UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-13957

Red Lion Hotels Corporation

(Exact name of registrant as specified in its charter)

Washington		91-1032187
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
201 W. North River Drive, Suite 100
Spokane Washington		99201
(Address of principal executive offices)		(Zip Code)

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

     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 þ No o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

     As of July 28, 2011, there were 19,088,769 shares of the registrant’s common stock outstanding.

 

 

TABLE OF CONTENTS

Item No.				Description		Page No.
PART I – FINANCIAL INFORMATION
Item 1				Financial Statements (unaudited):
				Consolidated Balance Sheets June 30, 2011 and December 31, 2010			3
				Consolidated Statements of Operations Three and Six Months Ended June 30, 2011 and 2010			4
				Consolidated Statements of Cash Flows Six Months Ended June 30, 2011 and 2010			5
				Condensed Notes to Consolidated Financial Statements			6
Item 2				Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3				Quantitative and Qualitative Disclosures About Market Risk			25
Item 4				Controls and Procedures			25
PART II – OTHER INFORMATION
Item 1				Legal Proceedings			26
Item 1A.				Risk Factors			26
Item 2				Unregistered Sales of Equity Securities and Use of Proceeds			26
Item 3				Defaults Upon Senior Securities			26
Item 4				(Removed and Reserved)			26
Item 5				Other Information			26
Item 6				Exhibits			27
				Signatures			28
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

RED LION HOTELS CORPORATION

		June 30,				December 31,
		2011				2010
		(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents		$	46,818			$	4,012
Restricted cash			4,707				4,120
Accounts receivable, net			6,532				5,985
Inventories			1,519				1,328
Prepaid expenses and other			3,090				1,937
Assets held for sale			9,805				—
Total current assets			72,471				17,382
Property and equipment, net			227,574				272,030
Goodwill			22,749				28,042
Intangible assets, net			7,961				7,984
Other assets, net			5,991				6,044
Total assets		$	336,746			$	331,482
LIABILITIES
Current liabilities:
Accounts payable		$	4,893			$	7,146
Accrued payroll and related benefits			5,023				4,367
Accrued interest payable			255				276
Advance deposits			931				487
Other accrued expenses			11,554				10,178
Revolving credit facility, due within one year			—				18,000
Current portion of long-term debt			24,594				25,275
Total current liabilities			47,250				65,729
Long-term debt, due after one year			50,901				51,877
Deferred income			4,891				4,859
Deferred income taxes			16,955				7,427
Debentures due Red Lion Hotels Capital Trust			30,825				30,825
Total liabilities			150,822				160,717
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Red Lion Hotels Corporation stockholders’ equity
Preferred stock - 5,000,000 shares authorized; $0.01 par value; no shares issued or outstanding			—				—
Common stock - 50,000,000 shares authorized; $0.01 par value; 19,067,541 and 18,869,254 shares issued and outstanding			191				189
Additional paid-in capital, common stock			148,002				146,834
Retained earnings			37,624				23,737
Total Red Lion Hotels Corporation stockholders’ equity			185,817				170,760
Noncontrolling interest			107				5
Total equity			185,924				170,765
Total liabilities and stockholders’ equity		$	336,746			$	331,482

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

RED LION HOTELS CORPORATION

		Three months ended June 30,								Six months ended June 30,
		2011				2010				2011				2010
		(In thousands, except per share data)
Revenue:
Hotels		$	39,276			$	38,632			$	69,434			$	69,253
Franchise			945				889				1,652				1,447
Entertainment			4,640				2,340				7,440				4,818
Other			519				594				1,126				1,239
Total revenues			45,380				42,455				79,652				76,757
Operating expenses:
Hotels			30,613				28,620				57,782				55,212
Franchise			1,070				810				1,964				1,388
Entertainment			4,138				1,986				6,752				3,999
Other			435				413				828				835
Depreciation and amortization			4,757				5,164				10,063				10,374
Hotel facility and land lease			2,187				1,779				4,298				3,526
Loss (Gain) on asset dispositions, net			(33,497	)			(57	)			(33,583	)			(155	)
Undistributed corporate expenses			1,553				1,362				2,897				3,805
Total expenses			11,256				40,077				51,001				78,984
Operating income (loss)			34,124				2,378				28,651				(2,227	)
Other income (expense):
Interest expense			(2,272	)			(2,314	)			(4,573	)			(4,550	)
Other income, net			381				9				385				46
Income (loss) before taxes			32,233				73				24,463				(6,731	)
Income tax expense (benefit)			13,473				6				10,474				(2,573	)
Net income (loss) from continuing operations			18,760				67				13,989				(4,158	)
Discontinued operations
Income (loss) from discontinued business units, net of income tax (benefit) expense of $0 and ($66) for the three months ended and $0 and ($142) for the six months ended June 30, 2011 and 2010 respectively			—				(129	)			—				(283	)
Net income (loss) from discontinued operations			—				(129	)			—				(283	)
Net income (loss)			18,760				(62	)			13,989				(4,441	)
Less: Net income or loss attributable to noncontrolling interest			(112	)			(2	)			(102	)			9
Net income (loss) attributable to Red Lion Hotels Corporation		$	18,648			$	(64	)		$	13,887			$	(4,432	)
Earnings per share — basic
Net income (loss) from continuing operations		$	0.99			$	0.00			$	0.74			$	(0.23	)
Net income (loss) from discontinued operations		$	0.00			$	0.00			$	0.00			$	(0.01	)
Net income (loss) attributable to Red Lion Hotels Corporation		$	0.98			$	0.00			$	0.73			$	(0.24	)
Weighted average shares -basic			19,023				18,420				18,999				18,345
Earnings per share — diluted
Net income (loss) from continuing operations		$	0.98			$	0.00			$	0.73			$	(0.23	)
Net income (loss) from discontinued operations		$	0.00			$	0.00			$	0.00			$	(0.01	)
Net income (loss) attributable to Red Lion Hotels Corporation		$	0.97			$	0.00			$	0.72			$	(0.24	)
Weighted average shares -diluted			19,182				18,651				19,163				18,345

