Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Red Lion Hotels CORPFinancial_Report.xls
EX-32.2 - 32.2 CERTIFICATION OF PFO PURSUANT TO EXCHANGE ACT RULE 13A-14(B) - Red Lion Hotels CORPrlhex32210q9-30x2014.htm
EX-31.2 - 31.2 CERTIFICATION OF PFO PURSUANT TO EXCHANGE ACT RULE 13A-14(A) - Red Lion Hotels CORPrlhex31210q9-30x2014.htm
EX-32.1 - 32.1 CERTIFICATION OF CEO PURSUANT TO EXCHANGE ACT RULE 13A-14(B) - Red Lion Hotels CORPrlhex32110q9-30x2014.htm
EX-31.1 - 31.1 CERTIFICATION OF CEO PURSUANT TO EXCHANGE ACT RULE 13A-14(A) - Red Lion Hotels CORPrlhex31110q9-30x2014.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 __________________________________________
FORM 10-Q
 __________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
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
incorporation or organization)
 
(I.R.S. Employer
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  ý    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  ý    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
 
ý
 
 
 
 
 
 
 
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  o    No  ý
As of November 3, 2014, there were 19,846,508 shares of the registrant’s common stock outstanding.



TABLE OF CONTENTS
 
 
 
 
Item No.
Description
Page No.
 
 
 
 
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1
 
 
Consolidated Balance Sheets September 30, 2014 and December 31, 2013
 
Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2014 and 2013
 
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013
 
Item 2
Item 3
Item 4
 
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1
Item 1A
Item 2
Item 3
Item 4
Item 5
Item 6
 



2


PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements

RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2014 and December 31, 2013
 
 
September 30,
2014
 
December 31,
2013
 
 
(In thousands, except share data)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
28,498

 
$
13,058

Accounts receivable, net
 
6,869

 
6,283

Notes receivable
 
2,806

 
672

Inventories
 
1,135

 
1,386

Prepaid expenses and other
 
2,715

 
3,266

Deferred income taxes
 

 
1,034

Assets held for sale
 
23,613

 
18,346

Total current assets
 
65,636

 
44,045

Property and equipment, net
 
146,023

 
166,356

Goodwill
 
8,512

 
8,512

Intangible assets
 
7,011

 
6,992

Notes receivable, long term net
 
2,434

 
4,423

Other assets, net
 
4,314

 
4,298

Total assets
 
$
233,930

 
$
234,626

 
 
 
 
 
LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
4,046

 
$
4,763

Accrued payroll and related benefits
 
4,961

 
2,786

Accrued interest payable
 
89

 
25

Advance deposits
 
226

 
199

Other accrued expenses
 
10,927

 
8,465

Deferred income taxes
 
2,186

 

Long-term debt, due within one year
 
2,367

 
3,000

Total current liabilities
 
24,802

 
19,238

Long-term debt, due after one year, net of discount
 
29,820

 
40,058

Deferred income
 
3,105

 
3,455

Deferred income taxes
 
627

 
3,841

Debentures due Red Lion Hotels Capital Trust
 
30,825

 
30,825

Total liabilities
 
89,179

 
97,417

 
 
 
 
 
Commitments and contingencies
 


 


 
 
 
 
 
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; 19,824,675 and 19,687,232 shares issued and outstanding
 
198

 
197

Additional paid-in capital
 
153,181

 
152,303

Accumulated other comprehensive income (loss)
 
(217
)
 
(159
)
Retained earnings (accumulated deficit)
 
(8,411
)
 
(15,132
)
 
 
 
 
 
Total stockholders' equity
 
144,751

 
137,209

Total liabilities and stockholders’ equity
 
$
233,930

 
$
234,626



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

3


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
For the Three and Nine Months Ended September 30, 2014 and 2013
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands, except per share data)
Revenue:
 
 
 
 
 
 
 
 
Hotels
 
$
35,888

 
$
36,888

 
$
91,847

 
$
92,297

Franchise
 
2,066

 
2,368

 
8,044

 
5,574

Entertainment
 
3,306

 
1,623

 
13,950

 
6,774

Other
 
14

 
83

 
64

 
256

Total revenues
 
41,274

 
40,962

 
113,905

 
104,901

Operating expenses:
 
 
 
 
 
 
 
 
Hotels
 
23,985

 
26,143

 
70,794

 
72,555

Franchise
 
1,911

 
1,862

 
5,507

 
5,174

Entertainment
 
3,092

 
1,459

 
11,946

 
6,558

Other
 
73

 
130

 
237

 
371

Depreciation and amortization
 
3,241

 
3,445

 
9,566

 
10,487

Hotel facility and land lease
 
1,167

 
1,161

 
3,492

 
3,315

Loss (gain) on asset dispositions, net
 
40

 
100

 
(3,439
)
 
(21
)
Undistributed corporate expenses
 
1,899

 
2,835

 
6,078

 
6,500

Total operating expenses
 
35,408

 
37,135

 
104,181

 
104,939

Operating income (loss)
 
5,866

 
3,827

 
9,724

 
(38
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(1,041
)
 
(1,252
)
 
(3,436
)
 
(4,281
)
Other income, net
 
47

 
98

 
204

 
401

Income (loss) from continuing operations before taxes
 
4,872

 
2,673

 
6,492

 
(3,918
)
Income tax expense (benefit)
 

 
1,099

 
32

 
(1,553
)
Income (loss) from continuing operations
 
4,872

 
1,574

 
6,460

 
(2,365
)
Discontinued operations
 
 
 
 
 
 
 
 
Income (loss) from discontinued business units, net of income tax (benefit) expense of $0 and $260 for the three months ended and $0 and $456 for the nine months ended September 30, 2014 and 2013, respectively
 
229

 
(214
)
 
263

 
(232
)
Income (loss) on disposal and impairment of the assets of the discontinued business units, net of income tax (benefit) expense of $0 and ($75) for the three months ended and $0 and ($280) for the nine months ended September 30, 2014 and 2013, respectively
 

 
(133
)
 
(2
)
 
(493
)
Income (loss) from discontinued operations
 
229

 
(347
)
 
261

 
(725
)
Net income (loss)
 
5,101

 
1,227

 
6,721

 
(3,090
)
 
 
 
 
 
 
 
 
 
Comprehensive income (loss)
 
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedge
 

 
104

 
(72
)
 
(164
)
Comprehensive income (loss)
 
$
5,101

 
$
1,331

 
$
6,649

 
$
(3,254
)
Earnings per share - basic and diluted
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.25

 
$
0.08

 
$
0.33

 
$
(0.12
)
Income (loss) from discontinued operations
 
$
0.01

 
$
(0.02
)
 
$
0.01

 
$
(0.04
)
Net income (loss)
 
$
0.26

 
$
0.06

 
$
0.34

 
$
(0.16
)
Weighted average shares - basic
 
19,822

 
19,631

 
19,765

 
19,538

Weighted average shares - diluted
 
19,866

 
19,672

 
19,839

 
19,538

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

4


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2014 and 2013
 
 
 
Nine Months Ended
 
 
September 30,
 
 
2014
 
2013
 
 
(In thousands)
Operating activities:
 
 
 
 
Net income (loss)
 
$
6,721

 
$
(3,090
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
9,566

 
10,844

(Gain) loss on disposition of property, equipment and other assets, net
 
(3,437
)
 
752

Amortization of debt issuance costs
 
170

 
49

Deferred income taxes
 
7

 
(1,459
)
Equity in investments
 
34

 
38

Stock based compensation expense
 
965

 
1,492

Excess tax shortfall from stock-based compensation
 

 
(102
)
Provision for doubtful accounts
 
149

 
58

Change in current assets and liabilities:
 
 
 
 
Restricted cash
 

 
2,411

Accounts receivable
 
(735
)
 
126

Notes receivable
 
(145
)
 

Inventories
 
108

 
(136
)
Prepaid expenses and other
 
(3
)
 
(651
)
Accounts payable
 
(717
)
 
712

Accrued payroll and related benefits
 
2,020

 
1,327

Accrued interest payable
 
64

 
(151
)
Other accrued expenses and advance deposits
 
2,417

 
2,248

Net cash provided by operating activities
 
17,184

 
14,468

Investing activities:
 
 
 
 
Purchases of property and equipment
 
(7,260
)
 
(8,534
)
Proceeds from disposition of property and equipment
 
16,176

 
16,024

Collection of notes receivable
 
200

 
3,730

Advances to Red Lion Hotels Capital Trust
 
(27
)
 
(27
)
Other, net
 
62

 
65

Net cash provided by investing activities
 
9,151

 
11,258

Financing activities:
 
 
 
 
Repayment of credit facility
 

 
(9,800
)
Borrowings on long-term debt
 

 
44,500

Repayment of long-term debt
 
(10,958
)
 
(38,878
)
Proceeds from stock options exercised
 

 
11

Proceeds from issuance of common stock under employee stock purchase plan
 
69

 
82

Additions to deferred financing costs
 
(6
)
 
(918
)
Excess tax shortfall from stock-based compensation
 

 
102

Net cash used in financing activities
 
(10,895
)
 
(4,901
)
 
 
 
 
 
The accompanying condensed notes are an integral part of the consolidated financial statements





5






RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (Continued)
For the Nine Months Ended September 30, 2014 and 2013

 
 
Nine Months Ended
 
 
September 30,
 
 
2014
 
2013
 
 
(In thousands)
 
 
 
 
 
Change in cash and cash equivalents:
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
15,440

 
20,825

Cash and cash equivalents at beginning of period
 
13,058

 
6,477

Cash and cash equivalents at end of period
 
$
28,498

 
$
27,302

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
Cash paid during periods for:
 
 
 
 
Income taxes
 
$
40

 
$
22

Interest on long-term debt
 
$
3,315

 
$
4,383

Cash received during periods for:
 
 
 
 
Income taxes
 
$

 
$
78

Non-cash operating, investing and financing activities:
 
 
 
 
Reclassification of property and other assets to assets held for sale
 
$
17,682

 
$
156

Exchange of real property for a note receivable
 
$
200

 
$
1,720

Common stock redeemed
 
$
155

 
$
299


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

6


RED LION HOTELS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization

Red Lion Hotels Corporation (“RLHC”, "we", "our", "us" 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 hotels under our proprietary brands, including Hotel RL, Red Lion Hotels, Red Lion Inns & Suites and Leo Hotel Collection. Established over 30 years ago, the Red Lion brand is particularly well known in the western United States, where our hotels are located. The Red Lion brands represent upscale and midscale full and select service hotels. As of September 30, 2014, the Red Lion network of hotels was comprised of 53 hotels located in 10 states and one Canadian province. The Red Lion Hotels and Red Lion Inn & Suites network was comprised of 51 hotels with 8,528 rooms and 421,022 square feet of meeting space, of which we operated 20 hotels (15 are wholly owned and five are leased), and franchised 31 hotels. The Leo Hotel Collection was comprised of two hotels with 3,256 rooms and 241,000 square feet of meeting space.

We are also engaged in entertainment operations, which derive revenues from promotion and presentation of entertainment productions and ticketing services under the operations of WestCoast Entertainment and TicketsWest. The ticketing service offers online ticket sales, ticketing inventory management systems, call center services, and outlet/electronic distributions for event locations.

We were incorporated in the state of Washington in April 1978, and until 1999 operated hotels under various brand names including Cavanaughs Hotels. In 1999, we acquired WestCoast Hotels, Inc., and rebranded our Cavanaughs hotels to the WestCoast brand, changing our name to WestCoast Hospitality Corporation. In 2001, we acquired Red Lion Hotels, Inc. In September 2005, after rebranding most of our WestCoast hotels to the Red Lion brand, we changed our name to Red Lion Hotels Corporation. The financial statements encompass the accounts of Red Lion Hotels Corporation and all of its consolidated subsidiaries, including Red Lion Hotels Holdings, Inc., Red Lion Hotels Franchising, Inc., Red Lion Hotels Management, Inc., and Red Lion Hotels Limited Partnership (“RLHLP”).

The financial statements 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 we do not exercise significant influence. In addition, we hold a 3% common interest in Red Lion Hotels Capital Trust (the “Trust”) that is considered a variable interest entity. We are 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 our cooperative marketing fund, a variable interest entity, of which we are the primary beneficiary.

All significant inter-company and inter-segment transactions and accounts have been eliminated upon consolidation.

Individual Hotels and Properties Referred to in these Condensed Notes to Consolidated Financial Statements

The following individual hotels and properties will be referred to in these Condensed Notes to Consolidated Financial Statements using the terms set forth in parentheses:

Red Lion Hotel Bellevue in Bellevue, Washington ("Bellevue property")
Red Lion Hotel Canyon Springs in Twin Falls, Idaho ("Canyon Springs property")
Red Lion Hotel Columbia Center in Kennewick, Washington ("Kennewick property")
Red Lion Hotel & Conference Center Kelso/Longview in Kelso, Washington ("Kelso property")
Red Lion Hotel Pocatello, Idaho ("Pocatello property")
Red Lion Hotel Wenatchee, Washington ("Wenatchee property")
Red Lion Hotel Yakima Center in Yakima Washington ("Yakima property")
Red Lion Hotel Eugene, Oregon ("Eugene property")
Red Lion Hotel Medford, Oregon ("Medford property")
Kalispell Center Mall, Kalispell, Montana ("Kalispell Mall property")

2.
Basis of Presentation

The unaudited consolidated financial statements included herein have been prepared by us 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.


7


The consolidated balance sheet as of December 31, 2013 has been compiled from the audited balance sheet as of such date. We believe 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, 2013, 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 our consolidated financial position at September 30, 2014, the consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2014 and 2013, and the consolidated cash flows for the nine months ended September 30, 2014 and 2013. The comprehensive income (loss) for the periods presented may not be indicative of that 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.

Reclassifications

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported income/losses, total assets, total liabilities, or stockholders’ equity as previously reported. See Notes 4, 5 and 6.

3.
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers". ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. We do not anticipate that adoption of ASU 2014-09 will have a material impact on our consolidated financial statements.

Management has assessed the potential impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to our company, or are not anticipated to have a material impact on our consolidated financial statements.

