UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

Form 10-K

 

 

Commission File Number: 001-13957

Red Lion Hotels Corporation

(Exact name of registrant as specified in its charter)

 

 

Registrant’s Telephone Number, Including Area Code: (509) 459-6100

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)  Yes o     No þ

 

The aggregate market value of the registrant’s common stock as of June 30, 2010 was $110.0 million, of which 69.9% or $76.9 million was held by non-affiliates as of that date. As of March 8, 2011, there were 18,993,267 shares of the Registrant’s common stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Registrant’s Proxy Statement for its 2011 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the Registrant’s 2010 fiscal year, are incorporated by reference herein in Part III.

 

 

 

TABLE OF CONTENTS

 

 

This annual report on Form 10-K includes forward-looking statements. We have based these statements on our current expectations and projections about future events. When words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will” and similar expressions or their negatives are used in this annual report, these are forward-looking statements. Many possible events or factors, including those discussed in “Risk Factors” under Item 1A of this annual report, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report.

 

In this report, “we,” “us,” “our,” “our company,” “the company” and “RLH” refer to Red Lion Hotels Corporation and, as the context requires, all of its wholly and partially owned subsidiaries, including its 100% ownership of Red Lion Hotels Holdings, Inc. and Red Lion Hotels Franchising, Inc. and its more than 99% ownership of Red Lion Hotels Limited Partnership. “Red Lion” refers to the Red Lion brand. The terms “the system,” “system-wide hotels” or “system of hotels” refer to our entire group of owned, leased and franchised hotels.

 

 

Introduction

 

We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, operation and franchising of midscale, full, select and limited service hotels under our proprietary Red Lion brand. Established over 30 years ago, the Red Lion brand is nationally recognized and particularly well known in the western United States, where our hotels are located. The Red Lion brand is typically associated with three-star full and select service hotels.

 

Our company was incorporated in the state of Washington in April 1978, and operated hotels until 1999 under various brand names including Cavanaughs Hotels. In 1999, we acquired WestCoast Hotels, Inc., and rebranded our Cavanaughs hotels to the WestCoast brand, changing our name to WestCoast Hospitality Corporation. In 2001, we acquired Red Lion Hotels, Inc. In September 2005, after rebranding most of our WestCoast hotels to the Red Lion name, we changed our company name to Red Lion Hotels Corporation. All of our hotels operate under the Red Lion brand.

 

Red Lion has created an environment that allows our customers to feel at home while they travel. Our product and service culture is successful in both urban and smaller markets, and our hotels strive to reflect the character of the local markets in which they operate while maintaining a consistent, comfortable and friendly experience. We believe our focus on customer service and consistent brand touch-points allow guests to “Stay Comfortable.” Our goal is to create the most memorable guest experience possible, through personalized service, allowing us to be a leader in our markets. We believe that providing our guests a consistent, comfortable and friendly experience in the warm, authentic way that Red Lion has historically been known for will drive our hotels’ success.

 

As of December 31, 2010, our system of hotels contained 44 hotels located in eight states and one Canadian province, with 8,557 rooms and 425,397 square feet of meeting space as provided below:

 

 

Operations

 

We operate in three reportable segments:

 

The hotels segment derives revenue primarily from guest room rentals and food and beverage operations at our owned and leased hotels. As of December 31, 2010, we operated 31 hotels, of which 19 are wholly-owned and

12 are leased. During 2010, our hotel segment accounted for approximately 90.9% of total revenues. In September 2010, and as further discussed in Note 22 of Notes to Consolidated Financial Statements, we concluded that one of our leased hotels in Astoria, Oregon had reached the end of its useful life and the hotel was closed. Accordingly, the operations of that hotel have been classified as discontinued operations in our financial statements.

 

The franchise segment is engaged primarily in licensing the Red Lion brand to franchisees. This segment generates revenue from franchise fees that are typically based on a percent of room revenues and are charged to hotel owners in exchange for the use of our brand and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. As of December 31, 2010, we had 13 franchised hotels operating under the Red Lion brand. During 2010, our franchise segment accounted for approximately 2.0% of total revenues.

 

The franchise segment has also historically reflected revenue from management fees charged to the owners of managed hotels. We have not managed any hotels for third parties since January 2008.

 

The entertainment segment derives revenues primarily from ticketing services and promotion and presentation of entertainment productions under the operations of TicketsWest and WestCoast Entertainment. We offer ticketing inventory management systems, call center services, and outlet/electronic channel distribution for event locations. We have developed an electronic ticketing platform that is integrated with our electronic hotel distribution system. During 2010, our entertainment segment accounted for approximately 5.6% of total revenues.

 

Our remaining activities, none of which constitutes a reportable segment, have been aggregated into “other.”

 

A summary of our reporting segment revenues is provided below (in thousands, except for percentages). For further information regarding our business segments, see Note 4 of Notes to Consolidated Financial Statements.

 

 

Revenue per available room (“RevPAR”) for owned and leased hotels on a comparable basis for 2010 increased 5.4% due to a 160 basis point increase in occupancy and a 2.5% increase in average daily rate (“ADR”). The increase in rate was primarily driven by a continued emphasis on modifications to our food and beverage offerings. System-wide, which includes franchised hotels, RevPAR on a comparable basis increased 3.5% year-over-year due to a 120 basis point increase in occupancy and a 1.4% increase in ADR. Average occupancy, ADR and RevPAR statistics are provided below:

 

Change from prior comparative periods:

 

 

 

 

Average occupancy, ADR and RevPAR, as defined below, are widely used in the hospitality industry and appear throughout this document as important measures to the discussion of our operating performance.

 

 

Throughout this document and unless otherwise stated, RevPAR, ADR and average occupancy statistics are calculated using statistics for comparable hotels. Some of the terms used in this report, such as “full service,” “upscale” and “midscale” are consistent with those used by Smith Travel Research, an independent statistical research service that specializes in the lodging industry. Our hotels are typically classified by Smith Travel Research in the upscale and midscale with food and beverage chain scale.

 

Company Strategy

 

Red Lion’s strategy is to grow the brand and profitability through (1) sales and marketing initiatives; (2) franchising; and (3) leveraging existing assets to grow franchise business.

 

Sales & Marketing Initiatives

 

We have invested in sales and marketing talent and technology to grow group and preferred corporate business and provide additional sales resources for our franchise properties as well as better market the Red Lion brand. The group market comprises nearly 30% of total room revenue and serves as a cushion to offset seasonal transient business. It also heavily influences our ability to drive higher rated transient business as compression occurs with available room inventory. We plan to continue to focus on this market going forward.

 

Franchising

 

We believe franchising represents a profitable, non-capital intensive growth opportunity. Our strategy is to commit adequate resources to substantially grow the Red Lion brand through franchising in the coming years. As we have demonstrated with recent new franchisees, our near term effort will continue in Red Lion’s historic geographic footprint in the western U.S., targeting well located limited, select and full service hotels. The Red Lion brand has been well known in the geographic areas in which we currently operate for more than 30 years, which we feel is attractive to potential franchisees looking for options to reduce costs and increase flexibility yet offer a distinct product valued by customers.

Today’s economy has forced many hotel owners to look for alternatives in reducing their operating costs and capital requirements, many of which are brand imposed and believed to be unnecessary, from an owner’s viewpoint. By allowing both limited and full service hotels to operate under the Red Lion brand, we are uniquely positioned to provide an appealing alternative for such owners, so our plan will incorporate pursuing 10 to 20 year old hotels whose owners face what they perceive to be unreasonable renovation requirements and who need a strong distribution system. Red Lion features an owner-friendly approach, based on the following: 1) A high level of brand support and access to Red Lion decision makers; 2) Flexibility in renovations, 3) Leading distribution technology and sales support.

 

As the owner of the Red Lion brand, we offer a strong support system by providing a full range of franchise services that we believe are valuable to hotel owners, including (i) central reservations, (ii) revenue management, (iii) national and regional sales, (iv) marketing, (v) systems, operations and customer service training, (vi) corporate purchasing programs and (vii) quality evaluations.

