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Red Lion Hotels CORP 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
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Table of Contents

 
 
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
For the quarterly period ended June 30, 2011
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 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          
            3  
            4  
            5  
            6  
Item 2       13  
Item 3       25  
Item 4       25  
       
 
       
PART II – OTHER INFORMATION
       
 
       
Item 1       26  
Item 1A.       26  
Item 2       26  
Item 3       26  
Item 4       26  
Item 5       26  
Item 6       27  
            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

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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, 2011 and December 31, 2010
                 
    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.

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RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three and Six Months Ended June 30, 2011 and 2010
                                 
    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.

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RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, 2011 and 2010
                 
    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.

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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.

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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

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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).

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    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 )

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     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:

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            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  
         
 
(1)   The aggregate intrinsic value is before applicable income taxes and represents the amount option recipients would have received if all options had been available to be exercised on the last trading day of the first six months of 2011, or June 30, 2011, based upon the Company’s closing stock price of $7.90.
     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.

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    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 )
 
                       

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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”.

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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 %                        
                                                         
 
(1)   Average occupancy represents total paid rooms divided by total available rooms. Total available rooms represents the number of rooms available multiplied by the number of days in the reported period and includes rooms taken out of service for renovation.
 
(2)   Average daily rate (“ADR”) represents total room revenues divided by the total number of paid rooms occupied by hotel guests.
 
(3)   Revenue per available room (“RevPAR”) represents total room and related revenues divided by total available rooms.
     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

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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

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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 )
 
                       

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     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 )
         
 
(1)   Amount as included in the line item “Loss (gain) on asset dispositions, net” on the accompanying consolidated statements of operations.
 
(2)   Amount as included in the line item “Undistributed corporate expenses” on the accompanying consolidated statements of operations.
 
(3)   Represents taxes on special items at our expected incremental tax rate as applicable.
Revenue
     A breakdown of our revenues from operations for the three and six months ended June 30, 2011 and 2010 is as follows (in thousands):
                                 
    Three months ended June 30,     Six months ended June 30,  
    2011     2010     2011     2010  
Operating revenue
                               
Hotels:
                               
Rooms
  $ 28,989     $ 27,919     $ 50,303     $ 49,199  
Food and beverage
    9,177       9,469       17,008       17,867  
Other department
    1,110       1,244       2,123       2,187  
 
                       
Total hotels segment
    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 Operating Revenue
  $ 45,380     $ 42,455     $ 79,652     $ 76,757  
 
                       

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     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. Comparable hotels are defined as 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.
     A breakdown of our comparable hotel revenues for the three and six months ended June 30, 2011 and 2010 is as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
    2011     2010     2011     2010  
Hotel revenue from operations
  $ 39,276     $ 38,632     $ 69,434     $ 69,253  
less: Hotel revenue from Seattle Fifth Avenue property
    (3,146 )     (3,827 )     (5,987 )     (6,604 )
 
                       
Comparable hotel revenue
  $ 36,130     $ 34,805     $ 63,447     $ 62,649  
 
                               
Rooms revenue from operations
  $ 28,989     $ 27,919     $ 50,303     $ 49,199  
less: Rooms revenue from Seattle Fifth Avenue property
    (2,264 )     (2,775 )     (4,379 )     (4,699 )
 
                       
Comparable rooms revenue
  $ 26,725     $ 25,144     $ 45,924     $ 44,500  
 
                               
Food and beverage revenue from operations
  $ 9,177     $ 9,469     $ 17,008     $ 17,867  
less: Food and beverage revenue from Seattle Fifth Avenue property
    (619 )     (663 )     (992 )     (1,182 )
 
                       
Comparable food and beverage revenue
  $ 8,558     $ 8,806     $ 16,016     $ 16,685  
     Three months Ended June 30, 2011 and 2010
     As Reported
     During the second quarter of 2011, revenue from the hotel segment increased $0.6 million compared to the second quarter of 2010. Room revenues in the second quarter of 2011 were up $1.1 million to $29.0 million compared to the same period a year ago. Increases in occupancy and rate for the second quarter of 2011 primarily drove the increase in revenue. Food and beverage revenues declined by $0.3 million when compared to the second quarter of 2010, primarily as a result of a decline in banquet revenue associated with a decline in group business in the second quarter of 2011.
     Comparable Basis
     On a comparable basis, during the second quarter of 2011, revenue from the hotel segment increased $1.3 million compared to the second quarter of 2010. Comparable room revenues in the second quarter of 2011 were up $1.6 million to $26.7 million compared to the same period a year ago. Increases in occupancy and rate for the second quarter of 2011 primarily drove the increase in revenue. Comparable food and beverage revenues declined by $0.2 million when compared to the second quarter of 2010, primarily as a result of a decline in banquet revenue associated with a decline in group business in the second quarter of 2011.
     Revenues in the franchise segment were essentially flat at $0.9 million in the second quarter of 2011 compared to the second quarter of 2010. Revenues in the entertainment segment increased to $4.6 million in the second quarter of 2011 compared to $2.3 million in the second quarter of 2010. This variance is mainly driven by the successful two week production of the Broadway show, Wicked, during the second quarter of 2011. Revenues derived from our other segment were down slightly to $0.5 million.
     Six months Ended June 30, 2011 and 2010
     As Reported
     During the first six months of 2011, revenue from the hotels segment increased $0.2 million compared to the first six months of 2010. Room revenues in the first six months of 2011 of $50.3 million were up $1.1 million compared to the same period one year ago. As expected, we experienced a decline in group revenue when compared to the same six months in the prior year. The first six months in the prior year included group revenue related to several citywide events in some of our key markets that did not recur in the first six months of 2011. The Spokane market had nationally focused citywide events in 2010 that did not repeat in 2011. The Denver and Salt Lake City markets were impacted by the reduction in government travel and reduced flight schedules. We managed to largely offset this decline by focusing on growth in our transient segment. Food and beverage revenues declined by $0.8 million when compared to the first six months of 2010, primarily as a result of a decline in banquet revenue which resulted from the decline in group business in the first six months of 2011.
     Comparable Basis
     On a comparable basis, during the first six months of 2011, revenue from the hotels segment increased $0.8 million compared to the first six months of 2010. Comparable room revenues in the first six months of 2011 of $45.9 million were up $1.4 million compared to the same

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period one year ago. As expected, we experienced a decline in group revenue when compared to the same six months in the prior year. The first six months in the prior year included group revenue related to several citywide events in some of our key markets that did not recur in the first six months of 2011. The Spokane market had nationally focused citywide events in 2010 that did not repeat in 2011. The Denver and Salt Lake City markets were impacted by the reduction in government travel and reduced flight schedules. We managed to largely offset this decline by focusing on growth in our transient segment. Comparable food and beverage revenues declined by $0.7 million when compared to the first six months of 2010, primarily as a result of a decline in banquet revenue which resulted from the decline in group business in the first six months of 2011.
     Revenues in the franchise segment increased to $1.7 million in the first six months of 2011 compared to $1.4 million in the first six months of 2010. The increase seen in the first six months of 2011 is attributable to the fact the first six months of 2010 included a rate holiday for franchisees that did not recur in the first six months of 2011. Revenues in the entertainment segment increased to $7.4 million in the first six months of 2011 compared to $4.8 million in the first six months of 2010, driven by the fact that we had a successful two week production of the Broadway show, Wicked, in the first six months of 2011. Revenues derived from our other segment were down slightly from $1.2 million to $1.1 million compared to the prior year.
Operating Expenses
     Operating expenses 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 the aggregate, operating expenses during the second quarter of 2011 compared to the 2010 period increased $4.7 million, excluding the impact of the $33.5 million gain on the sale of the Seattle property. During the first six months of 2011, operating expenses increased $5.6 million year over year, excluding the impact of the $33.5 million gain on the sale of the Seattle property. Operating expenses as well as direct margin by segment for the three and six months ended June 30, 2011 and 2010 can be seen below:
                                 
    Three months ended June 30,     Six months ended June 30,  
    2011     2010     2011     2010  
    (In thousands)     (In thousands)  
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  
Gain on asset dispositions, net
    (33,497 )     (57 )     (33,583 )     (155 )
Undistributed corporate expenses
    1,553       1,362       2,897       3,805  
 
                       
Total operating expenses
  $ 11,256     $ 40,077     $ 51,001     $ 78,984  
 
                       
 
                               
Hotels revenue — owned
  $ 27,799     $ 27,893     $ 49,523     $ 50,266  
Direct margin (1)
  $ 6,191     $ 7,539     $ 8,589     $ 10,937  
Direct margin %
    22.3 %     27.0 %     17.3 %     21.8 %
 
                               
Hotels revenue — leased
  $ 11,477     $ 10,739     $ 19,911     $ 18,987  
Direct margin (1)
  $ 2,472     $ 2,473     $ 3,063     $ 3,104  
Direct margin %
    21.5 %     23.0 %     15.4 %     16.3 %
 
                               
Franchise revenue
  $ 945     $ 889     $ 1,652     $ 1,447  
Direct margin (1)
  $ (125 )   $ 79     $ (312 )   $ 59  
Direct margin %
    -13.2 %     8.9 %     -18.9 %     4.1 %
 
                               
Entertainment revenue
  $ 4,640     $ 2,340     $ 7,440     $ 4,818  
Direct margin (1)
  $ 502     $ 354     $ 688     $ 819  
Direct margin %
    10.8 %     15.1 %     9.2 %     17.0 %
 
                               
Other revenue
  $ 519     $ 594     $ 1,126     $ 1,239  
Direct margin (1)
  $ 84     $ 181     $ 298     $ 404  
Direct margin %
    16.2 %     30.5 %     26.5 %     32.6 %
 
(1)   Revenues less direct operating expenses.

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     A breakdown of our comparable hotel operating expenses and direct margin for the three and six months ended June 30, 2011 and 2010 is as follows:
                                 
    Three months ended June 30,     Six months ended June 30,  
    2011     2010     2011     2010  
Hotel operating expenses per consolidated statement of operations
  $ 30,613     $ 28,620     $ 57,782     $ 55,212  
less: Hotel operating expenses from Seattle Fifth Avenue property
    (2,496 )     (2,383 )     (4,639 )     (4,583 )
 
                       
Comparable hotel operating expenses
  $ 28,117     $ 26,237     $ 53,143     $ 50,629  
 
                               
Hotel direct margin per operations
  $ 8,663     $ 10,012     $ 11,652     $ 14,041  
less: Hotel direct margin from Seattle Fifth Avenue property
    (650 )     (1,446 )     (1,348 )     (2,022 )
 
                       
Comparable hotel direct margin
  $ 8,013     $ 8,566     $ 10,304     $ 12,019  
 
                               
Comparable hotel direct margin %
    22.2 %     24.6 %     16.2 %     19.2 %
     Three months Ended June 30, 2011 and 2010
     As Reported
     Direct hotel expenses in the second quarter of 2011 increased by $2.0 million, or 6.9%, compared to the second quarter of 2010. Room related expenses increased $0.9 million, or 10.3%. Food and beverage costs increased $0.2 million, or 2.7% quarter over quarter. Overall, the hotels segment had a direct margin of $8.7 million in the second quarter of 2011 compared to $10.0 million during the second quarter of 2010, providing for a direct operating margin in the current period of 22.1%, compared to 25.9% during the same period in 2010. The year over year comparison for the hotel segment was primarily impacted by increased energy, maintenance and labor costs.
     Comparable Basis
     On a comparable basis, direct hotel expenses in the second quarter of 2011 increased by $1.9 million, or 7.1%, compared to the second quarter of 2010. On a comparable basis overall, the hotels segment had a direct margin of $8.0 million in the second quarter of 2011 compared to $8.6 million during the second quarter of 2010, providing for a direct operating margin in the current period of 22.2%, compared to 24.6% during the same period in 2010. The comparable year over year comparison for the hotel segment was primarily impacted by increased energy, maintenance and labor costs.
     Direct expenses for the franchise segment in the second quarter of 2011 increased by $0.3 million compared to the second quarter of 2010, primarily driven by investment to grow this segment. Direct expenses for the entertainment segment increased $2.2 million year over year driven by an increase in the number of shows in the second quarter of 2011, namely a two week production of the Broadway hit, Wicked during the second quarter of 2011.
     Depreciation and amortization expenses decreased $0.4 million in the second quarter of 2011, which resulted from the discontinuation of depreciation expense on our assets classified as “held for sale”. See Note 6 of Condensed Notes to Consolidated Financial Statements. Undistributed corporate expenses increased $0.2 million in the second quarter of 2011 compared to the second quarter of 2010. Undistributed corporate expenses include general and administrative charges such as corporate payroll, stock compensation expense, director’s fees, legal expenses, charitable contributions, director and officers insurance, bank service charges and outside accountants and various other consultants’ expense. We consider these expenses to be “undistributed” because the costs are not directly related to our business segments and therefore are not further distributed. However, costs that can be identified with a particular segment, such as accounting, human resources and information technology, are distributed and included in direct expenses.
     Six months Ended June 30, 2011 and 2010
     As Reported
     Direct hotel expenses in the first six months of 2011 increased by $2.6 million, or 4.7%, compared to the first six months of 2010. Room related expenses increased $1.1 million, or 7.2%. Food and beverage costs decreased $0.1 million, or 0.3% year over year. Overall, the hotels segment had a direct margin of $11.7 million in the first six months of 2011 compared to $14.0 million during the first six months of 2010, providing for a direct operating margin in the current period of 16.8%, compared to 20.3% during the same period in 2010. The year over year comparison for the hotel segment was primarily impacted by increased energy, maintenance and labor costs.
     Comparable Basis
     On a comparable basis, direct hotel expenses in the first six months of 2011 increased by $2.5 million, or 5.0%, compared to the first six months of 2010. On a comparable basis overall, the hotels segment had a direct margin of $10.3 million in the first six months of 2011 compared to $12.0 million during the first six months of 2010, providing for a comparable direct operating margin in the current period of 16.2%, compared to 19.2% during the same period in 2010. The year over year comparison for the hotel segment was primarily impacted by increased energy, maintenance and labor costs.
     Direct expenses for the franchise segment in the first six months of 2011 increased by $0.6 million compared to the first six months of 2010, driven by investment to grow this segment. Direct expenses for the entertainment segment increased $2.8 million year over year

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driven by an increase in the number of shows in the first quarter of 2011, namely a two week production of the Broadway hit, Wicked during the first six months of 2011.
     Depreciation and amortization expenses decreased $0.3 million in the first six months of 2011, which resulted from the discontinuation of depreciation expense on our assets classified as “held for sale”. See Note 6 of Condensed Notes to Consolidated Financial Statements. Undistributed corporate expenses decreased $0.9 million in the first six months of 2011, because the first six months of 2010 included $1.2 million of expense recorded upon the separation of our former President and Chief Executive Officer. Undistributed corporate expenses include general and administrative charges such as corporate payroll, stock compensation expense, director’s fees, legal expenses, charitable contributions, director and officers insurance, bank service charges and outside accountants and various other consultants’ expense. We consider these expenses to be “undistributed” because the costs are not directly related to our business segments and therefore are not further distributed. However, costs that can be identified with a particular segment, such as accounting, human resources and information technology, are distributed and included in direct expenses.
Income Taxes
     During the second quarter of 2011, we reported an income tax expense from continuing operations of $13.5 million compared to an income tax expense of $6,000 during the second quarter of 2010. For the first six months of 2011, we reported an income tax expense of $10.5 million compared to an income tax benefit of $2.6 million during the first six months of 2010. The increase for both comparative periods was due to the gain on the sale of our Seattle property. We expect to defer approximately $6.1 million of the taxable gain attributable to the sale of the property.
     We make 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 in the determination of tax credits and other items that impact our income tax expense or benefit.
     We assessed our ability to realize our deferred tax assets at June 30, 2011. We continue to have a net deferred tax liability position that includes sufficient taxable temporary differences scheduled to reverse prior to the expiration of any of our tax credit carryovers. Accordingly, at June 30, 2011, we concluded that no valuation allowance was necessary and that it is more likely than not that our deferred tax assets will be realized.

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Liquidity and Capital Resources
     On June 14, 2011, we completed a sale of our Red Lion Hotel on Fifth Avenue in Seattle, Washington for $71 million in cash and used $28 million of the proceeds to retire our revolving credit facility, which was scheduled to expire in September 2011.
     As of June 30, 2011 we had long term debt of $24.6 million maturing within one year. We are in compliance with our debt covenants and believe we have adequate liquidity to repay this debt when due and to fund our ongoing operating activities for the foreseeable future. Nevertheless, we are exploring options to refinance this debt in order to have the additional financial flexibility that increased working capital would provide.
     At June 30, 2011, outstanding debt was $106.3 million. We have outstanding bank debt of $12.1 million under a variable rate bank note, $30.8 million in the form of trust preferred securities and a total of $63.4 million in 13 fixed-rate notes collateralized by individual properties. Our average pre-tax interest rate on debt was 7.5% at June 30, 2011, of which 88.6% was fixed at an average rate of 7.9% and 11.4% was at an average variable rate of 4.0%. Our first fixed-rate term debt maturity is in September 2011.
     The variable rate property note is secured by our Red Lion Bellevue and Red Lion Templins properties, and matures in 2012. This note has financial covenants, including covenants relating to the total leverage, senior leverage and minimum debt service coverage ratios. We were in compliance with all covenants at June 30, 2011 and expect to continue to comply with all covenants in future periods. The interest rate on this note was 4.0% at June 30, 2011.
     A comparative summary of balance sheet data at June 30, 2011 and December 31, 2010 is provided below:
                 
    June 30,   December 31,
    2011   2010
Consolidated balance sheet data (in thousands):
               
Cash and cash equivalents
  $ 46,818     $ 4,012  
Working capital (1)
  $ 15,416     $ (48,347 )
Assets held for sale
  $ 9,805     $  
Property and equipment, net
  $ 227,574     $ 272,030  
Total assets
  $ 336,746     $ 331,482  
 
               
Total debt
  $ 75,495     $ 95,152  
Debentures due Red Lion Hotels Capital Trust
  $ 30,825     $ 30,825  
Total liabilities
  $ 150,822     $ 160,717  
Total stockholders’ equity
  $ 185,924     $ 170,765  
 
(1)   Represents current assets less current liabilities, excluding assets held for sale.
     During 2011, we expect cash expenditures to primarily include the funding of operating activities, interest payments on our outstanding indebtedness and capital expenditures. We expect to meet our long-term liquidity requirements for future investments and continued hotel and other various capital improvements using existing cash or through net cash provided by operations, debt, strategic asset sales or equity issuances.
Operating Activities
     Net cash used in operating activities during the first six months of 2011 totaled $1.3 million, a $10.7 million decrease from net cash provided by operating activities of $9.4 million during the first six months of 2010. The primary drivers of the decrease are a higher net loss plus the payment timing of accounts payable and other accrued expenses of $6.7 million.
Investing Activities
     Net cash provided by investing activities totaled $64.5 million during the first six months of 2011 compared to net cash used of $3.7 million during the first six months of 2010. The primary driver of the increase was the net proceeds from the sale of our Seattle property of $68.3 million. Cash additions to property and equipment decreased by $0.8 million. Capital expenditures in 2011 are expected to be between $11.0 and $13.0 million, and will primarily support investments in maintenance, technology and basic hotel improvement projects.

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Financing Activities
     Net cash used in financing activities was $20.4 million during the first six months of 2011, compared to $6.5 million during the first six months of 2010. Net financing activities during the first six months of 2011 included the retirement of our revolving credit facility with $28 million of the cash proceeds from the sale of our Seattle property, which secured the facility. Also impacting financing activities during the first six months were the fees associated with the amendment to the, now retired, facility in March 2011, which allowed us to maintain our borrowing capacity.
     At June 30, 2011, we had total debt obligations of $106.3 million, of which $63.4 million was under 13 notes collateralized by individual hotels with fixed interest rates ranging from 5.9% to 8.1%. These 13 notes mature beginning in 2011 and continuing through 2013. Included within outstanding debt are debentures due to the Red Lion Hotels Capital Trust of $30.8 million, which are uncollateralized and due to the trust in 2044 at a fixed rate of 9.5%. Our average pre-tax interest rate on debt was 7.5% at June 30, 2011.
     Of the $106.3 million in total debt obligations, three pools of cross securitized debt exist: (i) one consisting of five properties with total borrowings of $19.3 million; (ii) a second consisting of two properties with total borrowings of $17.3 million; and (iii) a third consisting of four properties with total borrowings of $21.5 million. Each pool of securitized debt and the other collateralized hotel borrowings include defeasance provisions for early repayment.
Contractual Obligations
     The following table summarizes our significant contractual obligations, including principal and interest on debt, as of June 30, 2011:
                                         
            Less than                     After  
    Total     1 year     1-3 years     4-5 years     5 years  
Debt (1)
  $ 82,174     $ 25,738     $ 56,436     $     $  
Operating and capital leases (2)
    62,375       4,327       24,061       13,663       20,324  
Service agreements
    1,414       380       1,034              
Debentures due Red Lion
                                       
Hotels Capital Trust (1)
    126,485       1,464       8,785       5,857       110,379  
 
                             
Total contractual obligations (3)
  $ 272,448     $ 31,909     $ 90,316     $ 19,520     $ 130,703  
 
                             
 
(1)   Including estimated interest payments and commitment fees over the life of the debt agreement.
 
(2)   Operating lease amounts are net of estimated sublease income of $11.1 million annually.
 
(3)   With regard to purchase obligations, we are not party to any material agreements to purchase goods or services that are enforceable or legally binding as to fixed or minimum quantities to be purchased or stated price terms.
     In 2001, we assumed a master lease agreement for 17 hotel properties, including 12 which were part of the Red Lion acquisition. Subsequently, we entered into an agreement with Doubletree DTWC Corporation whereby Doubletree DTWC Corporation is subleasing five of these hotel properties from Red Lion. During the second quarter of 2010, we amended the agreement to terminate the master lease as to the Astoria, Oregon property due to its closure. The master lease agreement requires minimum monthly payments of $1.2 million plus contingent rents based on gross receipts from the remaining 16 hotels, of which approximately $0.8 million per month is paid by a sublease tenant. The lease agreement expires in December 2020, although we have the option to extend the term on a hotel by hotel basis for three additional five-year terms.
     In February 2011, we reached an agreement with a new subtenant of our Red Lion Hotel Sacramento. The agreement provides for initial minimum annual rent payments of $0.4 million during the first three years with increases in future years, which are reflected in the table above.
     In October 2007, we completed an acquisition of a 100-year (including extension periods) leasehold interest in a hotel in Anaheim, California for $8.3 million, including costs of acquisition. As required under the terms of the leasehold agreement, we paid $1.8 million per year in lease payments through April 2011. At our option, we are entitled to extend the lease for 19 additional terms of five years each, with increases in lease payments tied directly to the Consumer Price Index. We exercised the option to extend for one additional 5 year term beginning in May 2011, leaving us with 18 remaining options to extend the lease for additional terms of five years each. Effective starting May 2011, we will pay $2.2 million per year through the extension period ending in April 2016, which is reflected in the table above.
     In May 2008, we completed an acquisition of a hotel in Denver, Colorado. In connection with the purchase agreement, we assumed an office lease used by guests contracted to stay at the hotel for approximately $0.7 million annually. As part of this contract business, we are reimbursed the entire lease expense amount. The lease expires in August 2012, and its expense has been included in the table above.

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Franchise Update
     At June 30, 2011, our system of hotels included 14 hotels under franchise agreements, representing a total of 2,633 rooms and 133,621 square feet of meeting space. During the second quarter we sold our Seattle property and entered into a franchise agreement with the buyer who will continue to operate the property as a Red Lion Hotel. In addition, the previously announced Red Lion Inn Rancho Cordova near Sacramento opened in May 2011.
Off-balance Sheet Arrangements
     As of June 30, 2011, we had no off-balance sheet arrangements, as defined by SEC regulations, which have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Critical Accounting Policies and Estimates
     The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We consider a critical accounting policy to be one that is both important to the portrayal of our financial condition and results of operations and requires management’s most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2010.
     Management has discussed the development and selection of our critical accounting policies and estimates with the audit committee of our board of directors, and the audit committee has reviewed the disclosures presented on Form 10-K for the year ended December 31, 2010. Since the date of our 2010 Form 10-K, there have been no material changes to our critical accounting policies, nor have there been any changes to our methodology and assumptions applied to these policies.
New and Future Accounting Pronouncements
     During the six months ended June 30, 2011 there were no new accounting pronouncements published that were applicable to us.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
     At June 30, 2011, $94.2 million of our outstanding debt was subject to currently fixed interest rates and was not exposed to market risk from rate changes. In March 2011, we amended the covenants of the variable rate property note secured by our Red Lion Bellevue and Red Lion Templins locations. We amended the terms to modify our total leverage ratio, senior leverage ratio and minimum debt service coverage ratio. The interest rate on the $12.1 million outstanding under that note is now based on prime rate plus 0.075%. Outside of this change, we do not foresee any other changes of significance in our exposure to fluctuations in interest rates, although we will continue to manage our exposure to this risk by monitoring available financing alternatives.
     The table below shows (in thousands) the principal amounts of the debt obligations on our consolidated balance sheet at June 30, 2011, that are payable during the last six months of 2011, during each of the years 2012 through 2015 and thereafter. During the first six months of 2011, recurring scheduled principal payments of $1.7 million were made that were included as debt obligations at December 31, 2010.
                                                                 
    2011   2012   2013   2014   2015   Thereafter   Total   Fair Value
Total debt
  $ 23,618     $ 12,999     $ 38,878     $     $     $     $ 75,495     $ 75,642  
Average interest rate
                                                    7.5 %        
 
                                                               
Debentures due Red Lion
                                                               
Hotels Capital Trust
  $     $     $     $     $     $ 30,825     $ 30,825     $ 31,411  
Average interest rate
                                                    9.5 %        
Item 4. Controls and Procedures
     As of June 30, 2011, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective to ensure that material information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms.
     There were no changes in internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the first six months of 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II — OTHER INFORMATION
Item 1. Legal Proceedings
     At any given time, we are subject to claims and actions incidental 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. See Note 13 of Condensed Notes to Consolidated Financial Statements.
Item 1A. Risk Factors
     In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A Risk Factors in our annual report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in our annual report may not be the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     None.
Item 3. Defaults Upon Senior Securities
     None.
Item 4. (Removed and Reserved)
Item 5. Other Information
     None.

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Item 6. Exhibits
Index to Exhibits
     
Exhibit    
Number   Description
 
 
   
10.1
  Agreement to Purchase Hotel between WHC809, LLC and LCP Seattle, LLC
 
   
31.1
  Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)
 
   
31.2
  Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)
 
   
32.1
  Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14(b)
 
   
32.2
  Certification of Chief Financial Officer pursuant to Exchange Act Rule 13(a)-14(b)
 
   
101.INS
  XBRL Instance Document
 
   
101.SCH
  XBRL Taxonomy Extension Schema Document
 
   
101.CAL
  XBRL Taxonomy Extension Calculation Linkbase Document
 
   
101.LAB
  XBRL Taxonomy Extension Label Linkbase Document
 
   
101.PRE
  XBRL Taxonomy Extension Presentation Linkbase Document
 
   
 

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SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  Red Lion Hotels Corporation
Registrant
 
 
     
     
     
 
             
    Signature   Title   Date
 
By:
  /s/ Jon E. Eliassen
 
Jon E. Eliassen
  President and Chief Executive Officer
(Principal Executive Officer)
  August 8, 2011
 
           
By:
  /s/ Dan R. Jackson
 
Dan R. Jackson
  Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
  August 8, 2011
 
           
By:
  /s/ Sandra J. Heffernan
 
Sandra J. Heffernan
  Vice President, Corporate Controller
(Principal Accounting Officer)
  August 8, 2011

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