel systems to improve up time,
existing hotel customer relationships and our nationwide field service network. |
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System Sales and Related Services. We also generate revenue from other products and services
within the hotel and lodging industry, including sales of broadband Internet and other interactive
television systems 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, 2011, we
provided advertising media services to approximately 1.1 million hotel rooms. We also deliver
targeted advertising and services to 340,000 hotel rooms on 10 popular satellite-delivered
channels.
Key Metrics:
Rooms Served
One of the metrics we monitor within our Hospitality and Advertising Services businesses is the
number of rooms we serve with our various services. As of June 30, we had the following number of
rooms installed with the designated service:
June 30, | ||||||||
2011 | 2010 | |||||||
Total rooms served (1) |
1,753,132 | 1,888,287 | ||||||
Total Guest Entertainment rooms (2) |
1,608,079 | 1,738,311 | ||||||
Total HD rooms (3) |
285,626 | 246,739 | ||||||
Percent of Total Guest Entertainment rooms |
17.8% | 14.2% | ||||||
Total Cable Television Programming (FTG) rooms (4) |
989,133 | 1,070,081 | ||||||
Percent of Total Guest Entertainment rooms |
61.5% | 61.6% |
(1) | Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees. |
|
(2) | Guest Entertainment rooms, of which 88.9% were digital as of June 30, 2011, receive one or
more Guest Entertainment services, such as movies, video games, music or other interactive and
advertising services. |
|
(3) | HD rooms are equipped with high-definition capabilities. |
|
(4) | Cable television programming (FTG) rooms receive basic or premium cable television
programming. |
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High Definition Room Growth
We also track the penetration of our high-definition television (HDTV) system, since rooms
equipped with HDTV services typically generate higher revenue from Guest Entertainment and Hotel
Services than rooms equipped with our standard-definition VOD systems. HDTV room growth occurs as
we install our HDTV system in newly contracted rooms or convert certain existing rooms to the HDTV
system in exchange for contract extensions. The installation of 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. We are prepared to increase capital investment levels and work jointly with
our best hotel customers to continue the rollout of high-definition systems within the operating
and capital plans of the hotels and the Company. We installed our HDTV systems in the following
number of net new rooms as of June 30:
June 30, | ||||||||
2011 | 2010 | |||||||
Net new HDTV rooms for the three months ended |
12,383 | 6,592 | ||||||
Net new HDTV rooms for the six months ended |
15,242 | 14,988 |
HDTV rooms, including new installations and major upgrades, are equipped with high-definition
capabilities.
Capital Investment Per Installed Room
The average investment per room associated with an installation can fluctuate due to engineering
efforts, component costs, product segmentation, cost of assembly and installation, average number
of rooms for properties installed, certain fixed costs and hotel capital contributions. The
following table sets forth our average installation cost per room during the periods ended:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | June 30, | June 30, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Average cost per installed HD room |
$ | 140 | $ | 207 | $ | 149 | $ | 221 |
The
decrease in the average cost per HD room from 2010 to 2011 was primarily driven by lower
component and overhead costs, larger average number of rooms for properties installed and hotels
contributing a greater share of total installation costs through purchases of systems and
equipment.
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Average Revenue Per Room
We monitor the average revenue we generate per Hospitality and Advertising Services room. Guest
Entertainment revenue can fluctuate based on several factors, including occupancy, consumer
sentiment, mix of travelers, the availability of high definition and alternative programming, the
popularity of movie content, the mix of services purchased and the overall economic environment.
Hotel Services revenue can fluctuate based on the percentage of our hotels purchasing cable
television programming services from us, the type of services provided at each site, as well as the
number of hotels purchasing broadband service and support from us. System Sales and Related
Services revenue can fluctuate based on the number of system and equipment sales, including
broadband system sales. Advertising Services revenue can fluctuate based on the demand for
advertising and the performance of products and services sold to business and leisure travelers, as
well as the number of rooms available to promote within. The following table sets forth the
components of our Hospitality and Advertising Services revenue per room for the three and six
months ended June 30:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Average monthly revenue per room: |
||||||||||||||||
Hospitality and Advertising Services |
||||||||||||||||
Guest Entertainment |
$ | 11.56 | $ | 12.54 | $ | 11.68 | $ | 12.76 | ||||||||
Non-Guest Entertainment |
||||||||||||||||
Hotel Services |
6.98 | 6.48 | 6.95 | 6.48 | ||||||||||||
System Sales and Related Services |
2.09 | 1.71 | 2.02 | 1.76 | ||||||||||||
Advertising Services |
0.46 | 0.49 | 0.48 | 0.47 | ||||||||||||
9.53 | 8.68 | 9.45 | 8.71 | |||||||||||||
Total Hospitality and Advertising Services revenue per room |
$ | 21.09 | $ | 21.22 | $ | 21.13 | $ | 21.47 | ||||||||
Our diversified revenue initiatives, including Hotel Services, Systems Sales and Related Services
and Advertising Services, increased to $9.53 per room for the current quarter, a 9.8% increase from
the prior year quarter. Quarter over quarter, Guest Entertainment revenue per room decreased 7.8%
to $11.56. For the six months ended June 30, 2011, revenue from diversified initiatives increased
to $9.45 per room, an 8.5% increase from the prior year period. During the same period, Guest
Entertainment revenue per room decreased 8.5% to $11.68. Total Non-Guest Entertainment revenue,
including Healthcare, comprised 46.8% of total revenue during the second quarter of 2011 and 46.1%
of total revenue for the six months ended June 30, 2011.
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Average Direct Costs Per Room
Guest Entertainment direct costs vary based on content license fees, the mix of Guest Entertainment
products purchased and the commission earned by the hotel. Hotel Services direct costs include the
cost of cable television programming and the cost of broadband Internet support services. The cost
of System Sales and Related Services primarily includes the cost of the systems and equipment sold
to hotels. Advertising Services direct costs include the cost of developing and distributing
programming. The overall direct cost margin primarily varies based on the composition of revenue.