 

In 2010, we invested heavily in franchise support and development resources. We hired a strong development team headed by an executive with years of experience in the hotel franchise development business. We also built a support team to ensure that we can deliver a positive and profitable experience for our new and existing franchise owners.

 

Leveraging Assets

 

We have also embarked on a program of strategic asset sales to unlock real estate value by means of very selective reduction in asset ownership. We are actively marketing three of our owned assets with the goal of retaining management and franchise rights with the new owners. Currently, our real estate holdings that are being marketed include our Red Lion Hotel on Fifth Avenue in downtown Seattle, Washington, our Red Lion Hotel Denver Southeast in Aurora, Colorado, and our Red Lion Colonial Hotel in Helena, Montana.

 

Proceeds will be used to restructure the Company’s balance sheet, which includes reducing debt. This will create the financial flexibility necessary to refinance and reposition remaining hotel properties as the market rebounds while better positioning the Company for growth through franchising.

 

Hotel Operations Strategy

 

We will continue to seek ways to improve profitability in 2011 through growth in revenue via the following initiatives:

 

 

 

Summary

 

Our current hotels are primarily located in eight Western states, with the majority in secondary and tertiary markets. We believe the current operating environment provides us the opportunity to grow our business through redeployment of capital along with franchising, as hotel owners seek to improve profitability through an affiliation with a strong regional hotel brand. We will continue to build on the strength and recognition of the Red Lion brand in the geographic footprint we have built as a platform for growth and achievement of long-term profitability and returns to shareholders.

 

During 2011, we expect overall economic conditions to continue to improve, although we believe that conditions in the markets in which we operate will be challenging in the first half of the year. While our goal is to deliver bottom-line profitability through the above described initiatives, there can be no assurance our results of operations will be similar to our results reported in prior stabilized years if economic conditions do not improve.

 

Employees

 

As of December 31, 2010, we employed 2,463 people on a full-time or part-time basis, with 2,313 directly related to hotel operations. We also had 94 employees in other operating segments, primarily within our entertainment segment, and 56 employees in our corporate office. Our total number of employees fluctuates seasonally, and we employ many part-time employees.

 

At December 31, 2010, approximately 4.9% of our total workforce was covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and organized settlement of labor disputes. We believe our employee relations are satisfactory.

 

Available Information

 

Through our website (www.redlion.com), we make available our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, amendments to these filings and all other reports and documents that we file with the U.S. Securities and Exchange Commission (“SEC”) pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. The public may read and copy the materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

 

Our internet website also contains our Code of Business Conduct and Ethics, our Corporate Governance Guidelines; charters for our Audit, Compensation and Nominating and Corporate Governance Committees, Accounting and Audit Complaints and Concerns Procedures, our Statement of Policy with Respect to Related Party Transactions and information regarding shareholder communications with our board of directors.

 

We are subject to various risks, including those set forth below, that could have a negative effect on our financial condition and could cause results to differ materially from those expressed in forward-looking statements contained in this report or other Red Lion communications.

 

General economic conditions will continue to negatively impact our results and liquidity.

 

Most business has been affected by current economic factors, including Red Lion. Discretionary travel has been impacted by economic pressures, which in turn has impacted the hospitality industry and our company. Higher unemployment, lower family income, lower corporate earnings, lower business investment and lower consumer spending all have reduced the demand for hotel rooms and related lodging services and put pressure on industry room rates and occupancy. In 2011, we expect our operations and financial results will continue to be impacted by general economic conditions, weakened hospitality demand and constraints on availability of financing. Factors such as continued unfavorable economic conditions, a significant decline in demand for lodging, or continued instability of the credit and capital markets could result in further pressure on credit, which could negatively impact our ability to obtain future financing on acceptable terms and our liquidity in general. While we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital, debt servicing and capital expenditures for the foreseeable future, if our operating results worsen significantly and our cash flow or capital resources prove inadequate or we do not meet our financial debt covenants, we could potentially face liquidity problems that could adversely affect our results of operations and financial condition.

 

Due to the geographic concentration of the hotels in our system, our results of operations and financial condition are subject to fluctuations in regional economic conditions.

 

Of the 44 hotels in our system at December 31, 2010, 34 are located in Oregon, Washington, Idaho and Montana. Our results of operations and financial condition may be impacted by the economy of the Pacific Northwest, which is dependent in large part on a limited number of major industries, including agriculture, tourism, technology, timber and aerospace. These industries may be affected by:

 

 

In addition, companies in these industries may decide to relocate all or part of their businesses outside the Pacific Northwest. Any of these factors could materially affect the local economies in which these industries operate and where we have a presence. Other adverse events specifically affecting the Pacific Northwest, such as economic recessions or natural disasters, could cause a loss of revenues for our hotels in this region. Our concentration of assets within this region may put us at greater economic risk. In addition, we operate or market multiple hotels within several markets. A downturn in general economic or other relevant conditions in these specific markets or in any other market in which we operate could lead to a decline in demand in these markets and cause a loss of revenues from these hotels.

 

Our operating results are subject to conditions affecting the lodging industry.

 

Our revenues and operating results may be impacted by and continue to fluctuate due to a number of factors, including but not limited to:

 

 

 

Any of these factors could adversely impact hotel room demand and pricing and thereby reduce occupancy, ADR and RevPAR; give rise to government imposed fines or private litigants winning damage awards against us; or otherwise adversely affect our results of operations and financial condition.

 

Our expenses may remain constant or increase even if revenues decline.

 

The expenses of owning and operating a hotel are not necessarily reduced when circumstances such as market factors and competition cause a reduction in its revenues. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately. In addition, we have recently been investing in sales and marketing, franchising, technology and personnel resources in an effort to position our company for future growth. These investments may not produce returns we anticipate or the returns may take longer to achieve than expected.

 

We are exposed to impairment risk of goodwill, intangibles and other long-lived assets.

 

Financial and credit market volatility directly impacts fair value measurement through our company’s estimated weighted average cost of capital used to determine discount rate, and through our common stock price that is used to determine market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are a short-term swing or a longer-term trend. At December 31, 2010 and 2009, our recorded goodwill remained unchanged at $28.0 million, and other intangible assets totaled $8.0 million and $10.2 million, respectively. While we have not previously recorded any impairment losses for goodwill, continued adverse market conditions could have a further impact on the fair value of our reporting units that could result in future impairments of goodwill, intangible and other long-lived assets. In addition, we recently announced plans to offer for sale our Red Lion Hotel Fifth Avenue in Seattle, Washington, our Red Lion Hotel

Denver Southeast in Aurora, Colorado, and our Red Lion Colonial Hotel in Helena, Montana. Sales of one or more of these hotels or other assets may also result in disposal of goodwill, intangibles and other long-lived assets.

 

The assessment for possible impairment requires us to make judgments, including:

 

 

In accordance with the guidance for the impairment of long-lived assets, if the expected undiscounted future cash flows are less than net book value, the excess of net book value over estimated fair value is charged to current earnings. As discussed further in Note 7 of Notes to Consolidated Financial Statements, assets with a carrying amount of $3.7 million were written down to their estimated fair value, resulting in a non-cash impairment charge of $3.7 million for the year ended December 31, 2010. Additionally, as discussed further in Note 8 of Notes to Consolidated Financial Statements, an intangible asset related to a lease contract was written down to its fair value, resulting in a non-cash impairment charge of $2.0 million. Both impairment charges related to the termination of a sublease agreement at our Red Lion Hotel Sacramento. Changes in our estimates and assumptions as they relate to valuation of goodwill, intangibles and other long-lived assets could affect, potentially materially, our financial condition or results of operations in the future.

 

We have incurred debt financing and may incur increased indebtedness in connection with growth of our system of hotels, capital expenditures or for other corporate purposes.

 

A substantial portion of our outstanding indebtedness is secured by individual properties. Neither our Articles of Incorporation nor our Bylaws limit the amount of indebtedness that we may incur. Subject to limitations in our debt instruments, we may incur additional debt in the future to finance growth of our system of hotels, renovations and for general corporate purposes. Accordingly, we could become highly leveraged, resulting in an increase in debt service that could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions, including increases in interest rates, and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. Our indebtedness is, and will likely continue to be, secured by mortgages on our owned hotels. If we are not able to meet our debt service obligations, we risk the loss of some or all of our assets, including our hotels, to foreclosure.

 

Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable to us. In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to sell one or more of our owned hotels at unattractive prices. Economic conditions could result in higher interest rates, which would increase debt service requirements on our variable rate credit facilities and could reduce the amount of cash available for general corporate purposes.

 

Our business is capital intensive and any potential acquisition, development, redevelopment and renovation projects might be more costly than we anticipate.

 

We are committed to keeping our properties well maintained and attractive to our customers in order to enhance our competitiveness within the industry. This creates an ongoing need for cash, and to the extent we or our franchisees cannot fund expenditures from cash generated from operations, funds must be borrowed or otherwise obtained. Hotel redevelopment, renovation and new project development are subject to a number of risks, including:

 

 

 

As a result, we could incur substantial costs for projects that are never completed. Further, financing for these projects may not be available or, even if available, may not be on terms acceptable to us. The availability of funds for new investments and maintenance of existing hotels depends in part on capital markets and liquidity factors over which we can exert little control. Any unanticipated delays or expenses incurred in connection with the acquisition, development, redevelopment or renovation of the hotels in our system could impact expected revenues and availability of funds, negatively affect our reputation among hotel customers, owners and franchisees and otherwise adversely impact our results of operations and financial condition, including the carrying costs of our assets.

 

Failure to comply with debt covenants could adversely affect our financial results or condition.

 

We maintain a $30 million revolving credit facility that includes customary affirmative and negative covenants, the most restrictive of which are financial covenants dealing with leverage, interest coverage and debt service coverage. At December 31, 2010, we had $18 million outstanding under the facility and were in compliance with our covenants. We also have variable rate indebtedness secured by our Red Lion Bellevue and Templins properties, the principal balance of which was $12.4 million at December 31, 2010. This indebtedness has restrictive covenants that mirror those of our credit facility. There is no assurance that we will be able to comply with these covenants in the future. Any failure to do so could result in a demand for immediate repayment of our obligations under the credit facility and any other indebtedness for which such failure or repayment demand constitutes an event of default, which would adversely affect our results of operation and financial condition, and limit our ability to obtain financing. For additional information, see Note 3 of Notes to Consolidated Financial Statements and Note 10 of Notes to Consolidated Financial Statements.

 

We will be required to refinance our revolving credit facility this year and other indebtedness this year and in 2013, and there is no assurance that we will be able to refinance that debt on competitive terms.

 

Our revolving credit facility matures on September 13, 2011. As a result, we will be required to repay, refinance or renegotiate the facility prior to that date. Our ability to refinance the facility on acceptable terms will depend on a number of factors, including our degree of leverage, the value of our assets, borrowing restrictions which may be imposed by lenders and conditions in the credit markets at the time we refinance. We also have at least $23.4 million in term debt maturing this year, and $49.9 million maturing in 2013. The availability of funds for new investments and improvement of existing hotels depends in large measure on capital markets and liquidity factors over which we can exert little control. There is no assurance that we will be able to obtain additional financing when needed on acceptable terms. For additional information, see Note 10 of Notes to Consolidated Financial Statements and Note 11 of Notes to Consolidated Financial Statements.

 

The lodging industry is highly competitive, which may impact our ability to compete successfully with other hospitality and leisure companies.

 

The lodging industry is comprised of numerous national, regional and local hotel companies and is highly competitive. Competition for occupancy is focused on three major segments of travelers: business travelers, convention and group business travelers and leisure travelers. All three segments are significant occupancy drivers for our hotel system and our marketing efforts are geared towards attracting their business.

 

Competition in the industry is primarily based on service quality, range of services, brand name recognition, convenience of location, room rates, guest amenities and quality of accommodations. We compete against national limited and full service hotel brands and companies, as well as various regional and local hotels in the midscale and upscale full-service hotel segments of the industry. Many of our competitors have greater name recognition, a larger network of locations and greater marketing and financial resources than we do. Additionally, new and existing competitors may offer significantly lower rates, greater convenience, services or amenities or superior facilities,

which could attract customers away from our hotels. Our ability to remain competitive and to attract and retain customers depends on our success in differentiating and enhancing the quality, value and efficiency of our product and customer service.

 

We also compete with other hotel brands and management companies for hotels to add to our system, including through franchise and management agreements. Our competitors include management companies as well as large hotel chains that own and operate their hotels and franchise their brands. As a result, the terms of prospective franchise and management agreements may not be as favorable as our current agreements. In addition, we may be required to make investments in or guarantee the obligations of third parties or guarantee minimum income to third parties in connection with future franchise or management agreements.

 

If we are unable to compete successfully in these areas, our market share and operating results could be diminished, resulting in a decrease in occupancy, ADR and RevPAR for our hotels. Changes in demographics and other changes in our markets may also adversely impact the convenience or desirability of our hotel locations, thereby reducing occupancy, ADR and RevPAR and otherwise adversely impacting our results of operations and financial condition.

 

We may be unsuccessful in identifying and completing franchise acquisitions, which could limit our ability to implement our growth strategy and result in significant expense.

 

We are currently pursuing the expansion of our franchise operations in markets where we currently operate and in selected new markets. This may require considerable management time as well as start-up expenses for market development before any significant revenues and earnings are generated. There can be no assurance that we will be successful in achieving our objectives with respect to growing the number of franchised hotels in our system or that we will be able to attract qualified franchisees.

 

The growth in the number of franchised hotels is subject to numerous risks, many of which are beyond the control of our franchisees or us. Among other risks, the following factors affect our ability to achieve growth in the number of franchised hotels:

 

 

the availability of hotel management, staff and other personnel;

 

the cost and availability of suitable hotel locations;

 

the availability and cost of capital to allow hotel owners and developers to fund investments;

 

cost effective and timely construction of hotels (which can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions); and

 

securing required governmental permits;

 

 

Our failure to compete successfully for franchise properties or to attract and maintain relationships with hotel owners and hotel investors could adversely affect our ability to expand our system of hotels. An inability to implement our growth strategy could limit our ability to grow our revenue base and otherwise adversely affect our results of operations.

If our franchisees terminate or fail to renew their relationship with our company, or if new franchise hotels are unable to effectively integrate into our system, our franchise revenue will decline.

 

As of December 31, 2010, there were 13 hotels in our system that were owned by others and operated under franchise agreements. Franchise agreements generally specify a fixed term and contain various early termination provisions, such as the right to terminate upon notice by paying us a termination fee. There is no assurance that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms.

 

Government regulation could impact our franchise business.

 

The Federal Trade Commission (the “FTC”), various states and certain foreign jurisdictions where we market franchises regulate the sale of franchises. The FTC requires franchisors to make extensive disclosure to prospective franchisees but does not require registration. A number of states in which our franchisees operate require registration or disclosure in connection with franchise offers and sales. In addition, several states in which our franchisees operate have “franchise relationship laws” or “business opportunity laws” that limit the ability of the franchisor to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. While our business has not been materially affected by such regulation, there can be no assurance that this will continue or that future regulation or legislation will not have such an effect.

 

The results of some of our hotels are significantly impacted by group contract business and other large customers, and the loss of such customers for any reason could harm our operating results.

 

Group contract business and other large customers, or large events, can significantly impact the results of operations of our hotels. These contracts and customers vary from hotel to hotel and change from time to time. Such contracts are typically for a limited period of time after which they may be eligible for competitive bidding. The impact and timing of large events are not always predictable and are often episodic in nature. The operating results for our hotels can fluctuate as a result of these factors, possibly in adverse ways, and these fluctuations can harm our overall operating results.

 

Our success depends on the value of our name, image and brand. If demand for our hotels decreases or the value of our name, image or brand diminishes, our business and operations would be harmed.