4.
Property and Equipment

Property and equipment is summarized as follows (in thousands):
 
 
September 30,
2014
 
December 31,
2013
Buildings and equipment
 
$
179,768

 
$
188,331

Landscaping and land improvements
 
6,771

 
6,459

Furniture and fixtures
 
31,871

 
32,685

 
 
218,410

 
227,475

Less accumulated depreciation
 
(114,970
)
 
(117,343
)
 
 
103,440

 
110,132

Land
 
39,087

 
48,886

Construction in progress
 
3,496

 
7,338

Property and equipment, net
 
$
146,023

 
$
166,356


The table as of September 30, 2014 excludes the property and equipment of the Bellevue, Pocatello and Wenatchee properties. The table as of December 31, 2013 excludes the property and equipment of the Canyon Springs, Kennewick, Kelso, Pocatello, Wenatchee and Yakima properties. The Bellevue property was classified as an asset held for sale in the second quarter of 2014 and the remaining properties were classified as assets held for sale in the fourth quarter of 2013. The Canyon Springs, Kennewick, Kelso and Yakima properties were sold in the second quarter of 2014. In addition, the table as of December 31, 2013 excludes the property and equipment of the Eugene property, which closed in January 2014. See Notes 5 and 6 for further discussion.


8


5.
Assets Held for Sale
We consider properties to be assets held for sale when all of the following criteria are met:
management commits to a plan to sell a property;
it is unlikely that the disposal plan will be significantly modified or discontinued;
the property is available for immediate sale in its present condition;
actions required to complete the sale of the property have been initiated;
sale of the property is probable, and we expect the completed sale will occur within one year; and
the property is actively being marketed for sale at a price that is reasonable given its current market value.

Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and cease depreciation. The operations of a property held for sale prior to the sale date are recorded in discontinued operations unless we intend to have significant continuing involvement after the sale, for example, through a franchise or management agreement, in which case the operations remain part of continuing operations.

As discussed in Note 4, as of September 30, 2014, the Pocatello, Wenatchee and Bellevue properties were classified as held for sale. As of December 31, 2013, the Yakima, Kennewick, Kelso, Canyon Springs, Pocatello and Wenatchee properties were classified as held for sale. The Yakima, Kennewick, Kelso and Canyon Springs properties were sold in the second quarter of 2014. The property and equipment of these properties are detailed in the table below (in thousands):

 
 
September 30,
2014
 
December 31,
2013
Buildings and equipment
 
$
19,896

 
$
25,367

Landscaping and land improvements
 
457

 
7,337

Furniture and fixtures
 
2,977

 
1,138

 
 
23,330

 
33,842

Less accumulated depreciation and amortization
 
(12,472
)
 
(25,207
)
 
 
10,858

 
8,635

Land
 
12,733

 
9,478

Construction in progress
 
22

 
233

Assets held for sale
 
$
23,613

 
$
18,346


Impairments of assets held for sale in continuing operations

At the time each property was listed for sale, and at any time during the marketing process in which there is a change in circumstances (such as a decrease in listed price), the carrying value of the assets is written down to estimated fair value less selling costs, and an impairment is recognized in continuing operations. No impairments were identified with respect to these properties during the three and nine months ended September 30, 2014 or 2013.

6.
Discontinued Operations

Of the properties discussed above in Note 5, one property - Wenatchee - was classified as discontinued operations for all periods presented as we do not anticipate maintaining significant continuing involvement following its sale. In addition to this property, during the first quarter of 2014, we ceased the operation of our Eugene property when we assigned our lease to another party. Accordingly, all operations of the Eugene property have been classified as discontinued operations for all periods presented.

Discontinued operations as of September 30, 2013 also includes the activities of the Kalispell Mall and Medford properties which were sold in the second and third quarters of 2013, respectively, as well the activities of a catering contract in Yakima, Washington, which we decided to cease operating in the first quarter of 2013.


9


The following table summarizes the assets and liabilities of discontinued operations included in the consolidated balance sheets as of September 30, 2014 and December 31, 2013 (in thousands):

 
 
September 30, 2014
 
December 31,
2013
ASSETS
 
 
 
 
   Cash and cash equivalents
 
$
34

 
$
53

   Accounts receivable, net
 
91

 
215

   Inventories
 
21

 
50

   Prepaid expenses and other
 
17

 
130

       Total current assets
 
163

 
448

   Property and equipment, net
 
3,694

 
4,042

        Total assets, net
 
$
3,857

 
$
4,490

 
 
 
 
 
LIABILITIES
 
 
 
 
   Accounts payable
 
$
21

 
$
75

   Accrued payroll related benefits
 
51

 
58

   Advance deposits
 
3

 
7

   Other accrued expenses
 
34

 
125

       Total current liabilities
 
$
109

 
$
265


The following table summarizes the results of discontinued operations for the periods indicated (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues
 
$
870

 
$
1,973

 
$
2,368

 
$
7,261

Operating expenses
 
(641
)
 
(1,721
)
 
(2,075
)
 
(6,346
)
Hotel facility and land lease
 

 
(90
)
 
(30
)
 
(334
)
Depreciation and amortization
 

 
(116
)
 

 
(357
)
Income tax benefit (expense)
 


 
(260
)
 

 
(456
)
Income (loss) from operations of discontinued business units, net of tax
 
229

 
(214
)
 
263

 
(232
)
 
 
 
 
 
 
 
 
 
Loss on disposal and impairment of the assets of discontinued business units
 

 
(208
)
 
(2
)
 
(773
)
Income tax benefit (expense)
 

 
75

 

 
280

Loss on disposal and impairment of the assets of the discontinued business units, net of tax
 

 
(133
)
 
(2
)
 
(493
)
Income (loss) from discontinued operations
 
$
229

 
$
(347
)
 
$
261

 
$
(725
)

Changes to discontinued operations in 2014

The following properties were classified as discontinued operations in the consolidated statements of comprehensive income (loss) for the year ended December 31, 2013 when they were initially listed for sale. They were subsequently reclassified into continuing operations due to a determination that there will be significant continuing involvement through a franchise agreement.

Yakima Property

In April 2014, we closed on the sale of the Yakima property for $3.7 million. Concurrent with the sale, we entered into a franchise agreement with the new owners of the property resulting in the property remaining as part of continuing operations for all periods presented.

10



Kennewick Property

In May 2014, we closed on the sale of the Kennewick property for $5.9 million. Concurrent with the sale, we entered into a franchise agreement with the new owners of the property resulting in the property remaining as part of continuing operations for all periods presented.

Kelso Property

In May 2014, we closed on the sale of the Kelso property for $4.8 million. $4.6 million was paid in cash and the remainder was paid via a secured promissory note due in January 2016. Concurrent with the sale, we entered into a franchise agreement with the new owners of the property resulting in the property remaining as part of continuing operations for all periods presented.

Canyon Springs Property

In June 2014, we closed on the sale of the Canyon Springs property for $2.5 million. Concurrent with the sale, we entered into a franchise agreement with the new owners of the property resulting in the property remaining as part of continuing operations for all periods presented.

Pocatello Property

Subsequent to the end of the third quarter of 2014, we entered into a definitive agreement to sell the Pocatello property for $3.0 million and closed that sale in October 2014. Concurrent with the sale, the purchaser signed a franchise agreement. We determined that, while the continuing cash flows from operations are not significant, we still have significant involvement under the franchise agreement such that the property should not continue to be classified as discontinued operations. It has been reclassified to continuing operations for all periods presented. See Note 16 for further discussion.

Impairments of assets held for sale in discontinued operations

At the time each property was listed for sale, and at any time during the marketing process in which there is a change in circumstances (such as a decrease in listed price), the carrying value of the assets is written down to estimated fair value less selling costs, and an impairment is recognized in discontinued operations. No impairments were identified with respect to these properties during the three and nine months ended September 30, 2014 or 2013.