The following table sets forth our Hospitality and Advertising Services direct costs per room for
the three and six months ended June 30:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Average monthly direct costs per room: |
||||||||||||||||
Hospitality and Advertising Services |
||||||||||||||||
Guest Entertainment |
$ | 4.42 | $ | 4.78 | $ | 4.51 | $ | 4.99 | ||||||||
Hotel Services |
5.81 | 5.63 | 5.78 | 5.61 | ||||||||||||
System Sales and Related Services |
1.46 | 1.15 | 1.36 | 1.18 | ||||||||||||
Advertising Services |
0.26 | 0.26 | 0.26 | 0.26 | ||||||||||||
Total Hospitality and Advertising Services direct costs per room |
$ | 11.95 | $ | 11.82 | $ | 11.91 | $ | 12.04 | ||||||||
Healthcare Business
The healthcare market in the United States consists of over 940,000 hospital beds across 5,800
facilities. We believe most hospitals currently do not have any form of interactive television
services. The primary reasons hospitals purchase interactive television systems are to increase
patient satisfaction, to improve clinical outcomes and to increase operational efficiencies. Our
Healthcare revenue is generated through a variety of services and solutions provided to care
facilities, including:
| revenue generated from the sale of the interactive system hardware, software license and
installation services; |
|
| revenue from the sale and installation of satellite television equipment and related
programming; |
|
| revenue from recurring support agreements for interactive content, software maintenance and
technical field service support, including service agreements covering cable plant, satellite
television equipment and interactive systems; and |
|
| revenue generated from cable plant design, modification and installation, as well as
television installation services. |
As of June 30, these services and solutions were installed as follows:
2011 | 2010 | Change | % Change | |||||||||||||
Systems installed |
60 | 52 | 8 | 15.4% | ||||||||||||
Beds served |
13,739 | 10,925 | 2,814 | 25.8% |
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General Operations
Total Operating Expenses
System operations expenses consist of costs directly related to the operation and maintenance of
systems at hotel sites. Selling, general and administrative expenses (SG&A) primarily include
payroll costs, share-based compensation, engineering development costs and legal, marketing,
professional and compliance costs. The following table sets forth the components of our operating
expenses per room for the three and six months ended June 30:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Systems operations expenses |
$ | 1.99 | $ | 2.02 | $ | 2.00 | $ | 2.00 | ||||||||
SG&A expenses |
2.21 | 2.34 | 2.07 | 2.31 | ||||||||||||
Depreciation and amortization (D&A) |
3.62 | 3.98 | 3.78 | 4.07 | ||||||||||||
Restructuring charge |
- | 0.05 | 0.12 | 0.02 | ||||||||||||
$ | 7.82 | $ | 8.39 | $ | 7.97 | $ | 8.40 | |||||||||
Systems operations as a percent of total revenue |
9.1% | 9.4% | 9.2% | 9.1% | ||||||||||||
SG&A as a percent of total revenue |
10.2% | 10.9% | 9.6% | 10.6% | ||||||||||||
D&A as a percent of total revenue |
16.7% | 18.5% | 17.5% | 18.6% | ||||||||||||
Total operating expenses as a percent of total revenue |
35.9% | 39.0% | 36.8% | 38.5% |
Special Note Regarding the Use of Non-GAAP Financial Information
To supplement our consolidated financial statements presented in accordance with accounting
principles generally accepted in the United States (GAAP), we use free cash flow, a non-GAAP
measure derived from results based on GAAP. The presentation of this additional information is not
meant to be considered superior to, in isolation of or as a substitute for results prepared in
accordance with GAAP.
We define free cash flow, a non-GAAP measure, as cash provided by operating activities less cash
used for certain investing activities. Free cash flow is a key liquidity measure, but should not
be construed as an alternative to cash flows from operating activities or as a measure of our
profitability or performance. We provide information about free cash flow because we believe it is
a useful way for us, and our investors, to measure our ability to satisfy cash needs, including
interest payments on our debt, taxes and capital expenditures. GAAP requires us to provide
information about cash flow generated from operations. Our definition of free cash flow does not
take into account our debt service requirements or other commitments. Accordingly, free cash flow
is not necessarily indicative of amounts of cash which may be available to us for discretionary
purposes. Our method of computing free cash flow may not be comparable to other similarly titled
measures of other companies.
Free Cash Flow
We manage our free cash flow by seeking to maximize the amount of cash we generate from our
operations and managing the level of our investment activity. The reduction from 2010 cash flow
was driven by a $13.5 million change in working capital, as accounts payable balances returned to
more normalized levels, in addition to higher interest payments of $3.8 million, related to the
interest rate swaps which expired on June 30, 2011. In addition,
we can manage capital expenditures by varying
the number of rooms we install in any given period.
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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, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cash provided by operating activities |
$ | 8,380 | $ | 27,016 | $ | 27,614 | $ | 55,114 | ||||||||
Property and equipment additions |
(5,950 | ) | (4,429 | ) | (10,595 | ) | (8,954 | ) | ||||||||
$ | 2,430 | $ | 22,587 | $ | 17,019 | $ | 46,160 | |||||||||
Liquidity and Capital Resources
During the first six months of 2011, cash provided by operating activities was $27.6 million, and
we used $10.6 million of the cash we generated for property and equipment additions. During the
same period, we prepaid $2.0 million against our Credit Facility, in addition to the required
payments totaling $3.5 million. We also used $2.9 million for preferred stock dividends. During
the first six months of 2010, cash provided by operating activities was $55.1 million, and we used
cash for property and equipment additions of $9.0 million. During the same period, we prepaid
$66.2 million against our Credit Facility, which included $13.7 million of net proceeds from the
common stock offering, in addition to the required payments totaling $2.4 million. We also used
$2.9 million for the preferred stock dividend payments. The decrease in cash provided by operating
activities for the first six months of 2011 compared to the first six months of 2010 was expected,
due to the change in working capital of $20.1 million period over period, primarily driven by
accounts payable and the interest expense related to our swap agreements, which expired in June
2011. Cash as of June 30, 2011 was $14.5 million versus $8.4 million as of December 31, 2010.
Our principal sources of liquidity are our cash from operations, our cash on hand and the $25.0
million revolving loan commitment, which matures in 2013. We believe our cash on hand, operating
cash flow, borrowing available under the Credit Facility and, subject to market conditions and regulatory requirements, potential availability under the shelf
registration will be sufficient to fund our business and comply with our financing obligations. We
plan to allocate a portion of our future cash flow from operations to the expansion of our
high-definition room base and to the repayment of debt, as necessary. As of June 30, 2011, working
capital was negative $32.0 million, compared to negative $50.5 million at December 31, 2010.
The collectability of our receivables is reasonably assured, as supported by our broad customer
base. Our interactive hotel base is well diversified in terms of location, demographics and
customer contracts. We provide our services to various hotel chains, ownership groups and
management companies. In accordance with our hotel contracts, monies collected by the hotel for
interactive television services are held in trust on our behalf, thereby limiting our risk from
hotel bankruptcies.
In April 2007 we entered into a $675.0 million bank Credit Facility, comprised of a $625.0 million
term loan, which matures in April 2014, and a $50.0 million revolving loan commitment, which
matures in April 2013. The term loan originally bore interest at our option of (1) the banks base
rate plus a margin of 1.0% or (2) LIBOR plus a margin of 2.0%. The term loan is collateralized by
substantially all of the assets of the Company.
Effective March 22, 2011, we entered into a First Amendment (the Amendment) to the bank Credit
Facility. The Amendment modifies certain terms of the Credit Facility, including an increase in
the permitted consolidated leverage ratio, the creation of a specific preferred stock dividend
payment basket and the potential to extend the term beyond its current expiration in April 2014.
The restricted payment basket within the Amendment allows for dividend payments not to exceed
$5,750,000 per year. The Amendment also reduces the commitments under the revolving loan
commitment, increases the interest rate and required quarterly repayment amount and adjusts other
covenants. In March 2011, the Company incurred $2.4 million of debt issuance costs related to
certain fees and expenses in connection with this Amendment.
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Under the Amendment, the $50.0 million revolving loan commitment has been reduced to $25.0 million.
The Amendment also requires us to make quarterly term loan repayments of $2.5 million, which began
June 30, 2011, through December 31, 2012, and $3.75 million beginning March 31, 2013 through
December 31, 2013. The amended term loan and revolving loan commitment bear interest at our option
of (1) the banks base rate plus a margin of 4.0% or (2) LIBOR plus a margin of 5.0%. In addition,
a LIBOR floor of 1.5% was established under the Amendment.