 

Our success depends, to a large extent, on our ability to shape and stimulate consumer tastes and demands by maintaining innovative, attractive and comfortable properties and services, as well as our ability to remain competitive in the areas of design and quality. If we are unable to anticipate and react to changing consumer tastes and demands in a timely manner, our results of operations and financial condition could be harmed.

 

Our business would be harmed if our public image or reputation were to be diminished by the operations of any of the hotels in our system. Our brand name and trademarks are integral to our marketing efforts. If the value of our name, image or brand were diminished, our business and operations would be harmed.

 

The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our hotels and harm our financial condition.

 

Real estate investments are relatively illiquid, and therefore our ability to promptly sell one or more of our hotels in response to changing economic, financial or investment conditions is limited. The real estate market, including the market for our hotels, is affected by many factors, such as general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. If we decide to sell one or more of our hotels, we may be unable to do so and, even if we are able to sell the hotels, it may take us a long time to find willing purchasers and the sales may be on unfavorable terms. We also may be required to expend funds to correct defects or to make improvements before a hotel can be sold. If we do not have funds available for such purposes, our ability to sell the hotel could be restricted or the price at which we can sell the hotel may be less than if these improvements were made.

In addition, it may be difficult or impossible to convert hotels to alternative uses if they become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to an alternative use would also generally require substantial capital expenditures.

 

This inability to respond promptly to changes in the performance of our hotels could adversely affect our financial condition and results of operations as well as our ability to service debt, including our debentures. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our hotels.

 

Our recently announced plans to offer for sale the Red Lion Hotel on Fifth Avenue in Seattle, Washington, the Red Lion Hotel Denver Southeast in Aurora, Colorado and the Red Lion Colonial Hotel in Helena, Montana may not be completed as anticipated.

 

Earlier this year we announced plans to offer for sale our Red Lion Hotel on Fifth Avenue in Seattle, Washington, our Red Lion Hotel Denver Southeast in Aurora, Colorado, and our Red Lion Colonial Hotel in Helena, Montana. Sales of one or more of these hotels may take longer than anticipated, may not occur at all, or may occur at price points that do not meet all of our objectives for the sales. In addition, the sale of these properties may negatively impact the value of the Red Lion brand or our ability to obtain new franchisees, particularly if the purchasers do not continue to flag the hotels with the Red Lion brand or if they do not maintain the hotels in a manner that meets guest expectations.

 

Risks associated with real estate ownership may adversely affect revenue or increase expenses.

 

We are subject to varying degrees of risk that generally arise from the ownership of real property. Revenue and cash flow from our hotels and other real estate may be adversely affected by, and costs may increase as a result of, changes beyond our control, including but not limited to:

 

 

There is currently a proposal to expand light rail to Bellevue, Washington, which could result in taking of a portion or all of our property in that city. While we may oppose such actions, if one or more of our hotels were taken through the eminent domain process, particularly at a time when hotel prices are depressed, we might not receive compensation commensurate with the long-term fair value of the property, and in addition, we may lose business presence in that market.

 

These adverse conditions could potentially cause the terms of our borrowings to change unfavorably. In such circumstances, if we were in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to sell one or more hotels at unattractive prices. Unfavorable changes in one or more of these conditions could also result in unanticipated expenses and higher operating costs, thereby reducing operating margins and otherwise adversely affecting our results of operations and financial condition.

 

The increasing use of third-party travel websites by consumers may adversely affect our profitability.

 

Some of our hotel rooms may be booked through third-party travel websites such as Priceline.com, Travelocity.com and Expedia.com. As internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of these

internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. We believe that these internet intermediaries hope that consumers will eventually develop brand loyalties to their reservation systems. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through internet intermediaries increases significantly, our profitability may be adversely affected.

 

Our hotels may be faced with labor disputes which would harm the operation of our hotels.

 

We rely heavily on our employees to provide high-quality personal service at our hotels. At certain of our owned and leased hotels, employees are covered by collective bargaining agreements, and attempts could be made in the future to unionize our employees at other locations. Any labor dispute or stoppage could harm our ability to provide high-quality personal services, which could reduce occupancy and room revenue, tarnish our reputation and harm our results of operations.

 

We may have disputes with the owners of the hotels that we manage or franchise.

 

The nature of our responsibilities under our franchise agreements or any hotel management agreements we may enter into in the future may, in some instances, be subject to interpretation and may give rise to disagreements. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential franchisees and hotel owners and joint venture partners; however, we may not always be able to do so. Failure to resolve such disagreements may result in franchisees leaving our system of hotels, or possibly result in litigation, arbitration or other legal actions.

 

Our business is seasonal in nature, and we are likely to experience fluctuations in our results of operations and financial condition.

 

Our business is seasonal in nature, with the period from May through October generally accounting for the greatest portion of our annual revenues. Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. The seasonal nature of our business increases our vulnerability to risks during this period, including labor force shortages, cash flow problems, economic downturns and poor weather conditions. The adverse impact to our revenues would likely be greater as a result of our seasonal business.

 

Our properties are subject to risks relating to natural disasters, terrorist activity and war, and any such event could materially adversely affect our operating results without adequate insurance coverage or preparedness.

 

Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, particularly in locations where we own and/or operate significant properties. We carry comprehensive liability, public area liability, fire, flood, boiler and machinery, extended coverage and rental loss insurance for our properties. However, certain types of catastrophic losses, such as those from earthquake, volcanic activity, terrorism and environmental hazards, may exceed or not be covered by our insurance coverage because it is not economically feasible to insure against such losses. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Similarly, war and terrorist activity, including the potential for war and threats of terrorist activity, epidemics, travel-related accidents, as well as geopolitical uncertainty and international conflict, which impact domestic and international travel, have caused in the past, and may cause in the future, our results to differ materially from anticipated results. In addition, depending on the severity, a major incident or crisis may prevent operational continuity and consequently impact the value of the brand or the reputation of our business.

 

Disruption or malfunction in our information systems could adversely affect our business.

 

Our information technology systems are vulnerable to damage or interruption from:

 

 

 

We rely on our systems to perform functions critical to our ability to operate, including our central reservation systems. Accordingly, an extended interruption in the systems’ function could significantly curtail, directly and indirectly, our ability to conduct our business and generate revenue.

 

If we fail to comply with privacy regulations, we could be subject to fines or other restrictions on our business.

 

We collect and maintain information relating to our guests for various business purposes, including credit card information and information on guest preferences that we use to enhance our customer service and for marketing and promotion purposes. The collection and use of personal data are governed by privacy laws and regulations enacted in the U.S. and by various contracts under which we operate. Privacy regulation is an evolving area in which different jurisdictions may subject us to inconsistent compliance requirements. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services to our guests. In addition, noncompliance with applicable privacy regulations, either by us or in some circumstances by third parties engaged by us, could result in fines or restrictions on our use or transfer of data.

 

Failure to maintain the security of internal or customer data could adversely affect us.

 

Our businesses require collection and retention of large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our customers, which are entered into, processed by, summarized by and reported by our various information systems and those of our service providers. We also maintain personally identifiable information about our employees. The integrity and protection of that customer, employee and company data is critical to us. Our customers and employees expect that we will adequately protect their personal information, and the regulatory environment surrounding information security and privacy is increasingly demanding. A theft, loss or fraudulent use of customer, employee or company data could adversely impact our reputation and could result in significant remedial and other costs, fines and litigation.

 

Any failure to protect our trademarks could have a negative impact on the value of our brand names.

 

The success of our business depends in part upon our continued ability to use our trademarks, increase brand awareness and further develop our brand. We have registered the following trade names and associated trademarks with the U.S. Patent and Trademark Office: Red Lion, WestCoast, Net4Guests, Stay Comfortable and TicketsWest. We have also registered some of these trademarks in Canada and Mexico, and are in the process of obtaining trademark registrations in Asia and Europe. We also own various derivatives of these trademarks that are registered with or have a registration application pending with the U.S. Patent and Trademark Office. We cannot be assured that the measures we have taken to protect our trademarks will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could adversely affect our business.

 

We are subject to environmental regulations.

 

Our operating costs may be affected by the obligation to pay for the cost of complying with existing and future environmental laws, ordinances and regulations. Under current federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the ability of the owner of the property to

borrow using such property as collateral for a loan or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated, and may impose remedial or compliance costs. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have an adverse effect on our results of operations and financial condition.

 

In connection with our acquisition of a hotel, a Phase I environmental assessment is conducted by a qualified independent environmental engineer. A Phase I environmental assessment involves an on-site inspection and researching historical usages of a property and databases containing registered underground storage tanks and other matters to determine whether an environmental issue exists with respect to the property which needs to be addressed. If the results of a Phase I environmental assessment reveal potential issues that warrant further investigation, a Phase II environmental assessment, which may include soil testing, ground water monitoring or borings to locate underground storage tanks, will be ordered. It is possible that Phase I and Phase II environmental assessments will not reveal all environmental liabilities or compliance concerns or that there will be material environmental liabilities or compliance concerns of which we will not be aware. Phase I environmental assessments have been performed on all properties owned by us, although they have not been performed on all of our leased properties.

 

We have not performed Phase II environmental assessments on two of our owned properties for which Phase II assessments were recommended, because we determined that any further investigation was not warranted for materiality reasons. One of these properties is located on a former railroad yard, purchased by us in 1975. In the past five years as we have further commercially developed the site, construction activities have excavated contaminated soil remaining from the railroad yard that we have remediated in accordance with applicable regulations and at the direction of the applicable environmental jurisdiction.

 

In March 2009, odors in the basement of our hotel in Salt Lake City led to the detection of a release of petroleum from an adjacent gas station owned by Sinclair Marketing. Petroleum and constituents of petroleum were identified in sumps on the hotel property and in both the soil and groundwater samples from the property that were analyzed. Since the initial detection of petroleum release, Sinclair has taken steps to remediate the property by excavating contaminated soils and by pumping and treating contaminated groundwater. Sinclair, through its counsel, has agreed to complete any further remediation that may be necessary to clean up this property. Sinclair has also agreed to reimburse us for our costs, including attorney’s fees, related to Sinclair’s remediation efforts, and has made periodic payments of those amounts. However, if Sinclair does not satisfy its commitment to remediate the property in accordance with applicable State of Utah cleanup standards, we could be liable to the State of Utah for any remaining soil or groundwater contamination by virtue of our status as the owner of the property. The State of Utah has been involved in Sinclair’s cleanup efforts at the hotel property and on Sinclair’s adjacent property, through the Utah Department of Environmental Quality, the Division of Environmental Response and Remediation and an Assistant Attorney General representing those state agencies.

 

At the request of the Montana Department of Environmental Quality (DEQ), we recently began to implement a Corrective Action Work Plan at our Kalispell property. The work plan consists of utility corridor investigations, municipal water sampling, monitoring well drilling and installation, and quarterly groundwater monitoring of an identified petroleum release site on the property. The purpose of the work plan is to provide additional documentation of the extent and magnitude of hydrocarbon contamination at the site. As part of this work, eight monitoring wells were installed and sampled. A recent report shows substantially higher than legal levels of hydrocarbons in ground water in some holes. In order for DEQ to mandate any corrective action the monitoring wells must be in place for a full year before a determination is made. At that time, DEQ may want the wells monitored for another year or may decide not to have us correct anything.

 

Other than as disclosed above, we have not been notified by any governmental authority and we have no other knowledge of any material noncompliance, material liability or material claim relating to hazardous or toxic substances or other environmental substances in connection with any of our properties. Nevertheless, there is no assurance that these properties do not have any environmental concerns associated with them. In addition, there is no assurance that we will not discover problems that currently exist, but of which we have no current knowledge, that future laws, ordinances or regulations will not impose any material environmental liability, or that the current

environmental condition of our existing and future properties will not be affected by the condition of neighboring properties, such as the presence of leaking underground storage tanks, or by third parties unrelated to us.

 

Failure to comply with the Sarbanes-Oxley Act could impact our business.

 

There can be no assurance that the periodic evaluation of our internal controls required by the Sarbanes-Oxley Act will not result in the identification of significant deficiencies or material weaknesses in our internal controls or that our auditors will be able to attest to the effectiveness of our internal control over financial reporting. Failure to comply may have consequences on our business including, but not limited to, increased risks of financial statement misstatements, SEC sanctions and negative capital market reactions.

 

We face risks relating to litigation.

 

At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of these proceedings cannot be predicted. If a plaintiff were successful in a claim against us, we could be faced with the payment of a material sum of money and we may not be insured for such a loss. If this were to occur, it could have an adverse effect on our financial condition.

 

In addition, our financial condition may be adversely impacted by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination, accessibility and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits in the future may be instituted against us and we may incur material damages and expenses which could have an adverse effect on our results of operations and financial condition.

 

If these or other franchise agreements are not renewed, or are terminated prior to the expiration of their respective terms, or if new franchise hotels are unable to effectively integrate into our system, the resulting decrease in revenue and loss of market penetration could have an adverse effect on our results of operations and financial condition.

 

In addition, in recent years there has been increasing activity by patent holding companies (so-called patent “trolls”) that do not use technology but whose sole business is to enforce patents for monetary gain against companies in a wide variety of businesses or industries. These efforts typically involve proposing licenses in exchange for a substantial sum of money and may also include the threat or actual initiation of litigation for that purpose. Any such litigation can be quite costly to defend, even if infringement is unsubstantiated or speculative. We have been threatened with one such claim and another claim has actually been recently filed against us. Each claim relates to separate technology, but we believe that each such technology is non-proprietary. If we are ultimately found to have violated a patent, our operations could be negatively impacted and/or we might be subject to substantial financial penalties, licensing fees and attorneys’ fees. It is not possible to predict the potential impact on our business and operations of any future claims of this type that may be asserted against us.

 

If any hotel acquisitions fail to perform in accordance with our expectations or if we are unable to effectively integrate new hotels into our operations, our results of operations and financial condition may suffer.

 

Based on our experience, newly acquired, developed or converted hotels typically begin with lower occupancy and room rates, thereby resulting in lower revenue. Any future expansion within our existing markets could adversely affect the financial performance of our hotels in those markets and, as a result, negatively impact our overall results of operations. Potential expansion into new markets may also present operating and marketing challenges that are different from those we currently encounter in our existing markets. Our inability to anticipate all of the changing demands that expanding operations will potentially impose on our management and management information and reservation systems, or our failure to quickly adapt our systems and procedures to any new markets could result in lost revenue and increased expenses and otherwise have an adverse effect on our results of operations and financial condition.

We rely on our central reservation system for occupancy at our hotels and any failures in such system could negatively affect our revenues and cash flows.

 

The hospitality industry requires the use of technology and systems for property management, procurement, reservations, operation of our customer loyalty program, distribution and other purposes. These technologies can be expected to change guests’ expectations, and there is the risk that advanced new technologies will be introduced requiring further investment capital. We maintain a hotel reservation system that allows us to manage our rooms inventory through various distribution channels, including our websites, and execute rate management strategies. As part of our marketing strategy, we encourage guests to book on our website, which guarantees the lowest rate available compared to third-party travel websites.

 

The development and maintenance of our central reservation system and other technologies may require significant capital. There can be no assurance that as various systems and technologies become outdated or new technology is required we will be able to replace or introduce them as quickly as our competition or within budgeted costs and timeframes. Further, there can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system. If our systems fail to operate as anticipated, or we fail to keep up with technological or competitive advances, our revenues and cash flows could suffer.

 

Our current or future joint venture arrangements may not reflect solely our best interests and may subject these investments to increased risks.

 

We may in the future acquire additional interests in other properties through joint venture arrangements with other entities. Partnerships, joint ventures and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business and create additional risks. Some of these acquisitions may be financed in whole or in part by loans under which we are jointly and severally liable for the entire loan amount along with the other joint venture partners. The terms of these joint venture arrangements may be more favorable to the other party or parties than to us. Although we actively seek to minimize such risks before investing in partnerships, joint ventures or similar structures, investing in a property through such arrangements may subject that investment to risks not present with a wholly owned property, including, among others, the following:

 

 

Failure to retain senior management or other key employees could adversely affect our business.

