UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

Commission file number: 001-13957

WESTCOAST HOSPITALITY CORPORATION

(509)459-6100
(Registrant’s telephone number, including area code)

     Indicated 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

     As of October 28, 2004 there were 13,060,919 shares of the registrant’s common stock outstanding.

WESTCOAST HOSPITALITY CORPORATION


Form 10-Q
For the Quarter Ended September 30, 2004


TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WestCoast Hospitality Corporation

The accompanying condensed notes are an integral part of the consolidated financial statements.

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WestCoast Hospitality Corporation

The accompanying condensed notes are an integral part of the consolidated financial statements.

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WestCoast Hospitality Corporation

The accompanying condensed notes are an integral part of the consolidated financial statements.

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WestCoast Hospitality Corporation
Consolidated Statements of Cash Flows (unaudited), (continued)
For the Nine Months Ended September 30, 2004 and 2003

The accompanying condensed notes are an integral part of the consolidated financial statements.

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WestCoast Hospitality Corporation

1. Organization

     WestCoast Hospitality Corporation (“WestCoast” or the “Company”) is a NYSE-listed hospitality and leisure company primarily engaged in the ownership, management, development and franchising of mid-scale, full service hotels under its WestCoast and Red Lion brands. As of September 30, 2004, the hotel system contained 68 hotels located in 12 states and one Canadian province, with more than 11,600 rooms and 550,000 square feet of meeting space. The Company managed 45 of these hotels, consisting of 29 owned hotels, 13 leased hotels and three third-party owned hotels. The remaining 23 hotels were owned and operated by third-party franchisees.

     The Company is also engaged in entertainment and real estate operations. Through the entertainment division, which includes TicketsWest.com, Inc., the Company engages in event ticket distribution and promotion and presents a variety of entertainment productions in communities targeted for hotel market penetration. The real estate division engages in the traditional real estate related services that the Company has pursued since its predecessor was originally founded in 1937, including developing, managing and providing broker services for sales and leases of commercial and multi-unit residential properties.

     The Company was incorporated in the State of Washington on April 25, 1978. The financial statements encompass the accounts of WestCoast Hospitality Corporation and all of its consolidated subsidiaries, including its 100% ownership of Red Lion Hotels, Inc. and WestCoast Hotels, Inc., its approximately 98% ownership of WestCoast Hospitality Limited Partnership (“WHLP”), and a 50% interest in a real estate limited partnership. The financial statements also include an equity method investment in a 19.9% owned real estate limited partnership and certain cost method investments in various entities included as other assets, over which the Company does not exercise significant influence. All significant inter-company transactions and accounts have been eliminated upon consolidation.

2. Basis of Presentation

     The unaudited consolidated financial statements included herein have been prepared by WestCoast pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as permitted by such rules and regulations. The balance sheet as of December 31, 2003 has been compiled from the audited balance sheet as of such date. The Company believes that the disclosures included herein are adequate; however, these consolidated statements should be read in conjunction with the financial statements and the notes thereto for the year ended December 31, 2003 previously filed with the SEC on Form 10-K.

     In the opinion of management, these unaudited consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly the consolidated financial position of the Company at September 30, 2004 and the consolidated results of operations and cash flows for the periods ended September 30, 2004 and 2003. The results of operations for the periods presented may not be indicative of those which may be expected for a full year.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures of contingent liabilities. Accordingly, ultimate results could differ materially from those estimates.

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3. Trust Preferred Offering

     During the first quarter of 2004 the Company completed a public offering of $46 million of trust preferred securities through WestCoast Hospitality Capital Trust (the “Trust”), a Delaware statutory trust sponsored by the Company. The securities are listed on the New York Stock Exchange and entitle holders to cumulative cash distributions at a 9.5% annual rate and the securities mature on February 24, 2044. In addition, the Company invested $1.4 million in trust common securities, representing 3% of the total capitalization of the Trust.