The original Credit Facility also stipulated we enter into hedge agreements to provide at least 50%
of the outstanding term loan into a fixed interest rate for a period not less than two years. The
swap agreements expired in June 2011. The Amendment does not require us to enter into any hedge
agreements (see Note 13 to the financial statements). The term loan interest rate as of June 30,
2011 was 6.5%. The all-in weighted average interest rate for the quarter ended June 30, 2011 was
12.0%, which includes both the term loan interest rate and the difference in the swaps fixed
interest rate versus LIBOR. As of June 30, 2011, we were in compliance with all financial
covenants required of our bank Credit Facility.
The Amendment includes terms and conditions which require compliance with leverage and interest
coverage covenants.
Our leverage and interest coverage ratios were as follows for the periods ended June 30:
2011 | 2010 | |||||||
Actual consolidated leverage ratio (1) (3) |
3.49 | 3.52 | ||||||
Maximum per covenant |
4.00 | 3.75 | ||||||
Actual consolidated interest coverage ratio (2) (3) |
2.57 | 3.21 | ||||||
Minimum per covenant |
2.25 | 3.00 |
(1) | Our maximum consolidated leverage ratio is the total amount of all indebtedness of the
Company, determined on a consolidated basis in accordance with GAAP, divided by operating
income exclusive of depreciation and amortization and adjusted (plus or minus) for certain
other miscellaneous cash items, non-cash items and non-recurring items, as defined by the
terms of the bank Credit Facility and the Amendment. |
|
(2) | Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous
cash items, non-cash items and non-recurring items divided by interest expense and preferred
dividends, as defined by the terms of the bank Credit Facility and the Amendment. |
|
(3) | Maximum consolidated leverage ratio and minimum consolidated interest coverage ratios are
defined terms of the bank Credit Facility and the Amendment, and are presented here to
demonstrate compliance with the covenants in the Amendment, as noncompliance with such
covenants could have a material adverse effect on us. |
Our debt covenant ratios will change in future periods as follows:
Q3 2013 | ||||||||
Q4 2012 | to maturity | |||||||
Maximum consolidated leverage ratio |
3.75 | 3.50 | ||||||
Minimum consolidated interest coverage ratio |
2.25 | 2.25 |
We do not utilize special purpose entities or off-balance sheet financial arrangements.
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In order to continue operating efficiently and expand our business, we must remain in
compliance with covenants outlined in the Amendment. Our ability to remain in compliance with
those covenants will depend on our ability to generate sufficient Consolidated EBITDA (a term
defined in the Amendment) and to manage our capital investment and debt levels. We continue taking
actions within our control to manage our debt level and remain in compliance with our debt
covenants. The actions within our control include our management of capital investment, working
capital and operating costs and exploring other alternative financing. If we are not able to
remain in compliance with our current debt covenants and our lenders will not amend or waive
covenants with which we are not in compliance, the debt would be due, we would not be able to
satisfy our financial obligations and we would need to seek alternative financing. If we were not
able to secure alternative financing, this would have a substantial adverse impact on the Company
and our ability to continue our operations.
We achieved a consolidated leverage ratio of 3.49 compared to the maximum allowable ratio of 4.00
for the second quarter of 2011. Our ability to continue to comply with our current covenants is
subject to the general economic climate and business conditions beyond our control. Additionally,
our ability to comply with these covenants depends on achieving our planned operating results and
making further debt reductions, as necessary. Although there are signs of stabilization in certain
sectors of the economy, the uncertainties impacting travel and lodging, in addition to the
constraints in the credit markets, consumer conservatism and other market dynamics, including
technological changes, may continue to negatively impact our planned results and required
covenants. If we are not able to remain in compliance with our current debt covenants, it will
likely have a significant, unfavorable impact on our business and financial condition.
The Credit Facility also requires we notify the agent upon the occurrence of a Material Adverse
Effect prior to any draw on the Companys revolving loan commitment, as such terms are defined and
used within our bank Credit Facility. However, under the Credit Facility, the provision of such a
notice is not an event of default, but if such an event occurred, it could restrict the Companys
ability to obtain additional financing under the revolving loan commitment. As of June 30, 2011,
we are not aware of any events which would qualify under the Material
Adverse Effect clause of the
Credit Facility. The total amount of long-term debt outstanding, including the current portion, as
of June 30, 2011 was $368.0 million versus $373.6 million as of December 31, 2010.
In April 2007, we entered into interest rate swap agreements with notional values of $312.5
million, at a fixed rate of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which
expired in June 2011. These swap arrangements effectively changed the underlying debt from a
variable interest rate to a fixed interest rate for the term of the swap agreements. The swap
agreements were designated as, and met the criteria for, cash flow hedges and were not considered
speculative in nature. All of the swap agreements were issued by Credit Suisse International.
With our amended Credit Facility, our interest rate swaps ceased to be effective and hedge
accounting was discontinued effective March 22, 2011 and going forward, primarily related to the
LIBOR floor of 1.5% as established under the Amendment. As a result, our deferred losses of
$4,928,000 recorded in other comprehensive income were frozen and were amortized into earnings over
the original remaining term of the hedged transaction. All subsequent changes in the fair value of
the swaps were recorded directly to interest expense. We recorded a loss of $4,480,000 related to
the amortization in the second quarter of 2011. In addition, we recorded a gain of $5,246,000
related to the change in fair value of the interest rate swaps. The net amount of $766,000 is a
non-cash gain and did not impact the amount of cash interest paid during the quarter. For the six
months ended June 30, 2011, we recorded a loss of $4,928,000 related to amortization of our
deferred losses and a gain of $6,439,000 related to the change in fair value of the interest rate
swaps. The net amount of $1,511,000 is a non-cash gain and did not impact the amount of cash
interest paid during the period.
The Credit Facility provides for the issuance of letters of credit up to $7.5 million, subject to
customary terms and conditions. Under the terms of the Amendment, this amount was reduced from
$15.0 million. As of June 30, 2011, we had outstanding letters of credit totaling $325,000.
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Obligations and commitments as of June 30, 2011 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) |
$ | 368,034 | $ | 10,522 | $ | 357,505 | $ | 7 | $ | - | ||||||||||
Interest on bank term loan (1) |
68,505 | 25,462 | 43,043 | - | - | |||||||||||||||
Operating lease payments |
3,018 | 1,173 | 1,257 | 523 | 65 | |||||||||||||||
Purchase obligations (2) |
10,595 | 5,306 | 3,396 | 1,828 | 65 | |||||||||||||||
Minimum royalties and commissions (3) |
449 | 407 | 42 | - | - | |||||||||||||||
Total contractual obligations |
$ | 450,601 | $ | 42,870 | $ | 405,243 | $ | 2,358 | $ | 130 | ||||||||||
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 |
$ | 325 | $ | 325 | $ | - | $ | - | $ | - | ||||||||||
(1) | Interest payments are estimates based on current LIBOR and scheduled debt amortization. |
|
(2) | Consists of open purchase orders and commitments. |
|
(3) | In connection with our programming-related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. |
Seasonality
Our quarterly operating results are subject to fluctuation, depending upon hotel occupancy rates
and other factors, including travel patterns and the economy. Our hotel customers typically
experience higher occupancy rates during the second and third quarters, due to seasonal travel
patterns and, accordingly, we historically have higher revenue and cash flow in those quarters.
However, quarterly revenue can be affected by the availability of popular content during those
quarters and by consumer purchasing behavior. We have no control over when new content is released
or how popular it will be, or the effect of economic conditions on consumer behavior.
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Discussion and Analysis of Results of Operations
Three Months Ended June 30, 2011 and 2010
Three Months Ended June 30, 2011 and 2010
Revenue Analysis. Total revenue for the second quarter of 2011 was $106.6 million, a decrease of
$6.4 million or 5.7%, compared to the second quarter of 2010. The decrease in revenue was from
Guest Entertainment and Advertising Services revenues, partially offset by increases in revenue
from Healthcare, System Sales and Related Services and Hotel Services. The following table sets
forth the components of our revenue (dollar amounts in thousands) for the quarter ended June 30:
2011 | 2010 | |||||||||||||||
Percent | Percent | |||||||||||||||
of Total | of Total | |||||||||||||||
Amount | Revenues | Amount | Revenues | |||||||||||||
Revenues: |
||||||||||||||||
Hospitality and Advertising Services |
||||||||||||||||
Guest Entertainment |
$ | 56,691 | 53.2% | $ | 65,963 | 58.3% | ||||||||||
Hotel Services |
34,173 | 32.1% | 34,125 | 30.2% | ||||||||||||
System Sales and Related Services |
10,270 | 9.6% | 8,986 | 8.0% | ||||||||||||
Advertising Services |
2,255 | 2.1% | 2,584 | 2.3% | ||||||||||||
Total Hospitality and Advertising Services |
103,389 | 97.0% | 111,658 | 98.8% | ||||||||||||
Healthcare |
3,246 | 3.0% | 1,413 | 1.2% | ||||||||||||
$ | 106,635 | 100.0% | $ | 113,071 | 100.0% | |||||||||||
Hospitality and Advertising Services revenue, which includes Guest Entertainment, Hotel
Services, System Sales and Related Services and Advertising Services, decreased $8.3 million or
7.4%, to $103.4 million in the second quarter of 2011 compared to $111.7 million in the second
quarter of 2010. Average monthly Hospitality and Advertising Services revenue per room was $21.09
in the second quarter of 2011, a decrease of 0.6% as compared to $21.22 in the prior year quarter.
The following table sets forth information with respect to Hospitality and Advertising Services
revenue per room for the quarter ended June 30:
2011 | 2010 | |||||||
Average monthly revenue per room: |
||||||||
Hospitality and Advertising Services |
||||||||
Guest Entertainment |
$ | 11.56 | $ | 12.54 | ||||
Hotel Services |
6.98 | 6.48 | ||||||
System Sales and Related Services |
2.09 | 1.71 | ||||||
Advertising Services |
0.46 | 0.49 | ||||||
Total Hospitality and Advertising Services revenue per room |
$ | 21.09 | $ | 21.22 | ||||
Guest Entertainment revenue, which includes on-demand entertainment such as movies, television
on-demand, music and games, decreased $9.3 million or 14.1%, to $56.7 million in the second quarter
of 2011 as compared to $66.0 million in the prior year quarter. On a per-room basis, monthly Guest
Entertainment revenue for the second quarter of 2011 declined 7.8%, to $11.56 compared to $12.54
for the second quarter of 2010. This change in revenue per room is affected by a 6.8% reduction in
the average number of rooms served period over period,
the mix of on-demand products purchased and the continued conservative consumer buying pattern of
travelers. As a result, average monthly movie revenue per room was $10.88 for the second quarter
of 2011, a 6.8% reduction as compared to $11.68 per room in the prior year quarter. Non-movie
Guest Entertainment revenue per room decreased 20.9% to $0.68 in the second quarter of 2011,
related to decreases in television on-demand programming, music and television Internet revenue.
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Hotel Services revenue, which includes recurring revenue from hotels for cable television
programming and broadband Internet service and support, was comparable to the prior year quarter,
at $34.2 million in the second quarter of 2011 versus $34.1 million in the second quarter of 2010.
On a per-room basis, monthly Hotel Services revenue for the second quarter of 2011 increased 7.7%,
to $6.98 compared to $6.48 for the second quarter of 2010. Monthly cable television programming
revenue per room increased 7.9%, to $6.39 for the second quarter of 2011 as compared to $5.92 for
the second quarter of 2010. These increases resulted primarily from price increases on cable
television programming over the prior year period. Recurring broadband Internet revenue per room
increased 5.4%, to $0.59 for the current quarter as compared to $0.56 for the prior year 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 2011, revenue increased $1.3 million or 14.3%, to $10.3 million as compared to
$9.0 million for the second quarter of 2010. The increase was the result of increased high
definition equipment and installation sales.
Advertising Services revenue consists of revenue generated by The Hotel Networks (THN), our
advertising services subsidiary. For the second quarter of 2011, revenue decreased $0.3 million or
12.7%, to $2.3 million as compared to $2.6 million in the prior year period. This decrease was
primarily the result of decreased general advertising by national advertisers on our system, offset
in part by an increase in channel access revenue, where we provide cable channels to providers for
the distribution of their programming.
Healthcare revenue includes the sale of interactive systems and services to healthcare facilities.
Healthcare revenue increased $1.8 million or 129.7%, to $3.2 million in the second quarter of 2011
as compared to $1.4 million for the second quarter of 2010, driven by higher revenue on system
sales, installation and other services. During the current quarter, we installed 1,080 beds and
two facilities compared to 598 beds and two facilities during the prior year period. We have 10
signed healthcare contracts in our backlog waiting for installation.
Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below). Total direct costs decreased $2.8 million or 4.4%, to $60.1 million in the
second quarter of 2011 as compared to $62.9 million in the second quarter of 2010. Total direct
costs were 56.4% of revenue for the second quarter of 2011 as compared to 55.6% in the second
quarter of 2010. Direct costs related to the Hospitality and Advertising Services businesses,
which include Guest Entertainment, Hotel Services, System Sales and Related Services and
Advertising Services, were $58.6 million for the second quarter of 2011 compared to $62.2 million
for the prior year quarter. The decrease in total direct costs was driven by lower volume and the
continued benefit of rate reductions in certain components of our cost structure. We had a lower
volume of activity in Guest Entertainment and Hotel Services, related to decreased movie and
television on-demand revenue and a reduction in room count. Rate reductions include reductions in
the average commission rate paid to hotels and lower connectivity costs, realized from right-sizing
bandwidth and renegotiating supplier agreements. Advertising Services also experienced lower fixed
costs this quarter, driven by lower satellite distribution costs.
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Operating Expenses. The following table sets forth information in regard to operating expenses for
the quarter ended June 30 (dollar amounts in thousands):
2011 | 2010 | |||||||||||||||
Percent | Percent | |||||||||||||||
of Total | of Total | |||||||||||||||
Amount | Revenues | Amount | Revenues | |||||||||||||
Operating expenses: |
||||||||||||||||
System operations |
$ | 9,733 | 9.1% | $ | 10,627 | 9.4% | ||||||||||
Selling, general and administrative |
10,839 | 10.2% | 12,314 | 10.9% | ||||||||||||
Depreciation and amortization |
17,783 | 16.7% | 20,925 | 18.5% | ||||||||||||
Restructuring charge |
3 | 0.0% | 239 | 0.2% | ||||||||||||
Other operating income |
(8) | (0.1)% | - | - | ||||||||||||
Total operating expenses |
$ | 38,350 | 35.9% | $ | 44,105 | 39.0% | ||||||||||
System operations expenses decreased $0.9 million or 8.4%, to $9.7 million in the second quarter of
2011 as compared to $10.6 million in the second quarter of 2010. The decrease was driven by the
reduction in workforce from a program initiated in the first quarter of 2011, as well as lower
property taxes. As a percentage of total revenue, system operations expenses decreased to 9.1%
this quarter as compared to 9.4% in the second quarter of 2010. Per average installed room, system
operations expenses also decreased, to $1.99 per room per month compared to $2.02 in the prior year
quarter.
Selling, general and administrative (SG&A) expenses decreased $1.5 million or 12.0%, to $10.8
million in the current quarter as compared to $12.3 million in the second quarter of 2010. The
decrease was also a result of our reduction in force program, as noted above, and the continuation
of our first quarter expense mitigation initiatives. As a percentage of revenue, SG&A expenses
were 10.2% in the current quarter as compared to 10.9% in the prior year quarter. SG&A expenses
were $2.21 per average installed room per month for the current quarter as compared to $2.34 in the
second quarter of 2010.
Depreciation and amortization expenses were $17.8 million in the second quarter of 2011 as compared
to $20.9 million in the second quarter of 2010. The decline was due to the reduction in capital
investments over the past several years and certain assets becoming fully depreciated. As a
percentage of revenue, depreciation and amortization expenses were 16.7% in the second quarter of
2011 compared to 18.5% in the second quarter of 2010.
In January 2011, we initiated a reduction in force program to gain operating efficiencies by
reorganizing departments and reducing layers of management. The reduction in force program reduced
our workforce by approximately 7%. As a result of this action and our previous restructuring and
reduction in force initiatives, we incurred nominal costs during the three months ended June 30,
2011. During the second quarter of 2010, we had $0.2 million of costs related to restructuring and
workforce reduction activities. Additional accruals and cash payments related to the restructuring
activities are dependent upon reduction in force or subleasing arrangements, which could change our
expense estimates.
Operating Income. As a result of the factors described above, operating income increased to $8.2
million in the second quarter of 2011 compared to $6.1 million in the second quarter of 2010.
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Interest Expense. Interest expense was $11.0 million in the current quarter versus $8.7 million in
the second quarter of 2010. The all-in weighted average interest rate was 12.0% for the second
quarter of 2011 versus 7.3% for the second quarter of 2010. The increases in our interest expense
and interest rate during the second quarter of 2011 were related to the 6.5% interest rate on our
amended Credit Facility and the final quarterly payment on our interest rate swap commitment. The
outstanding balance of our debt under the Credit Facility decreased to $368.0 million in the second
quarter of 2011 from $404.9 million in the second quarter of 2010. Interest expense for the second
quarter of 2011 included a net $0.8 million non-cash interest gain related to our interest rate
swap position, including a $5.2 million gain related to the change in fair value of the swaps and
$4.5 million in amortization of deferred losses frozen in other comprehensive income. In the
second quarter of 2010, interest expense included $0.8 million of non-cash interest charges related
to our interest rate swap position.
Loss on Early Retirement of Debt. During the second quarter of 2010, we made additional
prepayments on our term loan totaling $22.2 million and expensed $0.3 million of unamortized debt
issuance costs. We did not make any prepayments on our term loan in the second quarter of 2011.
Taxes. For the second quarter of 2011 and 2010, we incurred taxes of $137,000 and $229,000,
respectively, primarily for state franchise taxes.
Net Loss. As a result of the factors described above, net loss was $2.9 million for the second
quarter of 2011 compared to net loss of $3.1 million in the prior year quarter.
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Discussion and Analysis of Results of Operations
Six Months Ended June 30, 2011 and 2010
Six Months Ended June 30, 2011 and 2010
Revenue Analysis. Total revenue for the first half of 2011 was $214.4 million, a decrease of $16.8
million or 7.3%, compared to the first half of 2010. The decrease in revenue was from Guest
Entertainment and Advertising Services revenues, partially offset by increases in revenue from
System Sales and Related Services, Healthcare and Hotel Services. The following table sets forth
the components of our revenue (dollar amounts in thousands) for the six months ended June 30:
2011 | 2010 | |||||||||||||||
Percent | Percent | |||||||||||||||
of Total | of Total | |||||||||||||||
Amount | Revenues | Amount | Revenues | |||||||||||||
Revenues: |
||||||||||||||||
Hospitality and Advertising Services |
||||||||||||||||
Guest Entertainment |
$ | 115,613 | 53.9% | $ | 135,045 | 58.4% | ||||||||||
Hotel Services |
68,851 | 32.1% | 68,612 | 29.7% | ||||||||||||
System Sales and Related Services |
19,970 | 9.3% | 18,576 | 8.1% | ||||||||||||
Advertising Services |
4,789 | 2.3% | 4,924 | 2.1% | ||||||||||||
Total Hospitality and Advertising Services |
209,223 | 97.6% | 227,157 | 98.3% | ||||||||||||
Healthcare |
5,140 | 2.4% | 3,966 | 1.7% | ||||||||||||
$ | 214,363 | 100.0% | $ | 231,123 | 100.0% | |||||||||||
Hospitality and Advertising Services revenue, which includes Guest Entertainment, Hotel
Services, System Sales and Related Services and Advertising Services, decreased $18.0 million or
7.9%, to $209.2 million in the first six months of 2011 compared to $227.2 million in the first six
months of 2010. Average monthly Hospitality and Advertising Services revenue per room was $21.13
in the first half of 2011, a decrease of 1.6% as compared to $21.47 in the prior year period. The
following table sets forth information with respect to Hospitality and Advertising Services revenue
per room for the six months ended June 30:
2011 | 2010 | |||||||
Average monthly revenue per room: |
||||||||
Hospitality and Advertising Services |
||||||||
Guest Entertainment |
$ | 11.68 | $ | 12.76 | ||||
Hotel Services |
6.95 | 6.48 | ||||||
System Sales and Related Services |
2.02 | 1.76 | ||||||
Advertising Services |
0.48 | 0.47 | ||||||
Total Hospitality and Advertising Services revenue per room |
$ | 21.13 | $ | 21.47 | ||||
Guest Entertainment revenue, which includes on-demand entertainment such as movies, television
on-demand, music and games, decreased $19.4 million or 14.4%, to $115.6 million in the first six
months of 2011 as compared to $135.0 million in the prior year period. On a per-room basis,
monthly Guest Entertainment revenue for the first half of 2011 declined 8.5%, to $11.68 compared to
$12.76 for the first half of 2010. This change in revenue per room is affected by a 6.4% reduction
in the average number of rooms served period over period,
the mix of on-demand products purchased and the continued conservative consumer buying pattern of
travelers. Average monthly movie revenue per room was $11.01 for the first six months of 2011, a
7.6% reduction as compared to $11.92 per room in the prior year period. Non-movie Guest
Entertainment revenue per room decreased 20.2% to $0.67 in the first six months of 2011, related to
decreases in television on-demand programming, games and television Internet revenue.
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Hotel Services revenue, which includes recurring revenue from hotels for cable television
programming and broadband Internet service and support, increased $0.3 million or 0.3%, to $68.9
million during the first six months of 2011 versus $68.6 million in the first six months of 2010.
On a per-room basis, monthly Hotel Services revenue for the first half of 2011 increased 7.3%, to
$6.95 compared to $6.48 for the first half of 2010. Monthly cable television programming revenue
per room increased 7.4%, to $6.36 for the first half of 2011 as compared to $5.92 for the first
half of 2010. These increases resulted primarily from price increases on cable television
programming over the prior year period. Recurring broadband Internet revenue per room increased
5.4%, to $0.59 for the current six months as compared to $0.56 for the prior year six months.
System Sales and Related Services revenue includes the sale of cable television programming
equipment, broadband Internet equipment, HDTV installations and other services to hotels. For the
first half of 2011, revenue increased $1.4 million or 7.5%, to $20.0 million as compared to $18.6
million for the first half of 2010. The increase was from increased network design and television
installation services, incremental programming revenue and miscellaneous equipment sales, partially
offset by reductions in broadband equipment sales.
Advertising Services revenue consists of revenue generated by The Hotel Networks (THN), our
advertising services subsidiary. For the first six months of 2011, revenue decreased $0.1 million
or 2.7%, to $4.8 million as compared to $4.9 million in the prior year period. This decrease was
driven by decreased general advertising by national advertisers on our system, offset by increased
channel access revenue, where we provide cable channels to providers for the distribution of their
programming.
Healthcare revenue includes the sale of interactive systems and services to healthcare facilities.
Healthcare revenue increased $1.1 million or 29.6%, to $5.1 million in the first six months of 2011
as compared to $4.0 million for the first six months of 2010, driven by increased professional
services revenues, cable television programming system sales and recurring service, programming and
maintenance agreement revenues. During the current period, we installed 1,515 beds and four
facilities compared to 1,733 beds and seven facilities during the prior year period. We have 10
signed healthcare contracts in our backlog waiting for installation.
Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below). Total direct costs decreased $9.1 million or 7.0%, to $120.4 million in the
first half of 2011 as compared to $129.5 million in the first half of 2010. Total direct costs
were 56.2% of revenue for the first half of 2011 as compared to 56.0% in the first half of 2010.
Direct costs related to the Hospitality and Advertising Services businesses, which include Guest
Entertainment, Hotel Services, System Sales and Related Services and Advertising Services, were
$117.9 million for the first six months of 2011 compared to $127.4 million for the prior year
period. The decrease in total direct costs was driven by lower volume and the continued benefit of
rate reductions in certain components of our cost structure. We had a lower volume of activity in
Guest Entertainment and Hotel Services, related to decreased movie and television on-demand revenue
and a reduction in room count. Rate reductions include reductions in the average commission rate
paid to hotels and lower connectivity costs, realized from right-sizing bandwidth and renegotiating
supplier agreements. Advertising Services also experienced lower fixed costs this period, driven
by lower satellite distribution costs.
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Operating Expenses. The following table sets forth information in regard to operating expenses for
the six months ended June 30 (dollar amounts in thousands):
2011 | 2010 | |||||||||||||||
Percent | Percent | |||||||||||||||
of Total | of Total | |||||||||||||||
Amount | Revenues | Amount | Revenues | |||||||||||||
Operating expenses: |
||||||||||||||||
System operations |
$ | 19,801 | 9.2% | $ | 21,142 | 9.1% | ||||||||||
Selling, general and administrative |
20,528 | 9.6% | 24,429 | 10.6% | ||||||||||||
Depreciation and amortization |
37,423 | 17.5% | 43,097 | 18.6% | ||||||||||||
Restructuring charge |
1,164 | 0.5% | 242 | 0.2% | ||||||||||||
Other operating (income) expense |
(21) | 0.0% | 6 | 0.0% | ||||||||||||
Total operating expenses |
$ | 78,895 | 36.8% | $ | 88,916 | 38.5% | ||||||||||
System operations expenses decreased $1.3 million or 6.3%, to $19.8 million in the first half
of 2011 as compared to $21.1 million in the first half of 2010. The decrease was driven by our
reduction in force program initiated during the first quarter of 2011, as well as lower property
taxes and business insurance costs. As a percentage of total revenue, system operations expenses
increased to 9.2% this period as compared to 9.1% in the first six months of 2010. Per average
installed room, system operations expenses remained stable, at $2.00 per room per month for both
the six months ended June 30, 2011 and 2010.
Selling, general and administrative (SG&A) expenses decreased $3.9 million or 16.0%, to $20.5
million in the current half as compared to $24.4 million in the first half of 2010. The decrease
was also primarily a result of our reduction in force program, as noted above, and our first
quarter expense mitigation initiatives. As a percentage of revenue, SG&A expenses were 9.6% in the
current period as compared to 10.6% in the prior year period. SG&A expenses were $2.07 per average
installed room per month for the current six months as compared to $2.31 in the first six months of
2010.
Depreciation and amortization expenses were $37.4 million in the first six months of 2011 as
compared to $43.1 million in the first six months of 2010. The decline was due to the reduction in
capital investments over the past several years and certain assets becoming fully depreciated. As
a percentage of revenue, depreciation and amortization expenses were 17.5% in the first half of
2011 compared to 18.6% in the first half of 2010.
In January 2011, we initiated a reduction in force program to gain operating efficiencies by
reorganizing departments and reducing layers of management. The reduction in force program reduced
our workforce by approximately 7%. As a result of this action and our previous restructuring and
reduction in force initiatives, we incurred $1.2 million of costs during the six months ended June
30, 2011, of which $1.2 million was related to our Hospitality business and a nominal amount was
related to our Advertising Services business. During the first six months of 2010, we incurred
$0.2 million of costs related to restructuring and workforce reduction activities. Additional
accruals and cash payments related to the restructuring activities are dependent upon reduction in
force or subleasing arrangements, which could change our expense estimates.
Operating Income. As a result of the factors described above, operating income increased to $15.1
million in the first six months of 2011 compared to $12.7 million in the first six months of 2010.
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Interest Expense. Interest expense was $18.6 million in the current period versus $17.4 million in
the first six months of 2010. The all-in weighted average interest rate was 10.2% for the first
six months of 2011 versus 7.1% for the first six months of 2010. The increases in our interest
expense and interest rate were related to the 6.5% interest rate on our amended Credit Facility and
the quarterly payments on our interest rate swap commitments during the first and second quarters
of 2011. The interest rate swaps expired effective June 30, 2011. The outstanding balance of
our debt under the Credit Facility decreased to $368.0 million in the first half of 2011 from
$404.9 million in the first half of 2010. Interest expense for the first six months of 2011
included a net $1.5 million non-cash interest gain related to our interest rate swap position,
including a $6.4 million gain related to the change in fair value of the swaps and $4.9 million in
amortization of deferred losses frozen in other comprehensive income. In the first six months of
2010, interest expense included $1.5 million of non-cash interest charges related to our interest
rate swap position.
Loss on Early Retirement of Debt. During the first half of 2011, we made additional prepayments on
the term loan totaling $2.0 million and, as a result of this prepayment and the Amendment to our
Credit Facility, expensed $0.2 million of unamortized debt issuance costs. During the first half
of 2010, we made additional prepayments on our term loan totaling $66.2 million and expensed $0.8
million of unamortized debt issuance costs.
Taxes. For the first half of 2011 and 2010, we incurred taxes of $435,000 and $414,000,
respectively, primarily for state franchise taxes.
