e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission File Number:
001-13957
Red Lion Hotels
Corporation
(Exact name of registrant as
specified in its charter)
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Washington
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91-1032187
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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201 W. North River Drive, Suite 100
Spokane Washington
(Address of principal
executive offices)
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99201
(Zip Code)
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Registrants telephone number, including area code:
(509) 459-6100
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $.01 per share
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New York Stock Exchange
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Guarantee with Respect to 9.5% Trust Preferred
Securities
(Liquidation Amount of $25 per Trust Preferred
Security) of Red Lion Hotels Corporation Capital Trust
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New York Stock Exchange
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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 þ
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 þ
(Note Checking the box above will not relieve any
registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
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, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act.) Yes o No þ
The aggregate market value of the registrants common stock
as of June 30, 2007 was $246.9 million, of which 90.2%
or $222.6 million was held by non-affiliates as of that
date. As of February 29, 2008, there were
18,228,271 shares of the Registrants common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its 2008
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
Registrants 2007 fiscal year, are incorporated by
reference herein in Part III.
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 RLH refer to Red Lion Hotels
Corporation and, as the context requires, all of its wholly and
partially owned subsidiaries, including its 100% ownership of
Red Lion Hotels Holdings, Inc. and Red Lion Hotels Franchising,
Inc. and its more than 99% ownership of Red Lion Hotels Limited
Partnership. Red Lion refers to the Red Lion brand.
The terms the system, system-wide hotels
or system of hotels refer to our entire group of
owned, leased, managed and franchised hotels.
Hospitality
Industry Performance Measures and Definitions
The following performance measures appear throughout this
document and are widely used in the hospitality industry. These
measures are important to our discussion of operating
performance:
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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.
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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.
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Revenue per available room, or 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.
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Average daily rate, or 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.
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Comparable hotels are hotels that have been owned,
leased, managed or franchised by us for each of the periods
presented.
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Throughout this document and unless otherwise stated, RevPAR,
ADR and average occupancy statistics are calculated using
statistics for comparable hotels. When presented, the above
performance measures will be identified as belonging to a
particular market segment, system-wide, or for continuing
operations versus discontinued operations or total combined
operations. 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. Smith Travel Research
categorizes hotels into seven chain scales primarily based on
ADR. Our hotels are typically classified by Smith Travel
Research in the upscale and midscale with food and beverage
chain scale.
We were incorporated in the state of Washington in April 1978,
and have operated hotels under various brand names including,
until 1999, Cavanaughs Hotels. In 1999, we acquired WestCoast
Hotels, Inc., and rebranded our Cavanaughs hotels to the
WestCoast brand, changing our name to WestCoast Hospitality
Corporation. In 2001, we acquired Red Lion Hotels, Inc. In
September 2005, after rebranding most of our WestCoast hotels to
the Red Lion name, we changed our corporate name to Red Lion
Hotels Corporation.
Red Lion Hotels Corporation is a NYSE-listed hospitality and
leisure company (ticker symbols RLH and RLH-pa) primarily
engaged in the ownership, operation and franchising of midscale
and upscale, full service hotels under our proprietary Red Lion
brand. Established over 30 years ago, the Red Lion brand is
nationally recognized
3
and particularly well known in the western United States where
most of our hotels are located. The Red Lion brand is typically
associated with three and four-star hotels. As of
December 31, 2007, our system of hotels contained 53 hotels
located in eight states and one Canadian province, with 9,388
rooms and 472,529 square feet of meeting space as provided
below:
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Total
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Meeting
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Available
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Space
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Hotels
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Rooms
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(sq. ft.)
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Red Lion Owned and Leased Hotels
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30
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5,456
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279,684
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Other Leased Hotel (1)
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1
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310
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5,000
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Managed Hotel (2)
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1
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254
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36,000
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Red Lion Franchised Hotels (3)
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21
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3,368
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151,845
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Total
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53
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9,388
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472,529
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Total Red Lion Hotels
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51
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8,824
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431,529
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(1) |
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Represents a hotel acquired in the fourth quarter of 2007 that
is being repositioned as a Red Lion. It is currently flagged as
independent. |
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This hotel did not renew its agreement with Red Lion and left
our system of hotels in January 2008. |
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Subsequent to December 31, 2007, three franchise agreements
expired and were not renewed. Therefore, these hotels will leave
our system in 2008. |
Red Lion is about Staying Comfortable and our
product and service culture works in both large urban and
smaller markets. Our hotels strive to reflect the character of
their local markets while maintaining consistent brand
standards. We feel this makes our hotels an attractive choice
for customers within the markets in which we currently operate.
We believe our adherence to consistent customer service
standards and brand touch-points makes guests feel at home no
matter where they are.
Company
Strategy
Our mission at the hotels is to create the most memorable guest
experience possible through personalized, exuberant service,
allowing us to be a leader in our markets. We believe this will
drive growth and increase shareholder value. To achieve these
goals, we have focused and will continue to focus our
resources monetary, capital and human in
four primary areas:
Infrastructure Improving the foundation of
the company including continually focusing on our core
competencies and improving the infrastructure used to manage
reservations and support our hotel system. We maintain a state
of the art central reservation system and website technology.
Additionally, over the last several years we have completed the
installation of the MICROS Opera Property Management System
(Opera) in 16 of our hotels. During 2008, we intend
to install Opera at our remaining owned and leased properties.
Opera shares a single database with our central reservations
system that allows us better yield management. Combined with our
website, Opera has enhanced our ability to manage reservations
generated through all electronic channels and has positioned us
well to take advantage of electronic travel bookings. Guests
continue to book more reservations through our branded website,
as well as third-party on-line travel agents (OTAs,
or also referred to as alternative distribution systems or
ADS), and our central reservations and distribution
management technology allows us to manage the yield on these OTA
channels on a real-time,
hotel-by-hotel
basis.