7.
Goodwill and Intangible Assets

Goodwill represents the excess of the estimated fair value of the net assets acquired during business combinations over the net tangible and identifiable intangible assets acquired. Goodwill was recorded in prior years in connection with the acquisitions of franchises and entertainment businesses. The Red Lion brand name is an identifiable, indefinite lived-intangible asset that represents the separable legal right to a trade name and associated trademarks acquired in a business combination we entered into in 2001. Goodwill and the brand name are not amortized; however, we assess goodwill and the brand name for potential impairments annually in the fourth quarter, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the assets. We did not impair any goodwill or intangible assets during the three and nine months ended September 30, 2014 or 2013.

8.
Credit Facility and Long-Term Debt
The current and non-current portions of long-term debt as of September 30, 2014 and December 31, 2013 are as follows (in thousands):
 
 
September 30, 2014
 
December 31, 2013
 
 
Current
 
Non-Current
 
Current
 
Non-Current
 
 
 
 
 
 
 
 
 
Wells Fargo credit facility
 
$
2,367

 
$
29,820

 
$
3,000

 
$
40,058

Debentures due Red Lion Hotels Capital Trust
 

 
30,825

 

 
30,825

 
 
$
2,367

 
$
60,645

 
$
3,000

 
$
70,883


11


Wells Fargo Credit Facility
In June 2013, we entered into a credit facility agreement with Wells Fargo Bank, National Association ("Wells Fargo") to expand our existing credit facility. The credit facility balance of $32.2 million represents outstanding principal of $32.5 million net of unamortized origination fees of $0.3 million. In addition to this term loan, we have a revolving line of credit with Wells Fargo for up to $10.0 million, a portion of which supports outstanding letters of credit. At September 30, 2014, $9.8 million on the revolving line of credit was available as we had $0.2 million in letters of credit and no outstanding borrowings as of that date. The $10.0 million revolving line of credit is available under the facility until June 30, 2015.
Our obligations under the facility are (i) guaranteed by our subsidiaries Red Lion Hotels Limited Partnership, Red Lion Hotels Franchising, Inc., Red Lion Hotels Management, Inc. and Red Lion Hotels Holdings, Inc., (ii) secured by our accounts receivable and inventory, and (iii) further collateralized by 14 of our hotel properties located in Bellevue, Spokane, Olympia, Port Angeles, Richland, Pasco and Wenatchee, Washington; in Post Falls and Boise, Idaho; in Bend and Coos Bay, Oregon; in Eureka and Redding, California; and in Salt Lake City, Utah.
As discussed in Note 6, in the second quarter of 2014, we closed on the sales of the Yakima, Kelso, Kennewick and Canyon Springs properties, which were pledged as collateral for our credit facility. As required under the terms of the loan, we made principal payments totaling $8.9 million from the proceeds of the sales in the second quarter of 2014.
As discussed in Notes 6 and 16, in October 2014 we closed on the sale of the Pocatello property, which was pledged as collateral for our credit facility. As required under the terms of the loan, we made a principal payment of $1.4 million promptly following the sale.
As of September 2014, principal payments of $591,689 are required on the term loan on the last day of each calendar quarter or the first business day thereafter. If a property securing the facility is sold we will be required to make an additional principal payment on the term loan equal to the greater of (i) 50% of the net proceeds from the sale or (ii) 50% of the appraised market value of the property sold. If any such additional principal payment exceeds $1 million, the remaining principal balance amortization will be modified to reflect the additional payment. The term loan matures on June 29, 2018.

The facility requires us to comply with customary affirmative and negative covenants, as well as financial covenants relating to leverage, debt service, and loan coverage ratios. It also includes customary events of default. We were in compliance with these covenants at September 30, 2014 and December 31, 2013.

Debentures of Red Lion Hotels Capital Trust
Together with the Trust, we completed a public offering of $46.0 million of trust preferred securities in 2004. The securities are listed on the New York Stock Exchange and entitle holders to cumulative cash distributions at a 9.5% annual rate with maturity in February 2044. The cost of the offering totaled $2.3 million, which the Trust paid through an advance by us. The advance to the Trust is included with other noncurrent assets on our consolidated balance sheets.
We borrowed all of the proceeds from the offering, including our original 3% trust common investment of $1.4 million, on the same day through 9.5% debentures that are included as a long-term liability on our consolidated balance sheets. The debentures mature in 2044 and their payment terms mirror the distribution terms of the trust securities. The debenture agreement required the mandatory redemption of 35% of the then-outstanding trust securities at 105% of issued value if we completed an offering of common shares with gross proceeds of greater than $50 million. In accordance therewith and in connection with a common stock offering in May 2006, we repaid approximately $16.6 million of the debentures due the Trust. The Trust then redeemed 35% of the outstanding trust preferred securities and trust common securities at a price of $26.25 per share, a 5% premium over the issued value of the securities. Of the $16.6 million, approximately $0.5 million was received back by us for our trust common securities and was reflected as a reduction of our investment in the Trust. At September 30, 2014 and December 31, 2013, debentures due the Trust totaled $30.8 million.

9.
Derivative Financial Instruments and Accumulated Other Comprehensive Income (Loss)

We do not enter into derivative transactions for trading purposes, but rather to hedge our exposure to interest rate fluctuations. We manage our floating rate debt using interest rate swaps in order to reduce our exposure to the impact of changing interest rates and future cash outflows for interest.

As required under our credit facility, we entered into an interest rate swap with Wells Fargo to hedge at least 40% of our interest rate exposure. The swap has an original notional amount of $18.0 million and a fixed rate of 4.88%. Our contractual

12


payments have reduced the outstanding notional amount to $16.5 million as of September 30, 2014. The swap is settled on the same day as the required monthly interest payments on the term loan and expires on June 29, 2018.

We account for the interest rate swap under Accounting Standards Codification ("ASC') Topic No. 815, “Derivatives and Hedging” (“ASC 815”) pertaining to the accounting for derivatives and hedging activities. ASC 815 requires us to recognize all derivative instruments on our balance sheet at fair value. At September 30, 2014, the valuation of the interest rate swap resulted in the recognition of a swap liability totaling $0.2 million, which is included in other accrued expenses on the balance sheet.

We measure the value of the interest rate swap utilizing an income approach valuation technique, converting future amounts of cash flows to a single present value in order to obtain a transfer exit price within the bid and ask spread that is most representative of the fair value of our derivative instruments. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service. See Note 14 for further discussion.

From inception through the second quarter of 2014, our interest rate swap was designated as a cash flow hedge.  The gains and losses in the fair value of the swap were recorded in stockholders’ equity as a component of accumulated other comprehensive income (loss) ("AOCI") on the consolidated balance sheets.  In connection with the additional principal payments made concurrent with the sales of our properties, we no longer qualify for hedge accounting and we de-designated the interest rate swap as a cash flow hedge. Beginning in the third quarter of 2014, the gains and losses in the fair value of the swap are recorded as interest expense on the consolidated statements of comprehensive income (loss). After June 30, 2014, the AOCI is amortized and expensed as interest expense over the remaining life of the interest rate swap. For the three and nine months ended September 30, 2014 we reclassified losses of $14,470 from AOCI to interest expense on our consolidated statements of comprehensive income (loss).

Accumulated other comprehensive income (loss)

Changes in accumulated other comprehensive income (loss), comprised entirely of changes in the fair value of our cash flow hedge, were as follows (in thousands):

 
 
Nine Months Ended September 30,
 
 
2014
 
2013
Balance, beginning of period
 
$
(159
)
 
$

Loss on cash flow hedge
 
(72
)
 
(164
)
       Reclassification of accumulated other comprehensive income
 
$
14

 
$

Balance, end of period
 
$
(217
)
 
$
(164
)

10.
Business Segments

As of September 30, 2014, we had three operating segments: hotels, franchise and entertainment. The “other” segment consists of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables and certain property and equipment which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense and income taxes; therefore, those two items have not been allocated to the segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses.


13


Selected information with respect to continuing operations is provided below (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
Hotels
 
$
35,888

 
$
36,888

 
$
91,847

 
$
92,297

Franchise
 
2,066

 
2,368

 
8,044

 
5,574

Entertainment
 
3,306

 
1,623

 
13,950

 
6,774

Other
 
14

 
83

 
64

 
256

 
 
$
41,274

 
$
40,962

 
$
113,905

 
$
104,901

Operating income (loss) by segment:
 
 
 
 
 
 
 
 
Hotels
 
$
7,845

 
$
6,336

 
$
12,458

 
$
6,991

Franchise
 
143

 
493

 
2,500

 
363

Entertainment
 
136

 
70

 
1,760

 
(42
)
Other
 
(2,258
)
 
(3,072
)
 
(6,994
)
 
(7,350
)
Total operating income (loss)
 
5,866

 
3,827

 
9,724

 
(38
)
Interest expense
 
(1,041
)
 
(1,252
)
 
(3,436
)
 
(4,281
)
Other income
 
47

 
98

 
204

 
401

Income tax (expense) benefit
 

 
(1,099
)
 
(32
)
 
1,553

Income (loss) from continuing operations
 
$
4,872

 
$
1,574

 
$
6,460

 
$
(2,365
)

 
 
September 30,
2014
 
December 31,
2013
Identifiable assets:
 
 
 
 
Hotels (1)
 
$
178,802

 
$
192,225

Franchise
 
10,097

 
9,348

Entertainment
 
5,431

 
6,759

Other
 
39,600

 
26,294

 
 
$
233,930

 
$
234,626

__________
(1)
Includes the identifiable assets of discontinued operations that are classified as held for sale.

11.
Earnings (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 nine months ended September 30, 2014 and 2013 (in thousands, except per share amounts):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Numerator - basic and diluted:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
4,872

 
$
1,574

 
$
6,460

 
$
(2,365
)
Income (loss) from discontinued operations
 
229

 
(347
)
 
261

 
(725
)
Net income (loss)
 
$
5,101

 
$
1,227

 
$
6,721

 
$
(3,090
)
Denominator:
 
 
 
 
 
 
 
 
Weighted average shares - basic
 
19,822

 
19,631

 
19,765

 
19,538

Weighted average shares - diluted
 
19,866

 
19,672

 
19,839

 
19,538

Earnings (loss) per share
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.25

 
$
0.08

 
$
0.33

 
$
(0.12
)
Income (loss) from discontinued operations
 
$
0.01

 
$
(0.02
)
 
$
0.01

 
$
(0.04
)
Net income (loss)
 
$
0.26

 
$
0.06

 
$
0.34

 
$
(0.16
)


14


For the three months ended September 30, 2014, 94,991 of the 96,036 options to purchase common shares and 364,489 of the 407,338 restricted stock units outstanding as of that date were considered antidilutive. For the three months ended September 30, 2013, 166,366 of the 167,607 options to purchase common shares and 305,739 of the 344,775 restricted stock units outstanding as of that date were considered antidilutive.

For the nine months ended September 30, 2014, 94,871 of the 96,036 options to purchase common shares and 334,116 of the 407,338 restricted stock units outstanding as of that date were considered antidilutive. For the nine months ended September 30, 2013, all of the 167,607 options to purchase common shares and all of the 344,775 restricted stock units outstanding as of that date were considered antidilutive due to losses in the period.

12.
Income Taxes

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 the determination of tax credits and other items that impact our income tax expense or benefit.

At September 30, 2014 we were not able to reliably estimate the full year effective tax rate. Accordingly, we have recognized interim income tax benefit using the discrete method based on actual results for the nine months ended September 30, 2014. The effective tax rates from continuing operations for the nine months ended September 30, 2014 and 2013 were 0.38% and 29.8%, respectively. The difference between the effective tax rates and the statutory rate of 34.0% for the nine months ended September 30, 2014 is driven by the impact of a valuation allowance recorded as of December 31, 2013 to reduce our deferred tax assets to an amount that is more likely than not to be realized. For the nine months ended September 30, 2013, the difference between the effective tax rate and the statutory tax rate of 34.0% is primarily driven by state income taxes, federal tax credits, and non-deductible expenses.

We recognize the financial statement effect of a tax position when, based on the technical merits of the uncertain tax position, it is more likely than not to be sustained on a review by taxing authorities. These estimates are based on judgments made with currently available information. We review these estimates and make changes to recorded amounts of uncertain positions as facts and circumstances warrant. We had no material uncertain tax positions at September 30, 2014 and do not anticipate a significant change in any unrecognized tax benefits over the next 12 months. Accordingly, we have not provided for any unrecognized tax benefits or related interest and penalties. With limited exception, we are no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for years prior to 2008.

We assess the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. A significant piece of objective negative evidence evaluated is the cumulative loss incurred over the three-year period ended September 30, 2014. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.

As of September 30, 2014 and December 31, 2013, valuation allowances of $3.4 million and $5.9 million, respectively, have been recorded to reduce deferred tax assets to amounts that are more likely than not to be realized. The amounts of the deferred tax assets considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. Should we determine we will be able to realize our deferred tax assets, the tax benefits relating to any reversal of the valuation allowance will be accounted for as a reduction of income tax expense.

At September 30, 2014 and December 31, 2013, we had federal gross operating loss carryforwards of approximately $20.9 million and $28.6 million, respectively; state gross operating loss carryforwards of approximately $17.6 million and $21.8 million, respectively; and tax credit carryforwards of approximately $4.7 million and $4.3 million, respectively. The federal operating loss carryforwards will expire beginning in 2033, and the state operating loss carryforwards will expire beginning in 2017; the tax credit carryforwards will begin to expire in 2024.

13.
Stock Based Compensation

Stock Incentive Plans

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 our shareholders and allowed awards of 2.0 million shares,

15


subject to adjustments for stock splits, stock dividends and similar events. As of September 30, 2014, there were 456,130 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2006 plan.

Stock Option Plans

In the nine months ended September 30, 2014 and 2013 we recognized no compensation expense related to options.

A summary of stock option activity for the nine months ended September 30, 2014, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Exercise
Price
Balance, January 1, 2014
 
167,607

 
$
9.49

Options granted
 

 
$

Options exercised
 

 
$

Options forfeited
 
(71,571
)
 
$
8.93

Balance, September 30, 2014
 
96,036

 
$
9.92

Exercisable, September 30, 2014
 
96,036

 
$
9.92


Additional information regarding stock options outstanding and exercisable as of September 30, 2014, is as follows:
Range of
Exercise
Prices
 
Number
Outstanding
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Expiration
Date
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value(1)
 
Number
Exercisable
 
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value(1)
$5.10
 
5,000

 
0.09

 
2014
 
$
5.10

 
$
2,950

 
5,000

 
$
5.10

 
$
2,950

7.46
 
6,000

 
0.67

 
2014-2015
 
7.46

 

 
6,000

 
7.46

 

$8.74
 
49,189

 
3.05

 
2014-2018
 
8.74

 

 
49,189

 
8.74

 

$12.21-$13.00
 
35,847

 
2.09

 
2014-2017
 
12.62

 

 
35,847

 
12.62

 

 
 
96,036

 
2.39

 
2014-2018
 
$
9.92

 
$
2,950

 
96,036

 
$
9.92

 
$
2,950

__________ 
(1)
The aggregate intrinsic value is before applicable income taxes and represents the amount option recipients would have received if all options had been fully vested and exercised on the last trading day of the first nine months of 2014, or September 30, 2014, based upon our closing stock price on that date of $5.69.

Restricted Stock Units, Shares Issued as Compensation

As of September 30, 2014 and 2013, there were 407,338 and 344,775 unvested restricted stock units outstanding. Since we began issuing restricted stock units, approximately 22.1% of total units granted have been forfeited. In the third quarter of 2014, we recognized approximately $0.2 million in compensation expense related to restricted stock units compared to $0.7 million in the comparable period in 2013. For the nine months ended September 30, 2014, we recognized approximately $0.6 million in compensation expense related to the restricted stock units compared to $1.1 million in the comparable period in 2013. Included in expense for the three and nine months ended September 30, 2013 is approximately $0.4 million of expense related to the accelerated vesting of restricted stock units associated with the departure of our former CEO. As the restricted stock units vest, we expect to recognize approximately $2.0 million in additional compensation expense over a weighted average period of 36 months, including $0.2 million during the remainder of 2014.


16


A summary of restricted stock unit activity for the nine months ended September 30, 2014, is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, January 1, 2014
 
303,749

 
$
7.32

Granted
 
288,168

 
$
5.63

Vested
 
(83,275
)
 
$
7.09

Forfeited
 
(101,304
)
 
$
7.01

Balance, September 30, 2014
 
407,338

 
$
6.17


Employee Stock Purchase Plan

In January 2008, we adopted the 2008 employee stock purchase plan (the “2008 ESPP”) upon the expiration of its predecessor 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 and July 2014, 7,405 and 7,022 shares were issued to participants under the terms of the plan, respectively.

14.
Fair Value of Financial Instruments

Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 includes unobservable inputs that reflect assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

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 carrying amounts of our current notes receivable are reasonable estimates of their fair values due to the short nature of the loans (they are expected to be satisfied within a year). We estimate the fair value of our interest rate swap using standard calculations that use as their basis readily available observable market parameters, which are Level 2 inputs. We estimate the fair value of our long-term debt, excluding leases, using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. The debentures are valued at the closing price on September 30, 2014, of the underlying trust preferred securities on the New York Stock Exchange, which was a directly observable Level 1 input. The fair values provided below are not necessarily indicative of the amounts we 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.


17


 
 
September 30, 2014
 
December 31, 2013
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents and restricted cash(1)
 
$
28,498

 
$
28,498

 
$
13,058

 
$
13,058

Accounts receivable(1)
 
$
6,869

 
$
6,869

 
$
6,283

 
$
6,283

Notes receivable
 
$
5,240

 
$
5,240

 
$
5,095

 
$
5,095

Financial liabilities:
 
 
 
 
 
 
 
 
Current liabilities, excluding debt(1)
 
$
22,435

 
$
22,435

 
$
16,238

 
$
16,238

Total debt
 
$
32,187

 
$
32,694

 
$
43,058

 
$
44,311

Debentures
 
$
30,825

 
$
31,460

 
$
30,825

 
$
32,058

__________
(1)
Includes the cash, accounts receivable, and current liabilities of discontinued operations held for sale as of September 30, 2014 and December 31, 2013.

15.
Commitments and Contingencies

At any given time we are subject to claims and actions incidental to the operations of our business. Based on information currently available, we do not expect that any sums we may receive or have to pay in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.

Due to our equity method investment in a 19.9% owned real estate venture, we are considered a guarantor of the mortgage for the building associated with that investment. We would be obligated to pay a portion of this mortgage in the event the real estate venture were unable to meet its principal or interest payment obligations. As of September 30, 2014, the maximum amount payable under this guarantee was approximately $1.9 million, which represents 19.9% of the outstanding mortgage balance. At each reporting date, it was not probable that we would be required to pay any of this amount; thus we have not accrued a liability for any portion of this obligation in our September 30, 2014 or December 31, 2013 financial statements.

In September 2014, we amended the lease for Red Lion Hotel Vancouver (at the Quay) to revise the lease term to December 31, 2015.  In addition, we have the right to terminate the lease after December 31, 2014 with a payment of $3.0 million.  If we have not previously terminated the lease, the lease will expire on December 31, 2015 with a required payment of $3.0 million.

16.
Subsequent Events

On October 15, 2014, we closed on the sale of the Pocatello property for $3.0 million of which we received $1.3 million in cash and secured a promissory note for $1.7 million for the remaining balance. This property was pledged as collateral for our Wells Fargo credit facility. Under the terms of that facility, we made a principal payment in the amount of $1.4 million on the facility's term loan when the sale closed. See Notes 6 and 8 for further discussion. Concurrent with the sale, we entered into a franchise agreement with the buyer.

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, 2013, 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 "RLHC" refer to Red Lion Hotels Corporation and, as the context requires, all of its wholly owned subsidiaries, including Red Lion Hotels Holdings, Inc., Red Lion Hotels Franchising, Inc., Red Lion Hotels Management, Inc. and Red Lion Hotels Limited Partnership. "Red Lion" refers to the Red Lion brand. The terms "the network" or "network of hotels" refer to our entire group of owned, leased and franchised hotels.


18


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, 2013, 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 hotels under our proprietary brands, including Hotel RL, Red Lion Hotels, Red Lion Inns & Suites and Leo Hotel Collection (the “Red Lion Brands”). Established in the western United States over 30 years ago, the Red Lion represent upscale and midscale full and select service hotels.

Our brands offer a unique local spin on the expected travel experience in an environment that allows customers to feel welcome and at home. Our properties strive to highlight friendly service and reflect the local flair of their markets. Our focus is to anticipate guest needs and pleasantly surprise them with our distinctive Pacific Northwest-inspired customer service.  Warm and authentic, our commitment to customer service includes a focus on delivering the guest locally inspired, friendly and personalized signature moments. This is intended to position each Red Lion hotel as an advocate to our traveling guests, creating brand relevance and loyalty, differentiating us from our competition.

In October 2014, we launched a new brand, Hotel RL. This upscale lifestyle brand is a full-service, conversion brand targeted for the top 80 U.S. urban markets that is inspired by the spirit of the Pacific Northwest and designed for consumers with a millennial mindset. Our company expects to pursue joint venture and equity ownership opportunities with this brand and will also be reviewing current hotels for conversion opportunities. The company anticipates announcing the first addition to Hotel RL before the end of the year and plans to open or convert more in 2015.

A summary of our properties as of September 30, 2014 is provided below:
 
 
Hotels
 
Total
Available
Rooms
 
Meeting
Space
(sq. ft.)
Red Lion Owned and Leased Hotels
 
 
 
 
 
 
Continuing Operations
 
19

 
3,888

 
182,572

Discontinued Operations
 
1

 
149

 
7,678

Red Lion Franchised Hotels
 
31

 
4,491

 
230,772

Leo Hotel Collection
 
2

 
3,256

 
241,000

Total
 
53

 
11,784

 
662,022


We operate in three reportable segments:

The hotels segment derives revenue primarily from guest room rentals and food and beverage operations at our owned and leased hotels. As of September 30, 2014, we operated 20 hotels, of which 15 are wholly-owned and five are leased.

The franchise segment is engaged primarily in licensing the Red Lion Brands to franchisees. This segment generates revenue from franchise fees that are typically based on a percent of room revenue and are charged to hotel owners in exchange for the use of our brand and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards.

The entertainment segment derives revenue primarily from promotion and presentation of entertainment productions under the operations of WestCoast Entertainment and from ticketing services under the operations of TicketsWest. The ticketing service offers online ticket sales, ticketing inventory management systems, call center services, and outlet/electronic distributions for event locations.

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


19


Individual Hotels and Properties Referred to in this Report

The following individual hotels and properties will be referred to in this report using the terms set forth in parentheses:

Red Lion Hotel Bellevue in Bellevue, Washington ("Bellevue property")
Red Lion Hotel Canyon Springs in Twin Falls, Idaho ("Canyon Springs property")
Red Lion Hotel Columbia Center in Kennewick, Washington ("Kennewick property")
Red Lion Hotel & Conference Center Kelso/Longview in Kelso, Washington ("Kelso property")
Red Lion Hotel Pocatello, Idaho ("Pocatello property")
Red Lion Hotel Wenatchee, Washington ("Wenatchee property")
Red Lion Hotel Yakima Center in Yakima Washington ("Yakima property")
Red Lion Inn & Suites in Missoula, Montana ("Missoula property")
Red Lion Hotel Pendleton in Pendleton, Oregon ("Pendleton property")
Kalispell Center Mall, Kalispell, Montana ("Kalispell Mall property")

Executive Summary

Our strategy is to grow our brands and profitability by expanding our hotel network with additional franchised hotels and hotels partially owned by us through joint venture or partial equity participation.

We believe franchising represents a profitable, non-capital intensive growth opportunity. Our strategy is to identify larger urban metropolitan statistical areas (MSAs) that are saturated by larger brands in order to become the conversion brand of choice for owners of established hotels looking for alternatives in those markets. By segmenting our brands with clear distinctions between each offering, we believe we are uniquely positioned to provide an appealing alternative for a variety of owners. We expect that our strong brand name recognition in the Western U.S. markets will continue to provide us with opportunities to expand our hotel network within our existing footprint. The Midwest and East Coast markets also provide us with opportunity to expand our hotel network into markets across North America as our brands will be a unique and new value proposition for current and potential hotel owners in markets saturated by competitor brands. In addition to conversion from other brands, independently branded hotel operations may also benefit from the RLHC central services programs. For all properties, we are striving to provide hotel owners leading distribution technology and sales support as part of our brand support programs.

Additional growth in our hotel network in larger metropolitan cities will come from hotel acquisitions where we contribute partial equity or participate in joint venture ownership opportunities with hotel owners and investors. Equity investment in hotels new to our system is an opportunity for us to redeploy capital generated from sales of hotels into improvement in and expansion of our hotel network in major cities.

Further growth opportunities may come from the expansion of our brand offerings. In October 2014, we launched a new upscale hotel brand, Hotel RL. This new hotel product is intended to be flexible enough to allow adaptive reuse projects, conversions and new builds while giving owners a more free-form approach to adapt the hotel to their unique markets and locations. The new flat fee structure is a true differentiator in this segment which provides a predictable cost structure for our franchisees with the opportunity to leverage a greater proportion of their top-line growth to superior hotel performance.

We are also investing in sales and marketing talent and technology to improve our ability to manage the various channels which drive occupancy and rate at our hotels, including transient, group and preferred corporate business. We have implemented a new guest management ecosystem, RevPak, which includes a number of industry revenue generation systems fully integrated to provide comprehensive information by integrating information on customer acquisition, customer management and customer retention. This suite of products will deliver dynamic and personalized communications and promotions tailored to individual guest travel needs and habits.

Our focus on improving e-commerce revenue generation includes ongoing updates and improvements to our RedLion.com website and improved and targeted digital marketing utilizing information generated through our RevPak reservation and distribution system.

We are committed to keeping our properties well maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. We are continuing to explore opportunities to leverage our owned assets to generate additional capital for these types of reinvestments and capital improvements.


20


To support the clarification of our Red Lion Brand and improve our financial performance, in November 2013 we listed for sale several non-strategic hotel assets. Through October 2014, we have sold five of the six properties. Proceeds from the sales of these assets has provided additional capital for debt reduction and support of the growth initiatives for our hotel network.

In July 2014, we listed the Bellevue property for sale. The market in Bellevue, Washington is one of the best in the country in terms of redevelopment and land value and this property is located next to a planned stop on the extended light rail, which is targeted to be completed in 2023. We intend to use the proceeds, in addition to the current strength of our balance sheet, to pay down debt and invest in hotels in key markets across the country.

We will continue to seek ways to improve the profitability of our owned and leased hotel portfolio as we improve our technologies, such as the RevPak deployment and reinvest in our owned properties, with the goal of driving growth in revenue and generating cost efficiencies.

Revenue per available room ("RevPAR") for owned and leased hotels on a comparable basis from continuing operations increased 8.3% in the third quarter of 2014 from the third quarter of 2013. Comparable Average Daily Rate ("ADR"), from continuing operations, increased 3.7% in the third quarter of 2014 to $100.19 from $96.61 in the third quarter of 2013. Comparable occupancy from continuing operations increased 340 basis points in the third quarter of 2014 from the third quarter of 2013. Average occupancy, ADR and RevPAR statistics are provided below on a comparable basis from continuing operations.

 
 
For the three months ended September 30,
 
 
2014
 
2013
 
 
Average Occupancy
 
 
ADR
 
RevPAR
 
Average
Occupancy
 
ADR
 
RevPAR
Owned and Leased Hotels(1)
 
80.3
%
 
 
$
100.19

 
$
80.41

 
76.9
%
 
$
96.61

 
$
74.28

Franchised Hotels
 
60.6
%
 
 
$
86.78

 
$
52.63

 
62.7
%
 
$
80.18

 
$
50.29

Total System Wide
 
71.1
%
 
 
$
94.87

 
$
67.48

 
70.0
%
 
$
89.45

 
$
62.61

Change from prior comparative period:
 
 
 
 
 
 
 
 
 
 
 
 
 
Owned and Leased Hotels
 
340

bps
 
3.7
%
 
8.3
%
 
 
 
 
 
 
Franchised Hotels
 
(210
)
bps
 
8.2
%
 
4.7
%
 
 
 
 
 
 
Total System Wide(1)
 
110

bps
 
6.1
%
 
7.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30,
 
 
2014
 
2013
 
 
Average Occupancy
 
 
ADR
 
RevPAR
 
Average
Occupancy
 
ADR
 
RevPAR
Owned and Leased Hotels(1)
 
68.7
%
 
 
$
93.29

 
$
64.11

 
66.6
%
 
$
90.56

 
$
60.35

Franchised Hotels
 
52.0
%
 
 
$
83.28

 
$
43.34

 
53.0
%
 
$
79.06

 
$
41.89

Total System Wide
 
60.8
%
 
 
$
89.20

 
$
54.20

 
60.0
%
 
$
85.61

 
$
51.36

Change from prior comparative period:
 
 
 
 
 
 
 
 
 
 
 
 
 
Owned and Leased Hotels
 
210

bps
 
3.0
%
 
6.2
%
 
 
 
 
 
 
Franchised Hotels
 
(100
)
bps
 
5.3
%
 
3.5
%
 
 
 
 
 
 
Total System Wide
 
80

bps
 
4.2
%
 
5.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

(1)
Includes all hotels owned, leased and franchised, presented on a comparable basis. This excludes hotels classified as discontinued operations. This also excludes the two properties under the Leo Hotel Collection brand. The Missoula, Pendleton, Yakima, Kennewick, Kelso and Canyon Springs properties have been excluded from the owned and leased hotel statistics and included in the franchised statistics as we sold those previously owned properties during 2014 and 2013 and maintained franchise agreements on those properties.

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

Average occupancy represents total paid rooms occupied divided by total available rooms. We use average occupancy as a measure of the utilization of capacity in our network of hotels.

21


RevPAR represents total room and related revenues divided by total available rooms. We use RevPAR as a measure of performance yield in our network of hotels.
ADR represents total room revenues divided by the total number of paid rooms occupied by hotel guests. We use ADR as a measure of room pricing in our network of hotels.
Total available rooms represents the number of rooms available multiplied by the number of days in the reported period. We use total available rooms as a measure of capacity in our network of hotels and do not adjust total available rooms for rooms temporarily out of service for remodel or other short-term periods.
Comparable hotels are hotels that have been owned, leased or franchised by us and were in operation throughout each of the full periods presented, other than hotels classified as discontinued operations.

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

Results of Operations

Our reported numbers for the periods presented reflect the results of the Missoula property through February 20, 2013, and the results of the Pendleton property through April 4, 2013, when the sales of those properties closed. Our reported numbers also include the results of the Yakima property through April 10, 2014; the Kelso property through May 21, 2014; the Kennewick property through May 28, 2014 and the Canyon Springs property through June 6, 2014, when the sales of those properties closed. These properties are reported in continuing operations since we have significant continuing involvement in the operations of these properties that now operate as franchised hotels. In order to help investors distinguish changes from results of continuing operations versus changes due to the sales of these hotel properties, we will discuss operating results from continuing operations as reported and also discuss certain operating results and data for periods included in the report on a comparable hotel basis. Comparable hotels are hotels that have been owned, leased or franchised by us and were in operation throughout each of the full periods presented, other than hotels classified as discontinued operations. Therefore, the Missoula, Pendleton, Yakima, Kelso, Kennewick and Canyon Springs properties are excluded from the comparable owned and leased hotel statistics and operating results.

During the third quarter of 2014 we reported income from continuing operations of $4.9 million, or $0.25 per share, and during the third quarter of 2013, we reported income from continuing operations of $1.6 million, or $0.08 per share. For the third quarter of 2014 earnings before interest, taxes, depreciation and amortization adjusted to eliminate EBITDA of sold properties (“Adjusted EBITDA”), was $9.2 million, compared to Adjusted EBITDA of $7.1 million for the second quarter of 2013, which also eliminates separations costs of the former CEO and COO.

For the first nine months of 2014 we reported income from continuing operations of $6.5 million or $0.33 per share, and during the first nine months of 2013, we reported losses from continuing operations of $2.4 million, or $0.12 per share. The first nine months of 2014 included $3.5 million in gains on the sales of the Yakima, Kennewick, Kelso and Canyon Springs properties as well as a $2.1 million early termination fee for the Seattle Fifth Avenue franchise location. For the first nine months of 2014, Adjusted EBITDA, which also eliminates the gains on sales of properties and the early termination fee, was $13.8 million, compared to Adjusted EBITDA of $10.0 million for the first nine months of 2013.


22


A summary of our consolidated statements of comprehensive (loss) income is provided below (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Total revenue
 
$
41,274

 
$
40,962

 
$
113,905

 
$
104,901

Total operating expenses
 
35,408

 
37,135

 
104,181

 
104,939

Operating income (loss)
 
5,866

 
3,827

 
9,724

 
(38
)
Other income (expense):
 
 
 
 
 
 
 
 
Interest expense
 
(1,041
)
 
(1,252
)
 
(3,436
)
 
(4,281
)
Other income, net
 
47

 
98

 
204

 
401

Income (loss) before taxes
 
4,872

 
2,673

 
6,492

 
(3,918
)
Income tax expense (benefit)
 

 
1,099

 
32

 
(1,553
)
Income (loss) from continuing operations
 
4,872

 
1,574

 
6,460

 
(2,365
)
Income (loss) from discontinued operations, net of tax
 
229

 
(347
)
 
261

 
(725
)
Net income (loss)
 
$
5,101

 
$
1,227

 
$
6,721

 
$
(3,090
)
Comprehensive income (loss)
 
$
5,101

 
$
1,331

 
$
6,649

 
$
(3,254
)
Non-GAAP data:
 
 
 
 
 
 
 
 
EBITDA
 
$
9,383

 
$
7,324

 
$
19,755

 
$
10,658

Adjusted EBITDA
 
$
9,154

 
$
7,073

 
$
13,765

 
$
9,998


EBITDA is defined as net income (loss), before interest, taxes, depreciation and amortization.  EBITDA is considered a non-GAAP financial measurement.  We believe it is a useful financial performance measure for us and for our shareholders and is a complement to net income and other financial performance measures provided in accordance with generally accepted accounting principles in the United States ("GAAP").

We use EBITDA to measure financial performance 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 tax 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 and other operations 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 use Adjusted EBITDA as another measure of financial performance. We believe that the inclusion or exclusion of certain recurring and non-recurring items, such as gains and losses on asset dispositions and impairments, is necessary to provide the most accurate measure of core operating results and as a means to evaluate comparative results.

Because EBITDA and Adjusted EBITDA exclude depreciation and amortization, they do not measure the capital we require to maintain or preserve our long-lived assets. In addition, because EBITDA and Adjusted EBITDA do not reflect interest expense, they do not take into account the total amount of interest we pay on outstanding debt nor do they show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA and Adjusted EBITDA, as defined by us, may not be comparable to EBITDA and Adjusted EBITDA as reported by other companies that do not define EBITDA and Adjusted EBITDA exactly as we define the terms.  Because we use EBITDA and Adjusted EBITDA to evaluate our financial performance, we reconcile all EBITDA and Adjusted EBITDA measures to net income, which is the most comparable financial measure calculated and presented in accordance with GAAP.  EBITDA and Adjusted EBITDA do not represent cash provided by 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.



23


The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) for the periods presented (in thousands):
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
2014
 
2013
Adjusted EBITDA
 
$
9,154

 
$
7,073

 
$
13,765

 
$
9,998

 
EBITDA from hotel properties sold (1)
 

 
879

 
113

 
1,434

 
Gain on asset dispositions (2)
 

 

 
3,521

 

 
Early termination fee (3)
 

 

 
2,095

 

 
Separation Costs (4)
 

 
(582
)
 

 
(582
)
EBITDA from continuing operations
 
9,154

 
7,370

 
19,494

 
10,850

 
 
 
 
 
 
 
 
 
 
 
Income (loss) on discontinued operations, net of tax
 
229

 
(347
)
 
261

 
(725
)
 
Income tax benefit - discontinued operations
 

 
185

 

 
176

 
Depreciation and amortization - discontinued operations
 

 
116

 

 
357

EBITDA