     The Trust used the proceeds of the offering and the Company’s investment to purchase from the Company $47.4 million of its junior subordinated debentures with payment terms that mirror the distribution terms of the trust securities. The cost of the trust preferred offering totaled $2.3 million, including $1.7 million of underwriting commissions and expenses and $614 thousand of costs incurred directly by the Trust. The Trust paid these costs utilizing an advance from the Company. The advance to the Trust is included with other long-term assets on the accompanying consolidated balance sheet. The proceeds from the debenture sale, net of the costs of the trust preferred offering and the Company’s investment in the Trust, were $43.7 million. The Company’s accounting treatment for these events follows the guidance further discussed in Note 8.

     The Company used approximately $29.8 million of the net proceeds to pay accrued dividends on, and redeem in full, all outstanding shares of its Series A and Series B preferred stock on February 24, 2004. The Company is using the $13.9 million balance of the net proceeds for general corporate purposes including capital improvements.

4. Hotel Acquisitions

     Through 2003, the Company leased and operated a hotel in Yakima, Washington. The lease, as amended, included an option to purchase the property by December 31, 2003. In September 2003, the Company exercised the option to purchase the Red Lion Hotel Yakima Gateway and closed the purchase transaction in January 2004 utilizing certain tax deferred proceeds from the sale of the Red Lion River Inn completed in 2003. The gross purchase price of the hotel under the option, paid in cash, totaled $5.3 million. In addition, the Company maintained an option with a cost basis of $1.0 million that has become part of the new basis in the property and equipment.

     As part of a business combination in 1999, the Company assumed a lease on a hotel in Bellevue, Washington and has operated the property since that date. The lease included an option to purchase the property by December 31, 2003. In December 2003, the Company exercised its option to purchase the Red Lion Hotel Bellevue for $12.0 million. The Company completed the purchase of this hotel on April 17, 2004 utilizing certain tax deferred proceeds from the sale of the Red Lion River Inn completed in 2003. The gross purchase price of the hotel under the option, paid in cash, totaled $3.3 million. In addition, the Company maintained an option with a cost basis of $9.1 million and assumed debt totaling $7.9 million that has become part of the new basis in the property and equipment.

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5. Business Segments

     The Company has four operating segments: (1) hotels and restaurants; (2) franchise, central services and development; (3) entertainment; and (4) real estate. Corporate services consists primarily of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables and certain property and equipment which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense. Therefore, interest expense is not allocated to the segments. Selected information with respect to the segments is as follows (in thousands):

6. Earnings Per Common Share

     The following table presents a reconciliation of the numerators and denominators used in the basic and diluted earnings per common share computations for the three months and nine months ended September 30, 2004 and 2003 (in thousands, except per share amounts):

(a)

For the three month and nine month periods ended September 30, 2004 and 2003, the dilutive effect of converting 286,161 operating partnership (“OP”) units is included in the calculation of diluted earnings per share.

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(b)

At September 30, 2004 and 2003 the Company had 593,033 and 810,425 options outstanding to purchase common shares, respectively. For the nine months ended September 30, 2004 the dilutive effect of converting 752 options to purchase common shares is included in the calculation of diluted earnings per share. For the three months ended September 30, 2003 and 2004, and for the nine months ended September 30 , 2003, the effect of the shares that would be issuable upon exercise of these outstanding options would be anti-dilutive and the options are therefore excluded from the above weighted average share calculations.

(c)

All outstanding convertible notes are excluded from the above calculation for all periods presented as they would be antidilutive.

7. Stock Based Compensation

     As permitted by Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”), as amended by Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS No. 148”), the Company has chosen to measure compensation cost for stock-based employee compensation plans using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and to provide the disclosure only requirements of SFAS No. 123, including frequent and prominent disclosure of stock-based compensation expense.

     The Company has chosen not to record compensation expense for its stock based employee plans using fair value measurement provisions in the statement of operations. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under the plans, reported net income and earnings per share would have been changed to the pro forma amounts indicated below (in thousands, except per share amounts):