Our focus on driving customers to our brand website
www.redlion.com has made it our fastest
growing source of online reservations, the revenue from which
has more than tripled over the last three years, accounting for
10.2% of total hotel room revenues in 2007. We also have strong
merchant model agreements with leading OTA providers, and our
expansion during 2007 of promotional activity with various
travel agents resulted in an increase in combined revenues of
30.4% through these channels, compared to 2006.
Physical Assets Improving our product,
including the physical assets presented to our guests and the
feel of our guest experience. Over the past few years, we
completed the implementation of our Stay Comfortable
initiative and made major room renovations at all of our owned
and leased hotels including new floor and wall
4
coverings, tiled bathroom floors, granite vanities and other
bathroom upgrades, enhanced guest room features including plush
pillow top mattresses and upgraded linen and pillow packages,
large work desks and ergonomic chairs and amenities such as
complimentary wireless internet access. We also updated common
areas such as lobbies and restaurants. During 2005, 2006 and
2007, we spent approximately $50 million on these
improvements, in addition to ongoing maintenance and hotel
improvements and the purchase of the Anaheim property discussed
further below.
Since we began our hotel renovations in 2005, guest reaction has
been positive and has strengthened the performance of our hotel
system. During 2007, RevPAR and ADR at our owned and leased
properties increased 12.3% and 6.6%, respectively, over 2006,
and 20.9% and 19.9% over 2005, as provided in the below table:
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2007
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2006
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2005
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Average (2)
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Average(2)
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Average (2)
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Occupancy
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ADR(3)
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RevPAR(4)
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Occupancy
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ADR(3)
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RevPAR(4)
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Occupancy
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ADR(3)
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RevPAR(4)
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Red Lion Hotels:
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Owned and Leased Hotels
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62.4
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%
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$
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88.64
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$
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55.33
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59.3
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%
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$
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83.14
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$
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49.29
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61.9
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$
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73.90
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$
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45.76
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Franchised Hotels
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59.4
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%
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$
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74.18
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$
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44.09
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62.1
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%
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$
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71.31
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$
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44.26
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59.1
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%
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$
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65.93
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$
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38.97
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Total Red Lion Hotels
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61.5
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%
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$
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84.05
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$
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51.65
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60.2
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%
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$
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79.10
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$
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47.62
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61.1
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%
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$
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71.64
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$
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43.77
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System-wide(1)
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61.6
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%
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$
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85.08
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$
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52.40
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60.6
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%
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$
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80.31
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$
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48.70
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61.5
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%
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$
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72.87
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$
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44.81
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Change from prior comparative periods:
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Red Lion Hotels:
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2007 vs. 2006
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2007 vs. 2005
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Owned and Leased Hotels
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3.1
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6.6
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%
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12.3
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%
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0.5
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19.9
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%
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20.9
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%
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Franchised Hotels
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(2.7
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4.0
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%
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(0.4
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)%
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0.3
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12.5
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%
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13.1
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%
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Total Red Lion Hotels
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1.3
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6.3
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%
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8.5
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%
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0.4
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17.3
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%
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18.0
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%
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System-wide(1)
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1.0
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5.9
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%
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7.6
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%
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0.1
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16.8
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%
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16.9
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%
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(1) |
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System-wide includes all hotels owned, leased, managed and
franchised, presented on a comparable basis for hotel
statistics. This includes one managed property not utilizing the
Red Lion brand. |
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(2) |
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Average occupancy represents total paid rooms divided by total
available rooms. Total available rooms represents the number of
rooms available multiplied by the number of days in the reported
period and includes rooms taken out of service for renovation. |
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(3) |
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Average daily rate (ADR) represents total room
revenues divided by the total number of paid rooms occupied by
hotel guests. |
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(4) |
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Revenue per available room (RevPAR) represents total
room and related revenues divided by total available rooms. |
Our strategy has been to increase occupancy through strategic
marketing and investment in our properties, followed by
increasing rates as demand increased for our rooms. Revenues
during 2007 compared to 2006 have been positively impacted by
our efforts to target a higher-paying customer base by
concentrating our focus on more corporate business and group
stays, instead of lower rate promotional and permanent contract
business. Occupancy at our owned and leased properties has
increased as a result of this shift in customer base as well as
the impact of rooms not available due to the renovations through
much of 2006.
We remain committed to ongoing capital improvements in order to
continue to enhance the Red Lion brand by improving our hotel
quality to enhance our guests experience. Our franchise
properties saw improvements in ADR during 2007, although they
experienced lower RevPAR on reduced occupancy. Similar to the
investment and property improvements our owned and leased hotels
have experienced, our franchisees are required to meet the same
upscale brand standards as part of their franchise agreements.
In addition, we have a large real estate footprint with our 31
owned and leased properties and we continuously review for
development opportunities that will contribute further to our
existing hotel operations and drive future
5
shareholder value. We will strive to maximize the value of this
real estate portfolio and may consider in the future the
redevelopment of certain of our properties.
The Red Lion Way We want our guests to feel
our commitment to their memorable experience through their
interactions with our associates. In order to live up to our
mission statement, we focus on associate retention and
development and are committed to competitive compensation and
benefit packages and advancement opportunities. We develop
leaders throughout all levels of our organization who understand
that a culture of employee satisfaction and excellent service is
an integral component of our long-term growth strategy. We have
instilled the foundation for our culture through the development
of The Little Red Book, a guide to our identified
essential principles of Red Lion culture. Each associate has
been and will continue to be trained on how they can make a
difference through living these essential principles of service.
Our goal is to be known in our industry for leadership
excellence and for excellent service in each of our markets. As
a result of these efforts, in 2007 we saw an almost 10%
reduction in turnover.
The Red Lion Promise to Stay
Comfortable®
To accomplish our goals of delivering consistent
high-quality service to guests and establishing a scalable
foundation for future growth, we have implemented a number of
key initiatives designed to increase awareness of the Red Lion
brand. Stay Comfortable is our umbrella reference
for Red Lions guest experience enhancements first
introduced in 2006. During 2008, we will continue our
initiatives to enhance the brand and its high quality of service
and comfort through the rebranding of our guest loyalty program.
The former GuestAwards program has been rebranded to The Red
Lion R&R (Rewards and Recognition) Club effective
February 29, 2008.
Growth Preparing for growth means improving
our liquidity and capital resources and increasing the depth of
financial resources available to us. In order to grow, we must
also be successful in creating consistent upscale brand
standards throughout our hotel system and enhancing the service
delivery presented to our guests. We expect to add properties in
large, western U.S. urban markets, complemented by
franchising leading properties in smaller, secondary cities, and
progressively move east, leveraging the momentum of our growth
in the western states, as set forth below:
Hotel acquisitions and equity investments. We
intend to selectively make joint venture investments or acquire
hotels located in major metropolitan cities, and will evaluate
investment opportunities based upon a number of factors
including price, strategic fit, potential profitability and
geographic distribution. We believe that having equity interests
in such hotels will give us operational control of hotels in
highly visible markets. The greater San Francisco, Los
Angeles, Phoenix and Dallas areas are examples of hub markets we
are targeting for expansion. In October 2007, we acquired a
long-term leasehold interest in a 310-room hotel in Anaheim,
California, for $8.3 million, including costs of the
acquisition, which has begun extensive renovations to meet Red
Lion brand standards. Once repositioned, the hotel will be a
strategic property for us in an important California market that
we anticipate will provide a strong platform for further
expansion.
Franchise the Red Lion brand. We expect to
leverage our brand awareness in the western United States and
our acquisition in key hub markets to expand our presence
through franchising in primary and secondary markets. We believe
that this strategy will allow us to continue to expand our
geographic coverage without requiring significant capital
investment, resulting in increased revenues and profitability.
We believe our brand represents an attractive conversion
opportunity for hotel owners in markets where competing hotel
companies have saturated the market with their multiple brands.
Our single focus on the Red Lion brand offers potential
franchisees a full service brand alternative with a distinctive
product, a full range of support services, strong reservation
contribution and an attractive fee structure. We believe we are
well positioned to integrate new franchisees into our hotel
system with the scalable operational infrastructure we have
implemented in recent years.
With the completion of the room renovations and with the overall
strength in the industry, we saw increases of 10.8% in hotel
revenues during both the first and second quarters of 2007 and
4.8% and 3.7% during the third and fourth quarters,
respectively. During 2007, we saw total revenue growth from
continuing operations of 9.7% over the prior year and a 15.6%
increase in operating income, resulting in net income of
$6.1 million for the year ended December 31, 2007,
compared with a net loss of $0.6 million in 2006. RevPAR,
ADR and occupancy at our owned and leased hotels all increased
during 2007 from 2006, with the hotel segments direct
margin up 250 basis points to 23.3% from 20.8%.
6
Significant events during 2007 included:
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The acquisition of a leasehold interest in a 310-room hotel in
Anaheim, California, as discussed above;
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Subleased the Red Lion Hotel Sacramento and entered into a
long-term franchise agreement;
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Implemented a $10 million stock repurchase program;
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Completed the sale of a commercial office complex for
$13.3 million in a tax advantaged transaction;
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Completed the non-core hotel divestment plan through the sale of
a hotel in Montana, generating $3.9 million in gross
proceeds during 2007 (for total plan gross proceeds of
$72.6 million overall);
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Presented a 12-week production of Disneys The Lion King in
Honolulu, Hawaii, which contributed $1.5 million to 2007
EBITDA; and
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Implemented new ticketing application software in over half of
TicketsWests locations, targeting implementation at the
remainder of its locations during the first two quarters of 2008.
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Financially we believe we have a strong balance sheet and
financial position with low leverage. We had $15.0 million
in cash at December 31, 2007, as well as an unused
revolving credit facility for up to $50 million available
to us that can be increased to $100 million subject to
satisfaction of various conditions. We believe we have a solid
foundation for continued growth and feel the turmoil in the
capital markets has created a favorable environment for
strategic buyers. We believe we are positioned to achieve our
long-term strategic goals.
Competitive
Strengths
Strong
proprietary brand and long operating history.
The Red Lion brand, which we believe projects comfort and
memorable experiences for our hotel guests, has been well known
in the western United States for more than 30 years. As the
owner and operator of many of our hotels, we have been able to
exert substantial control of brand standards across the system.
In addition, as the owner of the Red Lion brand, we have
diversified our revenue base by franchising the brand to
third-party hotel owners.
Strong
value proposition.
Our Red Lion brand is associated with high-quality lodging,
extensive meeting facilities and superior food and beverage
operations. Our hotels provide exceptional and friendly service
and accommodations at competitive prices within the markets we
serve. We seek to ensure consistent quality across our hotel
portfolio, offering valuable services such as dining, fitness
centers, business services and other ancillary services. In
addition, our guest room standards include products that are
important to both leisure and business travelers, including free
wireless high-speed internet service, comfortable work space and
high-quality furnishings, including pillow-top beds.