 

We place substantial reliance on the lodging industry experience and the institutional knowledge of members of our senior management team. We compete for qualified personnel against companies with greater financial resources than ours, and the loss of the services of one or more of these individuals could hinder our ability to effectively manage our business. Finding suitable replacements for senior management and other key employees could be difficult, and there can be no assurance we will continue to be successful in retaining or attracting qualified personnel in the future. We do not carry key person insurance on any of our senior management team.

The market price for our common stock may be volatile.

 

The stock market has experienced and may in the future experience extreme volatility unrelated to the operating performance of particular companies. Many factors could cause the market price of our common stock to rise or fall, including but not limited to:

 

 

Washington law and our governing corporate documents contain provisions that could deter takeover attempts.

 

Our company is incorporated in the state of Washington and subject to Washington state law. Some provisions of Washington state law could interfere with or restrict takeover bids or other change-in-control events affecting us. For example, one statutory provision prohibits us, except under specified circumstances, from engaging in any significant business transaction, such as a merger, with any shareholder who owns 10% or more of our common stock (which shareholder, under the statute, would be considered an “acquiring person”) for a period of five years following the time that such shareholder becomes an acquiring person.

 

Due to the shareholdings of our significant shareholders, we may be limited in our ability to undertake transactions requiring shareholder approval.

 

As of December 31, 2010, Columbia Pacific Opportunity Fund, L.P. had sole voting and investment power with respect to 22.0% of our outstanding shares of common stock. Donald K. Barbieri, our Chairman of the Board, had sole voting and investment power with respect to 5.5% of our outstanding shares of common stock. 1.0% of our shares are held in a joint account, with respect to which Mr. Barbieri has shared voting power. Richard L. Barbieri, who is also a director and a brother of Donald K. Barbieri, beneficially owned 0.6% of our outstanding shares of common stock. In addition, we believe that other members of the Barbieri family who are not directors, executive officers or 5% shareholders individually hold our outstanding common stock. As a result, one or more of these shareholders may have the ability as a group to substantially influence actions requiring the approval of our shareholders, including a merger or a sale of all of our assets or a transaction that results in a change of control.

 

The performance of our entertainment division is particularly subject to fluctuations in economic conditions.

 

Our entertainment division, which comprised 5.6% of our total revenues from continuing operations in 2010, engages in event ticketing and the presentation of various entertainment productions. Our entertainment division is vulnerable to risks associated with changes in general regional and economic conditions, the potential for significant competition and a change in consumer trends, among other risks. In addition, we face the risk that entertainment productions will not tour the regions in which we operate or that such productions will not choose us as a presenter or promoter.

 

If we are unable to locate lessees for our retail space at our mall, our revenues and cash flow may be adversely affected.

 

We own and lease to others over 162,000 square feet of retail space in Kalispell, Montana. We are subject to the risk that leases for this space might not be renewed upon their expiration, the space may not be relet or the terms of renewal or reletting such space, including the cost of required renovations, might be less favorable to us than current lease terms. Vacancies could result due to the termination of a tenant’s tenancy, the tenant’s financial failure or a

breach of the tenant’s obligations. We may be unable to locate tenants for rental spaces vacated in the future or we may be limited to renting space on terms unfavorable to us. Delays or difficulties in attracting tenants and costs incurred in preparing for tenant occupancy could reduce cash flow, decrease the value of a property and jeopardize our ability to pay our expenses.

 

If one or more of our hotel subtenants breach subleases, our income and cash flow may be adversely affected.

 

We lease and sublease to others six hotels, including the Red Lion Hotel Sacramento to an operator in Sacramento, and five Doubletree and Hilton hotels to Doubletree DTWC Corporation, including the Doubletree Seattle Airport, the Hilton Salt Lake City Center, the Doubletree San Diego-Mission Valley, the Doubletree Durango and the Doubletree Sonoma Wine Country. We are subject to the risk that these subtenants might breach the subleases for one or more of these hotels. Such breaches might include but not be limited to failures to pay rent, failures to properly maintain the properties or failures to meet the financial or other obligations set forth in the master lease for these hotels. Such breaches could result in the loss of income, decreased cash flow, breach of the master lease for the hotels and/or loss of the hotels.

 

 

None.

 

 

Under the Red Lion name as of December 31, 2010, we owned 19 hotels, leased 12, and had franchise arrangements with 13 hotels owned and operated by third parties. To support our owned, leased and franchised hotels, we provide all the services typical in our industry: marketing, sales, advertising, frequency program, revenue management, procurement, quality assurance, education and training, design and construction management. We maintain a central reservation call center with links to various travel agent global distribution systems and electronic distribution channels on the internet, including our branded website. The table below reflects our hotel properties and locations, total available rooms per hotel, as well as meeting space availability, as of December 31, 2010.

 

 

Owned and Leased Hotels

 

Owned hotels are those properties which we operate and manage and have ownership of the hotel facility, equipment, personal property, other structures and in most cases, the land. We recognize revenues and expenses on these properties, including depreciation where appropriate.

 

Leased hotels are those properties which we operate and manage and may have ownership of some or all of the equipment and personal property on site, however, the hotel facility and usually underlying land is occupied under an operating lease from a third party. We recognize revenues and expenses on these properties, including lease expense. The most significant leases, with expiration dates ranging from 2011 to 2024 and having renewal provisions, typically require us to pay fixed monthly rent and variable rent based on a percentage of revenue if certain sales thresholds are reached. In addition, we are responsible for repairs and maintenance, operating expenses and management of operations. For additional information on leases, refer to Note 18 of Notes to Consolidated Financial Statements.

Franchised Hotels

 

Under our franchise agreements, we receive royalties for the use of the Red Lion brand name. We also make available certain services to those hotels including reservation systems, advertising and national sales, our guest loyalty program, revenue management tools, quality inspections and brand standards, as well as administer central services programs for the benefit of our system hotels and franchisees. We do not have management or operational responsibility for these hotels.

 

At December 31, 2010, our system of hotels included 13 hotels under franchise agreements, representing a total of 2,436 rooms and 120,831 square feet of meeting space. During the second quarter of 2010, the franchise agreement for the Red Lion Hotel Bakersfield (165 rooms) ended by agreement and was not renewed, and this property left our system of hotels.

 

Discontinued Operations

 

During the third quarter of 2010, we concluded that one of our leased hotels in Astoria, Oregon had reached the end of its useful life and the hotel was closed. The operations of this hotel have been classified as discontinued operations in accordance with generally accepted accounting principles and are separately disclosed on the consolidated statement of operations comparative for all periods presented. For additional information, see Note 22 of Notes to Consolidated Financial Statements.

 

Other Operations

 

In addition to the operations discussed above, we maintain a direct ownership interest in a retail mall in Kalispell, Montana, which is attached to our Red Lion hotel at that location.

 

 

At any given time, we are subject to claims and actions incident to the operation of our business. While the outcome of these proceedings cannot be predicted, it is the opinion of management that none of such proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations.

 

 

Executive Officers of the Registrant

 

Set forth below is information regarding our executive officers and certain key employees as of March 8, 2011:

 

 

Jon E. Eliassen.  Mr. Eliassen was appointed as our Interim President and Chief Executive Officer on January 13, 2010. He was appointed as our President and Chief Executive Officer on February 14, 2011, removing the interim status. He has been a director of the company since September 2003. Mr. Eliassen was President and CEO of the Spokane Area Economic Development Council from 2003 until 2007. Mr. Eliassen retired in 2003 from his position as Senior Vice President and Chief Financial Officer of Avista Corp., a publicly-traded diversified utility. Mr. Eliassen spent 33 years at Avista, including the last 16 years as its Chief Financial Officer. While at Avista, Mr. Eliassen was an active participant in development of a number of successful subsidiary company

operations including technology related startups Itron, Avista Labs and Avista Advantage. Mr. Eliassen serves as Chairman of the Board of Directors of Itron Corporation, serves as a member of the Board of Directors of IT Lifeline, Inc, and is the principal of Terrapin Capital Group, LLC. Mr. Eliassen’s corporate accomplishments are complemented by his extensive service to the community in roles which have included director and President of the Spokane Symphony Endowment Fund, director of The Heart Institute of Spokane, Washington State University Research Foundation, Washington Technology Center and Spokane Intercollegiate Research and Technology Institute and past director of numerous other organizations and energy industry associations.

 

George H. Schweitzer.  Mr. Schweitzer joined us in April 2008 as our Senior Vice President, Hotel Operations, and was named our Executive Vice President and Chief Operating Officer, Hotel Operations in November 2009. Prior to joining our company, Mr. Schweitzer had served since August 2006 as Partner and Executive Vice President of Business Development at Unifocus, a leading global provider of business intelligence applications and performance technology for the hospitality industry. Mr. Schweitzer founded and was President and CEO of LaborSage, Inc., a software and management consulting company focused on labor scheduling solutions for the hospitality industry, from 2001 to 2006, when it was acquired by Unifocus. Before entering the hospitality software industry, Mr. Schweitzer served as President and Chief Operating Officer of VenQuest Hotel Group in Irvine, California. Prior to VenQuest, Mr. Schweitzer held the position of Vice President Operations for Sunstone Hotels and Regional Vice President for Doubletree Hotels. Mr. Schweitzer has worked for over 30 years in the hospitality industry, including a period of nearly 20 years where he served in various positions, including Vice President — Operations, Regional Vice President and General Manager, of various Red Lion hotels.

 

Dan R. Jackson.  Mr. Jackson was appointed as our Senior Vice President, Chief Financial Officer in November 2010, and was promoted to Executive Vice President, Chief Financial Officer in March 2011. Prior to joining us, Mr. Jackson was Executive Vice President and CFO for KinderCare Learning Centers, Inc. and its successor, Knowledge Learning Corporation from November 2002 to June 2006. Mr. Jackson held the position of Senior Vice President of Finance for KinderCare Learning Centers, Inc. from October 1999 to October 2002 having joined the Company as Vice President of Financial Control and Planning in March 1997. Prior to KinderCare from September 1994 to February 1997, Mr. Jackson was Vice President and Controller for Red Lion Hotels, Inc. when it was held by Kohlberg Kravis Roberts & Co. During his 12 year tenure at Red Lion, he was responsible for the financial operations of over 50 hotels and was instrumental in the company’s initial public offering and subsequent sale to Doubletree Hotels.

 

Harry G. Sladich.  Mr. Sladich was appointed Executive Vice President of Sales and Marketing in May 2010. Mr. Sladich is a 33 year veteran of the hospitality industry with extensive experience in hotel sales and hotel operations as well as experience in destination marketing. Prior to his arrival at Red Lion, Mr. Sladich was President and Chief Executive Officer of the Spokane Regional Convention and Visitors Bureau and played a key role in building and selling the Washington State community’s image nationally, as well as internationally. Prior to the Spokane CVB, Mr. Sladich was Vice President of Sales and Marketing for Sterling Hospitality, hotel developers and operators of several franchises, including Holiday Inn Express, Hampton Inn and Quality Inn. Before working for Sterling Hospitality, Mr. Sladich was General Manager of Hotel Lusso, an upscale boutique hotel in Spokane, and was Vice-President of National Sales for Guestmark International (GMI), a national hotel marketing company based in Boston. Mr. Sladich has also worked for Sheraton Hotels in both hotel operations and food and beverage. Mr. Sladich started his career in 1977 in Spokane at the Travelodge River Inn, which is now the Red Lion River Inn. Washington State Governor Chris Gregoire appointed Mr. Sladich to two boards including the Motion Picture Competitiveness Program, WashingtonFilmWorks, and the Washington State Convention Center. He has also served on the board for the Western Association of Convention & Visitors Bureaus (WACVB), is past Chair for the Boys and Girls Club of Spokane County and is an Honorary Commander at Fairchild Air Force Base.

 

Thomas L. McKeirnan.  Mr. McKeirnan has been our Senior Vice President, General Counsel and Secretary since February 2005. Prior to that he served as Vice President, General Counsel and Secretary from January 2004 through February 2005 and Vice President, Assistant General Counsel from July 2003 to January 2004. Prior to joining us, Mr. McKeirnan was a partner at the Spokane, Washington law firm of Paine Hamblen Coffin Brooke & Miller LLP from January 2002 until July 2003 and an associate attorney at the same firm from 1999 to 2001. Mr. McKeirnan was an associate attorney with the Seattle, Washington law firm of Riddell Williams P.S. from 1995 until 1999. Mr. McKeirnan’s private legal practice focused on corporate, transactional, real estate and securities law,

with an emphasis on the hospitality industry. While in private practice, Mr. McKeirnan represented us as outside counsel on various strategic and transactional matters and also represented WestCoast Hotels, Inc. prior to our acquisition of that company.

 

Jack G. Lucas.  Mr. Lucas serves as Vice President of Red Lion Hotels Corporation and President of TicketsWest. He is in charge of overseeing all of the various departments within our entertainment division. He has been President of TicketsWest since February 2006 and Vice President of Red Lion Hotels Corporation since August 1998. Mr. Lucas has approximately 27 years of experience in the entertainment industry, and has been employed by us since 1987. Mr. Lucas previously spent 13 years on the management staff of the City of Spokane Entertainment Facilities, which included a 2,700-seat performing arts center, 30,000-seat stadium, 8,500-seat coliseum, and convention center. Mr. Lucas was awarded the 2004 International Ticketing Professional of the Year award from the International Ticketing Association.

 

 

(a) Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “RLH”. The following table sets forth for the periods indicated the high and low closing sale prices for our common stock on the NYSE:

 

 

(b) The closing sale price of the common stock on the NYSE on March 8, 2011 was $8.21, with 122 shareholders of record of the common stock.

 

(c) We did not pay any cash dividends on our common stock during the last two fiscal years. The board of directors periodically reviews our dividend policy and our longer-term objectives of maximizing shareholder value. Any determination to pay cash dividends in the future will be at the discretion of our board.

(d) The following table provides information as of December 31, 2010 on plans under which equity securities may be issued to employees, directors or consultants:

 

 

 

 

(e) The below graph assumes an investment of $100 in our common stock and depicts its price performance relative to the performance of the Russell 2000 Index and the Standard & Poor’s Hotels, Resorts & Cruise Lines Index, assuming a reinvestment of all dividends. The price performance on the graph is not necessarily indicative of future stock price performance.

 

 

 

The following table sets forth our selected consolidated financial data as of and for the years ended December 31, 2010, 2009, 2008, 2007 and 2006. The selected consolidated statement of operations and balance sheet data are derived from our audited consolidated financial statements. The audited consolidated financial statements for certain of these periods are included elsewhere in this annual report. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified in their entirety by, our consolidated financial statements and related notes, Management’s Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this annual report and in our prior filings with the SEC. Operating activities and the balance sheet of continuing operations have been reflected on a comparable basis for all years presented, which includes consolidation of our Central Program Fund (“CPF”). See Notes 5 and 22 of Notes to Consolidated Financial Statements for further detail.

 

 

 

 

 

EBITDA is a non-GAAP measure that represents net income (loss) attributable to Red Lion Hotels Corporation before interest expense, income tax benefit (expense) and depreciation and amortization. We utilize EBITDA as a financial measure as management believes investors find it a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe it is a complement to net income (loss) attributable to Red Lion Hotels Corporation and other financial performance measures. EBITDA is not intended to represent net income (loss) attributable to Red Lion

Hotels Corporation as defined by generally accepted accounting principles in the United States (“GAAP”), and such information should not be considered as an alternative to net income (loss), cash flows from operations or any other measure of performance prescribed by GAAP.

 

We use EBITDA to measure the financial performance of our owned and leased hotels because we believe interest, taxes and depreciation and amortization bear little or no relationship to our operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. We generally pay federal and state income taxes on a consolidated basis, taking into account how the applicable taxing laws apply to us in the aggregate. By excluding taxes on income, we believe EBITDA provides a basis for measuring the financial performance of our operations excluding factors that our hotels cannot control. By excluding depreciation and amortization expense, which can vary from hotel to hotel based on historical cost and other factors unrelated to the hotels’ financial performance, EBITDA measures the financial performance of our hotels without regard to their historical cost. For all of these reasons, we believe that EBITDA provides us and investors with information that is relevant and useful in evaluating our business.

 

However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as defined by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net income (loss) attributable to Red Lion Hotels Corporation, which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income (loss) or net income (loss) determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.

 

The following is a reconciliation of EBITDA and EBITDA from continuing operations to net income (loss) attributable to Red Lion Hotels Corporation for the periods presented:

 

 

Introduction

 

We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, operation and franchising of midscale, full, select and limited service hotels under our proprietary Red Lion brand. Established over 30 years ago, the Red Lion brand is nationally recognized and particularly well known in the western United States, where all of our hotels are located. The Red Lion brand is typically associated with three-star full and select service hotels.

 

As of December 31, 2010, our hotel system contained 44 hotels located in eight states and one Canadian province, with 8,557 rooms and 425,397 square feet of meeting space as provided below:

 

 

We operate in three reportable segments:

 

 

Our remaining activities, none of which constitutes a reportable segment, have been aggregated into “other,” and are primarily related to our direct ownership interest in a retail mall that is attached to one of our hotels and to other miscellaneous real estate investments.

 

Results of Operations

 

For the year ended December 31, 2010, our net loss was $8.6 million (or $0.47 per share), which includes a non-cash impairment charge of $5.7 million related to the termination of a franchise and sublease agreement. During the fourth quarter of 2010, we agreed to terminate the current sublease and franchise agreement with the operator of the Red Lion Hotel Sacramento. We subsequently entered into an agreement with a new franchisee and subtenant. As a result of the contract termination, the Company recognized an impairment charge of $5.7 million. Also included in the 2010 net loss is $1.2 million of expense related to the separation of a former President and Chief Executive Officer.

 

During 2009, we reported a net loss of $6.7 million (or $0.37 per share), which included a non-cash impairment charge of $8.7 million. Of that amount, $8.5 million was related to our Red Lion Hotel Denver Southeast which was acquired in May 2008 for $25.3 million. Subsequent to that acquisition, the Denver market experienced a substantial and sustained decline in demand for hotel rooms across all market segments. The remaining $0.2 million impairment charge related to a second property.

 

During 2008, we reported a net loss of approximately $1.6 million (or $0.09 per share). Included in this loss was a $3.7 million charge recorded during the first quarter of 2008 for separation costs associated with the retirement of a former President and Chief Executive Officer. In addition, during the fourth quarter of 2008 we recorded $2.1 million in restructuring expenses.

A summary of our consolidated statement of operations is as follows (in thousands, except per share data):

 

 

The following table details the impact of the $5.7 million impairment charge recorded for the year ended 2010, as well as a $1.5 million credit adjustment for the termination of a sublease and franchise agreement at our Red Lion Hotel Sacramento. Also detailed is a $1.2 million charge for separation costs. Additionally detailed is an impairment charge and restructuring expenses recorded for the year ended December 31, 2009. Finally, detailed is a $3.7 million charge for separation costs and $2.1 million in restructuring expenses recorded in 2008 on net loss, loss per share and EBITDA (in thousands, except per share data):

 

 

 

 

EBITDA represents net income (loss) attributable to Red Lion Hotels Corporation before interest expense, income tax expense (benefit) and depreciation and amortization. We utilize EBITDA as a financial measure because management believes that investors find it a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe it is a complement to net income (loss) attributable to Red Lion Hotels Corporation and other financial performance measures. EBITDA is not intended to represent net income (loss) attributable to Red Lion Hotels Corporation as defined by generally accepted accounting principles in the United States (“GAAP”), and such information should not be considered as an alternative to net income (loss), cash flows from operations or any other measure of performance prescribed by GAAP.

 

We use EBITDA to measure the financial performance of our owned and leased hotels because we believe interest, taxes and depreciation and amortization bear little or no relationship to our operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. We generally pay federal and state income taxes on a consolidated basis, taking into account how the applicable taxing laws apply to us in the aggregate. By excluding taxes on income, we believe EBITDA provides a basis for measuring the financial performance of our operations excluding factors that our hotels cannot control. By excluding depreciation and amortization expense, which can vary from hotel to hotel based on historical cost and other factors unrelated to the hotels’ financial performance, EBITDA measures the financial performance of our hotels without regard to their historical cost. For all of these reasons, we believe EBITDA provides us and investors with information that is relevant and useful in evaluating our business.

 

However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as defined by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net income (loss) attributable to Red Lion Hotels Corporation, which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income (loss) or net income (loss) determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.

The following is a reconciliation of EBITDA and EBITDA from continuing operations to net income (loss) attributable to Red Lion Hotels Corporation for the periods presented (in thousands):

 

 

Revenue

 

A breakdown of revenues from continuing operations is as follows (in thousands, except for percentage changes):

 

Revenues From Continuing Operations

 

 

2010 Compared to 2009

 

Revenues in 2010 from the hotels segment increased $0.8 million, or 0.5%, compared to 2009, resulting from a 5.4% increase in room revenue which was driven by our focus on higher-rated transient and preferred corporate guests and reduced room bookings from discount online travel agent (“OTA”) channels. RevPAR for our owned and leased properties increased 5.4% due to a 2.5% increase in ADR and a 160 basis point increase in occupancy from the prior year. Food and beverage revenue saw a 12.6% decrease in 2010 compared to 2009 reflecting the impact of our breakfast inclusive strategy and the decision to modify food and beverage offerings in select markets.

Revenue from our franchise segment decreased $0.4 million, or 11.3%, in 2010 compared to 2009, due to a one time settlement received in 2009. Revenue from our entertainment segment decreased $2.5 million, or 21.0%, in 2010 compared to 2009 resulting primarily from the impact of one less “Best of Broadway” production in 2010. Other segment revenues, consisting primarily of the operations of a mall, were down 6.1% to $2.5 million in 2010.

 

2009 Compared to 2008

 

Revenues in 2009 from the hotels segment decreased $20.8 million, or 12.4%, compared to 2008, primarily due to an 11.8% decrease in room revenue as transient and group revenues were down $7.0 million and $5.8 million, respectively, year-over-year. RevPAR for our owned and leased properties decreased 12.1% due to a 6.3% decrease in ADR and a 380 basis point decrease in occupancy from the prior year. The 14.5% decrease in food and beverage revenues in 2009 compared to 2008 was driven by a $4.4 million decrease in banquet and catering related revenues, and decrease in food outlet revenue commensurate with occupancy declines.

 

Revenue from our franchise segment decreased $0.8 million, or 18.6%, in 2009 compared to 2008, having less hotels in our system compared to the prior year and lower revenues generated from existing franchisees. During 2009, we received a $0.3 million settlement from a franchise that we terminated from the system in 2008, although we also collected $0.3 million in termination fees during 2008. Revenue from our entertainment segment decreased $0.3 million, or 2.7%, in 2009 compared to 2008, and other segment revenues, consisting primarily of the operations of a mall, were down 15.9% to $2.6 million in 2009.

 

Operating Expenses

 

Operating expenses generally include direct operating expenses for each of the operating segments, hotel facility and land lease expense, depreciation and amortization, gain or loss on asset dispositions and undistributed corporate expenses. In 2010, operating expenses included a $5.7 million impairment charge relating to the termination of a sublease and franchise agreement at our Red Lion Hotel Sacramento. In 2009, operating expenses included an $8.7 million impairment charge and a $0.1 million expense for restructuring. During 2008, operating expenses included $3.7 million in separation costs and $2.1 million in restructuring expense. In the aggregate, operating expenses decreased $0.4 million during 2010 when compared to 2009 and they decreased $14.7 million

during 2009 versus 2008. The table below provides a breakdown of our operating expenses, as well as direct margins by segment for each of the three years in the period ended December 31, 2010: