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EX-10.10 - EXHIBIT 10.10 - Red Lion Hotels CORPexhibit1010gregmountfinal.htm
EX-10.14 - EXHIBIT 10.14 - Red Lion Hotels CORPexhibit1014harrysladichfin.htm
EX-10.13 - EXHIBIT 10.13 - Red Lion Hotels CORPexhibit1013tommckeirnanfin.htm
EX-10.12 - EXHIBIT 10.12 - Red Lion Hotels CORPexhibit1012billlinehanfinal.htm
EX-21 - EXHIBIT 21 - Red Lion Hotels CORPrlhex2110k12-31x2014.htm
EX-23 - EXHIBIT 23 - Red Lion Hotels CORPrlhex2310k12-31x2014.htm
EX-31.2 - EXHIBIT 31.2 - Red Lion Hotels CORPrlhex31210k12-31x2014.htm
EX-31.1 - EXHIBIT 31.1 - Red Lion Hotels CORPrlhex31110k12-31x2014.htm
EXCEL - IDEA: XBRL DOCUMENT - Red Lion Hotels CORPFinancial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Red Lion Hotels CORPrlhex32110k12-31x2014.htm
EX-10.11 - EXHIBIT 10.11 - Red Lion Hotels CORPexhibit1011jimbellfinal.htm
EX-32.2 - EXHIBIT 32.2 - Red Lion Hotels CORPrlhex32210k12-31x2014.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $.01 per share
New York Stock Exchange
Guarantee with Respect to 9.5% Trust Preferred Securities
(Liquidation Amount of $25 per Trust Preferred
Security) of Red Lion Hotels Corporation Capital Trust
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o     No ý 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o    No ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
Indicate by check mark whether the registrant is a large accelerated filer, 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
 
x
 
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
The aggregate market value of the registrant's common stock as of June 30, 2014 was $108.5 million, of which 70.88% or $76.9 million was held by non-affiliates as of that date. As of February 23, 2015, there were 19,915,343 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2015 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 2014 fiscal year, are incorporated by reference herein in Part III.



TABLE OF CONTENTS
 
 
 
 
Item No.
Description
Page No.
 
 
 
 
PART I
 
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
 
 
 
 
PART II
 
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
 
 
 
 
PART III
 
Item 10
Item 11
Item 12
Item 13
Item 14
 
 
 
 
PART IV
 
Item 15
 
 
 
 
 
 
 



2


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" under Item 1A of this annual report, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report.

In this report, "we," "us," "our," "our company," "the Company" and "RLHC" refer to Red Lion Hotels Corporation and, as the context requires, all of its subsidiaries, including Red Lion Hotels Holdings, Inc., Red Lion Hotels Franchising, Inc. and Red Lion Hotels Limited Partnership, all of which are wholly owned, and RL Venture LLC, in which it holds a 55% member interest. "Red Lion" refers to the Red Lion Brands described below. The terms "the network", "system-wide hotels" or "network of hotels" refer to our entire group of owned, leased and franchised hotels.

Item 1.
Business

Introduction

We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the management, franchising and ownership of hotels under our proprietary brands, including Hotel RL, Red Lion Hotels, Red Lion Inns & Suites and Leo Hotel Collection (the “Red Lion Brands”). The Red Lion Brands represent upscale and midscale full and select service hotels.

Our company was incorporated in the state of Washington in April 1978, and until 1999 operated hotels under various brand names including Cavanaughs Hotels and WestCoast Hotels, Inc. All of our hotels currently operate under the Red Lion Brands.

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 of our hotels 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 recently announced the first addition to Hotel RL at the Inner Harbor of Baltimore, currently under renovation and expected to open in summer 2015. We also recently announced that three of our existing hotels located in Salt Lake City, Utah, and in Olympia and Spokane, Washington will convert to the Hotel RL brand; the conversions are expected to be completed throughout 2015.

In addition to our core brands, the Leo Hotel Collection is a soft branding option for properties to gain access to the Red Lion platform.

A summary of our properties as of December 31, 2014 is provided below:
 
 
 
Total
 
Meeting
 
 
 
Available
 
Space
 
Hotels
 
Rooms
 
(sq. ft.)
 
 
 
 
 
 
Red Lion company operated hotels
19

 
3,887

 
177,250

Red Lion franchised hotels
34

 
4,677

 
244,072

Leo Hotel Collection
2

 
3,256

 
241,000

Total
55

 
11,820

 
662,322


3



Operations

We operate in three reportable segments:
The hotels segment derives revenue primarily from guest room rentals and food and beverage operations at our company operated hotels. As of December 31, 2014, we operated 19 hotels, 14 of which are wholly-owned and five of which are leased. During 2014 our hotel segment accounted for approximately 81.5% of total revenues.
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 revenues and are charged to hotel owners in exchange for the use of our brands and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. As of December 31, 2014, we had 36 franchised hotels with 34 under the Red Lion brand and two hotels under the Leo Hotel Collection brand. During 2014 our franchise segment accounted for approximately 6.6% of total revenues.
The entertainment segment derives revenues from promotion and presentation of entertainment productions under the trade name WestCoast Entertainment, and from ticketing services under the trade name TicketsWest. The ticketing service business offers ticketing inventory management systems, call center services, and outlet/electronic channel distribution for event locations. During 2014 our entertainment segment accounted for approximately 11.8% of total revenues.
Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".
A summary of our reporting segment revenues from continuing operations is provided below (in thousands, except for percentages). For further information regarding our business segments, see Note 3 of Notes to Consolidated Financial Statements.
 
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
Hotel
 
$
118,616

 
81.5
%
 
$
120,391

 
87.6
%
 
$
131,112

 
89.9
%
Franchise
 
9,618

 
6.6
%
 
7,136

 
5.2
%
 
5,177

 
3.5
%
Entertainment
 
17,115

 
11.8
%
 
9,439

 
6.9
%
 
9,165

 
6.3
%
Other
 
77

 
0.1
%
 
341

 
0.3
%
 
442

 
0.3
%
Total Revenue
 
$
145,426

 
100.0
%
 
$
137,307

 
100.0
%
 
$
145,896

 
100.0
%
 
Revenue per available room ("RevPAR") for company operated hotels on a comparable basis from continuing operations increased 6.9% in 2014 from 2013 primarily due to both a 3.3% increase in average daily rate ("ADR") and a 220 basis point increase in occupancy. Systemwide RevPAR on a comparable basis from continuing operations increased 6.0% year-over-year primarily due to a 3.4% increase in ADR and a 150 basis point increase in occupancy. Average occupancy, ADR and RevPAR statistics for comparable hotels from continuing operations are provided below:
 
 
 
2014
 
2013
 
 
Average Occupancy
 
ADR
 
RevPAR
 
Average
Occupancy
 
ADR
 
RevPAR
Company operated hotels
 
66.6
%
 
$
91.26

 
$
60.80

 
64.4
%
 
$
88.35

 
$
56.87

Franchised hotels
 
51.4
%
 
$
82.30

 
$
42.33

 
50.9
%
 
$
79.54

 
$
40.52

Total systemwide (1)
 
59.6
%
 
$
87.68

 
$
52.26

 
58.1
%
 
$
84.77

 
$
49.29


4



Change from prior comparative periods:
 
 
2014 vs. 2013
 
 
Average Occupancy
 
ADR
 
RevPAR
Company operated hotels
 
220

bps
 
3.3
%
 
6.9
%
Franchised hotels
 
50

bps
 
3.5
%
 
4.5
%
Total systemwide (1)
 
150

bps
 
3.4
%
 
6.0
%

(1) Includes all hotels owned, leased, under management contract and franchised, and excludes hotels classified as discontinued operations. This also excludes the two properties under the Leo Hotel Collection brand. The Missoula, Pendleton, Yakima, Kennewick, Kelso, Canyon Springs and Pocatello properties have been excluded from the owned and leased hotel statistics and included in the franchise 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 in discussing 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 system of hotels.
RevPAR represents total room and related revenues divided by total available rooms. We use RevPAR as a measure of performance yield in our system 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 system 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 system 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 owned, leased, under management contract or franchised by us and in operation throughout each of the full periods presented, excluding 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," "upscale" and "midscale" are consistent with those used by Smith Travel Research, an independent statistical research service that specializes in the lodging industry. Our hotels are typically classified by Smith Travel Research as midscale with food and beverage.
 

Company Strategy

Our strategy is to grow our brands and profitability by expanding our hotel network with additional franchised hotels, managing the operations of hotels partially owned by us through joint venture or sliver equity participation, and managing operations of hotels with which we contract to perform management services.

We believe franchising and management 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 are uniquely positioned to provide an appealing alternative for a variety of owners. We believe our strong brand name recognition in the Western U.S. markets provides us with an opportunity to expand our hotel network within our existing footprint. The Midwest, South 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. To assist in our ability to grow our hotel network in larger metropolitan cities, we may consider special incentives, management contracting services, sliver equity, joint venture opportunities with hotel owners and investors or adding additional brand options. In addition to conversion from other brands, independently branded hotel operations may also benefit from the RLHC central services programs. For all properties, we strive to provide hotel owners leading distribution technology and sales support as part of our brand support programs.

We believe that additional growth in our hotel network in larger metropolitan cities will come from hotel acquisitions where we contribute partial equity or participate in equity ownership opportunities in joint ventures with hotel owners and

5


investors. Equity investment in hotels new to our system is an opportunity for us to redeploy capital generated from sales of hotels into improvement 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. In December 2014, we announced the acquisition of an adaptive reuse property located at Baltimore's Inner Harbor in Maryland. Currently under renovation, the 130-room hotel is expected to open in summer 2015 as the company's first Hotel RL.

In January 2015, we announced that we had completed a comprehensive transaction to accelerate the execution of our national growth strategy. Key components included the transfer of 12 of our wholly owned hotels to RL Venture LLC, a newly created entity that was initially wholly owned by us, the sale to an unrelated third party of a 45 percent member interest in that entity, and the concurrent refinancing of all of our secured debt. Three of the hotels will be renovated and converted to the recently announced lifestyle, three-star Hotel RL brand. The remaining nine Red Lion Hotels and Red Lion Inn & Suites will also undergo comprehensive renovations. All 12 hotels will continue to be managed by RLHC's wholly owned subsidiary, Red Lion Hotels Management, Inc., under an initial five-year management contract, with three five-year extensions.

To further support the market repositioning of our Red Lion Brands and improve our financial performance, throughout 2014 and the beginning of 2015, we sold seven non-strategic hotel assets. Proceeds from the sales of these assets have provided additional capital for debt reduction and support of the growth initiatives for our hotel network.

We are also investing in sales and marketing talent and technology to improve our ability to manage the various channels which drive occupancy and average daily 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.

Employees

As of December 31, 2014, we employed 1,622 people on a full-time or part-time basis, with 1,477 directly related to hotel operations. We also had 110 employees in other operating segments, primarily within our entertainment segment, and 35 employees in our corporate office. Our total number of employees fluctuates seasonally, and we employ many part-time employees.

At December 31, 2014, approximately 11.0% of our total workforce was covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and organized settlement of labor disputes. We believe our employee relations are satisfactory.

Available Information

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

The SEC also maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

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

6



Item 1A.
Risk Factors

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

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

Our revenues and operating results may be impacted by and fluctuate due to a number of factors, including the following:

Changes in demand for transient rooms and related lodging services, including reductions in business and federal, state and local government travel that may result due to budgetary constraints, increase in the use of video conferencing services, or general economic conditions;
Extended periods of low occupancy demand, which may negatively impact our ability to increase rates;
Changes in travel patterns, extreme weather conditions and cancellation of or changes in events scheduled to occur in our markets;
The attractiveness of our hotels to consumers and competition from other hotels and lodging alternatives such as Airbnb;
The significant investment in hotel maintenance and renovation needed due to the last six to seven years of reduced capital expenditure levels;
The need to periodically repair and renovate the hotels in our hotel network, including the ongoing need to refresh hotels to meet current industry standards and guest expectations;
Insufficient available capital to us or our franchise hotel owners to fund renovations and investments needed to maintain our competitive position;
The quality and performance of the employees of the hotels in our network;
Transportation and fuel costs, the financial condition of the airline industry and the resulting impacts on travel, including possible cancellation or reduction of scheduled flights into our markets and reductions in our business with airlines crews, which regularly stay at our hotels in many markets;
Increases in operating costs due to inflation and other factors such as minimum wage requirements, overtime, healthcare, working conditions, work permit requirements and other labor-related costs, energy prices, insurance and property taxes, as well as increases in construction or associated renovation costs;
Existing and potential new regulations relating to the preparation and sale of food and beverages, liquor service and health and safety of premises;
Impact of war, actual or threatened terrorist attacks, heightened security measures and other national, regional or international political and geopolitical conditions;
Travelers' fears of exposure to contagious diseases or foodborne illness;
The impact of internet intermediaries and competitor pricing;
New supply or oversupply of hotel rooms in markets in which we operate;
Restrictive changes in zoning and similar land use laws and regulations, or in health, safety and environmental laws, rules and regulations;
Recently enacted, pending and possible future requirements to make substantial modifications to our hotels to comply with the Americans with Disabilities Act of 1990 or other governmental or regulatory requirements;
The financial condition of third-party property owners and franchisees, which may impact their ability to fund renovations and meet their financial obligations to us as required under management and franchise agreements;
Changes in guest expectations with respect to amenities at network hotels that require additional capital to meet; and
Improvements in technology that require capital investment by us or our franchise hotel owners in infrastructure to implement and maintain.

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

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

The lodging industry is comprised of numerous national, regional and local hotel companies and is highly competitive. Competition for occupancy is focused on three major categories of travelers: business travelers, convention and group business

7


travelers and leisure travelers. All three categories are significant occupancy drivers for our hotel system and our marketing efforts are geared towards attracting their business.

Competition in the industry is primarily based on service quality, range of services, brand name recognition, convenience of location, room rates, guest amenities and quality of accommodations. We compete against national limited and full-service hotel brands and companies, as well as various regional and local hotels in the midscale and upscale full-service hotel segments of the industry. Many of our competitors have greater name recognition, a larger network of locations and greater marketing and financial resources than we do. Competitors may offer significantly lower rates, greater convenience, services or amenities or superior facilities, which could attract customers away from our hotels. New hotels are being built in a number of the markets where we operate, which could adversely affect our business. In order to remain competitive and to attract and retain customers, we and our franchise owners must be able to differentiate and enhance the quality, value and efficiency of our product and customer service, and we must make additional capital investment to modernize and update our hotels.

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

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

The market price for our common stock may be volatile.

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

Changes in general economic conditions, such as the 2007-2009 recession, and subsequent fluctuations in stock market prices and volumes;
Changes in financial estimates, expectations of future financial performance or recommendations by analysts;
Changes in market valuations of companies in the hospitality industry;
Actual or anticipated variations in our quarterly results of operations;
Issuances of additional common stock or other securities;
Announcements by our shareholders disclosing acquisitions or sales of our common stock or expressing their views with respect to actions they believe should be taken by our company; and
Announcements by us or our competitors of, or speculation with respect to, acquisitions, investments or strategic alliances.

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

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

8



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

Of the 55 hotels in our system at December 31, 2014, 35 are located in Oregon, Washington, Idaho and Montana. Accordingly, our results of operations and financial condition may be impacted by the economy of the Pacific Northwest, which is dependent in large part on a limited number of major industries, including agriculture, tourism, technology, timber and aerospace. These industries may be affected by:

The rate of national and local unemployment;
The relative strength of national and local economies; and
Changes in governmental regulations.

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

We may be unsuccessful in identifying and completing acquisitions of new franchised and managed hotels and expanding our brands, which could limit our ability to implement our growth strategy and result in significant expense.

We are continuing to pursue the expansion of our franchise operations in markets where we currently operate and in selected new markets. We are also pursuing expansion of our Red Lion Brands into targeted segments. Both owned and franchised hotels will be able to carry the Hotel RL, Red Lion Hotel or Red Lion Inns & Suites brand. We may consider adding additional brand options in the future.

As of December 31, 2014, we did not manage any hotels in our system that we did not own or lease. However, subsequent to December 31, 2014, we completed a joint venture transaction and a separate sale of our Bellevue property, both of which include management contracts. Additionally, in the past we have managed many hotels that were owned by third parties and operated under the Red Lion brand. Going forward we plan going forward to seek to increase the number of hotels that we manage for third parties in order to expand our hotel network. Management of non-owned hotels also allows us to take advantage of economies of scale with our infrastructure.

The growth of our franchise business and the management of non-owned hotels will both require considerable management time, as well as expenses for market development before any significant revenues and earnings are generated. There can be no assurance that we will be successful in achieving our objectives with respect to growing the number of franchised and managed hotels in our system or that we will be able to attract qualified franchisees or hotel owners wanting to delegate responsibility for hotel management.

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

Competition with other hotel companies, many of which have more franchised and managed hotels in their systems and more resources to assist owners of new franchised and managed hotels with capital expenditures needed to satisfy brand standards;
Our ability to attract and retain qualified franchisees and hotel owners who want us to operate their hotels under one or more of our brands;
The recognition in the market and the reputation of the Red Lion Brands;
Access to financial resources necessary to open or rebrand hotels;
The ability of the owners of franchised and managed hotels to open and operate additional hotels profitably. Factors affecting the opening of new hotels, or the conversion of existing hotels to Red Lion Brands, include among others:
The availability of hotel management, staff and other personnel;
The cost and availability of suitable hotel locations;
The availability and cost of capital to allow hotel owners and developers to fund investments;

9


Cost effective and timely construction of hotels (which can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions); and
Securing required governmental permits;
Our ability to continue to maintain and enhance our central reservation system to support additional franchised and managed hotels in a timely, cost-effective manner; and
The effectiveness and efficiency of our development organization.

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

Joint venture and other acquisition arrangements may not prove successful and could result in operating difficulties and failure to realize anticipated benefits.

In January 2015, we transferred 12 of our owned hotels to a joint venture in which we now hold a 55% interest. We may in the future acquire interests in other properties through joint venture arrangements with other entities. In addition, we may enter into other non-property investment joint ventures through other divisions such as our entertainment division or for marketing or other services. Partnerships, joint ventures and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business and create additional risks. Some of these acquisitions may be financed in whole or in part by loans under which we are jointly and severally liable for the entire loan amount along with the other joint venture partners. The terms of these joint venture arrangements may be more favorable to the other party or parties than to us. Although we will actively seek to minimize such risks before investing in partnerships, joint ventures or similar structures, investing in a property through such arrangements may subject that investment to risks not present with a wholly owned property, including, among others, the following:

The other owner(s) of the investment might become bankrupt;
The other owner(s) may have economic or business interests or goals that are inconsistent with ours;
The other owner(s) may be unable to make required payments or meet guarantor obligations on loans under which we are jointly and severally liable;
The other owner(s) may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, such as selling the property at a time when to do so would have adverse consequences to us;
Actions by the other owner(s) might subject the property to liabilities in excess of those otherwise contemplated by us; and
It may be difficult for us to sell our interest in the property at the time we deem a sale to be in our best interests.

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

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

If our franchise or management contracts terminate or fail to renew, if new franchisees are unable to effectively integrate their hotels into our system, or if franchisees or owners are unprofitable or go out of business, our franchise or management fee revenue will decline.

As of December 31, 2014, there were 36 hotels in our system that were owned by others and operated under franchise agreements. Franchise agreements generally specify a fixed term and contain an early termination provision for the franchisee to terminate at specific intervals or for specific reasons with or without penalty by providing notice to us. There is no assurance that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms.

Subsequent to December 31, 2014, we entered into management contracts for each of the 12 hotels in our joint venture portfolio as well as our previously owned hotel in Bellevue, WA. These agreements generally specify a fixed term as well as management responsibilities defined by certain terms and conditions. Our failure to meet the obligations within these agreements

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could trigger early termination. Additionally, there is no assurance that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms for other reasons.

If owners of hotels that we manage or franchise cannot repay or refinance mortgage loans secured by their properties, our revenues and profits could decrease and our business could be harmed.

The owners of many of our managed and franchised properties have pledged their hotels as collateral for mortgage loans that they entered into when those properties were purchased or refinanced. If those owners cannot repay or refinance maturing indebtedness on favorable terms or at all, the lenders could declare a default, accelerate the related debt, and repossess the property. Such sales or repossessions could, in some cases, result in the termination of our management or franchise agreements and eliminate our anticipated income and cash flows, which could negatively affect our results of operations.

Failure of the joint venture owners to comply with debt covenants could adversely affect our financial results or condition.

In January 2015, we transferred 12 of our owned hotels to RL Venture LLC (“RL Venture”), a joint venture in which we hold a 55% equity interest. We continue to manage these hotels under a management agreement that has an initial five-year term with three five-year extensions. In connection with that transaction, the joint venture borrowed $53.8 million, which is secured by the 12 hotels. The credit agreement for this loan contains customary affirmative and negative covenants. There is no assurance that the joint venture will be able to comply with these covenants in the future. Any failure to do so could result in a demand for immediate repayment of the loan, which could result in one or more of these hotels being foreclosed upon and otherwise adversely affect our results of operation and financial condition, and limit our ability to obtain financing. For additional information, see Note 18 of Notes to Consolidated Financial Statements.

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

Many businesses, including RLHC, have been adversely affected by the state of the economy. Discretionary travel has decreased because of economic pressures, and this in turn has hurt the hospitality industry and our company. Over the last several years, high unemployment, lower family income, low corporate earnings, lower business investments and lower consumer and government spending all have reduced the demand for hotel rooms and related lodging services and put pressure on industry room rates and occupancy. Although the economy appears to be gradually improving, we still expect the operations of hotels in our network and financial results in 2015 will continue to be negatively impacted by general economic conditions, and weak hospitality occupancy and rates. These factors could also negatively impact our ability to obtain future financing and our liquidity in general. While we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital and debt service for the foreseeable future, if our cash flow or capital resources prove inadequate or we do not meet our financial debt covenants, we could potentially face liquidity problems that could have a material adverse effect on our results of operations and financial condition.

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

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

Changes in national, regional and local economic conditions;
Changes in local real estate market conditions;
Increases in interest rates and other changes in the availability, cost and terms of financing and capital leases;
Increases in property and other taxes;
The impact of present or future environmental legislation;
Adverse changes in other governmental regulations, insurance and zoning laws; and
Condemnation or taking of properties by governments or related entities.

These adverse conditions could potentially cause the terms of our borrowings to change unfavorably. 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.

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

The expenses of owning and operating a hotel are not necessarily reduced when circumstances such as market factors and competition cause a reduction in its revenues. Accordingly, a decrease in our revenues could result in a disproportionately higher

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decrease in our earnings because our expenses are unlikely to decrease proportionately. In addition, we have recently been investing in sales and marketing, technology, franchising and personnel resources in an effort to position our company for future growth. These investments may not produce the returns we anticipate or the returns may take longer to achieve than expected.

We reported net losses from continuing operations from 2008 through 2013 and, although we had a net profit in 2014, there is no assurance that we will remain profitable in the future.

During the years 2008 through 2013, we reported net losses from continuing operations. Not only did these losses have a direct adverse effect on our financial condition, they also increased our costs of borrowing. Although we had a net profit in 2014, the long prior history of net losses could impair our ability to raise capital needed for hotel maintenance and other corporate purposes. There is no assurance that we will be able to continue to achieve profitability in the future.

Our business requires capital for ongoing hotel maintenance, modernization and renovation, as well as for any acquisitions or development projects we may want to undertake. If needed capital is not available, our ability to successfully compete with hotels in our scale category may be adversely impacted.

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 also focused on working with our franchise hotel owners so that they maintain their properties to the same standards. This requires ongoing access to capital for both us and our franchisees for replacement of outdated furnishings as well as for facility repair, modernization and renovation. To the extent we or our franchisees cannot fund these expenditures from cash generated from operations, funds must be borrowed or otherwise obtained. If these funds cannot be obtained, the expenditures have to be deferred to a later period.

Over the last six to seven years, our levels of capital expenditures for these purposes have been lower than normal due to the general economic conditions impacting our industry. As a result, in order to support the room rates that we have historically charged, we believe it will be necessary over the next few years to invest in renovations at higher levels than in recent years. If we are unable to make these investments, we may be required to reduce rates, or suffer lower occupancy, which could cause our hotels to be classified in a lower scale category and have a material adverse effect on the Red Lion Brand and our business in general. There are likely to be similar adverse effects if our franchisees are unable to make comparable investments in their properties.

Hotel maintenance, hotel acquisitions and new project development are subject to a number of risks, including:

Availability of capital;
Construction delays and cost overruns;
Unavailability of rooms or meeting space for revenue generating activities during modernization and renovation projects;
Numerous federal, state and local government regulations affecting the lodging industry, including building and zoning requirements and other required governmental permits and authorizations;
Uncertainties as to market demand or a loss of market demand after capital improvements have begun; and
Potential environmental problems.

Whether capital for new investments and maintenance of existing hotels will be available to us and our franchisees depends on a number of factors, including profitability, degree of leverage, the value of assets, borrowing restrictions that may be imposed by lenders and conditions in the capital markets. The condition of the capital markets and liquidity factors are outside our control, so there is no assurance that we or our franchisees will be able to obtain financing as needed.

If we raise capital through issuance of additional common stock, preferred stock or convertible debt, current shareholders may experience significant dilution. Moreover, there is no assurance that we could raise money through equity issuances.

If additional capital is obtained through financing, our leverage may increase. If our leverage increases, the resulting debt service 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.

Any unanticipated delays or expenses incurred in connection with hotel maintenance and renovation, hotel acquisitions and new project development could impact expected revenues and availability of funds, negatively affect our reputation among hotel customers, owners and franchisees and otherwise adversely impact our results of operations and financial condition, including the carrying costs of our assets.


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We may incur indebtedness in connection with capital expenditures, other corporate purposes or growth of our system of hotels.

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 hotel renovations, repairs and replacements, for general corporate purposes or for hotel acquisitions. If our leverage increases, the resulting debt service 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.

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

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

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

Our central reservation system includes a third-party operated call center that enables guests to make reservations on a 24/7 basis. Poor performance by the third party provider, disputes with the third party provider, increased costs of the call center or our inability to renew or extend our agreement with the third party on favorable terms could adversely impact the hotel operations and our expenses as well as those of our franchised and managed hotels.

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

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

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

Our operations require us to collect and retain large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our customers, which are entered into, processed by, summarized by and reported by our various information systems and those of our service providers. We also maintain personally identifiable information about our employees. Our franchise hotel owners also maintain similar personally identifiable information, on systems that we do not control. The security of this data may potentially be breached due to a number of risks, including cyber-attack, system failure, computer virus, or unauthorized or fraudulent use by customers, company employees, franchisees or employees of third party vendors. A theft, loss or fraudulent use of customer, employee or company data by us or our franchise hotel owners could adversely impact our reputation and could result in significant remedial and other costs, fines and litigation.

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

We collect and maintain information relating to our guests for various business purposes, including credit card information and information on guest preferences that we use to enhance customer service and for marketing and promotional purposes. The collection and use of personal data are governed by privacy laws and regulations enacted in the U.S., as well as by various

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contracts under which we operate. Privacy regulation is an evolving area in which different jurisdictions may have inconsistent compliance requirements. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services. In addition, noncompliance with applicable privacy regulations, either by us or in some circumstances by third parties engaged by us or our franchise hotel owners, could result in fines or restrictions on our use or transfer of data.

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

The success of our business depends in part upon our continued ability to use our trademarks, increase brand awareness and further develop our brands. We have registered with the U.S. Patent and Trademark Office various formulations of certain trademarks, including the following: Red Lion, Hotel RL, Leo Hotel Collection, WestCoast, Cavanaughs, Stay Comfortable, TicketsWest and Cascadia Soapery. We have also registered various formulations of the Red Lion trademark in Canada, Mexico, Australia, the European Union and a number of countries in Asia. We cannot be assured that the measures we have taken to protect our trademarks will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brands and their market acceptance, competitive advantages or goodwill, which could adversely affect our business.

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

Financial and credit market volatility directly impacts fair value measurement through our company's estimated weighted average cost of capital used to determine discount rate, and through our common stock price that is used to determine market capitalization. During times of volatility, significant judgment must be applied to determine whether credit or stock price changes are a short-term swing or a longer-term trend.

At the end of 2014 and 2013, our recorded goodwill amount was $8.5 million at the end of each year, and other intangible assets totaled $7.0 million at the end of each year. Market conditions in the future could adversely impact the fair value of one or more of our hotel, franchise and entertainment reporting units, which could result in future impairments of their goodwill, intangibles and other long-lived assets.

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

Estimated future cash flows from the respective properties or business units, which are dependent upon internal forecasts;
Estimation of the long-term rate of growth for our business;
The useful life over which our cash flows will occur;
The determination of real estate and prevailing market values;
Asset appraisals; and
Current estimated net sales proceeds from pending offers or net sales proceeds from previous, comparable transactions, if available and appropriate.

In accordance with the guidance for the impairment of long-lived assets, if the expected undiscounted future cash flows are less than net book value, the excess of net book value over estimated fair value of the assets is charged to current earnings. As discussed further in Note 4 of Notes to Consolidated Financial Statements, during the year ended December 31, 2013, assets, including assets that were held for sale were written down to their estimated fair value, resulting in pre-tax impairment charges of $7.8 million. During the year ended December 31, 2012, assets that were held for sale were written down to their estimated fair value, resulting in pre-tax impairment charges of $9.4 million. There were no impairment charges in 2014. Changes in our estimates and assumptions as they relate to valuation of goodwill, intangibles and other long-lived assets could affect, potentially materially, our financial condition or results of operations in the future.

Our new programs and new brands may not be successful.

We cannot assure you that our recently announced programs and brands, such as RevPak and Hotel RL, or any other new programs or brands we may launch in the future will be accepted by hotel owners, potential franchisees, or the traveling public or other customers. We also cannot be certain that we will recover the costs we incurred in developing or acquiring the brands or any new programs or brands, or that the brands or any new programs will be successful.

Certain of our shareholders, including our largest shareholder which currently owns more than 28% of our stock, and recently separately invested in our joint venture partner entity, have in the past encouraged us to sell our company. These or other shareholders may seek to impact our corporate policy and strategy, and their interests may differ from those of

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other shareholders. In addition, given the amount of stock held by our largest shareholder, we would likely need its approval in order to undertake any sale or other disposition of all or substantially all of our assets. If any of our larger shareholders or any group of shareholders decided to sell their shares, this would likely result in a significant decline in the trading price of our common stock.

As of January 21, 2015, Columbia Pacific Opportunity Fund, L.P. ("Columbia Pacific") held approximately 28% of our outstanding shares of common stock. In addition, in January 2015, Columbia Pacific Real Estate Fund II, L.P., an affiliate of Columbia Pacific, invested in the entity that we partnered with to complete our joint venture transaction. In June of 2008, Columbia Pacific filed a Schedule 13D with the SEC disclosing that it had communicated to us that it believed we would be better able to maximize shareholder value through a liquidation or sale. It has subsequently filed numerous amendments to the Schedule 13D disclosing additional communications with our company. An amendment filed by Columbia Pacific on February 28, 2012 included a copy of a letter to our board of directors encouraging us to sell our company in its entirety or in parts. A number of other significant shareholders have also expressed to us similar sentiments.

In March 2012, we retained BofA Merrill Lynch to advise us in connection with our exploration of strategic alternatives, including, among others, a potential sale of the company or a strategic combination with a third party. Our board of directors formed a Strategic Alternatives Committee to oversee the process. Over the ensuing months, our advisors contacted more than 75 potentially interested strategic industry and financial partners, including those that had expressed interest directly to us or were referred to us by shareholders. We received a limited number of non-binding indications of interest, but did not ultimately receive any offers. After taking into account the recommendation of the Strategic Alternatives Committee, our board of directors suspended the formal strategic alternatives process in September 2012.

Columbia Pacific or one or more other shareholders may take actions designed to impact our corporate policy and strategy, and their interests may differ from those of other shareholders. Such actions could include, among other things, attempting to obtain control of our board of directors or initiating or substantially assisting an unsolicited takeover attempt.

Under our Articles of Incorporation and the laws of the state where we are incorporated, we can undertake a merger or sale of all or substantially all of our assets only if the transaction is approved by holders of at least two-thirds of our outstanding shares of common stock. This in turn means that any person or group of persons holding at least one-third of our outstanding shares of common stock would be able to block any such transaction if they chose to do so. Because Columbia Pacific already holds so close to one-third of our shares, we believe that as a practical matter it will be able, either acting alone or with other shareholders, to prevent any such transaction believed not to be in its or their best interests.

This state of affairs adds a level of uncertainty to our business and operations, including in employee hiring and retention, in franchise acquisitions, and in generally developing corporate policy and strategy. In addition, because our common stock is relatively thinly traded, if Columbia Pacific or any other significant shareholders decided to sell their holdings of our common stock, this would likely result in a significant decline in its trading price. Our stock price may also fluctuate materially based on announcements by our shareholders disclosing acquisitions or sales of our common stock or expressing their views with respect to actions they believe should be taken by our company.

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

In 2014 we hired new chief executive, chief financial and chief marketing officers. We may in the future hire additional officers and key employees. To be properly integrated into our company, new executives and employees must spend a significant amount of time learning our business model and management system, in addition to performing their regular duties. As a result, the integration of new personnel may result in some disruption to our ongoing operations. If we fail to successfully complete this integration, our business and financial results may suffer.

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

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


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

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

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

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

Our entertainment division, which comprised 11.8% of our revenues from continuing operations in 2014, engages in event ticketing and the presentation of various entertainment productions. Our entertainment division is vulnerable to risks associated with general regional and economic conditions, significant competition and changing consumer trends, among others. The overall economy in the markets we serve has impacted the ticketing division through lower demand for concerts, events and sporting activities. Also, we face the risk that entertainment productions will not tour the regions in which we operate or that the productions will not choose us as a presenter or promoter.

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

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

Government regulation could impact our franchise business.

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

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

Real estate investments are relatively illiquid, and therefore we and RL Venture have a limited ability to promptly sell one or more hotels in response to changing economic, financial or investment conditions is limited. The real estate market, including the market for hotels, is affected by general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. In addition, it may be difficult or impossible to convert hotels to alternative uses if they become unprofitable due to competition, age of improvements, decreased demand or other factors. The conversion of a hotel to an alternative use would also generally require substantial capital expenditures. This inability to respond promptly to changes in the performance of our hotels could adversely affect our financial condition and results of operations as well as our ability to service debt, including our debentures. In addition, sales of appreciated real property could generate material adverse tax consequences, which may make it disadvantageous for us to sell certain of our hotels.

We are subject to various obligations and restrictions under the leases governing our leased properties. In addition, we may not be able to renew these leases on favorable terms or at all.


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Five of our hotels and our corporate offices are subject to leases. In addition to the requirement to pay rent, the leases for these properties generally impose various maintenance and other obligations on us and may also require us to obtain the consent of the landlord before taking certain actions such as modifications to the properties. These lease provisions may limit our flexibility with the leased properties, delay modifications or other actions we may wish to take, or result in disputes with the landlords. In addition, the terms of the leases for three of our leased properties will expire in the period from 2018 to 2024. The lease on our corporate office space expires in 2017. There is no assurance that the landlords will be willing to extend these leases and, even if they are willing to extend, it is possible that the lease costs will increase, which would adversely impact the hotel operations and our expenses.

Our hotels may be faced with labor disputes that could harm the operation of our hotels.

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

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

Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, particularly in locations where our properties are located. Our properties are generally covered by comprehensive liability, public area liability, fire, boiler and machinery, extended coverage and rental loss insurance. However, certain types of catastrophic losses, such as those from earthquake, volcanic activity, flood, terrorism and environmental hazards, may exceed or not be covered by the insurance. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. Similarly, threatened or actual terrorist activity, war, epidemics, travel-related accidents, geopolitical uncertainty, international conflict and similar events that impact domestic and international travel have caused in the past, and may cause in the future, our results to differ materially from anticipated results. In addition, depending on the severity, a major incident or crisis may prevent operational continuity at hotels in our network and consequently impact the value of our brand or the reputation of our business.

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

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

Earthquakes, fires, floods and other natural disasters;
Power losses, computer system failures, internet and telecommunications or data network failures, operator negligence, improper operation by or supervision of employees, physical and electronic losses of data and similar events; and
Computer viruses, penetration by individuals seeking to disrupt operations or misappropriate information, and other breaches of security.

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

We are subject to environmental regulations.

Our results of operations may be affected by the cost of complying with existing and future environmental laws, ordinances and regulations. Under 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 the property. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate a contaminated property properly, may prevent the owner from selling a property or using it as collateral for a loan. Environmental laws may also restrict the use or transfer of a property as well as the operation of businesses at the property, and they may also 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.


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When we acquire a hotel, a Phase I environmental site assessment (“ESA”) is usually conducted by a qualified independent environmental engineer. A Phase I ESA involves an on-site inspection and research of historical usages of a property, databases of underground storage tanks and other matters to determine whether an environmental issue with respect to the property needs to be addressed. If the results of a Phase I ESA reveal potential issues warranting further investigation, a Phase II ESA, which may include soil testing, ground water monitoring or borings to locate underground storage tanks, will be recommended. It is possible that Phase I and Phase II ESAs will not reveal all environmental liabilities or compliance concerns or that there will be material environmental liabilities or compliance concerns that we do not discover. Phase I ESAs have been performed on all properties owned and leased by us.

In March 2009, odors in the basement of our hotel property in Salt Lake City led to the detection of a release of petroleum from an adjacent gas station owned by Sinclair Marketing. Petroleum and petroleum constituents were identified in soil and groundwater on both properties. Under the oversight of the Utah Department of Environmental Quality (“DEQ”), Sinclair took steps to remediate the properties by excavating contaminated soils and by pumping and treating contaminated groundwater. Sinclair reimbursed us for our costs, including attorneys' fees, related to its remediation efforts. On February 9, 2012, the DEQ sent Sinclair a "No Further Action" (“NFA”) letter stating that, although petroleum-contaminated soil and groundwater remained from the release, it was not considered a threat to human health and the environment, and therefore, no further remedial action was required. However, the letter also noted that, if future changes to these characteristics created a threat to human health or the environment, additional corrective action might be required. If future remediation is ever required and Sinclair does not perform it, we as the owner of the property could be held responsible.

In connection with our debt refinancings in 2011 and 2013 and the pledging of hotel properties as collateral for our credit facility, Phase I ESAs were performed on the pledged properties. Based on the results, Phase II ESAs were performed on four of our hotel properties located in Richland, Pasco, Port Angeles and Yakima, Washington. In addition, water sample tests were performed at our Redding, California hotel property. Based on the results of these assessments and tests, it was necessary to take further actions with respect to our properties in Pasco and Port Angeles, Washington.

The Phase II ESA performed at the Pasco property included a number of subsurface soil samples taken in areas identified in the Phase I ESA as having a potential for environment contamination due to prior activities on the site. In one of these samples - taken near a former gasoline station area - gasoline and diesel-range petroleum hydrocarbons were detected at concentrations greater than applicable cleanup levels. Based on the results of this testing, further assessment was conducted.

In August of 2013, a focused Phase II ESA was completed at the Pasco property. The results of soil sampling of additional borings did not identify any additional areas of contaminated soil. However, results of this assessment did indicate weathered petroleum hydrocarbon contaminants in soil at concentrations greater than applicable cleanup levels near the former gasoline station area. Based on the tests performed, the contamination appears to be confined to that area, limited to the soil, and therefore unlikely to affect groundwater quality.

We have reported the subsurface information for the Pasco property to the Washington State Department of Ecology (“DOE”) under its Voluntary Clean-up Program (“VCP”). The contamination does not appear to be an immediate threat to human health or the environment, and the groundwater does not appear to be threatened. In addition, the soil is capped with asphalt, which limits the exposure to humans or biota from petroleum vapors and reduces the risk of direct contact with contaminated soil. Therefore, we have requested a NFA designation from the DOE. Further, subsequent evaluation of the test results revealed a “false positive” indicating there was no indication of weathered petroleum hydrocarbon contaminants in soil. Based on this finding, we expect to receive a final NFA designation for the DOE in 2015.

A Phase II ESA conducted at the Port Angeles hotel property revealed that fill material from an unknown source was placed at the property prior to construction of the existing buildings. Diesel and lube oil-range petroleum hydrocarbons and benzene were detected in one sample collected.

If the fill material was from a contaminated site, it could be a potential source of subsurface contamination, so additional testing was conducted at the Port Angeles site in August 2013. These tests identified weathered petroleum hydrocarbons, benzene, and benzo(a)pyrene contaminants at concentrations greater than applicable cleanup levels near a former auto repair area that were likely related to impacted fill material identified in the area. The contamination exceeds clean-up standards but does not appear to be a threat to human health or the environment. Groundwater appears to be contaminated, but groundwater in this area is likely influenced by tides and is not currently utilized as drinking water. The contaminated soil is capped with asphalt or structures, so that exposure to petroleum vapors or direct contact with contaminated soil is limited.

We have reported the contamination identified at the Port Angeles property to the DOE under the VCP. We have requested a NFA designation from the DOE. We plan to continue to monitor the affected area and ensure that the asphalt cap is maintained.

18


On January 21, 2015 the DOE denied our request for a NFA designation, until further analysis is performed. Depending on the results of further analysis we may have some requirement to perform clean-up of the affected area.

Other than as disclosed above, we have not been notified by any governmental authority and we have no other knowledge of any material noncompliance, material liability or material claim relating to hazardous or toxic substances or other environmental substances in connection with any of our properties. Nevertheless, there is no assurance that these properties do not have any environmental concerns associated with them. In addition, there is no assurance that we will not discover problems we are unaware of that currently exist, that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our existing and future properties will not be affected by the condition of neighboring properties, such as the presence of leaking underground storage tanks, or by third parties unrelated to us.

We face risks relating to litigation.

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

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

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

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

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



19


Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

Under the Red Lion Brands as of December 31, 2014, we owned 14 hotels, leased five, and had franchise arrangements with 36 hotels owned and operated by third parties. To support our owned, leased and franchised hotels, we provide all the services typical in our industry: marketing, sales, advertising, frequency program, revenue management, procurement, quality assurance, education and training, design and construction management. We maintain a central reservation call center with links to various travel agent global distribution systems and electronic distribution channels on the internet, including our branded website. The table below reflects our hotel properties and locations, total available rooms per hotel, as well as meeting space availability, as of December 31, 2014.

 
  
 
  
Total
 
Meeting
 
 
 
 
Available
 
Space
Property
 
Location
 
Rooms
 
(sq. ft.)
Company operated properties
 
 
 
 
 
 
Red Lion Hotel Eureka(1)
  
Eureka, California
  
175

  
4,890

Red Lion Hotel Redding(1)
  
Redding, California
  
192

  
6,800

Red Lion Hotel Boise Downtowner(1)
  
Boise, Idaho
  
182

  
8,600

Red Lion Templin’s Hotel on the River(1)
  
Post Falls, Idaho
  
163

  
11,000

Red Lion Hotel Bend (1)
  
Bend, Oregon
  
75

  
2,000

Red Lion Hotel Coos Bay(1)
  
Coos Bay, Oregon
  
144

  
5,000

Red Lion Hotel Salt Lake Downtown(1)
  
Salt Lake City, Utah
  
393

  
12,000

Red Lion Hotel Olympia(1)
  
Olympia, Washington
  
192

  
16,500

Red Lion Hotel Pasco(1)
  
Pasco, Washington
  
279

  
17,240

Red Lion Hotel Port Angeles(1)
  
Port Angeles, Washington
  
186

  
3,010

Red Lion Hotel Richland Hanford House(1)
  
Richland, Washington
  
149

  
9,247

Red Lion Bellevue(2)
  
Bellevue, Washington
  
181

  
5,700

Red Lion Hotel at the Park(1)
  
Spokane, Washington
  
400

  
30,000

Red Lion Hotel Wenatchee(2)
  
Wenatchee, Washington
  
149

  
7,678

Red Lion Anaheim
  
Anaheim, California
  
308

  
5,000

Red Lion Hotel Kalispell
  
Kalispell, Montana
  
170

  
10,500

Red Lion River Inn
  
Spokane, Washington
  
245

  
2,800

Red Lion Hotel Seattle Airport
  
Seattle, Washington
  
144

  
4,500

Red Lion Hotel Vancouver (at the Quay)
  
Vancouver, Washington
  
160

  
14,785

Company operated properties (19 properties)
 
 
 
3,887

  
177,250


20




 
  
 
  
Total
 
Meeting
 
 
 
 
Available
 
Space
Property
 
Location
 
Rooms
 
(sq. ft.)
Franchised properties
 
 
 
 
 
 
Red Lion Inn & Suites Victoria
  
Victoria, BC Canada
  
85

  
450

Red Lion Inn & Suites Phoenix/Tempe - ASU
 
Tempe, Arizona
 
118

 
1,300

Red Lion Inn & Suites Tucson
 
Tucson, Arizona
 
155

 
1,600

Red Lion Inn & Suites Cathedral City
 
Cathedral City, California
 
97

 
750

Red Lion Hotel Oakland International Airport
  
Oakland, California
  
189

  
4,400

Red Lion Hotel Woodlake Conference Center Sacramento
 
Sacramento, California
 
306

 
60,000

Red Lion Hotel Ontario Airport
 
Ontario, California
 
107

 
687

Red Lion Inn & Suites Perris
 
Perris, California
 
105

 

Red Lion Inn & Suites Denver Airport
 
Denver, Colorado
 
87

 

Red Lion Inn & Suites Fort Collins
 
Fort Collins, Colorado
 
63

 

Red Lion Hotel Lewiston
  
Lewiston, Idaho
  
183

  
12,259

Red Lion Hotel Pocatello(3)
  
Pocatello, Idaho
  
150

  
13,000

Red Lion Hotel Canyon Springs
  
Twin Falls, Idaho
  
112

  
5,085

Red Lion Inn & Suites Detroit
 
Detroit, Michigan
 
77

 

Red Lion Colonial Hotel
  
Helena, Montana
  
149

  
15,500

Red Lion Inn Missoula
  
Missoula, Montana
  
76

  
640

Red Lion Hotel Farmington
  
Farmington, New Mexico
  
192

  
10,000

Red Lion Hotel Gallup
  
Gallup, New Mexico
  
126

  
9,000

Red Lion Hotel Grants
  
Grants, New Mexico
  
126

  
9,000

Red Lion Hotel & Casino Elko
  
Elko, Nevada
  
222

  
3,000

Red Lion Inn & Suites McMinnville
  
McMinnville, Oregon
  
67

  
1,312

Red Lion Hotel Portland Airport
  
Portland, Oregon
  
136

  
3,000

Red Lion Hotel Salem
  
Salem, Oregon
  
148

  
10,000

Red Lion Hotel on the River — Jantzen Beach
  
Portland, Oregon
  
318

  
35,000

Red Lion Hotel Pendleton
  
Pendleton, Oregon
  
170

  
9,769

Red Lion Hotel Tacoma
  
Tacoma, Washington
  
119

  
750

Red Lion Hotel Renton
 
Renton, Washington
 
224

 
7,000

Red Lion Inn & Suites Federal Way
 
Federal Way, Washington
 
90

 
300

Red Lion Hotel & Conference Center Kelso/Longview(3)
  
Kelso, Washington
  
161

  
8,670

Red Lion Hotel Columbia Center(3)
  
Kennewick, Washington
  
162

  
9,700

Red Lion Inn & Suites Kennewick
 
Kennewick, Washington
 
61

 
300

Red Lion Inn & Suites Kent
 
Kent, Washington
 
60

 
600

Red Lion Inn & Suites Walla Walla
 
Walla Walla, Washington
 
80

 

Red Lion Hotel Yakima Center(3)
  
Yakima, Washington
  
156

  
11,000

Las Vegas Hotel and Casino - LVH(4)
 
Las Vegas, Nevada
 
2,956

 
220,000

The Riverside Hotel - Boise(4)
 
Boise, Idaho
 
300

 
21,000

Franchised properties (36 properties)
  
 
  
7,933

  
485,072

Total — All properties (55 properties)
  
 
  
11,820

  
662,322

__________ 
(1) In January 2015 we transferred these hotels to RL Venture LLC and then sold an unrelated third party a 45 percent member interest in that entity.
(2) At December 31, 2014 these hotels were listed for sale and classified as assets held for sale. We sold both hotels in early 2015 and entered into a franchise or management agreement with each purchaser.
(3) These properties were previously owned by our company, but we sold them in 2014 and entered into a franchise agreement with each purchaser.

21


(4) These properties are part of the Leo Hotel Collection.

Company Operated Properties

Company operated properties are those properties which we operate and manage through ownership, lease, or management contract. We currently recognize revenues and expenses on these properties where appropriate.

Franchised Hotels

Under our franchise agreements, we receive royalties for the use of the Red Lion Brands. We also make available certain services to those hotels including reservation systems, advertising and national sales, our guest loyalty program, revenue management tools, quality inspections and brand standards, as well as administer central services programs for the benefit of all the hotels in our network.
Discontinued Operations
 
Discontinued operations includes the following: a commercial mall in Kalispell, Montana that was sold in first quarter 2013; a catering contract in Yakima, Washington that was terminated in first quarter 2013; a hotel in Medford, Oregon that was sold in third quarter 2013; and a hotel in Eugene, Oregon that ceased operations in first quarter 2014.

The discontinued operations presentation, as required under generally accepted accounting principles ("GAAP"), separately reports the revenue and expenses including any related asset impairment charges, net of income taxes as "Income (loss) from discontinued operations" on the company's consolidated statements of comprehensive income (loss) for all periods presented.

For additional information, see Note 6 of Notes to Consolidated Financial Statements.

Item 3.
Legal Proceedings

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

Item 4.
Mine Safety Disclosures

Not applicable.

PART II

Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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

 
High
 
Low
2014
 
 
 
     Fourth Quarter (ended December 31, 2014)
$
6.38

 
$
5.26

     Third Quarter (ended September 30, 2014)
$
5.89

 
$
5.27

     Second Quarter (ended June 30, 2014)
$
6.07

 
$
5.46

     First Quarter (ended March 31, 2014)
$
6.18

 
$
5.50

2013
 
 
 
     Fourth Quarter (ended December 31, 2013)
$
6.22

 
$
5.10

     Third Quarter (ended September 30, 2013)
$
6.73

 
$
5.22

     Second Quarter (ended June 30, 2013)
$
7.15

 
$
5.85

     First Quarter (ended March 31, 2013)
$
9.30

 
$
5.63


22


(b) The closing sale price of the common stock on the NYSE on February 23, 2015 was $6.75. As of that date, there were approximately 118 shareholders of record of the common stock.
(c) We did not pay any cash dividends on our common stock during the last two fiscal years. The board of directors periodically reviews our dividend policy and our longer-term objectives of maximizing shareholder value. Any determination to pay cash dividends in the future will be at the discretion of our board.
(d) The following table provides information as of December 31, 2014 on plans under which equity securities may be issued to employees, directors or consultants:
 
 
  
(a)
 
(b)
 
(c)
 
 
 
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders:
  
 
  
 
 
 
 
1998 Stock Incentive Plan(1)
  
3,500

  
$
7.46

 

 
2006 Stock Incentive Plan (2)
  
71,676

 
$
10.41

 
448,788

Equity Compensation Plans Not Approved by Security Holders
  

  
$

 

 
Total
  
75,176

  
$
10.27

 
448,788


__________
(1) No further grants will be made under the 1998 Stock Incentive Plan.
(2) Excludes 398,513 restricted stock units under the 2006 Stock Incentive Plan.

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


Item 6.
Selected Financial Data


23


The following table sets forth our selected consolidated financial data as of and for the years ended December 31, 2014, 2013, 2012, 2011 and 2010. The selected consolidated statements of comprehensive income (loss) and balance sheet data are derived from our audited consolidated financial statements. The audited consolidated financial statements for certain of these periods are included elsewhere in this annual report. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified in their entirety by, our consolidated financial statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this annual report and in our prior filings with the SEC.
 
 
 
 
Year ended December 31,
 
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
(In thousands, except per share data)
Consolidated Statements of Comprehensive Income (Loss) Data
 
 
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
145,426

 
$
137,307

 
$
145,896

 
$
150,443

 
$
153,905

 
Goodwill impairment
 

 

 

 
14,236

 

 
Asset impairment
 

 
7,785

 
9,440

 
8,417

 

 
Gain on asset dispositions
 
(4,006
)
 
(112
)
 
(160
)
 
(33,379
)
 
(24
)
 
Operating expenses
 
138,667

 
148,152

 
156,265

 
141,954

 
155,244

 
Operating income (loss)
 
6,759

 
(10,845
)
 
(10,369
)
 
8,489

 
1,660

 
Income (loss) from continuing operations
 
2,492

 
(15,070
)
 
(11,164
)
 
(5,295
)
 
(2,423
)
 
Earnings (loss) per share from continuing operations:
 
 
 
 
 
 
 
 
 
 
 
  Basic
 
$
0.13

 
$
(0.77
)
 
$
(0.58
)
 
$
(0.28
)
 
$
(0.13
)
 
  Diluted
 
$
0.13

 
$
(0.77
)
 
$
(0.58
)
 
$
(0.28
)
 
$
(0.13
)
Discontinued Operations:
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations of discontinued business units, net of income tax expense (benefit)
 
(187
)
 
(1,204
)
 
1,009

 
(1,557
)
 
(425
)
 
Loss on disposal and impairment of the assets of the discontinued business units, net of income tax expense (benefit)
 
$
(2
)
 
$
(773
)
 
$
(4,526
)
 
$
(296
)
 
$
(5,762
)
 
Earnings (loss) per share from discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 Basic
 
$
(0.01
)
 
$
(0.10
)
 
$
(0.18
)
 
$
(0.10
)
 
$
(0.33
)
 
 Diluted
 
$
(0.01
)
 
$
(0.10
)
 
$
(0.18
)
 
$
(0.10
)
 
$
(0.33
)
Net Income (Loss)
 
$
2,303

 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
 
$
(8,610
)
Earnings (Loss) per share
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
 
$
(0.38
)
 
$
(0.47
)
 
Diluted
 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
 
$
(0.38
)
 
$
(0.47
)
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
19,785

 
19,575

 
19,327

 
19,053

 
18,485

 
Diluted
 
19,891

 
19,575

 
19,327

 
19,053

 
18,485



24


 
 
 
Year ended December 31,
 
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
(In thousands, except per share data)
Non-GAAP Data
 
 
 
 
 
 
 
 
 
 
 
EBITDA
 
$
19,671

 
$
1,612

 
$
1,508

 
$
24,693

 
$
14,784

 
Adjusted EBITDA
 
14,875

 
11,956

 
14,275

 
15,820

 
22,531

 
Adjusted net income (loss)
 
(2,493
)
 
(6,703
)
 
(1,907
)
 
(16,121
)
 
(863
)
Consolidated Statement of Cash Flow Data
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
10,578

 
$
7,087

 
$
13,470

 
$
1,797

 
$
19,487

 
Net cash (used in) provided by investing activities
 
(5,600
)
 
6,441

 
12,347

 
21,611

 
(10,428
)
 
Net cash (used in) provided by financing activities
 
(12,910
)
 
(6,947
)
 
(21,321
)
 
(25,439
)
 
(8,932
)
Consolidated Balance Sheet Data
 
 
 
 
 
 
Cash
 
$
5,126

 
$
13,058

 
$
6,477

 
$
1,981

 
$
4,012

 
Assets held for sale
 
21,173

 
18,346

 
18,288

 
30,380

 

 
Property and equipment, net
 
160,410

 
166,356

 
195,012

 
232,589

 
272,030

 
Total assets
 
223,354

 
234,626

 
260,942

 
304,896

 
331,482

 
Total debt
 
30,200

 
43,058

 
49,178

 
70,496

 
95,152

 
Debentures due Red Lion Hotels Capital Trust
 
30,825

 
30,825

 
30,825

 
30,825

 
30,825

 
Total liabilities
 
82,517

 
97,417

 
108,034

 
139,031

 
160,717

 
Total stockholders' equity
 
140,837

 
137,209

 
152,908

 
165,865

 
170,765


EBITDA is defined as net income (loss), before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure due to the significance of our long-lived assets and level of indebtedness.
Adjusted EBITDA and Adjusted net income (loss) are additional measures of financial performance. We believe that the inclusion or exclusion of certain special 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.
EBITDA, Adjusted EBITDA and Adjusted net income (loss) are commonly used measures of performance in the industry. We utilize these measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. EBITDA, Adjusted EBITDA and Adjusted net income (loss) are not intended to represent net income (loss) defined by generally accepted accounting principles in the United States ("GAAP"), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP. In addition, other companies in our industry may calculate EBITDA and in particular Adjusted EBITDA and Adjusted net income (loss) differently than we do or may not calculate them at all, limiting the usefulness of EBITDA, Adjusted EBITDA and Adjusted net income (loss) as comparative measures.


25


The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) attributable to RLHC for the periods presented:
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(In thousands, except per share data)
 Net income (loss)
$
2,303

 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
 
$
(8,610
)
 
Depreciation and amortization
12,762

 
13,960

 
14,968

 
17,625

 
18,902

 
Interest expense
4,575

 
5,516

 
7,553

 
8,355

 
9,012

 
Income tax (benefit) expense
31

 
(817
)
 
(6,339
)
 
5,861

 
(4,520
)
 EBITDA
19,671

 
1,612

 
1,508

 
24,693

 
14,784

 
Loss on discontinued operations (1)
189

 
1,977

 
3,327

 
1,853

 
6,187

 
Loss (gain) on asset dispositions (2)
(3,996
)
 

 

 
(33,379
)
 

 
Early termination fee (3)
(2,095
)
 

 

 

 

 
Lease termination costs (4)
750

 

 

 

 
1,560

 
Asset impairment (5)

 
7,785

 
9,440

 
8,417

 

 
Separation costs (6)
356

 
582

 

 

 

 
Goodwill impairment (7)

 

 

 
14,236

 

Adjusted EBITDA
$
14,875

 
$
11,956

 
$
14,275

 
$
15,820

 
$
22,531

 
 
 
 
 
 
 
 
 
 
 
(1
)
Discontinued operations includes the following: a hotel in Eugene, Oregon that ceased operations in 2014; a hotel in Medford, Oregon that was sold in 2013; a commercial mall in Kalispell, Montana that was sold in 2013; a catering contract in Yakima, Washington that was terminated in 2013; a hotel in Sacramento, California that was sold in 2012.
(2
)
During 2014, we recorded $4.0 million in gain on the sales of the Yakima, Kelso, Kennewick, Canyon Springs and Pocatello properties. In 2011, we recorded a $33.5 million gain on the sale of the Seattle Fifth Avenue Hotel. These amounts are included in the line item "Gain on asset dispositions, net" on the accompanying statements of comprehensive income (loss).
(3
)
During 2014, we recorded income from a $2.1 million early termination fee related to the Seattle Fifth Avenue Hotel terminating its franchise agreement. This amount is included in the line item "Franchise revenue" on the accompanying consolidated statements of comprehensive income (loss).
(4
)
During 2014, we amended the lease for the Red Lion Hotel Vancouver at the Quay and recorded an additional $0.8 million in amortized lease termination fees. During 2010, we recorded a $1.5 million expense related to the termination of a franchise and sublease agreement for the Red Lion Hotel Sacramento at Arden Village.
(5
)
During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. During 2012, we recorded a $9.4 million impairment charge on the Pendleton, Missoula, Denver, and Helena properties. During 2011, we recorded a $8.4 million impairment charge on the Missoula, Denver, Helena, and Vancouver properties.
(6
)
During 2014, we recorded a $0.4 million separation cost associated with the separation of the former Executive Vice President and Chief Financial Officer. During 2013, we recorded a $0.4 million separation cost associated with the retirement of the former President and Chief Executive Officer and a $0.2 million charge related to the separation of a former Executive Vice President and Chief Operating Officer. These amounts are included in the line item "General and administrative expenses" on the accompanying statements of comprehensive income (loss).
(7
)
During 2011, we recorded a $14.2 million impairment charge on goodwill in the hotel segment.

26


The following is a reconciliation of Adjusted net income (loss) to net income (loss) attributable to RLHC for the periods presented:
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(In thousands, except per share data)
 Net income (loss)
$
2,303

 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
 
$
(8,610
)
 
Loss on discontinued operations (1)
189

 
1,977

 
3,327

 
1,853

 
6,187

 
Gain on asset dispositions (2)
(3,996
)
 

 

 
(33,479
)
 

 
Early termination fee (3)
(2,095
)
 

 

 

 

 
Lease termination costs (4)
750

 

 

 

 
1,560

 
Asset impairment (5)

 
7,785

 
9,440

 
8,417

 

 
Separation costs (6)
356

 
582

 

 

 

 
Goodwill impairment (7)

 

 

 
14,236

 

Adjusted net income (loss)
$
(2,493
)
 
$
(6,703
)
 
$
(1,907
)
 
$
(16,121
)
 
$
(863
)
 
 
 
 
 
 
 
 
 
 
 
(1
)
Discontinued operations includes the following: a hotel in Eugene, Oregon that ceased operations in 2014; a hotel in Medford, Oregon that was sold in 2013; a commercial mall in Kalispell, Montana that was sold in 2013; a catering contract in Yakima, Washington that was terminated in 2013; a hotel in Sacramento, California that was sold in 2012.
(2
)
During 2014, we recorded $4.0 million in gain on the sales of the Yakima, Kelso, Kennewick and Canyon Springs and Pocatello properties. In 2011, we recorded a $33.5 million gain on the sale of the Seattle Fifth Avenue Hotel. These amounts are included in the line item "Gain on asset dispositions, net" on the accompanying statements of comprehensive income (loss).
(3
)
During 2014, we recorded income from a $2.1 million early termination fee related to the Seattle Fifth Avenue Hotel terminating its franchise agreement. This amount is included in the line item "Franchise revenue" on the accompanying consolidated statements of comprehensive income (loss).
(4
)
During 2014, we amended the lease for the Red Lion Hotel Vancouver at the Quay and recorded an additional $0.8 million in amortized lease termination fees. During 2010, we recorded a $1.5 million expense related to the termination of a franchise and sublease agreement for the Red Lion Hotel Sacramento at Arden Village.
(5
)
During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. During 2012, we recorded a $9.4 million impairment charge on the Pendleton, Missoula, Denver, and Helena properties. During 2011, we recorded a $8.4 million impairment charge on the Missoula, Denver, Helena, and Vancouver properties.
(6
)
During 2014, we recorded a $0.4 million separation cost associated with the separation of the former Executive Vice President and Chief Financial Officer. During 2013, we recorded a $0.4 million separation cost associated with the retirement of the former President and Chief Executive Officer and a $0.2 million charge related to the separation of a former Executive Vice President and Chief Operating Officer.
(7
)
During 2011, we recorded a $14.2 million impairment charge on goodwill in the hotel segment.

Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction
We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the management, franchising and ownership of hotels under our proprietary brands, including Hotel RL, Red Lion Hotels, Red Lion Inns & Suites and Leo Hotel Collection (the “Red Lion Brands”). The Red Lion Brands represent upscale and midscale full and select service hotels.

A summary of our properties as of December 31, 2014 is provided below:
 
 
Hotels
 
Total
Available
Rooms
 
Meeting
Space
(sq. ft.)
 
 
 
 
 
 
 
Red Lion company operated hotels
 
19

 
3,887

 
177,250

Red Lion franchised hotels
 
36

 
7,933

 
485,072

Total
 
55

 
11,820

 
662,322



27


We operate in three reportable segments:
The hotels segment derives revenue primarily from guest room rentals and food and beverage operations at our company operated hotels. As of December 31, 2014, we operated 19 hotels, 14 of which were wholly owned and five of which were leased. During 2014 our hotel segment accounted for approximately 81.5% of total revenues.
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 revenues and are charged to hotel owners in exchange for the use of our brands and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. As of December 31, 2014, we had 36 franchise hotels with 34 under the Red Lion Brands and two hotels under the Leo Hotel Collection brand. During 2014 our franchise segment accounted for approximately 6.6% of total revenues.
The entertainment segment derives revenues from promotion and presentation of entertainment productions under the trade name WestCoast Entertainment, and from ticketing services under the trade name TicketsWest. The ticketing service business offers ticketing inventory management systems, call center services, and outlet/electronic channel distribution for event locations. During 2014 our entertainment segment accounted for approximately 11.8% of total revenues.
Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".

Results of Operations

Our reported numbers for the periods presented in this report reflect results of the Yakima, Canyon Springs, Pocatello, Kelso and Kennewick properties (all sold in 2014), the Missoula and Pendleton properties (sold in 2013), and the Denver and Helena properties (sold in 2012) for the full years prior to their sales, but only for partial years in the years in which they were sold. These properties were reported in continuing operations since we have significant continuing involvement in their operations as they 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 properties reported in continuing operations that are owned or leased by us for the entirety of the reporting periods being compared.

A summary of our consolidated statements of comprehensive income (loss) is provided below (in thousands):
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
Total revenue
 
$
145,426

 
$
137,307

 
$
145,896

Total operating expenses
 
138,667

 
148,152

 
156,265

Operating income (loss)
 
6,759

 
(10,845
)
 
(10,369
)
Other income (expense):
 
 
 
 
 
 
Interest expense
 
(4,575
)
 
(5,516
)
 
(7,553
)
Other income, net
 
339

 
474

 
229

Income (loss) from continuing operations before taxes
 
2,523

 
(15,887
)
 
(17,693
)
Income tax expense (benefit)
 
31

 
(817
)
 
(6,529
)
Income (loss) from continuing operations
 
2,492

 
(15,070
)
 
(11,164
)
Income (loss) from discontinued operations
 
(189
)
 
(1,977
)
 
(3,517
)
Net income (loss)
 
$
2,303

 
$
(17,047
)
 
$
(14,681
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
2,303

 
$
(17,047
)
 
$
(14,674
)
Earnings (loss) per share - basic & diluted
 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
Non-GAAP data: (1)
 
 
 
 
 
 
EBITDA
 
$
19,671

 
$
1,612

 
$
1,508

Adjusted EBITDA
 
$
14,875

 
$
11,956

 
$
14,275

Adjusted net income (loss)
 
$
(2,493
)
 
$
(6,703
)
 
$
(1,907
)
_________
 
 
 
 
 
 
(1)  See Item 6. Selected Financial Data for a reconciliation of non-GAAP measures to net income (loss) for the periods presented


28


For the year ended December 31, 2014, we reported net income of $2.3 million or $0.12 per share. Net income includes $4.0 million in gains on the sales of the Yakima, Kelso, Kennewick, Canyon Springs and Pocatello properties. Net income also includes a $2.1 million early termination fee received related to the Seattle Fifth Avenue Hotel terminating its franchise agreement. In addition, net income includes $0.8 million in amortized lease termination fees related to the amended lease for the Red Lion Hotel Vancouver at the Quay and $0.4 million in separation costs associated with the separation of the former Executive Vice President and Chief Financial Officer.

For the year ended December 31, 2013, our net loss was $17.0 million or $0.87 per share. The net loss includes an impairment charge of $7.8 million on the Yakima, Canyon Springs, Pocatello, Kelso and Wenatchee properties. In addition, the net loss is impacted by a $5.9 million valuation allowance recorded during the year related to our deferred tax assets. The net loss also includes $0.6 million of separation costs associated with the retirement of our former President and Chief Executive Officer and the separation of our former Executive Vice President and Chief Operating Officer.

For the year ended December 31, 2012, our net loss was $14.7 million or $0.76 per share. The net loss includes an impairment charge of $9.4 million related to the Helena, Denver Southeast, Missoula and Pendleton properties.

The above special items are reflected as Adjusted EBITDA. For the year ended December 31, 2014, adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") was $14.9 million, compared to $12.0 million for the year ended December 31, 2013 and $14.3 million in 2012.

Revenue

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

Revenue from Continuing Operations
 
Year Ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$ Change
% Change
 
$ Change
% Change
Hotels
118,616

 
120,391

 
131,112

 
(1,775
)
(1.5
)%
 
(10,721
)
(8.2
)%
Franchise
9,618

 
7,136

 
5,177

 
2,482

34.8
 %
 
1,959

37.8
 %
Entertainment
17,115

 
9,439

 
9,165

 
7,676

81.3
 %
 
274

3.0
 %
Other
77

 
341

 
442

 
(264
)
(77.4
)%
 
(101
)
(22.9
)%
Total Revenue
$
145,426

 
$
137,307

 
$
145,896

 
$
8,119

5.9
 %
 
$
(8,589
)
(5.9
)%

Comparable Hotel Revenue (Non-GAAP Data)

A breakdown of our comparable hotel revenues is as follows (in thousands, except for percentage changes):
 
Year Ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$ Change
% Change
 
$ Change
% Change
Hotel revenue from continuing operations
$
118,616

 
$
120,391

 
$
131,112

 
(1,775
)
(1.5
)%
 
(10,721
)
(8.2
)%
less: hotel revenue from sold and closed properties
(6,116
)
 
(14,752
)
 
(27,505
)
 
8,636

(58.5
)%
 
12,753

(46.4
)%
Comparable total hotel revenue
$
112,500

 
$
105,639

 
$
103,607

 
$
6,861

6.5
 %
 
$
2,032

2.0
 %

Comparable hotels is defined as properties that are operated by the company and excludes the results of discontinued operations and sold properties. Discontinued operations include the following: a catering contract in Yakima, Washington that was terminated in first quarter 2013; a hotel in Medford, Oregon that was sold in third quarter 2013; and a hotel in Eugene, Oregon that ceased operations in first quarter 2014. Sold properties include the following: the Kalispell property, which was sold in April 2012; the Helena property and the Sacramento property, sold in 2012; the Missoula property, which was sold in February 2013; the Pendleton property, which was sold in April 2013; the Yakima property, which was sold in April 2014; the Kelso and Kennewick properties, which were sold in May 2014; the Canyon Springs property, which was sold in June 2014; and the Pocatello property which was sold in October 2014.

We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. Comparable operating results are not intended to represent reported operating

29


results defined by generally accepted accounting principles in the United States ("GAAP"), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP.

2014 Compared to 2013

During 2014, revenue from the hotel segment decreased $1.8 million or 1.5% from 2013. The primary reason for the decline is the sale of properties in 2014. On a comparable basis, revenue from the hotel segment increased $6.9 million or 6.5% in 2014 compared to 2013. This comparable increase was primarily driven by a 230 basis points increase in occupancy compared to 2013, primarily driven by increases in permanent and group room nights. ADR increased 3.3% compared to 2013, primarily driven by higher rates in the transient segment.

Revenue from our franchise segment increased $2.5 million to $9.6 million in 2014 compared to 2013. This was primarily due to the early termination fee for the Seattle Fifth Avenue franchise location of $2.1 million.

Revenue in the entertainment segment increased $7.7 million to $17.1 million in 2014. This was primarily due to triple the number of Broadway show dates in 2014 as compared to 2013.

2013 Compared to 2012

Revenues in 2013 from the hotel segment decreased $10.7 million or 8.2% from 2012. The primary reason for the decline is the sale of properties in 2013. On a comparable basis, revenue from the hotel segment increased $2.0 million or 2.09% in 2013 compared to 2012. This comparable increase was primarily driven by a 3.9% increase in ADR. The increase in rate was primarily driven by an increase in the transient market segment. Our largest source of growth came from non-qualified retail, our highest rated customer segment. Focused growth in that segment along with management of the occupancy contribution from opaque online travel agency ("OTA") channels were a big part of our ADR increase strategy during 2013.

Revenue from our franchise segment increased $2.0 million to $7.1 million in 2013 compared to 2012. The addition of new franchised properties and contractual rate increases for existing franchisees drove this increase.

Revenue in the entertainment segment increased $0.3 million to $9.4 million in 2013 compared to 2012. The 2013 segment revenue was positively impacted by stronger ticket demand for events in the markets that our ticketing business serves.

Operating Expenses

Operating expenses generally include direct operating expenses for each of the operating segments, depreciation and amortization, hotel facility and land lease expense, gain or loss on asset dispositions and general and administrative expenses.

Operating Expenses from Continuing Operations

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

30


 
Year ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$ Change
% Change
 
$ Change
% Change
Hotels
$
94,241

 
$
97,831

 
$
107,247

 
$
(3,590
)
(3.7
)%
 
$
(9,416
)
(8.8
)%
Franchise
7,004

 
6,555

 
4,758

 
449

6.8
 %
 
1,797

37.8
 %
Entertainment
14,785

 
9,189

 
9,020

 
5,596

60.9
 %
 
169

1.9
 %
Other
318

 
535

 
827

 
(217
)
(40.6
)%
 
(292
)
(35.3
)%
Depreciation and amortization
12,762

 
13,960

 
14,968

 
(1,198
)
(8.6
)%
 
(1,008
)
(6.7
)%
Hotel facility and land lease
5,210

 
4,464

 
4,143

 
746

16.7
 %
 
321

7.7
 %
Asset impairment

 
7,785

 
9,440

 
(7,785
)
(100.0
)%
 
(1,655
)
(17.5
)%
Loss (gain) on asset dispositions, net
(4,006
)
 
(112
)
 
(160
)
 
(3,894
)
3,476.8
 %
 
48

(30.0
)%
General and administrative expenses
8,353

 
7,945

 
6,022

 
408

5.1
 %
 
1,923

31.9
 %
Total operating expenses
$
138,667

 
$
148,152

 
$
156,265

 
$
(9,485
)
(6.4
)%
 
$
(8,113
)
(5.2
)%

Comparable Hotel Expense (Non-GAAP Data)

A breakdown of our comparable hotel expenses is as follows (in thousands, except for percentage changes):
 
Year ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$ Change
% Change
 
$ Change
% Change
Hotel operating expenses from continuing operations
$
94,241

 
$
97,831

 
$107,247
 
(3,590
)
(3.7
)%
 
(9,416
)
(8.8
)%
less: hotel operating expenses from sold and closed properties
(5,714
)
 
(12,571
)
 
(24,367
)
 
6,857

(54.5
)%
 
11,796

(48.4
)%
Comparable hotel operating expenses
$
88,527

 
$
85,260

 
$
82,880

 
3,267

3.8
 %
 
2,380

2.9
 %

Comparable hotels is defined as properties that are operated by the company and excludes the results of discontinued operations and sold properties. Discontinued operations include the following: a catering contract in Yakima, Washington that was terminated in first quarter 2013; a hotel in Medford, Oregon that was sold in third quarter 2013; and a hotel in Eugene, Oregon that ceased operations in first quarter 2014. Sold properties include the following: the Kalispell property, which was sold in April 2012; the Helena property and the Sacramento property, sold in 2012; the Missoula property, which was sold in February 2013; the Pendleton property, which was sold in April 2013; the Yakima property, which was sold in April 2014; the Kelso and Kennewick properties, which were sold in May 2014; the Canyon Springs property, which was sold in June 2014; and the Pocatello property was sold in October 2014.

We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. Comparable operating results are not intended to represent reported operating results defined by generally accepted accounting principles in the United States ("GAAP"), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP.

2014 Compared to 2013

Direct hotel expenses as reported were $94.2 million in 2014 compared to $97.8 million in 2013. The primary reason for the decline is the sale of properties in 2014. On a comparable basis, direct hotel expenses were $88.5 million in 2014 compared to $85.3 million in 2013, representing a 3.8% increase. The increase was driven primarily by increased payroll and occupancy related costs, partially offset by lower costs due to changes in our loyalty program. On a comparable basis, the hotel segment had a direct margin of 21.3% in 2014 compared to 19.3% in 2013. The improvement in margin was primarily driven by the increase in ADR.
   
Direct expenses for the franchise segment in 2014 increased by $0.4 million compared to 2013, primarily driven by increased franchise development costs.

Direct expenses for the entertainment segment in 2014 increased $5.6 million as compared to 2013. The increase is due to the volume of shows.


31


Depreciation and amortization expenses decreased $1.2 million in 2014 compared to 2013. The primary reason for the decline is the sale of properties in 2014; we do not depreciate our assets held for sale.

Hotel facility and land lease costs decreased $0.7 million to $5.2 million in 2014 compared to 2013. During 2014, we amended the lease for the Red Lion Hotel Vancouver at the Quay and recorded an additional $0.8 million in amortized lease termination fees.

During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. We had no such impairments in 2014.

During 2014, we recorded $4.0 million in gain on the sales of the Yakima, Kelso, Kennewick and Canyon Spring and Pocatello properties. We had no such gains in 2013.

General and administrative expenses increased by $0.4 million in 2014 compared to 2013. The increase is primarily due to the accrual of a corporate bonus in 2014. There was no such accrual in 2013.

2013 Compared to 2012

Direct hotel expenses as reported were $97.8 million in 2013 compared to $107.2 million in 2012. The primary reason for the decline is the sale of properties in 2013. On a comparable basis, direct hotel expenses were $85.3 million in 2013 compared to $82.9 million in 2012, representing a 2.9% increase. The year over year increase was primarily due to increased marketing expense to improve ADR as well as one-time labor cost adjustments that benefited 2012. On a comparable basis, the hotel segment had a direct margin of 19.3% in 2013 compared to 20.0% in 2012.
   
Direct expenses for the franchise segment in 2013 increased by $1.8 million compared to 2012, primarily driven by increased marketing costs.

Direct expenses for the entertainment segment in 2013 increased $0.2 million as compared to 2012. The variance is driven
by the change in the year over year timing and mix of shows.

Depreciation and amortization expenses decreased $1.0 million in 2013 compared to 2012. The primary reason for the decline is the sale of properties in 2013; we do not depreciate our assets held for sale.

Hotel facility and land lease costs increased $0.3 million to $4.5 million in 2013 compared to 2012 primarily resulting from the sale of the Kalispell Mall property. Concurrent with the sale, we entered into an operating lease agreement with the buyer of the commercial mall under which we continue to operate the attached Red Lion Hotel Kalispell.

During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. During 2012, we recorded a $9.4 impairment charge on our Helena, Denver Southeast, Missoula and Pendleton properties.

General and administrative expenses increased by $1.9 million in 2013 compared to 2012. We incurred additional corporate expenses during 2013 primarily due to CEO transition costs, and increased board of director costs and legal expense.

Interest Expense

Interest expense for the year ended December 31, 2014 decreased $1.0 million to $4.6 million. The decline is attributable to a decline in the principal amount of debt outstanding in 2014. Our average pre-tax interest rate on debt during 2014 was 6.9% compared to 6.3% in 2013.

Interest expense for the year ended December 31, 2013 decreased $2.0 million to $5.5 million compared to $7.6 million recorded in 2012. The decline is primarily attributable to a decline in the principal amount of debt outstanding in 2013. Our average pre-tax interest rate on debt during 2013 was 6.3% compared to 7.5% in 2012.

Income Taxes

Our effective income tax rate with respect to income from continuing operations for 2014 was 1.2% as compared to (5.1)% and (36.9)% for 2013 and 2012, respectively. The variances in our rate are due primarily to recording a valuation allowance of $5.9 million against the Company's net deferred tax assets in 2013. Other items giving rise to a difference between our statutory U.S. federal tax rate of 34% and our effective rate include state taxes and incentive tax credits allowed under federal law.


32


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

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

Based on our current assessment of future taxable income, a valuation allowance is required to reduce our deferred tax assets to an amount that is more likely than not to be realized. We relied on the reversal of certain deferred tax liabilities for realization of a portion of our deferred tax assets and recorded a valuation allowance on the remaining balance at December 31, 2014.

Discontinued Operations

During the first quarter of 2014, we ceased the operation of the Red Lion Hotel Eugene in Eugene, Oregon ("Eugene property") when we assigned our lease to a third party. During the first quarter of 2013, we terminated a catering contract in Yakima, Washington. During the second quarter of 2013, we closed on the sale of the Kalispell Center Mall property in Kalispell, Montana ("Kalispell Mall property") for $11.6 million. During the third quarter of 2013 we sold the Red Lion Hotel Medford in Medford, Oregon ("Medford property") for $2.8 million.

Accordingly, the results of these operations have been classified as discontinued operations in our consolidated statements of comprehensive income (loss) for all periods presented. For additional information, see Note 6 of Notes to Consolidated Financial Statements.

During 2013, as a result of the anticipated closure of the Eugene property, long-lived assets with a carrying value of $1.5 million were written down to their estimated fair value of $0.5 million less disposal costs of $0.1 million resulting in a pre-tax impairment charge in discontinued operations of $1.1 million.

Liquidity and Capital Resources
During the third quarter of 2013, we entered into an agreement with Wells Fargo Bank, National Association ("Wells Fargo") to expand our existing credit facility. The balance of the term loan under the credit facility at the time of the expansion was $0.5 million and there was no outstanding balance on the revolving line of credit. The term loan was increased to a total of $45.0 million, with $38.2 million used to refinance nine fixed-rate notes collateralized by individual properties ("CMBS debt") that were maturing in July 2013.
The original terms of the expanded facility are as follows: