UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-K

Commission File Number: 001-13957

WestCoast Hospitality Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, Including Area Code:

(509) 459-6100

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

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

None

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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes o          No þ

      The aggregate market value of the registrant’s common stock as of June 30, 2004 was $69.8 million, of which 69.3% or $48.4 million was held by non-affiliates as of that date. There were 13,083,051 shares of the Registrant’s common stock outstanding as of March 15, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Registrant’s Proxy Statement for its 2005 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the Registrant’s 2004 fiscal year, are incorporated by reference herein in Part III.

TABLE OF CONTENTS

PART I

      This annual report on Form 10-K includes forward-looking statements. We have based these statements on our current expectations and projections about future events. When words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will” and similar expressions or their negatives are used in this annual report, these are forward-looking statements. Many possible events or factors, including those discussed in “Risk Factors Relating to Our Business” beginning on page 12 of this annual report, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report.

      In this report, “we,” “us,” “our,” “our company” and “the company” refer to WestCoast Hospitality Corporation and, as the context requires, its wholly and partially owned subsidiaries, and “WestCoast” refers to WestCoast Hospitality Corporation. The term “the system” or “system of hotels” refers to our entire group of owned, leased, managed and franchised hotels.

Introduction

      We are a NYSE-listed hospitality and leisure company primarily engaged in the ownership, management, development and franchising of mid-scale and upper mid-scale, full service hotels under our Red Lion and WestCoast brands. In addition to our hotel operations, we are engaged in entertainment and real estate operations. As of December 31, 2004, our hotel system contained 67 hotels located in 12 states and one Canadian province, with more than 11,500 rooms and 532,000 square feet of meeting space. We own and operate 42 hotels, of which 29 are wholly owned and 13 are leased. We manage 3 hotels owned by third parties and franchise 22 hotels.

      Our hotels are known for their meeting facilities and superior food and beverage operations. Our mix of business is well balanced between group business, business travelers, and the leisure traveler with the mix varying by location. We maintain and manage our own Central Reservation Call Center with links to the various travel agent global distribution systems (“GDS”) and the electronic distribution channels on the internet including our branded websites www.redlion.com and www.westcoasthotels.com. To support our owned, managed and franchised hotels we provide all the services typical in our industry: marketing, sales, advertising, frequency program, revenue management, procurement, quality assurance, education and training and design and construction. In 2004, our sales and marketing efforts and our reservation channels delivered approximately 34% of a system hotel’s room revenue.

      In November 2004 we announced our plan to invest $40.0 million to improve comfort, freshen décor and upgrade technology. At the same time, we announced our plan to divest 11 of our non-strategic owned hotels, one of our real estate office buildings and certain other non-core properties (collectively referred to as “the divestment properties”). The activities of those 11 hotels and the real estate property are considered discontinued operations under generally accepted accounting principles. Unless otherwise identified using phrases such as “from continuing operations”, all references to system hotels, owned or leased hotels, hotel statistics, and measurements of financial performance such as net income and EBITDA include the activities of those discontinued operations.

      For the year ended December 31, 2004, we reported a net loss of approximately $6.3 million, compared to net income of approximately $1.2 million in 2003. This decrease of $7.5 million between years includes a net of tax non-cash impairment charge of approximately $5.8 million related to four of the divestment properties. It also includes an increase of $4.4 million in interest expense between years primarily related to the issuance of $47.4 million of interest bearing debentures to WestCoast Hospitality Capital Trust. The net proceeds from the issuance of the debentures of $43.7 million were used to retire in full our then outstanding Series A and Series B cumulative preferred shares totaling $29.8 million including accrued dividends. Operating income (which results only from continuing operations) was $11.2 million for the year ended December 31, 2004, up 2.6% as compared to 2003.

      EBITDA represents net income (or loss) before interest expense, income tax benefit or expense, depreciation, and amortization. We utilize EBITDA as a financial measure because management believes that investors find it to be 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. EBITDA from continuing operations is calculated in the same manner, but excludes the operating activities of business units identified as discontinued. As discussed further in Item 6 of this Form 10-K, EBITDA is not intended to represent net income or loss as defined by generally accepted accounting principles in the United States 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 generally accepted accounting principles in the United States.

      Our EBITDA from continuing operations for the year ended December 31, 2004 was $22.6 million, up 4.5% from 2003 EBITDA of $21.6 million. However, due primarily to the non-cash impairment charge of approximately $8.9 million related to four of the divestment properties, total EBITDA, including that from discontinued operations, was $18.3 million for the year ended December 31, 2004 as compared to $25.3 million in 2003.

      For the year ended December 31, 2004, we recorded a loss applicable to common shareholders of $6.7 million or $0.51 per common share. For the years ended December 31, 2003 and 2002 we recorded income or (loss) applicable to common shareholders of ($1.3) million and $5.4 million, respectively, or ($0.10) and $0.42 per share, respectively.

      A comprehensive discussion of net income or loss for the years ended December 31, 2004, 2003 and 2002, individual operating unit performances, general corporate expenses and other significant items can be found in Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as the Consolidated Financial Statements and Notes thereto included elsewhere in this annual report.

Overview and Company Strategy

      As discussed above, we are a hospitality and leisure company. We intend to grow our hotel operations primarily by expanding the number of hotels franchised under the Red Lion brand. We are initially focusing our growth in the Western United States and Canada by pursuing a “hub and spoke” pattern of establishing brand penetration in key cities, followed by expansion into adjoining markets. We intend to increase the number of management agreements of third-party owned hotels by marketing our management and reservation services and we will also seek opportunities to grow through acquisitions of whole or partial interests in hotels.

      Through our entertainment division, which includes our TicketsWest.com, Inc. subsidiary (“TicketsWest”), we engage in activities complementary to the operation of the hotels in our system. TicketsWest provides event ticket distribution services and promotes and presents a variety of entertainment productions in communities in which we have a hotel presence. TicketsWest offers ticketing inventory management systems, call center services and outlet and electronic channel distribution. We have also developed an electronic ticketing platform that is integrated with our electronic hotel distribution system, allowing us to cross-sell leisure and entertainment packages to promote occupancy in system hotels.

      Our real estate division engages in the traditional real estate related services that we have pursued since we were originally founded, including developing, managing and acting as a broker for sales and leases of commercial and multi-unit residential properties. Our real estate division derives a substantial part of its revenues from fees it generates from services it provides to third parties. This division also provides services that we utilize for our hotels and other real estate that we own and lease.