Net Loss. As a result of the factors described above, net loss was $3.8 million for the first six
months of 2011 compared to net loss of $5.6 million in the prior year period.
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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 standalone sales. Under the service agreement, which includes
maintenance and Internet access, we recognize revenue ratably over the term of the maintenance
and service contract, typically three years. |
|
| Broadband System Sales. We provide broadband Internet access through the sale and
installation of equipment. Revenue from the sale and installation of this equipment is
recognized when the equipment is installed. The delivery and installation of the equipment
are concurrent. In addition, this equipment, which can be acquired from other manufacturers
or retailers, has standalone value to the customer. The software used within these systems
can also be supplied by other vendors unrelated to us. Equipment prices are fixed and
determinable prior to delivery and are based on objective and reliable sales evidence from a
standalone basis. |
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| Hotel System Sales and Support. We also market and sell our guest entertainment
interactive systems to hotels, along with recurring support for interactive content, software
maintenance and technical field service, for a fixed fee. Revenue from the sale and
installation of the interactive system, including the operating software, is deferred and
recognized over the term of the contract, generally five years, due to inseparable proprietary
software elements. The multiple elements are not separable because the proprietary software
is required to operate the system and we do not license or sell the software separately under
this business model. The interactive system prices are fixed and determinable prior to
delivery. Revenue from this arrangement, which includes equipment, operating software,
interactive content and maintenance services, is recognized ratably over the term of the
related contract. |
|
| Other Cable Television Programming Systems and Equipment Sales and Services. We generate
revenues from the sale and installation of cable television programming systems (i.e. DIRECTV
satellite systems); from the installation of master antenna (MATV) equipment, including
wiring, at the hotel; and from the sale of miscellaneous system equipment or services, such as
in-room terminals, television remotes or other media devices, along with service parts and
labor. Prices for the equipment or services are fixed and determinable prior to delivery.
The equipment is not proprietary and can be supplied by other vendors. These sales are not
made under multiple element arrangements and we recognize the revenue when the equipment is
delivered or service (repair or installation) has been performed. No future performance
obligation exists on an equipment sale or on a repair service which has been provided. |
|
| Advertising and Media Services. We generate revenue from the sale of advertising-based
media services within our hospitality media and connectivity businesses through our
wholly-owned subsidiary, The Hotel Networks, and server-based channels within our interactive
room base. Advertising-based media services include traditional television advertising,
video-on-demand or interactive advertising, programming carriage services and channel access
services. The Hotel Networks delivers targeted advertising to hotel rooms on, or sells
programming providers access to, 10 satellite-delivered channels, known as the SuperBlock,
which include MSNBC, CNBC, FOX News and The Weather Channel. In addition to the satellite
platform, we generate revenue from server-based channels and other interactive and
location-based applications which can be delivered by our interactive television platform.
Advertising revenue is recognized, net of agency commissions, when advertisements are
broadcast or ratably over a contracted advertising period and when collection is reasonably
assured. We establish the prices charged to each advertiser and no future performance
obligations exist on advertising which has been broadcast. Persuasive evidence of an
arrangement exists through our contracts with each advertiser. |
|
| Healthcare System Sales and Support. We provide our interactive television infrastructure
and content to the healthcare industry. We generate revenue from two sources: 1) the sale and
installation of system equipment and 2) support agreements with the facility to provide
software maintenance, programming and system maintenance for one year. The package price of
the interactive system and related maintenance is fixed and determinable prior to delivery.
The entire selling price of the interactive system is recognized upon installation, and is
calculated using the estimated selling price on a standalone basis. The support arrangement,
which includes interactive content, software maintenance and system services, is renewable
upon completion of the initial year and is recognized ratably over the term of the related
contract. The hospital is under no obligation to contract with us for the support
arrangement. They may contract with other providers and utilize the equipment and software
installed by us. We attained 100% renewal activity for maintenance services, therefore
establishing VSOE of the fair value of maintenance services. |
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Allowance for Doubtful Accounts. We determine the estimate of the allowance for doubtful accounts
considering several factors, including historical experience, aging of the accounts receivable, bad
debt recoveries and contract terms between the hotel and us. In accordance with our hotel
contracts, monies collected by the hotel for interactive television services are held in trust on
our behalf. Collectability is reasonably assured, as supported by our credit check process,
nominal write-off history and broad customer base. Our interactive hotel base is well diversified
in terms of location, demographics and customer contracts. If the financial condition of a hotel
chain or group of hotels were to deteriorate and reduce the ability to remit our monies, we may be
required to increase our allowance by recording additional bad debt expense.
Allowance for Excess or Obsolete System Components. We regularly evaluate component levels to
ascertain build requirements based on our backlog and service requirements based on our current
installed base. When a certain system component becomes obsolete due to technological changes, and
it is determined the component cannot be utilized within our current installed base, we record a
provision through depreciation for excess and obsolete components, based on estimated forecasts of
product demand and service requirements. Additionally, we have components held primarily for
resale, and if the component is not an active item for our assembly or service inventory, we record
a provision through the cost of sales related to that product. We make every effort to ensure the
accuracy of our forecasts of service requirements and future production; however, any significant
unanticipated changes in demand or technological advances could have an impact on the value of
system components and reported operating results.
Long-Lived Assets. We review the carrying value of long-lived assets, such as property and
equipment and intangible assets, whenever events or circumstances indicate the carrying value of an
asset may not be recoverable from the estimated future cash flows expected to result from its use
and eventual disposition. In cases where undiscounted expected future cash flows are less than the
carrying value, an impairment loss is recognized to reduce the carrying value of the asset to its
estimated fair value.
Property and Equipment. Our property and equipment is stated at cost, net of accumulated
depreciation and amortization. Installed hotel systems consist of equipment and related costs of
installation, including certain payroll costs, sales commissions and customer acquisition costs
directly related to the successful acquisition of hotel contracts. Maintenance costs, which do not
significantly extend the useful lives of the respective assets, and repair costs are charged to
system operations expense as incurred. We begin depreciating hotel systems when such systems are
installed and activated. Depreciation of other equipment begins when such equipment is placed in
service. We attribute no salvage value to equipment, and depreciation and amortization are
computed using the straight-line method over the following useful lives:
Years | ||||
Buildings |
30 | |||
Hotel systems |
1 1/2 7 | |||
Other equipment |
3 10 |
Intangible Assets. In accordance with FASB ASC Topics 350, Intangibles - Goodwill and Other, and
360, Property, Plant, and Equipment, we evaluate the remaining useful lives of our intangible
assets with finite lives, and review for impairment when triggering events occur or change in
circumstances warrant modifications to the carrying amount of the assets. These triggering events
or circumstances include a significant deterioration in market conditions. We periodically
evaluate the reasonableness of the useful lives of the intangible assets:
Years | ||||
Hotel contracts and relationships |
10 20 | |||
Tradenames |
7 | |||
Acquired technologies, rights and patents |
2 10 | |||
Content agreements and relationships |
4 |
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Allowance for System Removal. We de-install properties through the course of normal operations due
to a number of factors, including: poor revenue performance, hotel bankruptcy or collection issues,
hotel closings and change in service provider. We regularly evaluate our backlog of properties
scheduled for de-installation and record a provision for estimated system removal costs. The costs
incurred as a result of de-installation include the labor to de-install the system as well as
unamortized installation costs. Over the last five years, de-installation activity was in a range
of 2% to 8% of our installed room base.
Goodwill Impairment. We account for goodwill and other intangible assets under FASB ASC Topic 350,
Intangibles - Goodwill and Other. Under FASB ASC Topic 350, purchased goodwill is not amortized;
rather, it is tested for impairment annually. We perform our goodwill impairment test for each
reporting unit during the fourth quarter. Impairment testing could occur more frequently if there
is a triggering event or change in circumstances which indicate the carrying value may not be
recoverable, such as a significant deterioration in market conditions. We did not encounter such
triggering events during the second quarter of 2011.
Effective January 1, 2011, we adopted additional provisions of FASB ASC Topic 350, which provide
that reporting units with zero or negative carrying amounts are required to perform Step 2 of the
goodwill impairment test if it is more likely than not a goodwill impairment exists. During the
second quarter of 2011, we did not encounter any events or circumstances which could trigger an
impairment of our goodwill or intangible assets; therefore, this adoption has not had any impact on
our consolidated financial position, results of operations or cash flows.
We operate in three reportable segments, Hospitality, Advertising Services and Healthcare, for
which only Hospitality and Advertising Services have goodwill. FASB ASC Topic 350 requires a
two-step impairment test for goodwill, to be performed annually or if a triggering event indicates
the carrying value may not be recoverable. If there was such a triggering event, the first step
would be to compare the carrying amount of the reporting units net assets to the fair value of the
reporting unit. Fair value measurements must take into consideration the principal or most
advantageous market, the highest and best use, the valuation technique and incorporate market
participant assumptions. Valuation techniques to be used to measure fair value are the market
approach, income approach and/or cost approach, and must be based on market participant
assumptions. We consider the income approach to be a more meaningful indicator of fair value over
the use of the market and cost approaches, due to a lack of comparable companies and assets. We
believe the income approach provides the best estimate of fair value, and utilize a discounted cash
flow analysis based on key assumptions and estimates. We would then reconcile the aggregate
reporting units fair values to their indicated market capitalization. Key assumptions used to
determine fair value include projections of revenue and cost data, capital spending, growth and
operating earnings, factored for certain economic conditions. Certain costs within the reporting
units are fixed in nature; therefore, changes in revenue which exceed or fall below the fixed cost
threshold would have an effect on cash flow and recoverability of goodwill.
If the fair value of the reporting unit exceeds the carrying value, no further evaluation is
required and no impairment loss is recognized. If the carrying amount exceeds the fair value, then
the second step must be completed, which involves allocating the fair value of the reporting unit
to each asset and liability, with the excess being implied goodwill. An impairment loss occurs if
the amount of the recorded goodwill exceeds the implied goodwill. We are required to record such
impairment losses as a component of income from continuing operations.
The determination of fair value requires us to make significant estimates and assumptions. These
estimates may differ from actual results due to inherent uncertainty, such as deterioration in
market conditions, prohibiting expected revenue recovery levels. Our revenue is closely linked to
the performance of products and services sold to business and leisure travelers. A significant
slow-down in economic activities could adversely impact our business, financial condition, results
of operations and cash flows. Consequently, our goodwill may be impaired if the market conditions
deteriorate or the capital market erodes. We believe there are no current impacts to our reporting
units.
Recent Accounting Developments
See Note 17 to the financial statements.
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Item 3 Quantitative and Qualitative Disclosures About Market Risk
We are exposed to various market risks, including potential losses resulting from adverse changes
in interest rates and foreign currency exchange rates. We do not enter into derivatives or other
financial instruments for trading or speculative purposes.
At June 30, 2011, we had debt totaling $368.0 million as follows (dollar amounts in thousands):
Carrying | Fair | |||||||
Amount | Value | |||||||
Bank Credit Facility: |
||||||||
Term loan |
$ | 367,308 | $ | 352,616 | ||||
Capital leases |
726 | 726 | ||||||
$ | 368,034 | $ | 353,342 | |||||
The fair value of our long-term debt is estimated based on current interest rates for similar debt
of the same remaining maturities and quoted market prices, except for capital leases, which are
reported at carrying value. For our capital leases, the carrying value approximates the fair
value. In addition, the fair value of our long-term debt is strictly hypothetical and not
indicative of what we are required to pay under the terms of our debt instruments.
We had two interest rate swap agreements, with notional values of $312.5 million, at a fixed rate
of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which expired in June 2011. The
term loan interest rate as of June 30, 2011 was 6.5% and the capital lease interest rate was 7.6%.
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, 2011 was
12.0%, compared to 7.3% for the quarter ended June 30, 2010. We had fixed rate debt of $0.7
million and variable rate debt of $367.3 million. 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, due to our LIBOR floor
of 1.5%.
Economic Condition and Consumer Confidence. Our results are generally connected to the performance
of the lodging industry, where occupancy rates may fluctuate resulting from various factors.
Reduction in hotel occupancy and consumer buy rates, resulting from business, general economic or
other events, such as a recession in the United States, significant international crises, acts of
terrorism, war or public health issues, could adversely impact our business, financial condition
and results of operations. The overall travel industry and consumer buying pattern can be, and has
been in the past, adversely affected by weaker general economic climates, geopolitical instability
and concerns about public health.
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of the end of the
period covered by this Quarterly Report on Form 10-Q, the Chief Executive Officer and Chief
Financial Officer have concluded the disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are effective to ensure information
required to be disclosed by us in reports we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Additionally, our disclosure controls and
procedures were also effective in ensuring information required to be disclosed in our Exchange Act
reports is accumulated and communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting. There was no change in our internal control
over financial reporting during the second quarter of 2011 which has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
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Part II Other Information
Item 1 Legal Proceedings
We are subject to litigation arising in the ordinary course of business. As of the date hereof, we
believe the resolution of such litigation will not have a material adverse effect upon our
financial condition, results of operations or cash flows.
On July 11, 2008, Linksmart Wireless Technology, LLC, a California limited liability company based
in Pasadena, California, filed actions for patent infringement in the U.S. District Court in
Marshall, Texas, against the Company and numerous other defendants, which allege infringement of a
patent issued on August 17, 2004 entitled User Specific Automatic Data Redirection System. On
October 26, 2010, the Court issued an order staying the cases pending the final determination in
the Patent Office re-examination proceeding. No material events occurred in this action during the
six months ended June 30, 2011. Please refer to the description of this matter as contained in the
Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March
14, 2011.
Item 1A Risk Factors
No material change.
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3 Defaults Upon Senior Securities
Not applicable.
Item 5 Other Information
Not applicable.
Item 6 Exhibits
31.1 | Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer |
||
31.2 | Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer |
||
32 | Section 1350 Certifications |
||
101.INS | XBRL Instance Document |
||
101.SCH | XBRL Taxonomy Extension Schema Document |
||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
LodgeNet Interactive Corporation | ||||||
(Registrant) | ||||||
Date: August 5, 2011
|
/ s / Scott C. Petersen | |||||
Scott C. Petersen | ||||||
President, Chief Executive Officer and | ||||||
Chairman of the Board of Directors | ||||||
(Principal Executive Officer) | ||||||
Date: August 5, 2011
|
/ s / Frank P. Elsenbast | |||||
Frank P. Elsenbast | ||||||
Senior Vice President, Chief Financial Officer | ||||||
(Principal Financial & Accounting Officer) |
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