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

RED LION HOTELS CORPORATION

		Six months ended June 30,
		2011				2010
		(In thousands)
Operating activities:
Net income (loss)		$	13,989			$	(4,441	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			10,063				10,400
Gain on disposition of property, equipment and other assets, net			(33,583	)			(155	)
Deferred income tax provision (benefit)			9,589				(2,926	)
Equity in investments			23				25
Stock based compensation expense			655				1,050
Provision for doubtful accounts			65				131
Change in current assets and liabilities:
Restricted cash			(587	)			(1,422	)
Accounts receivable			(612	)			(1,851	)
Inventories			(229	)			69
Prepaid expenses and other			(1,153	)			(600	)
Accounts payable			(2,253	)			3,501
Accrued payroll and related benefits			656				2,868
Accrued interest payable			(21	)			(17	)
Deferred income			275				—
Other accrued expenses and advance deposits			1,812				2,733
Net cash (used in) provided by operating activities			(1,311	)			9,365
Investing activities:
Purchases of property and equipment			(3,070	)			(3,832	)
Proceeds from disposition of property and equipment			68,331				8
Advances to Red Lion Hotels Capital Trust			(27	)			(27	)
Other, net			(694	)			198
Net cash (used in) provided by investing activities			64,540				(3,653	)
Financing activities:
Borrowings on revolving credit facility			10,000				4,500
Repayment of revolving credit facility			—				(9,500	)
Retirement of revolving credit facility			(28,000	)			—
Repayment of long-term debt			(1,657	)			(1,570	)
Proceeds from stock options exercised			513				304
Proceeds from issuance of common stock under employee stock purchase plan			63				71
Additions to deferred financing costs			(1,220	)			(171	)
Common stock redeemed			(122	)			(84	)
Net cash (used in) provided by financing activities			(20,423	)			(6,450	)
Net change in cash from operating activities of discontinued operations			—				1
Change in cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents			42,806				(737	)
Cash and cash equivalents at beginning of period			4,012				3,882
Cash and cash equivalents at end of period		$	46,818			$	3,145
Supplemental disclosure of cash flow information:
Cash paid during periods for:
Interest on long-term debt		$	4,595			$	4,567
Noncash operating, investing and financing activities:
Tax effect on conversion of equity		$	61			$	—
Reclassification of property and other assets to assets held for sale		$	9,219			$	—
Reclassification of goodwill to assets held for sale		$	586			$	—

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

RED LION HOTELS CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

     Red Lion Hotels Corporation (“Red Lion” or the “Company”) is 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 the Red Lion brand. As of June 30, 2011, the Red Lion system of hotels contained 44 hotels located in eight states and one Canadian province, with 8,457 rooms and 424,387 square feet of meeting space. As of that date, the Company operated 30 hotels, of which 18 are wholly owned and 12 are leased, and the Company franchised 14 hotels that were owned and operated by various third-party franchisees.

     The Company is also engaged in entertainment operations, which includes TicketsWest.com, Inc., through which the Company derives revenues from event ticket distribution and promotion and presentation of a variety of entertainment productions. In addition to hotel operations, the Company maintains a direct ownership interest in a retail mall that is attached to one of its hotels and in other miscellaneous real estate investments.

     The 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, the Company acquired WestCoast Hotels, Inc., and rebranded its Cavanaughs hotels to the WestCoast brand — changing the Company’s name to WestCoast Hospitality Corporation. In 2001, the Company acquired Red Lion Hotels, Inc. In September 2005, after rebranding most of its WestCoast hotels to the Red Lion brand, the Company changed its name to Red Lion Hotels Corporation. The financial statements encompass the accounts of Red Lion Hotels Corporation and all of its consolidated subsidiaries, including its 100% ownership of Red Lion Hotels Holdings, Inc., and Red Lion Hotels Franchising, Inc., and its approximately 99% ownership of Red Lion Hotels Limited Partnership (“RLHLP”). The 1% noncontrolling interest in RLHLP has been classified as a component of equity separate from equity of Red Lion Hotels Corporation.

     The financial statements also include an equity method investment in a 19.9% owned real estate venture, as well as certain cost method investments in various entities included as other assets, over which the Company does not exercise significant influence. In addition, the Company holds a 3% common interest in Red Lion Hotels Capital Trust (the “Trust”) that is considered a variable interest entity. The Company is not the primary beneficiary of the Trust; thus, it is treated as an equity method investment. The consolidated financial statements include all of the activities of the Company’s cooperative marketing fund, a variable interest entity, of which the Company is the primary beneficiary.

     All significant inter-company and inter-segment transactions and accounts have been eliminated upon consolidation. Certain amounts disclosed in prior period statements have been reclassified to conform to the current period presentation.

2. Basis of Presentation

     The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements have been condensed or omitted as permitted by such rules and regulations.

     The consolidated balance sheet as of December 31, 2010 has been compiled from the audited balance sheet as of such date. The Company believes the disclosures included herein are adequate; however, they should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2010, previously filed with the SEC on Form 10-K.

     In the opinion of management, these unaudited consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly the consolidated financial position of the Company at June 30, 2011, the consolidated results of operations for the three and six months ended June 30, 2011 and 2010, and the consolidated cash flows for the six months ended June 30, 2011 and 2010. The results of operations for the periods presented may not be indicative of those which may be expected for a full year.

     Management makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures of contingent liabilities. Actual results could materially differ from those estimates.

3. Liquidity

     On June 14, 2011, the Company completed a sale of its Red Lion Hotel on Fifth Avenue in Seattle, Washington for $71 million in cash and used $28 million of the proceeds to retire its revolving credit facility. See Note 6 for further details.

     As of June 30, 2011 the Company had long term debt of $24.6 million maturing within one year. The Company is in compliance with its debt covenants and believes it has adequate liquidity to repay this debt when due and to fund its ongoing operating activities for the foreseeable future. Nevertheless, the Company is exploring options to refinance this debt in order to have the additional financial flexibility that increased working capital would provide.

4. Property and Equipment

     Property and equipment used in continuing operations is summarized as follows (in thousands):

		June 30,				December 31,
		2011				2010
Buildings and equipment		$	252,035			$	301,766
Furniture and fixtures			43,374				47,316
Landscaping and land improvements			9,304				9,821
			304,713				358,903
Less accumulated depreciation and amortization			(137,055	)			(153,373	)
			167,658				205,530
Land			57,141				63,581
Construction in progress			2,775				2,919
		$	227,574			$	272,030

     During the first quarter of 2011, the Company determined that two of its properties, the Red Lion Hotel on Fifth Avenue in Seattle, Washington (“Seattle property”), and the Red Lion Colonial Hotel in Helena, Montana, met the criteria to be classified as assets held for sale. During the second quarter the Company completed the sale of the Seattle property. See Note 6 for further details.

5. Goodwill and Intangibles

     Under generally accepted accounting principles, when a portion of a reporting unit is disposed of, a company must allocate a portion of the reporting unit’s goodwill to the disposal. In the second quarter, the Company completed the sale of its Seattle property to a third party for $71 million. The Company completed an evaluation of its goodwill allocated to the hotel reporting unit during the quarter and determined that $4.7 million of the $19.5 million allocated to the reporting unit should be disposed of as part of the sale of the Seattle property. This disposal amount of $4.7 million is included in the $33.5 million pretax gain on the sale of the Seattle property. See Note 6 for further details.

6. Assets Held for Sale

     The Company considers a property to be an asset held for sale when management approves and commits to a formal plan to actively market the property for sale, the sale of the property is probable, and transfer of the property is expected to qualify for recognition as a completed sale within one year. Upon designation as an asset held for sale, the Company records the carrying value of the property at the lower of its carrying value, which includes allocable goodwill, or its estimated fair value, less estimated costs to sell, and the Company stops recording depreciation expense. The operations of a property held for sale prior to the sale date are recorded in discontinued operations unless the Company will have continuing involvement after the sale.

     During the first quarter of 2011, the Company determined that two of its hotel properties, the Seattle property and the Red Lion Colonial Hotel in Helena, Montana, met the criteria to be classified as assets held for sale, but did not meet the criteria for treatment as discontinued operations. During the second quarter the Company completed the sale of the Seattle property to a third party for $71 million. The Company recognized a pretax gain on the sale of $33.5 million. Approximately $6.1 million of the taxable gain attributable to the sale of the property is expected to be deferred.

     The Company plans to sell the Red Lion Colonial Hotel in Helena within one year and anticipates that it will maintain significant continuing involvement in it, either through a management or franchise agreement. The Helena, Montana property remains classified as held

for sale in the accompanying condensed consolidated balance sheet. Included in assets held for sale is the estimate of the goodwill attributable to the property. The Company will complete an evaluation of its goodwill in the period that the sale of the property occurs, and will dispose of the appropriate amount of goodwill as determined by the valuation analysis. The assets classified as assets held for sale on the consolidated balance sheet as of June 30, 2011 are detailed in the table below.

		June 30,
		2011
Buildings and equipment		$	8,396
Furniture and fixtures			1,367
Landscaping and land improvements			99
			9,862
Less accumulated depreciation and amortization			(4,374	)
			5,488
Land			3,145
Construction in progress			81
Total property and equipment			8,714
Goodwill			586
Other assets, net			505
Assets held for sale		$	9,805

7. Credit Facility and Long Term Debt

     On June 14, 2011 the Company retired its credit facility using a portion of the proceeds from the sale of the Seattle property, which secured the facility. The facility had an expiration date in September 2011.

     The Company owes $12.1 million to a bank under a property note, collateralized by two properties, bearing interest at prime rate plus .075%. The note has certain customary covenants, the most restrictive of which are financial covenants relating to total leverage, senior leverage and minimum debt service coverage ratios. The interest rate on the outstanding balance at June 30, 2011 was 4.00% and the Company was in compliance with all covenants. This note matures in September 2012.

     The Company has other debt totaling $22.6 million that will mature in September and October of 2011 and is therefore classified as a current liability on the Company’s balance sheet at June 30, 2011. The Company also has another $40.8 million in fixed rate notes collateralized by individual properties and $30.8 million in the form of trust preferred securities. The Company is currently exploring options for raising additional funds to address maturing debts and supplement working capital.

8. Business Segments

     As of June 30, 2011 and December 31, 2010, the Company had three operating segments – hotels, franchise and entertainment. The “other” segment consists primarily of a retail mall and miscellaneous revenues and expenses, cash and cash equivalents, certain receivables and certain property and equipment which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense and income taxes; therefore, they have not been allocated to the segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues. Selected information with respect to continuing operations is provided below (in thousands).

		Three months ended June 30,								Six months ended June 30,
		2011				2010				2011				2010
Revenues:
Hotels		$	39,276			$	38,632			$	69,434			$	69,253
Franchise			945				889				1,652				1,447
Entertainment			4,640				2,340				7,440				4,818
Other			519				594				1,126				1,239
		$	45,380			$	42,455			$	79,652			$	76,757
Operating income (loss):
Hotels		$	36,235			$	3,816			$	33,042			$	1,671
Franchise			(372	)			(14	)			(892	)			(127	)
Entertainment			430				263				527				634
Other			(2,169	)			(1,687	)			(4,026	)			(4,405	)
		$	34,124			$	2,378			$	28,651			$	(2,227	)

		June 30,				December 31,
		2011				2010
Identifiable assets:
Hotels		$	256,147			$	292,436
Franchise			10,244				9,811
Entertainment			5,339				5,115
Other			65,016				24,120
		$	336,746			$	331,482

9. Net Income (Loss) Per Share

     The following table presents a reconciliation of the numerators and denominators used in the basic and diluted net income (loss) per share computations for the three and six months ended June 30, 2011 and 2010 (in thousands, except per share amounts):

		Three months ended June 30,								Six months ended June 30,
		2011				2010				2011				2010
Numerator — basic and diluted:
Net income (loss) from continuing operations		$	18,760			$	67			$	13,989			$	(4,158	)
Net income (loss) from discontinued operations		$	—			$	(129	)		$	—			$	(283	)
Less: Net income or loss attributable to noncontrolling interest		$	(112	)		$	(2	)		$	(102	)		$	9
Net income (loss) attributable to Red Lion Hotels Corporation		$	18,648			$	(64	)		$	13,887			$	(4,432	)
Denominator:
Weighted average shares — basic			19,023				18,420				18,999				18,345
Weighted average shares — diluted			19,182				18,651				19,163				18,345
Net income (loss) per share from continuing operations
Basic		$	0.99			$	0.00			$	0.74			$	(0.23	)
Diluted		$	0.98			$	0.00			$	0.73			$	(0.23	)
Net Income (loss) per share from discontinued operations
Basic		$	0.00			$	0.00			$	0.00			$	(0.01	)
Diluted		$	0.00			$	0.00			$	0.00			$	(0.01	)
Net Income (loss) per share attributable to Red Lion Hotels Corporation:
Basic		$	0.98			$	0.00			$	0.73			$	(0.24	)
Diluted		$	0.97			$	0.00			$	0.72			$	(0.24	)

     For the three months ended June 30, 2011, 40,157 of the 335,926 options to purchase common shares outstanding as of that date were considered dilutive, as were 74,740 of the 303,974 restricted stock units outstanding. In addition, all of the 44,837 convertible operating partnership units of RLHLP (“OP units”) were considered dilutive for the period. For the three months ended June 30, 2010, 125,834 of the 904,189 options to purchase common shares outstanding as of that date were considered dilutive as were 60,738 of the 262,684 restricted stock units outstanding and all of the 44,837 OP units.

     For the six months ended June 30, 2011, 42,260 of the 335,926 options to purchase common shares outstanding as of that date were considered dilutive, as were 99,670 of the 303,974 restricted stock units outstanding. In addition, 22,542 of the 44,837 OP units were considered dilutive for the period. Due to the loss for the six months ended June 30, 2010, all of the 904,189 options to purchase common shares and the 262,684 restricted stock units outstanding as of that date were considered anti-dilutive as were the 44,837 OP units.

10. Income Taxes

     The Company makes estimates and judgments in determining income tax expense or benefit for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which typically arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, and the determination of tax credits and other items that impact the Company’s income tax expense.

     At June 30, 2011, the Company was not able to reliably estimate the full year effective tax rate. Accordingly, the Company has recognized interim income tax expense or benefit using the discrete method based on actual results for the three and six months ended June 30, 2011. The difference in the effective tax rate of 43% at June 30, 2011 from the statutory rate of 34.0% is primarily driven by the impact of state income taxes, federal tax credits, non-deductible expenses and goodwill write off related to the sale of the Company’s Seattle property during the quarter. See Note 6 for further details.

     The Company assessed its ability to realize its deferred tax assets at June 30, 2011. The Company continues to have a net deferred tax liability position that includes sufficient taxable temporary differences scheduled to reverse prior to the expiration of its tax credit carryovers. Accordingly, at June 30, 2011, the Company concluded that no valuation allowance is necessary and that it is more likely than not that its deferred tax assets will be realized.

11. Stock Based Compensation

     The 2006 Stock Incentive Plan authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The plan was approved by the shareholders of the Company and allows awards of 2.0 million shares, subject to adjustments for stock splits, stock dividends and similar events. As of June 30, 2011, there were 1,022,871 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2006 plan.

     In the first six months of 2011, the Company recognized approximately $0.1 million in compensation expense related to options, compared to $0.2 million during the same period in 2010. As outstanding options vest, the Company expects to recognize approximately $0.1 million in additional compensation expense, before the impact of income taxes, over a weighted average period of 15 months, including $40,000 during the remaining six months of 2011.

     A summary of stock option activity for the six months ended June 30, 2011, is as follows:

						Weighted
						Average
		Number				Exercise
		of Shares				Price
Balance, January 1, 2011			478,047			$	7.62
Options granted			—			$	—
Options exercised			(100,652	)		$	5.10
Options forfeited			(41,469	)		$	10.73
Balance, June 30, 2011			335,926			$	7.99
Exercisable, June 30, 2011			298,430			$	7.92

Additional information regarding stock options outstanding and exercisable as of June 30, 2011, is as follows:

						Weighted
						Average								Weighted				Aggregate								Weighted				Aggregate
Range of						Remaining								Average				Intrinsic								Average				Intrinsic
Exercise		Number				Contractual				Expiration				Exercise				Value (1)				Number				Exercise				Value (1)
Prices		Outstanding				Life (Years)				Date				Price				(in thousands)				Exercisable				Price				(in thousands)
$5.10 - $6.07			126,596				1.75				2011-2014			$	5.57			$	295,230				126,596			$	5.57			$	295,230
$7.10 - $7.80			27,864				5.07				2011-2020				7.39				14,291				23,467				7.44				10,774
$8.74 - $8.80			133,652				6.85				2011-2018				8.76				—				100,553				8.76				—
$12.21-$13.00			47,814				5.64				2016-2017				12.61				—				47,814				12.61				—
			335,926				4.61				2011-2020			$	7.99			$	309,521				298,430			$	7.92			$	306,004

     As of June 30, 2011 and 2010, there were 303,974 and 262,684 unvested restricted stock units outstanding, respectively. Since the Company began issuing restricted stock units, approximately 12.1% of total units granted have been forfeited. In the second quarter and first six months of 2011, the Company recognized approximately $0.1 million and $0.2 million, respectively, in compensation expense related to restricted stock units compared to $0.1 million and $0.5 million, respectively, in the comparable periods in 2010. The 2010 expense reflects $0.4 million recorded upon the separation of the Company’s former President and Chief Executive Officer. As the restricted stock units vest, the Company expects to recognize approximately $2.0 million in additional compensation expense over a weighted average period of 40 months, including $0.3 million during the remainder of 2011.

A summary of restricted stock unit activity for the six months ended June 30, 2011, is as follows:

						Weighted
						Average
		Number				Grant Date
		of Shares				Fair Value
Balance, January 1, 2011			220,816			$	6.40
Granted			149,962			$	8.12
Vested			(55,738	)		$	5.04
Forfeited			(11,066	)		$	6.24
Balance, June 30, 2011			303,974			$	7.27

     In January 2008, the Company adopted the 2008 employee stock purchase plan (the “2008 ESPP”) upon the expiration of its previous plan. Under the 2008 ESPP, a total of 300,000 shares of common stock are authorized for purchase by eligible employees at a discount through payroll deductions. No employee may purchase more than $25,000 worth of shares in any calendar year, or more than 10,000 shares during any six-month purchase period under the plan. As allowed under the 2008 ESPP, a participant may elect to withdraw from the plan, effective for the purchase period in progress at the time of the election with all accumulated payroll deductions returned to the participant at the time of withdrawal. In January 2011, there were 12,606 shares issued under the terms of the plan to participants.

12. Fair Value of Financial Instruments

     Estimated fair values of financial instruments (in thousands) are shown in the table below. The carrying amounts for cash and cash equivalents, accounts receivable and current liabilities are reasonable estimates of their fair values. The fair value of long-term debt is estimated based on the discounted value of contractual cash flows using the estimated rates currently offered for debt with similar remaining maturities. The debentures are valued at the closing price on June 30, 2011, of the underlying trust preferred securities on the New York Stock Exchange.

		June 30,								December 31,
		2011								2010
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Financial assets:
Cash and cash equivalents and restricted cash		$	51,525			$	51,525			$	8,132			$	8,132
Accounts receivable		$	6,532			$	6,532			$	5,985			$	5,985
Financial liabilities:
Current liabilities, excluding debt		$	22,656			$	22,656			$	22,454			$	22,454
Total debt		$	75,495			$	75,642			$	95,152			$	95,400
Debentures		$	30,825			$	31,411			$	30,825			$	31,279

     The fair values provided above are not necessarily indicative of the amounts the Company or the debt holders could realize in a current market exchange. In addition, potential income tax ramifications related to the realization of gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration.

13. Commitments and Contingencies

     At any given time the Company is subject to claims and actions incidental to the operations of its business. During 2010, a federal court ruled in favor of the Company in a lawsuit the Company filed against the owner of a former franchisee. The defendant appealed the ruling, and the Company is actively responding. The Company cannot at this time reasonably predict the outcome of the proceedings. The Company has not recorded a receivable for this contingent gain. The Company does not expect that any sums it may receive or have to pay in connection with this or any other legal proceeding would have a materially adverse effect on its consolidated financial position or net cash flows.

14. Discontinued Operations

     During the third quarter of 2010, the Company concluded that its leased hotel in Astoria, Oregon had reached the end of its useful life. Accordingly, the operations of this hotel have been classified as discontinued operations in the Company’s financial statements. The Company has segregated the operating results of this hotel from continuing operations on the Company’s consolidated statements of operations for the three and six months ended June 30, 2011 and any comparable periods presented. During the first quarter of 2011, the Company terminated the lease with the Port of Astoria. At June 30, 2011 and December 31, 2010, there were no remaining assets or liabilities of this hotel to report on the Company’s consolidated balance sheets.

     The following table summarizes results of discontinued operations for the periods indicated (dollars in thousands):

		Three months ended June 30,								Six months ended June 30,
		2011				2010				2011				2010
Revenues		$	—			$	—			$	—			$	—
Operating expenses							(184	)							(399	)
Depreciation and amortization							(11	)							(26	)
Income tax benefit (expense)							66								142
Net income (loss) from operations			—				(129	)			—				(283	)
Loss on disposal of discontinued business units			—								—
Income tax benefit
Net loss on disposal of discontinued business units			—				—				—				—
Net income (loss) from discontinued operations		$	—			$	(129	)		$	—			$	(283	)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This quarterly report on Form 10-Q 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 quarterly report, these are forward-looking statements. Many possible events or factors, including those discussed in “Risk Factors” under Item 1A of our annual report filed with the Securities and Exchange Commission (“SEC”) on Form 10-K for the year ended December 31, 2010, 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 quarterly report.

     In this report, “we,” “us,” “our,” “our company” and “the company” refer to Red Lion Hotels Corporation and, as the context requires, all of its wholly and partially owned subsidiaries, including, but not limited to, its 100% ownership of Red Lion Hotels Holdings, Inc. and Red Lion Hotels Franchising, Inc. and its approximate 99% ownership of Red Lion Hotels Limited Partnership. “Red Lion” refers to the Red Lion brand. The term “the system,” “system-wide hotels” or “system of hotels” refers to our entire group of owned, leased and franchised hotels.

     The following discussion and analysis should be read in connection with our unaudited consolidated financial statements and the condensed notes thereto and other financial information included elsewhere in this quarterly report, as well as in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2010, previously filed with the SEC on Form 10-K.

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.

     The discussion and information given below excludes the results related to our leased hotel in Astoria, Oregon. The results related to the Astoria hotel have been segregated from continuing operations and reflected as discontinued operations for all periods presented. See Note 14 of Condensed Notes to Consolidated Financial Statements.

     As of June 30, 2011, our hotel system contained 44 hotels located in eight states and one Canadian province, with 8,457 rooms and 424,387 square feet of meeting space as provided below:

						Total				Meeting
						Available				Space
		Hotels				Rooms				(sq. ft.)
Owned and Leased Hotels			30				5,824				290,766
Franchised Hotels			14				2,633				133,621
Total Red Lion Hotels			44				8,457				424,387

     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.
	•		The franchise segment is engaged primarily in licensing the Red Lion brand to franchisees, and generates revenue from marketing fees and franchise fees that are typically based on a percent of room revenues and are charged to hotel owners. It has also historically reflected revenue from management fees charged to the owners of managed hotels, although we have not managed any hotels for third parties since January 2008.
	•		The entertainment segment derives revenue primarily from ticketing services and the promotion and presentation of entertainment productions.

     Our remaining activities, which are primarily related to our ownership interest in a retail mall attached to one of our hotels and to other miscellaneous real estate investments, do not constitute a reportable segment and have been aggregated into “other”.

Executive Summary

     Our company strategy is to grow the Red Lion brand and our profitability through (1) sales and marketing initiatives; (2) franchising; and (3) leveraging existing assets to grow the business. We have embarked on a program of strategic asset sales to unlock real estate value by means of selective reductions in asset ownership. We successfully completed the sale of our Red Lion Hotel on Fifth Avenue in Seattle, Washington (“Seattle property”) for $71 million during the second quarter of 2011. We are currently marketing our Red Lion Colonial Hotel in Helena, Montana with the expectation of retaining management and/or franchise rights.

     We plan to use the majority of net proceeds from asset sales to reduce debt (we retired our revolving credit facility in the second quarter of 2011 using a portion of the proceeds from the sale of the Seattle property) and improve working capital. This restructuring of our balance sheet should create the financial flexibility necessary to refinance and reposition our remaining hotel properties and to position us for strategic growth opportunities.

     Our hotel operational strategy is to increase group, preferred corporate and higher-rated transient business, while using revenue management tools that we have invested in during the past year to strategically manage lower-rated online travel agent and permanent business. We have added sales personnel at our properties and at the corporate office to expand our local and national reach in an effort to grow our mix of group and preferred corporate customer base. During the first six months of 2011, we saw a decline in our group business when compared to the first six months of 2010. This decline was expected as we had several citywide events in some of our key markets in the first six months of 2010 that did not recur in the first six months of 2011. We managed to largely offset this decline by focusing on growth in our transient segment.

     For our owned and leased properties, RevPAR increased 6.3% in the second quarter of 2011 from the second quarter of 2010 and 3.2% in the first six months of 2011 compared to the same period in 2010. Occupancy increased 290 basis points in the second quarter of 2011 from the second quarter of 2010. Year to date occupancy increased 140 basis points versus the same period of the prior year. ADR was up 1.2% in the second quarter of 2011 versus the second quarter of 2010, to $82.20 from $81.23, and increased 0.6% in the first six months of 2011 as compared to the first six months of 2010. Average occupancy, ADR and RevPAR statistics are provided below on a comparable basis. Comparable hotels are defined as properties whose operations are included in the consolidated results for the entirety of the reporting periods being compared. The Seattle property is excluded from the owned and leased hotel statistics and it is included in the franchised hotel statistics below for all periods presented.

		For the three months ended June 30,																								For the six months ended June 30,
		2011												2010												2011												2010
		Average (1)												Average (1)												Average (1)												Average (1)
		Occupancy				ADR (2)				RevPAR(3)				Occupancy				ADR (2)				RevPAR(3)				Occupancy				ADR (2)				RevPAR(3)				Occupancy				ADR (2)				RevPAR(3)
Owned and Leased Hotels			61.3	%		$	82.20			$	50.43				58.4	%		$	81.23			$	47.44				54.4	%		$	80.11			$	43.56				53.0	%		$	79.64			$	42.21
Franchised Hotels			68.7	%		$	86.19			$	59.19				62.2	%		$	88.79			$	55.23				61.9	%		$	84.64			$	52.42				56.3	%		$	86.10			$	48.48
Total Red Lion Hotels			63.3	%		$	83.35			$	52.75				59.4	%		$	83.32			$	49.51				56.4	%		$	81.43			$	45.91				53.9	%		$	81.43			$	43.87
Change from prior comparative period:
Owned and Leased Hotels			2.9				1.2	%			6.3	%															1.4				0.6	%			3.2	%
Franchised Hotels			6.5				-2.9	%			7.2	%															5.6				-1.7	%			8.1	%
Total Red Lion Hotels			3.9				0.0	%			6.5	%															2.5				0.0	%			4.7	%

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

Results of Operations

     Our reported numbers for the interim and year to date periods presented in this report reflect results of our Seattle property for the full second quarter and six months ended June 30, 2010, but not the full second quarter and six months ended June 30, 2011 as the sale of that property closed on June 14, 2011. In order to help investors distinguish true results from operations versus changes due to the sale of the Seattle property, we will discuss operating results as reported and also discuss certain operating results for the periods included in this report

on a comparable hotel basis. As mentioned above, comparable hotels are properties that are owned or leased by us and the operations of which are included in the consolidated results for the entirety of the reporting periods being compared.

     During the second quarter of 2011 and 2010, we reported net income from continuing operations of $18.8 million or $0.99 per diluted share and $0.1 million or $0.00 per diluted share, respectively. The sale of our Seattle property generated a gain of $33.5 million. This gain is the main driver of the year over year increase in net income from continuing operations. For the second quarter of 2011, total revenue increased $3.0 million to $45.4 million when compared to the second quarter of 2010. Operating expenses in the second quarter of 2011 were $44.8 million excluding the impact of the $33.5 million gain on the sale of the Seattle property, compared to operating expenses of $40.1 million in the second quarter of 2010. The increase in expenses is driven by higher lease, energy, maintenance and labor costs. For the second quarter of 2011, EBITDA from continuing operations before special items was $5.6 million excluding the $33.5 million gain on the sale of the Seattle property compared to $7.5 million for the second quarter of 2010. EBITDA from continuing operations before special items can be found in a separate table below.

     For the first six months of 2011, we reported net income from continuing operations of $14.0 million or $0.74 per diluted share compared to a net loss from continuing operations for the same period in 2010 of $4.2 million or $0.23 per share. The sale of our Seattle property generated a gain of $33.5 million, which is the main driver of the year over year increase in net income from continuing operations. Revenue for the first six months of 2011 increased $2.9 million from the first six months of 2010. Our entertainment segment drove most of this increase. Operating expenses for the first six months of 2011 were $84.5 million excluding the impact of the $33.5 million gain on the sale of the Seattle property, compared to operating expenses of $79.0 million for the first six months of 2010. The increase in expenses is driven by higher costs in the entertainment segment and higher lease, energy, maintenance and labor costs. For the first six months of 2011, EBITDA from continuing operations before special items was $5.4 million, excluding the $33.5 million gain on the sale of the Seattle property, compared to $9.4 million for the first six months of 2010. The $9.4 million excludes a $1.2 million charge related to the departure of our former President and Chief Executive Officer. EBITDA from continuing operations before special items can be found in a separate table below.

     A summary of our consolidated statements of operations is provided below (in thousands, except per share data):

		Three months ended June 30,								Six months ended June 30,
		2011				2010				2011				2010
Total revenue		$	45,380			$	42,455			$	79,652			$	76,757
Operating expenses			11,256				40,077				51,001				78,984
Operating income (loss)			34,124				2,378				28,651				(2,227	)
Other income (expense):
Interest expense			(2,272	)			(2,314	)			(4,573	)			(4,550	)
Other income, net			381				9				385				46
Income (loss) before taxes			32,233				73				24,463				(6,731	)
Income tax expense (benefit)			13,473				6				10,474				(2,573	)
Net Income (loss) from continuing operations			18,760				67				13,989				(4,158	)
Discontinued operations:
Income (loss) from discontinued business units, net of income tax (benefit) expense of $(66) and $(142) for the three and six months ended June 30, 2010 respectively			—				(129	)			—				(283	)
Net income (loss) from discontinued operations			—				(129	)			—				(283	)
Net income (loss)			18,760				(62	)			13,989				(4,441	)
Less: Net income or loss attributable to noncontrolling interest			(112	)			(2	)			(102	)			9
Net income (loss) attributable to Red Lion Hotels Corporation		$	18,648			$	(64	)		$	13,887			$	(4,432	)
EBITDA		$	39,150			$	7,365			$	38,997			$	7,803
EBITDA as a percentage of revenues			86.3	%			17.3	%			49.0	%			10.2	%
EBITDA from continuing operations		$	39,150			$	7,549			$	38,997			$	8,202
EBITDA from continuing operations as a percentage of revenues			86.3	%			17.8	%			49.0	%			10.7	%

     EBITDA represents net income attributable to Red Lion Hotels Corporation before interest expense, income tax 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, on-going operations. We believe it is a complement to net income attributable to Red Lion Hotels Corporation and other financial performance measures. EBITDA is not intended to represent net income 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, cash flows from operations or any other measure of performance prescribed by GAAP.

     We use EBITDA to measure financial performance 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 attributable to Red Lion Hotels Corporation, which is the most comparable financial measure calculated and presented in accordance with GAAP.

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

		Three months ended June 30,								Six months ended June 30,
		2011				2010				2011				2010
EBITDA		$	39,150			$	7,365			$	38,997			$	7,803
Income tax (expense) benefit			(13,473	)			60				(10,474	)			2,715
Interest expense			(2,272	)			(2,314	)			(4,573	)			(4,550	)
Depreciation and amortization			(4,757	)			(5,175	)			(10,063	)			(10,400	)
Net income (loss) attributable to Red Lion Hotels Corporation		$	18,648			$	(64	)		$	13,887			$	(4,432	)

		Three months ended June 30,								Six months ended June 30,
		2011				2010				2011				2010
EBITDA from continuing operations		$	39,150			$	7,549			$	38,997			$	8,202
Income tax (expense) benefit			(13,473	)			(6	)			(10,474	)			2,573
Interest expense			(2,272	)			(2,314	)			(4,573	)			(4,550	)
Depreciation and amortization			(4,757	)			(5,164	)			(10,063	)			(10,374	)
Discontinued operations, net of tax			—				(129	)			—				(283	)
Net income (loss) attributable to Red Lion Hotels Corporation		$	18,648			$	(64	)		$	13,887			$	(4,432	)

     During the second quarter 2011, we recorded a $33.5 million gain from the sale of our Red Lion Hotel on Fifth Avenue in Seattle, Washington and in the first quarter of 2010, we recorded an expense of $1.2 million resulting from the separation of our former President and Chief Executive Officer. As a result, the operations as presented in the accompanying financial statements for the three and six months ended June 30, 2011 compared to 2010 do not reflect a meaningful comparison between periods. The following table represents a reconciliation of certain earnings measures before special items to net income / (loss) from continuing operations (in thousands):

		Three months ended June 30, 2011												Three months ended June 30, 2010
		Net income / (loss)												Net income / (loss)
		from continuing												from continuing
($ in thousands except per share data)		operations				EBITDA				Diluted EPS				operations				EBITDA				Diluted EPS
Amount before special items		$	(363	)		$	5,601			$	(0.02	)		$	67			$	7,549				0.00
Special items:
Gain on asset disposition (1)			33,549				33,549				1.75				—				—				—
Income tax benefit (expense) of special items, net (3)			(14,426	)			—				(0.75	)			—				—				—
Amount per consolidated statement of operations		$	18,760			$	39,150			$	0.98			$	67			$	7,549				0.00

		Six months ended June 30, 2011												Six months ended June 30, 2010
		Net income / (loss)												Net income / (loss)
		from continuing												from continuing
($ in thousands except per share data)		operations				EBITDA				Diluted EPS				operations				EBITDA				Diluted EPS
Amount before special items		$	(5,134	)		$	5,448			$	(0.27	)		$	(3,372	)		$	9,421			$	(0.18	)
Special items:
Gain on asset disposition (1)			33,549				33,549				1.75				—				—				—
Separation costs (2)			—				—								(1,219	)			(1,219	)			(0.07	)
Income tax benefit (expense) of special items, net (3)			(14,426	)			—				(0.75	)			433				—				0.02
Amount per consolidated statement of operations		$	13,989			$	38,997			$	0.73			$	(4,158	)		$	8,202			$	(0.23	)