      We trace our history back to 1937, with the founding of our predecessor as a general commercial real estate development and management business. In the 1970s, our predecessor began focusing on the development and management of hotels. Our company was incorporated in the State of Washington on April 25, 1978 as its successor. We continued to grow our hotel business under the brand name Cavanaugh’s throughout the 1980s and 1990s, and in 1998 we completed the initial public offering of our common stock. We acquired WestCoast Hotels, Inc. on December 31, 1999, which added more than 4,800 rooms in 20 cities

to our system of hotels, enhanced our presence in certain key western “hub” markets, including Seattle, Portland, San Francisco and Southern California, and launched our company into the franchise business. Following this acquisition, we rebranded our Cavanaughs hotels to the WestCoast brand and changed our name to WestCoast Hospitality Corporation. On December 31, 2001 we acquired Red Lion Hotels, Inc., which added more than 7,400 rooms in 40 cities to our system of hotels, further enhanced our presence in a number of “hub” markets and afforded us the opportunity to expand our franchise business to include the Red Lion brand.

      Our senior management team, led by our President and Chief Executive Officer, Arthur M. Coffey, brings an experienced and innovative approach to the management of our operations. Our senior management team has extensive business experience, and five members of the team have been with our company for more than 20 years. Our senior management team’s strengths include hotel development, ownership and management; e-commerce; franchising, sales and marketing; food and beverage management; entertainment production and real estate services. Their extensive expertise, along with their diverse working backgrounds provides our company with a broad perspective from which we can make strategic management and operational decisions.

      A substantial portion of our assets are held by three of our subsidiaries: Red Lion Hotels, Inc., WestCoast Hotels, Inc. and WestCoast Hospitality Limited Partnership, which we refer to as WHLP. We are the sole general partner and approximately 98% owner of WHLP. We own 100% of the outstanding capital stock of both Red Lion Hotels, Inc. and WestCoast Hotels, Inc.

Hospitality Industry Performance Measures

      We believe that the following performance measures, which are widely used in the hospitality industry and appear throughout this annual report, are important to our discussion of operating performance:

      Comparable hotels are hotels that have been owned, leased, managed or franchised by us for more than one year. Throughout this annual report, unless otherwise stated, RevPAR, ADR and average occupancy statistics are calculated using statistics for comparable hotels. When presented in this annual report, the above performance measures will be identified as belonging to a particular market segment, system wide, or for continuing operations versus discontinued operations or total combined operations.

Business Segments

      For financial accounting purposes, we divide our operations into four business segments: hotels and restaurants; franchise, central service and development; entertainment; and real estate. In addition, corporate services consist primarily of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables and certain property and equipment that are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense, income tax expense and other income and expense items. Therefore, these items are not allocated to the segments.

      The following table illustrates, for the periods indicated, revenue per reportable business segment and the percentage of total revenue generated by each segment, excluding the activities of business units identified as discontinued operations in the consolidated financial statements. For additional information regarding segments, please refer to “Business Segments” in the notes to our consolidated financial statements that are part of this annual report (in thousands).

Hotel Operations

      Hotel operations include our hotels and restaurants business segment, as well as our franchise, central services and development segment.

      We owned and operated 29 hotels with a total of 5,303 rooms and more than 257,000 square feet of meeting space as of December 31, 2004. The number of owned properties includes three hotels for which the underlying land is leased. The lease expiration dates range from 2014 to 2062. For additional information, refer to “Operating Lease Commitments” in the notes to the consolidated financial statements. We operate restaurants in 24 of our owned hotels. Two of these 24 hotels also contain a restaurant space under lease to a third party.

      As of December 31, 2004 we leased 13 hotels with a total of 2,184 rooms and more than 99,000 square feet of meeting space. Under these leases, we are responsible for hotel operations and management. We recognize revenues and associated expenses with leased hotel operations. Lease terms typically require us to pay fixed monthly rent and variable rent based on a percentage of revenue if certain sales thresholds are reached. In addition, we are responsible for repairs and maintenance, operating expenses and management of operations. Refer to “Operating Lease Commitments” in the notes to the consolidated financial statements for additional information. We operate restaurants in 11 of our leased hotels. Each of the remaining two leased hotels has a restaurant under lease to a third party.

      Of these 42 hotels, 11 have been identified as assets held for sale and are classified as discontinued operations on the consolidated balance sheets and for the consolidated statements of operations. Those 11 hotels aggregate 1,694 rooms and approximately 58,000 square feet of meeting space.

      As of December 31, 2004, we managed three third-party owned hotels with a total of 476 rooms and more than 43,000 square feet of meeting space. We refer to these hotels as managed hotels. Under the typical management agreement, we manage virtually all aspects of the hotel’s operations, while the hotel owner is responsible for operating and other expenses. Our management fee is normally based on a percentage of the hotel’s gross revenue plus an incentive fee based on operating performance. The duration of our management agreements varies, and hotel owners in some cases have renewal options.

      As of December 31, 2004, we had franchise arrangements with 22 hotels that were owned and operated by third parties under our licensed brand names. These hotels, which we refer to as franchised hotels, had at that date a total of 3,560 rooms and more than 132,000 square feet of meeting space. We do not have management or operational responsibility for franchised hotels. However, we do provide certain services to those hotels, including reservation systems, advertising and national sales, a guest loyalty program, revenue management tools, quality inspections and brand standards. We receive payments for use of the brand names and for the central services programs we administer for our franchisees.

      The hotels in our system primarily operate under the Red Lion brand. Our Red Lion brand is nationally recognized and is typically associated with three-and four-star full-service hotels. As discussed below, we plan to focus our growth strategy on conversion of new hotels to our Red Lion brand. Our WestCoast brand is associated with distinctive and independently recognized hotels that are known apart from their WestCoast affiliation and are located in the western region of the United States.

      The following tables provide certain information about our system of hotels as of December 31, 2004.

Hotel System Growth Strategy

      We intend to grow our hotel operations primarily by increasing the number of hotels franchised and managed under our Red Lion brand, with an initial focus on the western region of the United States and Canada. We anticipate that most of our growth will come through conversion of three-and four-star hotels to the nationally recognized Red Lion brand. Our expansion of the Red Lion brand will follow our “hub and spoke” expansion model. Initially, we will seek to achieve market penetration in a hub. Then we will seek to expand into surrounding areas to increase brand penetration in the market.

      Key to this growth strategy is the planned $40.0 million reinvestment in our existing owned and leased Red Lion hotels, one of the most significant facility improvement programs in company history. This investment accelerates our ongoing program to improve hotel quality by increasing customer comfort, freshening decor and modernizing with new technology. We believe that by improving the quality of our existing product in areas where customers’ quality expectations are continuing to grow, we both position our continuing operations to take advantage of the growth potential in our existing markets, and make the Red Lion brand more attractive for franchise opportunities.

      We intend to increase the number of management agreements we have with third-party hotel owners by marketing our management services. We believe that our experience in managing our own hotels and those of third parties gives us a competitive advantage to obtain such agreements. We also intend to seek opportunities to sell reservation and distribution management services to hotels that want to remain independent.

      Our strategy has been to increase occupancy through strategic marketing and investment in our properties, and then to increase rate as demand increases for our rooms. Our occupancy has now increased year on year for each of the past thirteen consecutive calendar months and the resulting demand allowed us to increase the average daily rate during 2004. The combined effect of this strategy is that our RevPAR has increased at a faster rate than many of our direct competitors over the past year.

      We continue to receive a higher percentage of our reservations through electronic distribution systems that include our own branded website and third-party Internet channels (alternative distribution systems or ADS). Our central reservations and distribution management technology allows us to manage the yield on these ADS channels on a real-time, hotel-by-hotel basis. We have fixed-charge markup merchant model agreements with nine ADS providers, which typically entitle the provider to keep a fixed percentage of the price paid by the customer for each room booked. This allows us to maximize the yield of a typically lower rated market segment. Our focus on our branded website has made it our single largest source of online reservations, allowing us to further maximize our yield on those types of bookings.

      In addition, through 2004, we continued to increase bookings as a result of our focus on direct sales, our “Stay Comfortable” advertising campaign and the “We Promise or We Pay” branded website booking initiative. The “We Promise or We Pay” initiative is designed to encourage guests to book on redlion.com or westcoasthotels.com. Through this initiative, we guarantee to our guests that our branded websites will provide the lowest rate available compared to non-opaque ADS channels. We have also begun to see the positive effects of our launch of “Net4Guests,” our privately-labeled wireless internet service. Net4Guests provides hotel guests and GuestAwards frequency program members access to free high speed wireless internet.

      In 2004 we initiated our additional capital improvement program focused on guest contact areas which significantly improves room amenities with new pillow-top beds and an upgraded pillows and linens package. We also launched a marketing campaign geared specifically to increasing awareness of the Net4Guests and room amenity upgrade programs known as “Stay Comfortable”. During 2004, we spent a total of $10.9 million on capital improvements projects for the hotel and restaurants segment. During the year ended December 31, 2003, we spent $5.6 million on capital improvement programs for our hotels and restaurants. Our previously announced re-investment plan for $40.0 million in capital improvement projects, began in 2005 and is expected to be concluded in 2006.

Guest Loyalty Program

      In 2003, we integrated the best features of our Red Lion Club and WestAwards guest loyalty programs in order to enhance guest services with a single expanded guest loyalty program called “GuestAwards.” We continue to promote guest loyalty by providing our guests the flexibility to earn air miles with each qualifying hotel stay or points for every eligible dollar charged to the guest room. GuestAward points are redeemable for complimentary hotel stays, air miles or travel, car rental, merchandise, entertainment and other incentives. We continue to actively pursue cooperative redemption arrangements with marketing partners to expand the appeal and flexibility of our loyalty plan.

E-Commerce

      In February 2003, we launched a new hotel reservation system that allows us to manage single image inventory through our distribution channels and execute rate management strategies through channels of distribution including voice, global distribution systems and Internet sites. In addition, we provide effective and efficient guest service including online hotel reservations, GuestAwards enrollment and ticketing of TicketsWest events, through our various websites, www.redlion.com, www.westcoasthotels.com, www.guestawards.com and www.ticketswest.com.

      We are continuing to see positive results from our strategy of managing the ADS channels to drive incremental revenue and increase brand exposure. At the same time, revenue growth on our branded websites has exceeded our expectations. In the fourth quarter of 2004, we selected Zentropy Partners, a leading Internet consultancy, to redevelop our branded websites. With four of five phases complete, the new websites are scheduled to launch in the second quarter of 2005. With a focus on ease of use and comprehensiveness of content, both conversion and unique visitor traffic are expected to increase. To help drive traffic to the new sites, we joined Sidestep, the leading meta-search referral site, with participation scheduled to begin concurrent with the launch of the new sites.

Team Red

      We encourage our associates and their families to volunteer for “Team Red”, our innovative community outreach program designed to benefit local communities. We continue to build on our long-term commitment to assist and support our local communities through Team Red and other civic initiatives.

Marketing

      Our marketing strategy provides quality and value to the hotels in our system. Through consistent national and regional messaging in high visibility markets, we reach the majority of our target segments. In

addition, we offer intelligence tools such as rate management strategies, competitive set benchmarking and market demand reports to the hotels.

Competition

      The lodging industry is comprised of numerous national, regional and local hotel companies. We compete against these companies in the mid-scale and upper mid-scale full-service hotel segment of the industry, primarily in downtown and waterfront locations. Competition for occupancy is focused on three major segments of traveler: the business traveler, which is a significant occupancy driver for our hotel system; the convention and group business traveler, which utilizes room nights, meeting space and food and beverage operations; and the leisure traveler. Leisure travelers occupy approximately the same number of rooms as the convention and group business travelers, however, their travel is seasonal in nature. Marketing efforts throughout the year are geared towards these three major segments.

      We also compete with other hotel operators and management companies for hotels to add to our system. Our competitors include management companies as well as large hotel chains that own and operate their own hotels and franchise their brands.

Trademarks

      We have registered the following trademarks with the U.S. Patent and Trademark Office: Red Lion, WestCoast, WestAwards, TicketsWest, GuestAwards, Net4Guests, Stay Comfortable and G&B (G&B Real Estate Services is the name used by our real estate division). We have also registered some of these trademarks in Canada and Mexico. We also own various derivatives of these trademarks, each of which is registered with or has a registration application pending with the U.S. Patent and Trademark Office. Our trademarks and the associated name recognition are valuable to our business.

Employees

      As of December 31, 2004, we employed approximately 3,650 persons on a full-time and part-time basis, with 3,240 in hotel operations and the remainder in our administrative office and our entertainment and real estate divisions. Approximately 270 persons working in hotel operations were covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and organized settlement of labor disputes. We believe our employee relations are satisfactory.

Seasonality

      Our business is subject to seasonal fluctuations. Significant portions of our revenues and profits are realized from May through October. Our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. In addition, results are affected by national and regional economic conditions, including the magnitude and duration of economic slowdowns and rebounds in the United States; actual and threatened terrorist attacks and international conflicts and their impact on travel; and weather conditions.

Non-core Asset Sales

      We continue to focus on our hotel operations and, as a result, may from time to time seek to opportunistically divest our interests in non-core assets to reinvest in our hotel business. On November 23, 2004, the Board of Directors approved a plan for the sale over the next twelve months to third party buyers of the following 11 hotels and other real estate owned by us:

      The activities of the hotels and the Crescent Building are considered discontinued operations under generally accepted accounting principles. The net impact of the operations of these business units is segregated and separately disclosed on our consolidated statement of operations, comparative for all periods presented. Likewise, the assets and liabilities of the business are segregated and separately stated on the consolidated balance sheet for all periods presented. The remaining other real estate is considered held for sale under generally accepted accounting principles, but does not meet the definition of a discontinued operation. These assets held for sale are separately disclosed on the consolidated balance sheet as of December 31, 2004. Seven of the properties being sold are in markets where we currently have more than one hotel. We consider our other hotels in these markets to be best positioned for growth potential and for future returns on our reinvestment strategy.

Risk Factors Relating to Our Business

      Our revenues and our operating results are subject to conditions affecting the lodging industry. These include:

      Changes in any of these conditions could adversely impact hotel room demand and pricing and result in reduced occupancy, ADR and RevPAR or could otherwise adversely affect our results of operations and financial condition. We have a limited ability to pass through increased operating costs in the form of higher room rates, so that such increased costs could result in lower operating margins.

      The lodging industry is highly competitive. Competition in the industry is primarily based on service quality, range of services, brand name recognition, convenience of location, room rates, guest amenities and quality of accommodations. We compete with other national limited and full service hotel companies as well as various regional and local hotels. Many of our competitors have a larger network of locations and greater financial resources than our company. Additionally, new and existing competitors may offer significantly lower rates, greater convenience, services or amenities or superior facilities, which could attract customers away from our hotels, resulting in a decrease in occupancy, ADR and RevPAR for our hotels. Changes in demographics and other changes in our markets may also adversely impact the convenience or desirability of our hotel locations thereby reducing occupancy, ADR and RevPAR and otherwise adversely impacting our results of operations and financial condition.

      Of the hotels in our system at December 31, 2004, 51 are located in Oregon, Washington, Idaho or Montana. Therefore, our results of operations and financial condition may be significantly affected by the economy of the Pacific Northwest, which is dependent in large part on a limited number of major industries, including agriculture, tourism, technology, timber and aerospace. These industries may be affected by:

       — changes in governmental regulations and economic conditions;

       — the relative strength of national and local economies; and

       — the rate of national and local unemployment.

      In addition, companies in these industries may decide to relocate all or part of their businesses outside the Pacific Northwest. Any of these factors could materially affect the local economies in which these industries operate and where we have a presence. Other adverse events affecting the Pacific Northwest, such as economic recessions or natural disasters, could cause a loss of revenues for our hotels in this region, which may be greater as a result of our concentration of assets in these areas. In addition, we operate or market multiple hotels within several cities including Portland, Oregon; Seattle, Spokane and Yakima, Washington; Kalispell, Montana and Boise, Idaho. A downturn in general economic or other relevant conditions in these specific markets or in any other market in which we operate could lead to a decline in demand in these markets and cause a loss of revenues from these hotels.

      The expenses of owning property are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from a hotel. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately. In such instances, our financial condition and ability to service debt could be adversely affected by:

       — interest rate levels;

       — the availability of financing;

       — the cost of compliance with government regulations, including zoning and tax laws; and

       — changes in government regulations, including those governing usage, zoning and taxes.

      Real estate assets generally cannot be sold quickly. In general, we may not be able to vary our portfolio of hotels or other real estate promptly in response to economic or other conditions. This inability to respond promptly to changes in the performance of our assets could adversely affect our financial condition and ability to service debt, including the debentures. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our hotels. We are currently attempting to sell 11 hotels, one office building, and several other real estate investment properties. If unsuccessful in our efforts, our financial condition and earnings could be adversely impacted.

      We intend to grow our hotel operations partly by acquiring whole or partial interests in hotels. However, we cannot assure you that:

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

      As of December 31, 2004, there were 22 hotels in our system that were owned by others and operated under franchise agreements with us. Although these agreements generally specify a fixed term, they typically contain various early termination provisions, such as the right to terminate upon notice by paying us a termination fee, or the right to terminate if we fail to contribute a negotiated level of revenue to the franchisee through our reservation systems. We cannot assure you that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms. If these franchise agreements are not renewed, or are terminated prior to the expiration of their respective terms, the resulting decrease in revenue and loss of market penetration could have an adverse effect on our results of operations and financial condition.

      We intend to pursue a full range of growth opportunities, including identifying hotels for acquisition, development, management, rebranding and franchising. We compete for growth opportunities with national and regional hospitality companies, some of which have greater name recognition, marketing support, reservation system capacity and financial resources than we do. Our ability to make acquisitions is dependent upon, among other things, our relationships with owners of existing hotels and certain major hotel investors, financing acquisitions and renovations and successfully integrating new hotels into our operations. We may be unable to find suitable hotels for acquisition, development, management, rebranding or franchising on acceptable terms, or at all. Competition with other hotel companies may increase the cost of acquiring hotels. Even if suitable hotels are identified for acquisition, we may not be able to find financing to acquire the hotels

on acceptable terms. Further, we may not have adequate cash from operations to pursue such growth opportunities. Our failure to compete successfully for acquisitions, to obtain suitable financing for acquisitions we have identified or to attract and maintain relationships with hotel owners and major hotel investors could adversely affect our ability to expand our system of hotels. An inability to implement our growth strategy could limit our ability to grow our revenue base and otherwise adversely affect our results of operations.

      We intend to acquire additional hotels and we may acquire additional ticket and entertainment operations in the future. We also intend to continue the redevelopment and re-branding of other acquired hotels into “Red Lion” hotels. In addition, we expect to develop new hotels in the future, depending on market conditions. Hotel redevelopment, renovation and new project development are subject to a number of risks, including:

      As a result of these risks, we could incur substantial costs for a project that is never completed. Further, financing for these projects may not be available or, even if available, may not be on acceptable terms. Any unanticipated delays or expenses incurred in connection with the acquisition, development, redevelopment or renovation of the hotels in our system could impact expected revenues, negatively affect our reputation among hotel customers, owners and franchisees and otherwise adversely impact our results of operations and financial condition.

      As of December 31, 2004, our hotel system contained 67 hotels located in 12 states and one Canadian province, with more than 11,500 rooms and 532,000 square feet of meeting space. We managed 45 of these hotels, including 29 owned hotels, 13 leased hotels and three third-party owned hotels. The remaining 22 hotels were owned and operated by third-parties franchisees. We also own commercial and other properties. Accordingly, we are subject to varying degrees of risk that generally arise from the ownership of real property. Revenue from our hotels and other real estate may be adversely affected by changes beyond our control, including the following:

      An increase in interest rates or property and other taxes could increase expenses and adversely affect our cash flow. Adverse conditions such as those discussed above could cause the terms of our borrowings to become unfavorable to us. In such circumstances, if we were in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to sell one or more hotels at times that might not permit realization of the maximum return on our investments. Unfavorable changes in one or more of these

conditions could also result in unanticipated expenses and higher operating costs, thereby reducing operating margins and otherwise adversely affecting our results of operations and financial condition.

      As of March 15, 2005, Donald K. Barbieri, our Chairman of the Board, had sole voting and investment power with respect to 9.4% of our outstanding shares of common stock. Heather Barbieri, his ex-spouse, had sole voting and investment power with respect to 8.3% of our outstanding shares of common stock. Pursuant to a trust agreement, Donald K. Barbieri and Heather Barbieri share voting and investment power with respect to 6.7% of our outstanding shares of common stock. Richard L. Barbieri, who is also a director and Donald K. Barbieri’s brother, beneficially owned 4.0% of our outstanding shares of common stock as of March 15, 2005. David M. Bell, who is one of our executive officers and the brother-in-law of Donald K. and Richard L. Barbieri, beneficially owned 4.2% of our outstanding shares of common stock as of that same date. In addition, we believe that other members of the Barbieri family who are not directors, executive officers or 5% shareholders individually hold outstanding common stock. As such, to the extent they are willing and able to act in concert, they may have the ability as a group to approve or block actions requiring the approval of our shareholders, including a merger or a sale of all the assets of our company or a transaction that results in a change of control.

      We are subject to numerous federal, state and local government regulations affecting the lodging industry, including building and zoning requirements. Increased government regulation could require us to make unplanned expenditures and result in higher operating costs. Further, we are subject to laws governing our relationship with employees, including minimum wage requirements, overtime, working conditions and work permit requirements. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could increase expenses and result in lower operating margins. Under the Americans with Disabilities Act of 1990 (the “ADA”), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. We may be required to remove access barriers or make unplanned, substantial modifications to our hotels to comply with the ADA or to comply with other changes in governmental rules and regulations, which could reduce the number of total available rooms, increase operating costs and have a negative impact on revenues and earnings. Any failure to comply with ADA requirements or other governmental regulations could result in the U.S. government imposing fines or in private litigants winning damage awards against us.

      Our business is seasonal in nature, with the months from May through October generally accounting for a greater portion of annual revenues than the months from November through April. Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. The seasonal nature of our business increases our vulnerability to risks such as labor force shortages and cash flow problems. Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, regional economic downturn or poor weather conditions should occur during the months of May through October, the adverse impact to our revenues could likely be greater as a result of our seasonal business.

      We place substantial reliance on the lodging industry experience and the institutional knowledge of members of our senior management team. Mr. Coffey, Mr. Narayan and Mr. Taffin are particularly important to our future success due to their substantial experience in the lodging industry and their long history with either the Red Lion brand or our company. The loss of the services of these members of our senior

management team could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for Mr. Coffey, Mr. Narayan, or Mr. Taffin could be difficult, and competition for such personnel of similar experience is intense. We do not carry key person insurance on any of our senior management.

      We own and lease to others approximately 500,000 square feet of office and retail space in Spokane, Washington and Kalispell, Montana. We are subject to the risk that leases for this space might not be renewed upon their expiration, the space may not be relet or the terms of renewal or reletting such space (including the cost of required renovations) might be less favorable to us than current lease terms. Vacancies could result due to the termination of a tenant’s tenancy, the tenant’s financial failure or a breach of the tenant’s obligations. We may be unable to locate tenants for rental spaces vacated in the future or we may be limited to renting space on unfavorable terms. Delays or difficulties in attracting tenants and costs incurred in preparing for tenants could reduce cash flow, decrease the value of a property and jeopardize our ability to pay our expenses.

      We plan to continue to manage and lease properties owned by third parties. Risks associated with these activities include the risks that:

      Our entertainment division, which comprised 7.1% of our total revenues from continuing operations in 2004, engages in event ticketing and the presentation of various entertainment productions. We have in the past attracted additional hotel guests by cross-selling to them tickets to entertainment events through our TicketsWest subsidiary. Our entertainment division is vulnerable to risks associated with changes in general regional and economic conditions, the potential for significant competition and a change in consumer trends, among others. In addition, we face the risk that Broadway shows and other entertainment productions will not tour the Pacific Northwest or that such productions will not choose us as a presenter or promoter.

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

      We carry comprehensive liability, public area liability, fire, flood, boiler and machinery, extended coverage and rental loss insurance covering our properties. There are, however, certain types of catastrophic losses that are not generally insured because it is not economically feasible to insure against such losses. Should an uninsured loss or a loss in excess of insured limits occur with respect to any particular property, we

could lose our capital invested in the property, as well as the anticipated future revenue from the property and, in the case of debt which is with recourse to us, would remain obligated for any mortgage debt or other financial obligations related to the property. We cannot assure you that material losses in excess of insurance coverage will not occur in the future. Any such loss could have an adverse effect on our results of operations and financial condition.

      Our operating costs may be affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of compliance with future environmental legislation. Under current federal, state and local environmental laws, ordinances and regulations, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate such contaminated property properly, may adversely affect the ability of the owner of the property to borrow using such property as collateral for a loan or to sell such property. Environmental laws also may impose restrictions on the manner in which a property may be used or transferred or in which businesses may be operated, and may impose remedial or compliance costs. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have an adverse effect on our results of operations and financial condition. We have not performed Phase II environmental assessments on two of our owned properties for which Phase II assessments were recommended, because we determined that any further investigation was not warranted. We cannot assure you that these properties do not have any environmental concerns associated with them. While we have not been notified by any governmental authority and we have no other knowledge of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in connection with any of our properties, we have not performed Phase I environmental assessments on all of our leased properties, and we cannot assure you that we will not discover problems that currently exist but of which we have no current knowledge that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our existing and future properties will not be affected by the condition of neighboring properties (such as the presence of leaking underground storage tanks) or by third parties (whether neighbors such as dry cleaners or others) unrelated to us.

      Our outstanding indebtedness as of December 31, 2004 was $202.4 million, including $47.4 million of debentures related to our trust preferred offering during the first quarter of 2004. Much of our outstanding indebtedness is secured by individual properties. Neither our Articles of Incorporation nor our Bylaws limit the amount of indebtedness that we may incur. Subject to limitations in our debt instruments, we may incur additional debt in the future to finance acquisitions and renovations and for general corporate purposes. Accordingly, we could become highly leveraged, resulting in an increase in debt service that could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions (including increases in interest rates) and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. Our indebtedness is, and will likely continue to be, secured by mortgages on our owned hotels. We cannot assure you that we will be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets, including our hotels, to foreclosure. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable to us. In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, we could be required to sell one or more hotels in our system at times that may not permit realization of the maximum return on our investments. Economic conditions could result in higher interest rates, which would increase debt service requirements on variable rate debt and could reduce the amount of cash available for various corporate purposes.

      Some of our hotel rooms may be booked through third-party travel websites such as Travelocity.com, Expedia.com and Priceline.com. If these Internet bookings increase, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of these Internet travel intermediaries are attempting to offer hotel rooms as a commodity, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. We believe that these Internet intermediaries hope that consumers will eventually develop brand loyalties to their reservation systems. Although most of the business for our hotels is expected to be derived from traditional channels, if the amount of sales made through Internet intermediaries increases significantly, room revenues may flatten or decrease and our profitability may be adversely affected.

Overview

      Our hotel properties provide caring service and comfortable accommodations at competitive prices consistent with the markets they serve. We seek to maintain consistent quality in our system of hotels, all of which offer valuable services such as dining, fitness centers, business services or other ancillary services. In addition, guest rooms are well equipped with products important to both leisure and business travelers. Most of our hotels offer flexible meeting space to service the group and convention markets. We continue to invest in our hotel properties to maintain quality conditions.

Hotel Listing

      The following table outlines a complete listing of all our hotel properties as of December 31, 2004:

Environmental Assessments

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

Other Properties

      In addition to the hotels noted above, the company maintains direct ownership interest in two office buildings in Spokane, Washington, a retail mall in Kalispell, Montana and other miscellaneous real estate investments.

      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.

      No matters were submitted to a vote of security holders during the fourth quarter of 2004.

PART II

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

      The last reported sale price of the common stock on the NYSE on March 15, 2005 was $6.92. As of March 15, 2005, there were approximately 87 shareholders of record of the common stock.

      We do not anticipate paying any cash dividends on the common stock in the foreseeable future. We intend to retain earnings to provide funds for the continued growth and development of our business. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources. Any determination to pay cash dividends in the future will be at the discretion of our board of directors and will depend upon, among other things, our results of operations, financial condition, contractual restrictions and other factors deemed relevant by our board. Our board will periodically review our company’s dividend policy on common shares.

      The following table sets forth our selected consolidated financial data as of and for the years ended December 31, 2004, 2003, 2002, 2001 and 2000. The selected consolidated statement of operations and balance sheet data are derived from our audited financial statements. The audited consolidated financial statements for certain of these periods are included elsewhere in this annual report. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified in their entirety by, our consolidated financial statements and related notes, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other financial information included elsewhere in this annual report (in thousands except per share amounts).

Notes for Selected Financial Data Table

      As noted, EBITDA represents net income (or loss) before interest expense, income tax benefit or expense, depreciation, and amortization. We utilize EBITDA as a financial measure because management believes that investors find it to be 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 and other financial performance measures. EBITDA from continuing operations is calculated in the same manner, but excludes the operating activities of business units identified as discontinued. EBITDA is not intended to represent net income or loss as defined by generally accepted accounting principles in the United States 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 generally accepted accounting principles in the United States.

      We use EBITDA to measure the financial performance of our owned and leased hotels because it excludes interest, taxes, depreciation and amortization, which bear little or no relationship to 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 our company in the aggregate. By excluding taxes on income, we believe EBITDA provides a basis for measuring the financial performance of our operations excluding factors that our hotels cannot control. By excluding depreciation and amortization expense, which can vary from hotel to hotel based on historical cost and other factors unrelated to the hotels’ financial performance, EBITDA measures the financial performance of our hotels without regard to their historical cost. For all of these reasons, we believe that EBITDA provides us and investors with information that is relevant and useful in evaluating our business. We believe that the presentation of EBITDA from continuing operations is useful for the same reasons, in addition to using it for comparative purposes for our intended operations going forward.

      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 from continuing operations excludes the activities of operations we have determined to be discontinued, it does not reflect the totality of operations as experienced for the periods presented. 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, which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.

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

      In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”), “Goodwill and Intangible Assets”, which revises the accounting for purchased goodwill and intangible assets. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no longer amortized, but are tested for impairment annually and also in the event of an impairment indicator. The adoption of SFAS No. 142 on January 1, 2002, resulted in the elimination of goodwill amortization of $855 thousand for the years ended December 31, 2004, 2003 and 2002.

      Net income and earnings per share adjusted for goodwill amortization for 2001 and years prior compared to fiscal 2004, 2003 and 2002 is as follows (in thousands except per share data):

      The following discussion and analysis should be read in connection with our consolidated financial statements and the notes thereto and the other financial information included elsewhere in this annual report.

Overview

      We operate in four reportable segments: hotels and restaurants; franchise, central services and development; entertainment; and real estate. The hotels and restaurants segment derives revenue primarily from guest room rentals and food and beverage operations at our owned and leased hotels and from management fees charged to the owners of our managed hotels. Management fees are typically based on a percentage of the hotel’s gross revenues plus an incentive fee based on operating performance. The franchise, central services and development segment is engaged primarily in licensing our brands to franchisees. This segment generates revenue from franchise fees that are typically based on a percent of room revenues and are charged to hotel owners in exchange for the use of our brands and access to our central services programs (reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards). The entertainment segment derives revenue primarily from ticketing services and promotion and presentation of entertainment productions. The real estate segment generates revenue from owning, managing, leasing and developing commercial and multi-unit residential properties.

      A summary of our consolidated results, balance sheet data and hotel statistics as of and for the years ended December 31, 2004, 2003 and 2002 is as follows (in thousands, except per share amounts):

      Key hotel and restaurant segment revenue data from continuing operations are as follows (in thousands):

      System wide performance statistics are as follows:

      Hotel and restaurant revenues from continuing operations for the year ended December 31, 2004 increased $2.8 million, or 2.0%, to $143.2 million compared to $140.4 million for the year ended December 31, 2003. Revenue from owned and leased hotels was up $4.1 million compared to 2003. The increase was primarily due to growth of about $5.1 million in room revenue between comparable periods, or 5.9%. Occupied rooms increased 5.0% in 2004 compared to 2003 and ADR is up $0.37 to $71.31. The resulting $43.06 RevPAR from owned and leased hotels that are part of 2004 continuing operations was $2.24 higher than RevPAR in 2003 of $40.82. These increases are partially offset by declines of $475 thousand in food and beverage revenue as compared to 2003, primarily due to the closure of one of our hotel restaurants. Incidental revenues from guest amenities and other sources is also down $460 thousand, primarily related to the closure of one of our hotel gift shops, lower telephone revenue and lower movie rental revenue. Revenue from management of third party hotels, included in this segment, is down $1.3 million for 2004 from $2.1 million in 2003 to $769 thousand in 2004 due to a decrease in the number of hotels under management agreements.

      2004 was a period of strong growth for us. Demand suffered significantly early in 2003 due, in our opinion, to declining business and excursion travel resulting from national economic challenges, personal spending cutbacks and national security threats. We believe that our operating results reflect that our hotel and restaurants segment began to stabilize during the third quarter of 2003 and has continued these positive trends through 2004. Our occupancy gains during each month of 2004 compared to the same periods in 2003 substantiate this belief. These results are typical of the overall national trends. During the third and fourth quarters of 2004, our revenue results are indicative of better regional demand for mid-scale and upper mid-scale hotel rooms and our ability to service that demand through our system of hotels. We also believe the rebranding of 22 hotels from WestCoast to Red Lion hotels, which was completed in the first quarter of 2003, continues to have a positive effect.

      Our strategy has been to increase occupancy through strategic marketing and investment in our properties, and then to increase rate as demand increases for our rooms. Our occupancy has now increased year on year for each of the past thirteen calendar months and the resulting demand allowed us to increase the average daily rate during the fourth quarter. We believe that the combined effect of this strategy is that RevPAR has increased at a faster rate than many of our direct competitors over the past year.

      We continue to receive a higher percentage of our reservations through electronic distribution systems that include our own branded website and third-party Internet channels (alternative distributions system or ADS). Our central reservations and distribution management technology allows us to manage the yield on these ADS channels on a real-time, hotel-by-hotel basis. We have fixed-charge markup merchant model agreements with nine ADS providers, which typically entitle the provider to keep a fixed percentage of the price paid by the customer for each room booked. This allows us to maximize the yield of a typically lower rated market segment. Our focus on our branded website has made it our single largest source of online reservations, allowing us to further maximize our yield on those types of bookings. Our success is reflective of our management of these ADS channels and our merchant model agreements. During 2004, we experienced higher system wide ADR compared to 2003 by $0.69. At the same time, our system wide occupancy grew from 55.2% to 58.6% between comparative years.

      In addition, through 2004 we continued to increase bookings as a result of our focus on direct sales, “Stay Comfortable” advertising campaign and the “We Promise or We Pay” branded website booking initiative. The “We Promise or We Pay” initiative is designed to encourage guests to book on our branded websites of westcoasthotels.com and redlion.com. Through this initiative, we guarantee to our guests that our branded websites will provide the lowest rate available compared to non-opaque ADS channels. Our branded websites have become our single largest source of electronically distributed room revenue. We increased reservation contribution, measured in terms of revenue, to system hotels over the past year to 34% during 2004 from 26% during 2003. We also began to see the positive effects of our launch of “Net4Guests,” our privately-labeled wireless internet service during the third quarter of 2004 and into the fourth quarter. Net4Guests provides hotel guests and GuestAwards frequency program members access to free high speed wireless internet.

      In 2004 we have initiated our capital improvement program which significantly improved room amenities with new pillow-top beds and an upgraded pillows and linens package. We also launched a marketing campaign geared specifically to increasing awareness of the Net4Guests and room amenity upgrade programs known as “Stay Comfortable”.

      Our brand strengthening initiatives, marketing efforts and technological upgrades are achieving the desired results. Our central reservations system is able to drive more business to our system hotels and a greater percentage of that business is coming through our branded websites. Revenue derived through our branded website yields a higher margin for the system hotels than other electronic distribution sources.

      Franchise, central services and development revenue for the year ended December 31, 2004 decreased by $1.0 million, or 28.6%, to $2.6 million compared to $3.6 million for the year ended December 31, 2003. Net changes in franchise fee income accounted for substantially all of this change, with an average of 27 franchises in place during 2003 compared to an average of 22 during 2004.

      Entertainment segment revenue increased approximately $3.6 million, or 45.6% for the year ended December 31, 2004, to $11.6 million from $8.0 million during the year ended December 31, 2003. Approximately $2.7 million of the increase was due to presentation of nine Broadway shows during 2004 compared to four such shows presented during 2003. The remaining increase was primarily due to ticketing income from four new locations we now serve.

      Real estate revenue from continuing operations is up 4.0% to $5.4 million for the year ended December 31, 2004 compared to $5.2 million for 2003. Overall, the segment experienced increased revenues from fees earned on three new management and development projects during 2004 that were in place for only a portion of 2003. It also experienced increased leasing occupancy, and increased management fees for real estate projects. These improvements were offset by slightly lower commission revenue, fewer achieved percentage rents, and lower rental rates at an owned facility.

      In aggregate, direct expenses for the year ended December 31, 2004 increased to $148.6 million from $143.9 million for 2003. This represents an increase of $4.7 million or 3.3% between periods. Direct expenses include direct operating expenses for each of the operating segments, depreciation, amortization, gain or loss on asset dispositions and conversion expenses, if any.

      Direct hotels and restaurants segment expenses increased $3.0 million from $120.9 million in 2003 to $123.9 million for the year ended December 31, 2004. Hotel room related costs were up about $2.1 million between comparative periods due primarily to labor costs for additional hotel staffing related to higher guest service levels and direct sales efforts, promotional activities, the costs of the Net4Guests program, and the general increased costs associated with higher occupancies. Also, our hotels experienced an overall 4.3% increase in utility costs, maintenance costs, and sales department related expenses. Medical benefits and worker’s compensation costs also contributed to the increase. Food and beverage costs were down $799 thousand, resulting from lower labor costs and the positive effects of our core menu program. Facility and land lease expense is down $595 thousand due to the reduced lease expense from having purchased the Yakima and Bellevue properties, partially offset by the increase in lease expense related to the sale leaseback of the River Inn Property discussed below.

      Direct costs for franchise, central services and development were down $109 thousand between comparative periods due to labor savings and cost containment earlier in the year. The entertainment segment direct costs increased $3.5 million in connection with the additional Broadway presentations in 2004 noted above, reduced profitability in certain operating areas due to non-scalable labor costs, increases in ticketing activity requiring more labor, and advertising costs for the 2004/2005 Broadway season. Real estate segment direct expenses from continuing operations were down $31 thousand on consistent activity between periods. Corporate services direct expenses also remained consistent between periods.

      Depreciation and amortization increased $202 thousand or 2.0% between 2004 and 2003, for two primary reasons. The operating results for 2003 reflected a depreciation catch up adjustment for certain assets previously held for sale in Spokane, Washington and Kalispell, Montana, for which no such adjustment exists for in 2004. This was offset by the effect of depreciation on recent capital additions which added to the depreciable base of property and equipment.

      For the year ended December 31, 2004, the net gain recognized on asset disposals was $1.1 million, related to the recognition of deferred gains over time on both a previously sold office building and hotel, and a $418 thousand gain on the sale of undeveloped land in Spokane, Washington, offset by a loss on the sale of a land parcel in Yakima. In connection with that land sale, we extended our catering agreement with the City of Yakima, Washington. The net loss for the year ended December 31, 2003 of $339 thousand was related primarily to the disposition of signage related to the rebranding of 22 of our hotels and the disposition of our interest in a hotel venture, offset by the recognition of deferred gains over time on the office building.

      Conversion costs in 2003 represent expenses incurred unrelated to property and equipment to re-brand hotels to the Red Lion name. No such costs were incurred in 2004.

      Undistributed corporate expenses for the year ended December 31, 2004 were $3.3 million compared to $2.6 million for the year ended December 31, 2003. The increase of $633 thousand was primarily due to higher employee costs and certain corporate insurance costs. Undistributed corporate expense includes general and administrative charges such as corporate payroll, legal expenses, contributions, directors and officers insurance, bank service charges, outside accountants and consultants expense, and investor relations charges. We consider these expenses to be “undistributed” because the costs are not directly related to our business segments and therefore are not distributed to those segments. In contrast, costs more directly related to our business segments such as accounting, human resources and information technology expenses are distributed out to operating segments and are included in direct expenses.

      Operating income from continuing operations increased by $288 thousand or 2.6% from $10.9 million for 2003 to $11.2 million for 2004. During the first two quarters of 2004 we experienced a decline in operating income primarily due to increased costs in our operating segments for the reasons previously discussed. During the third and fourth quarters of 2004 operating income rebounded, due to strong revenue increases in our hotel operating segment for the reasons previously discussed, with aggregate costs remaining steady and proportionate to the revenue base. This rebound more than offset the declines from the first two quarters.

      Interest expense for the year ended December 31, 2004 was $13.8 million compared to $9.7 million for the year ended December 31, 2003. The increase of $4.1 million, or 42.9%, was due to a greater average amount of outstanding interest bearing debt, primarily in connection with the addition of the $47.4 million of debentures issued during the first quarter of 2004 to WestCoast Hospitality Capital Trust (“the Trust”), a Deleware statutory trust sponsored by us. A majority of the proceeds from the debentures were used to retire our then existing preferred stock and eliminate the ongoing dividend requirement of those securities. While these new debentures reflect a 9.5% rate, the interest is tax deductible under current U.S. Federal tax law giving them an effective post tax rate of approximately 6.2%. The average pre-tax interest rate on debt during 2004 was 7.8% versus 7.3% during 2003. In addition to the interest rate on the debentures, a substantial portion of our borrowings carry a pre-tax interest rate of 6.7% for ten years, which management believes is a favorable long-term rate.

      The other income and expense line items are comparable between periods and consistent with our long-term historical results. During 2003, we had $927 thousand of loan fee write-offs, offset by a contract termination fee of $390 thousand and other miscellaneous net gains.

      Income tax benefit on continuing operations for 2004 was $876 thousand. Income tax expense for 2003 was $51 thousand. The change of $927 thousand in tax provision was primarily due to increased deductions related to interest on the debentures held by the Trust, partially offset by a higher pre-tax net income from operations.

      Net loss from continuing operations for 2004 was $890 thousand, compared to net income from continuing operations for 2003 of $1.6 million. The lower income was primarily the result of increased interest expense due to the trust preferred offering in the first quarter of 2004, partially offset by stronger performance in our operating segments for the reasons previously discussed.

      In connection with our November 2004 announcement of plans to invest $40.0 million to improve comfort, freshen décor and upgrade technology at our hotels, we implemented a plan to divest 11 of our non-strategic owned hotels, one of our real estate office buildings and certain other non-core properties (collectively referred to as “the divestment properties”). The activities of those 11 hotels and the real estate property are considered discontinued operations under generally accepted accounting principles.

      We evaluated the divestment properties for potential impairment in accordance with the provisions of SFAS No. 144 “Accounting for the Impairment or Disposal of Long-lived Assets.” As a result, four of the hotel assets included in the divestment properties were determined to have been impaired, $8.9 million in aggregate, or $5.8 million net of the expected income tax benefit of $3.1 million. The impairment amount was calculated using expected sales prices, less expected transaction costs, as compared to the carrying value at the

date of the evaluation, in November 2004. That impairment amount is reflected, net of income tax impact, as part of discontinued operations.

      Also in November 2004, the 11 hotels and the office building were reclassified as assets held for sale, specifically designated as discontinued operations. All of the results of operations of these 11 hotels and office building have been reclassified from continued operations to discontinued operations in the consolidated statement of operations. Depreciation of these assets, if previously appropriate, has been suspended. For comparative purposes, for periods prior to 2004 the balance sheet and operations activity for the properties considered discontinued has been reclassified to conform to the 2004 presentation.

      The net impact on consolidated earnings of the activities of the discontinued operations was $375 thousand of net income for the year ended December 31, 2004, including tax impact. This includes $25 thousand of aggregate net impact from the 11 hotels and $350 thousand of net impact from the office building. This compares to the year ended December 31, 2003 for which the discontinued operations had a net impact on consolidated earnings of a $341 thousand net loss including tax impact. The 2003 balance includes aggregate activity of the 11 hotels of a $486 thousand net loss and a $145 thousand net income from the office building.

      The net loss for the year ended December 31, 2004 was $6.3 million, compared to net income of $1.2 for the year ended December 31, 2003. The lower net income is primarily the result of the $5.8 million net of tax impairment discussed above, increased interest expense due to the trust preferred offering in the first quarter of 2004, partially offset by stronger performance in our operating segments for the reasons previously discussed.

      Due to the retirement of all of our Series A and Series B preferred stock in February 2004, preferred stock dividends decreased $2.2 million between the 2003 and 2004. As a result, the increase in interest expense was partially offset by the decrease in preferred stock dividends. The resulting net loss applicable to common shareholders was $6.7 million for 2004 compared to $1.3 million for 2003.

      The loss per share for 2004 was $0.51 compared to a loss of $0.10 for 2003. The net loss applicable to common shareholders increased $5.3 million as described above, while the number of weighted average common shares outstanding in both periods remained relatively consistent.