We believe we are well positioned against other hotel owners and
operators in the midscale and upscale full service segments of
the lodging industry. In our hub markets, we believe
our primary competitors include Crowne
Plaza®,
Doubletree®,
Four
Points®
and
Radisson®.
In our secondary markets, we believe our competitors include
Courtyard®,
Holiday
Inn®
and Hilton Garden
Inn®.
Attractiveness
to franchisees.
We offer a strong support system to our franchisees by providing
a full suite of franchise services, including (i) central
reservations, (ii) revenue management, (iii) national
and regional sales, (iv) marketing, (v) systems,
operations and customer service training, (vi) corporate
purchasing programs and (vii) quality evaluations. As such,
our Red Lion brand is attractive to potential franchisees by
offering a distinct product valued by customers. During 2007,
over 46% of our system-wide total room revenues were delivered
through our reservation channels. We believe that our
reservation systems, sales and marketing initiatives and our
support services are valueable to hotel owners.
7
Strong
emphasis on customer service and leadership
training.
We continually challenge ourselves to maintain and maximize
customer service. We want our guests to feel our commitment to
their memorable experience through their interactions with our
associates. In order to live up to our mission statement, we
believe strongly in associate retention and development and are
committed to competitive compensation and benefit packages and
advancement opportunities. We are developing leaders throughout
all levels of our organization who understand that a culture of
employee satisfaction and excellent service is an integral
component of our long-term growth strategy.
We have created a service standard and training program called
The Red Lion Way, which is designed to provide Red
Lion employees more tools to create a positive and memorable
guest experience. In addition, we have instilled the foundation
for our Red Lion culture through the development of The
Little Red Book, a guide to our identified essential
principles embodied in The Red Lion Way. Each
associate has been and will continue to be trained on how they
can make a difference through living these essential principles
of service. Through our focus on this increased level of
personal service and continuous development of our associates,
we believe we differentiate Red Lion from our competitors.
Experienced
senior management team.
We have an experienced senior management team led by our
President and Chief Executive Officer, Anupam Narayan, who has
been in the industry over 25 years. Our senior executive
officers have on average more than 20 years of hospitality
industry experience. We have strengths in several key areas,
including hotel development, ownership and management; finance;
e-commerce;
franchising; sales and marketing; food and beverage management;
human resources; entertainment and real estate. This extensive
and diverse expertise provides us with a broad perspective from
which we can make strategic management and operational decisions.
Operations
We operate in three reportable segments:
The hotels segment derives revenue primarily from guest
room rentals and food and beverage operations at our owned and
leased hotels. As of December 31, 2007, we operated 31
hotels, of which 18 are wholly-owned and 13 are leased. During
2007, our hotel segment accounted for approximately 88.9% of
total revenues, or $166.2 million.
The franchise and management segment is engaged primarily
in licensing the Red Lion brand to franchisees and managing
hotels for third-party owners. 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 brand and access to our central services
programs. These programs include the reservation system, guest
loyalty program, national and regional sales, revenue management
tools, quality inspections, advertising and brand standards. It
also reflects revenue from management fees charged to the owners
of our managed hotels, typically based on a percentage of a
hotels gross revenues plus an incentive fee based on
operating performance. As of December 31, 2007, we managed
one hotel owned by a third-party and franchised 21 hotels.
During 2007, our franchise and management segment accounted for
approximately 1.5% of total revenues, or $2.8 million.
The entertainment segment derives revenues primarily from
ticketing services and promotion and presentation of
entertainment productions under the operations of TicketsWest
and WestCoast Entertainment. We offer ticketing inventory
management systems, call center services and outlet/electronic
channel distribution for event locations. We have developed an
electronic ticketing platform that is integrated with our
electronic hotel distribution system. During 2007, our
entertainment segment accounted for approximately 7.9% of total
revenues, or $14.8 million.
We historically owned certain commercial real estate and engaged
in traditional real estate related services, including
developing, managing and acting as a broker for sales and leases
of commercial and
multi-unit
residential properties (collectively referred to as the real
estate management business). Together, these operations
comprised our real estate segment. Effective April 30,
2006, we divested this real estate management business. In
addition, consistent with our strategy of divesting non-core
assets, during the fourth quarter of 2006, we listed one of our
two
8
remaining wholly-owned commercial real estate properties for
sale and classified its results of operations within
discontinued operations for all periods presented. In September
2007, we sold the property for approximately $13.3 million
and recognized a pre-tax gain on sale of $1.9 million. For
additional information, see Note 3 of Notes to Consolidated
Financial Statements.
Our remaining activities, none of which constitutes a reportable
segment, have been aggregated into other, including
the remaining operations of our former real estate segment,
which have been reclassified for all comparative periods, where
appropriate.
A summary of our reporting segment revenues is provided below
(in thousands, except for percentage changes). For further
information regarding our business segments, see Note 17 of
Notes to Consolidated Financial Statements.
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Year Ended December 31,
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2007
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2006
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2005
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Hotels:
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Room revenue
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$
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114,312
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61.2
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%
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$
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103,677
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60.9
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%
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$
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96,296
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59.1
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%
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Food and beverage revenue
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48,061
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25.7
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%
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47,517
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27.9
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%
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45,659
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28.0
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%
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Other department revenue
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3,795
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2.0
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%
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3,623
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2.1
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%
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4,170
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2.5
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%
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Total hotels segment revenue
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166,168
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88.9
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%
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154,817
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90.9
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%
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146,125
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89.6
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%
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Franchise and management revenue
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2,756
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1.5
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%
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2,853
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1.7
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%
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2,860
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1.8
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%
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Entertainment revenue
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14,839
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7.9
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%
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10,791
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6.3
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%
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9,827
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6.0
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%
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Other revenue
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3,130
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1.7
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%
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1,907
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1.1
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%
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4,241
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2.6
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%
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Total revenue
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$
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186,893
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100.0
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%
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$
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170,368
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100.0
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%
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$
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163,053
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100.0
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%
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Employees
As of December 31, 2007, we employed approximately
3,026 people on a full-time or part-time basis, with 2,742
in hotel operations and the remainder in our administrative
office and our entertainment division. At December 31,
2007, approximately 4.6% 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,
amendments to these reports and all other reports filed with the
U.S. Securities and Exchange Commission (SEC),
pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934. These reports may also be obtained at no
cost through the SEC (www.SEC.gov or 800-SEC-0330 or the
SECs Public Reference Room, 100 F Street, N.E.,
Washington D.C. 20549).
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 stockholder
communications with our Board of Directors.
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 Red Lion communications.
9
The
lodging industry is highly competitive, which may impact our
ability to compete successfully with other hospitality and
leisure companies in the future.
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 segments of travelers:
business travelers, convention and group business travelers and
leisure travelers. All three segments 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. Additionally, new
and existing competitors may offer significantly lower rates,
greater convenience, services or amenities or superior
facilities, which could attract customers away from our hotels.
Our ability to remain competitive and to attract and retain
customers depends on our success in differentiating and
enhancing the quality, value and efficiency of our product and
customer service.
We also compete with other hotel brands and management companies
for hotels to add to our system, including through management
and franchise 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 management or franchise 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.
Our
operating results are subject to conditions affecting the
lodging industry.
Our revenues and operating results may be adversely impacted by
a number of factors, including but not limited to:
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The attractiveness of our hotels to consumers and competition
from other hotels;
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The quality, philosophy and performance of the employees of our
hotels;
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The need to periodically repair and renovate the hotels in our
system;
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The lack of availability of capital to allow us to fund
renovations and investments;
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Changes in travel patterns, extreme weather conditions and
cancellation of or changes in events scheduled to occur in our
markets;
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Increases in transportation and fuel costs, the financial
condition of the airline industry and the impact on air travel;
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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;
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Regulations and changes therein relating to the preparation and
sale of food and beverages, liquor service and health and safety
of premises;
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Impact of war, actual or threatened terrorist attacks,
heightened security measures and other national, regional or
international political and geopolitical conditions;
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10
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Travelers fears of exposure to contagious diseases;
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The impact of internet intermediaries on pricing;
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Oversupply of hotel rooms in markets in which we operate;
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Restrictive changes in zoning and similar land use laws and
regulations, or in health, safety and environmental laws, rules
and regulations;
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Possible requirements to make substantial modifications to our
hotels to comply with the Americans with Disabilities Act of
1990 or other governmental or regulatory actions; and
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The financial condition of third-party property owners and
franchisees, which may impact their ability to fund amounts
required for renovations as required under management and
franchise agreements.
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Any of these factors could adversely impact hotel room demand
and pricing and result in reduced occupancy, ADR and RevPAR, or
could otherwise adversely affect our results of operations and
financial condition including government imposed fines or
private litigants winning damage awards against us.
General
Economic Conditions May Negatively Impact Our
Results
A downturn in the national, regional or local economic climate
could reduce the demand for hotel rooms and related lodging
services and put pressure on room rates. Moderate or severe
economic downturns or adverse conditions may negatively affect
our operations. These conditions may be widespread or isolated
to one or more geographic regions.
Our
hotels may be faced with labor disputes which would 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 its possible in the future attempts could
be made to unionize our employees at other locations. Any labor
dispute or stoppage 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
success depends on the value of our name, image and brand. If
demand for our hotels decreases or the value of our name, image
or brand diminishes, our business and operations would be
harmed.
Our success depends, to a large extent, on our ability to shape
and stimulate consumer tastes and demands by maintaining
innovative, attractive and comfortable properties and services,
as well as our ability to remain competitive in the areas of
design and quality. If we are unable to anticipate and react to
changing consumer tastes and demands in a timely manner, our
results of operations and financial condition could be harmed.
Our business would be harmed if our public image or reputation
were to be diminished by the operations of any of the hotels in
our system. Our brand name and trademarks are integral to our
marketing efforts. If the value of our name, image or brand were
diminished, our business and operations would be harmed.
Our
business is capital intensive and our hotel acquisition,
development, redevelopment and renovation projects might be more
costly than we anticipate.
We are committed to keeping our properties well maintained and
attractive to our customers in order to enhance our
competitiveness within the industry. This creates an ongoing
need for cash, and to the extent we, our franchisees or owners
of any hotels we manage cannot fund expenditures from cash
generated from operations, funds must be borrowed or otherwise
obtained. In addition, we intend to acquire additional hotels in
the future, either through direct purchase or joint venture.
Hotel redevelopment, renovation and new project development are
subject to a number of risks, including:
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Construction delays or cost overruns;
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11
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Numerous federal, state and local government regulations
affecting the lodging industry, including building and zoning
requirements and other required governmental permits and
authorizations;
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Uncertainties as to market demand or a loss of market demand
after capital improvements have begun; and
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Potential environmental problems.
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As a result, we could incur substantial costs for projects that
are never completed. Further, financing for these projects may
not be available or, even if available, may not be on terms
acceptable to us. The availability of funds for new investments
and maintenance of existing hotels depends in part on capital
markets and liquidity factors over which we can exert little
control. Any unanticipated delays or expenses incurred in
connection with the acquisition, development, redevelopment or
renovation of the hotels in our system could impact expected
revenues 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.
Our
expenses may remain constant or increase even if revenues
decline.
The expenses of owning property are not necessarily reduced when
circumstances such as market factors and competition cause a
reduction in revenues to a hotel. Accordingly, a decrease in our
revenues could result in a disproportionately higher decrease in
our earnings because our expenses are unlikely to decrease
proportionately.
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 such as Travelocity.com and Expedia.com. If these
internet bookings increase, these intermediaries may be able to
obtain higher commissions, reduced room rates or other
significant contract concessions from us. Moreover, some of
these internet travel intermediaries are attempting to offer
hotel rooms as a commodity, by increasing the importance of
price and general indicators of quality (such as
three-star downtown hotel) at the expense of brand
identification. We believe that these internet intermediaries
hope that consumers will eventually develop brand loyalties to
their reservation systems. Although most of the business for our
hotels is expected to be derived from traditional channels, if
the amount of sales made through internet intermediaries
increases significantly, our room revenues may flatten or
decrease and our profitability may be adversely affected.
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:
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Changes in national, regional and local economic conditions;
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Changes in local real estate market conditions;
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Increases in interest rates, and other changes in the
availability, cost and terms of financing and capital leases;
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Increases in property and other taxes; and
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The impact of present or future environmental legislation and
adverse changes in other governmental regulations.
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These adverse conditions could potentially cause the terms of
our borrowings to change unfavorably. In such circumstances, if
we were in need of capital to repay indebtedness in accordance
with its terms or otherwise, we could be required to sell one or
more hotels at times that might not permit realization of the
maximum return on our investments. Unfavorable changes in one or
more of these conditions could also result in unanticipated
expenses and higher operating costs, thereby reducing operating
margins and otherwise adversely affecting our results of
operations and financial condition.
12
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
our ability to promptly sell one or more of our hotels in
response to changing economic, financial or investment
conditions is limited. The real estate market, including the
market for our hotels, is affected by many factors, such as
general economic conditions, availability of financing, interest
rates and other factors, including supply and demand, that are
beyond our control. If we decide to sell one or more of our
hotels, we may be unable to do so and, even if we are able to
sell the hotels, it may take us a long time to find willing
purchasers and the sales may be on unfavorable terms. We also
may be required to expend funds to correct defects or to make
improvements before a hotel can be sold. If we do not have funds
available for such purposes, our ability to sell the hotel could
be restricted or the price at which we can sell the hotel may be
less than if these improvements were made.
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 may
have disputes with the owners of the hotels that we manage or
franchise.
The nature of our responsibilities under our hotel management
agreements, as well as our responsibilities to enforce brand
standards under both management and franchise agreements 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 and 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 possibly result in litigation,
arbitration or other legal actions.
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, regional economic
downturns, poor weather conditions, actual or threatened
terrorist attacks and international conflicts. The adverse
impact to our revenues would likely be greater as a result of
our seasonal business.
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 we own
and/or
operate significant properties. We carry comprehensive
liability, public area liability, fire, flood, boiler and
machinery, extended coverage and rental loss insurance for our
properties. However, certain types of catastrophic losses, such
as those from earthquake, volcanic activity, terrorism and
environmental hazards, may exceed or not be covered by our
insurance coverage because it is not economically feasible to
insure against such losses. 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. In that
event, we might nevertheless remain obligated for any mortgage
debt or other financial obligations related to the property.
Similarly, war and terrorist activity, including the potential
for war and threats of terrorist activity, epidemics,
travel-related accidents, as well as geopolitical uncertainty
and international conflict, which
13
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 and consequently impact the value of the brand or the
reputation of our business.
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 maintaining guest
preferences to enhance our customer service and for marketing
and promotion purposes and credit card information. The
collection and use of personal data are governed by privacy laws
and regulations enacted in the U.S. and by various
contracts under which we operate. Privacy regulation is an
evolving area in which different jurisdictions may subject us to
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 to our guests. In
addition, noncompliance with applicable privacy regulations,
either by us or in some circumstances noncompliance by third
parties engaged by us, 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 brand. We have registered the following
trade names and associated trademarks with the U.S. Patent
and Trademark Office: Red Lion, WestCoast, Net4Guests, Stay
Comfortable and TicketsWest. We have also registered some of
these trademarks in Canada and Mexico, and are in the process of
obtaining trademark registrations in Asia and Europe. We also
own various derivatives of these trademarks, all of which are
registered with or have a registration application pending with
the U.S. Patent and Trademark Office. 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 brand and its market acceptance, competitive
advantages or goodwill, which could adversely affect our
business.
We are
subject to environmental regulations.
Our operating costs may be affected by the obligation to pay for
the cost of complying with existing environmental laws,
ordinances and regulations, as well as the cost of compliance
with future environmental legislation. Under current federal,
state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or
toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic
substances. In addition, the presence of contamination from
hazardous or toxic substances, or the failure to remediate such
contaminated property properly, may adversely affect the ability
of the owner of the property to borrow using such property as
collateral for a loan or to sell such property. Environmental
laws also may impose restrictions on the manner in which a
property may be used or transferred or in which businesses may
be operated, and may impose remedial or compliance costs. The
costs of defending against claims of liability or remediating
contaminated property and the cost of complying with
environmental laws could have an adverse effect on our results
of operations and financial condition.
In connection with our acquisition of a hotel, a Phase I
environmental assessment is conducted by a qualified independent
environmental engineer. A Phase I environmental assessment
involves an
on-site
inspection and researching historical usages of a property and
databases containing registered underground storage tanks and
other matters to determine whether an environmental issue exists
with respect to the property which needs to be addressed. If the
results of a Phase I environmental assessment reveal potential
issues that warrant further investigation, a Phase II
environmental assessment, which may include soil testing, ground
water monitoring or borings to locate underground storage tanks,
will be ordered. It is possible that Phase I and Phase II
environmental assessments will not reveal all environmental
liabilities or compliance concerns or that there will be
material environmental liabilities or compliance concerns of
which we will not be aware. Phase I environmental assessments
have been performed on all properties owned by us, although they
have not been performed on all of our leased properties.
14
We have not performed Phase II environmental assessments on
two of our owned properties for which Phase II assessments
were recommended, because we determined that any further
investigation was not warranted for materiality reasons. We
cannot assure you that these properties do not have any
environmental risks associated with them. While 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, we cannot assure you that these properties do not
have any environmental concerns associated with them. We cannot
assure you that we will not discover problems that currently
exist, but of which we have no current knowledge, that future
laws, ordinances or regulations will not impose any material
environmental liability, or that the current environmental
condition of our existing and future properties will not be
affected by the condition of neighboring properties, such as the
presence of leaking underground storage tanks, or by third
parties 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.
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 53 hotels in our system at December 31, 2007, 41 are
located in Oregon, Washington, Idaho or Montana. Our results of
operations and financial condition may be significantly affected
by the economy of the Pacific Northwest, which is dependent in
large part on a limited number of major industries, including
agriculture, tourism, technology, timber and aerospace. These
industries may be affected by:
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Changes in governmental regulations and economic conditions;
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The relative strength of national and local economies; and
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The rate of national and local unemployment.
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In addition, companies in these industries may decide to
relocate all or part of their businesses outside the Pacific
Northwest. Any of these factors could materially affect the
local economies in which these industries operate and where we
have a presence. Other adverse events affecting the Pacific
Northwest, such as economic recessions or natural disasters,
could cause a loss of revenues for our hotels in this region.
Our concentration of assets within this region puts us at
greater economic risk. In addition, we operate or market
multiple hotels within several markets. A downturn in general
economic or other relevant condition in these specific markets
or in any other market in which we operate could lead to a
decline in demand in these markets and cause a loss of revenues
from these hotels.
The
results of some of our individual 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
our hotels. These contracts and customers vary from hotel to
hotel and change from time to time. Such contracts are typically
for a limited period of time after which they may be eligible
for competitive bidding. The impact and timing of large events
are not always predictable and are often episodic in nature. The
operating results
15
for our hotels can fluctuate as a result of these factors,
possibly in adverse ways, and these fluctuations can harm our
overall operating results.
If our
franchisees terminate or fail to renew their relationship with
our company, our franchise revenue will decline.
As of December 31, 2007, there were 21 hotels in our system
that were owned by others and operated under franchise
agreements. Franchise agreements for three hotels expired
subsequent to that date and will leave our system of hotels
during 2008. In addition, one hotel under a management contract
expired subsequent to that date and has since left our system of
hotels.
Franchise agreements generally specify a fixed term and contain
various early termination provisions, such as the right to
terminate upon notice by paying us a termination fee. We cannot
assure shareholders that these agreements will be renewed, or
that they will not be terminated prior to the end of their
respective terms.
All franchised hotels were required to meet Red Lions
upscale brand standards by the end of 2007. Currently, we expect
sixteen franchised hotels to meet our elevated brand standards.
We anticipate that between two and four franchised hotels may
not meet the elevated brand standards, which may result in the
termination of these franchises in the first half of 2008. If
these or other franchise agreements are not renewed, or are
terminated prior to the expiration of their respective terms,
the resulting decrease in revenue and loss of market penetration
could have an adverse effect on our results of operations and
financial condition.
We may
be unsuccessful in identifying and completing acquisition
opportunities, which could limit our ability to implement our
long-term growth strategy and result in significant
expenses.
We intend to pursue a full range of growth opportunities,
including identifying hotels for acquisition, development,
management, rebranding and franchising. Our ability to make
acquisitions is dependent upon, among other things, our
relationships with owners of existing hotels and certain major
hotel investors, financing acquisitions and renovations and
successfully integrating new hotels into our operations. We may
be unable to find suitable hotels for acquisition, development,
management, rebranding or franchising on acceptable terms, or at
all. Competition with other hotel companies may increase the
cost of acquiring hotels. Even if suitable hotels are identified
for acquisition, we may not be able to find lenders or capital
partners willing to finance the acquisition of the hotels on
acceptable terms. Further, we may not have adequate cash from
operations or from our available debt capacity to pursue such
growth opportunities. Our failure to compete successfully for
acquisitions, to obtain suitable financing for acquisitions we
have identified or to attract and maintain relationships with
hotel owners and major hotel investors could adversely effect
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.
If
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. Our expansion within our
existing markets could adversely affect the financial
performance of our existing hotels in those markets and, as a
result, negatively impact our overall results of operations.
Expansion into new markets may also present operating and
marketing challenges that are different from those we currently
encounter in our existing markets. Additionally, any new hotels
or enhanced or upgraded hotel amenities may fail to achieve
revenue and profitability levels comparable to our existing
hotels. Our inability to anticipate all of the changing demands
that expanding operations will impose on our management and
management information and reservation systems, or our failure
to quickly adapt our systems and procedures to the new markets
could result in lost revenue and increased expenses and
otherwise have an adverse effect on our results of operations
and financial condition.
16
We
rely on our central reservation system for occupancy at our
hotels and any failures in such system could negatively affect
our revenues and cash flows.
The hospitality industry continues to demand the use of
technology and systems including those utilized for property
management, procurement, reservation systems, operation of our
customer loyalty program and distribution. 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 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 assurance 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 timeframes for such
technology. 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 as
anticipated, or we fail to keep up with technological or
competitive advances, our revenues and cash flows could suffer.
We
have incurred debt financing and may incur increased
indebtedness in connection with future acquisitions, capital
expenditures or for other corporate purposes.
A substantial portion of our outstanding indebtedness is secured
by individual properties. Neither our Articles of Incorporation
nor our Bylaws limit the amount of indebtedness that we may
incur. Subject to limitations in our debt instruments, we may
incur additional debt in the future to finance acquisitions and
renovations and for general corporate purposes. Accordingly, we
could become highly leveraged, resulting in an increase in debt
service that could adversely affect our operating cash flow. Our
continuing indebtedness could increase our vulnerability to
general economic and lodging industry conditions, including
increases in interest rates, and could impair our ability to
obtain additional financing in the future and to take advantage
of significant business opportunities that may arise. Our
indebtedness is, and will likely continue to be, secured by
mortgages on our owned hotels. We cannot assure shareholders
that we will be able to meet our debt service obligations and,
to the extent that we cannot, we risk the loss of some or all of
our assets, including our hotels, to foreclosure.
Adverse economic conditions could cause the terms on which
borrowings become available to be unfavorable to us. In such
circumstances, if we are in need of capital to repay
indebtedness in accordance with its terms or otherwise, we could
be required to sell one or more of our owned hotels at times
that may not permit realization of the maximum potential return
on our investments. Economic conditions could result in higher
interest rates, which would increase debt service requirements
on our variable rate credit facilities and could reduce the
amount of cash available for general corporate purposes.
Failure
to comply with debt covenants could adversely affect our
financial results or condition.
In September 2006, we entered into a $50 million revolving
credit facility that includes customary affirmative and negative
covenants, the most restrictive of which are financial covenants
dealing with leverage, interest coverage and debt service
coverage. At December 31, 2007, we were in compliance with
our covenants and had no amounts outstanding under the facility.
We believe we will be able to comply with such requirements in
the future, although failure to do so could adversely affect our
results or financial condition and may limit our ability to
obtain financing. For additional information, see Note 9 of
Notes to Consolidated Financial Statements.
Our
current or future joint venture arrangements may not reflect
solely our best interests and may subject these investments to
increased risks.
We may in the future acquire interests in other properties
through joint venture arrangements with other entities.
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
17
may be more favorable to the other party or parties than to us.
Although we 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:
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The other owner(s) of the investment might become bankrupt;
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The other owner(s) may have economic or business interests or
goals that are inconsistent with ours;
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The other owner(s) may be unable to make required payments on
loans under which we are jointly and severally liable;
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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;
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Actions by the other owner(s) might subject the property to
liabilities in excess of those otherwise contemplated by
us; and
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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.
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Failure
to retain senior management or other key employees could
adversely affect our business.
We place substantial reliance on the lodging industry experience
and the institutional knowledge of members of our senior
management team. The loss of the services of one or more of
these individuals could hinder our ability to effectively manage
our business and implement our growth strategies. Finding
suitable replacements for senior management and other key
employees would be difficult, as competition for such personnel
of similar experience and perspective is intense. We compete for
qualified personnel against companies with greater financial
resources than ours. There can be no assurance we will continue
to be successful in retaining or attracting qualified personnel
in the future. We do not carry key person insurance on any of
our senior management team.
The
market price for our common stock may be volatile.
During the latter part of 2007 and into 2008, market prices of
securities including our common stock have fluctuated. Many
factors could cause the market price of our common stock to rise
or fall, including but not limited to:
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Actual or anticipated variations in our quarterly results of
operations;
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Changes in market valuations of companies in the hospitality
industry;
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Changes in financial estimates, expectations of future financial
performance or recommendations by analysts;
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Changes in general conditions in the economy and subsequent
fluctuations in stock market prices and volumes;
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Issuances of common stock or other securities in the future;
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The addition or departure of key personnel, including one or
more members of our senior management team; and
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Announcements by us or our competitors of acquisitions,
investments or strategic alliances.
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Due to
the shareholdings of our Chairman, together with other members
of the Barbieri family, we may be limited in our ability to
undertake transactions requiring shareholder
approval.
As of December 31, 2007, Donald K. Barbieri, our Chairman
of the Board, had sole voting and investment power with respect
to 5.2% of our outstanding shares of common stock. Heather
Barbieri, his ex-spouse, had sole voting and investment power
with respect to 5.3% of our outstanding shares of common stock.
Pursuant to a trust
18
agreement, Donald K. Barbieri and Heather Barbieri share voting
and investment power with respect to an additional 3.0% of our
outstanding shares of common stock. Richard L. Barbieri, who is
also a director and Donald K. Barbieris brother,
beneficially owned 1.2% of our outstanding shares of common
stock as of December 31, 2007. In addition, we believe that
other members of the Barbieri family who are not directors,
executive officers or 5% shareholders individually hold our
outstanding common stock. As such, to the extent they are
willing and able to act in concert, they may have the ability as
a group to substantially influence actions requiring the
approval of our shareholders, including a merger or a sale of
all of our assets or a transaction that results in a change of
control.
The
performance of our entertainment division is particularly
subject to fluctuations in economic conditions.
Our entertainment division, which comprised 7.9% of our total
revenues from continuing operations in 2007, engages in event
ticketing and the presentation of various entertainment
productions. Our entertainment division is vulnerable to risks
associated with changes in general regional and economic
conditions, the potential for significant competition and a
change in consumer trends, among other risks. In addition, we
face the risk that entertainment productions will not tour the
regions in which we operate or that such productions will not
choose us as a presenter or promoter.
If we
are unable to locate lessees for our office and retail space,
our revenues and cash flow may be adversely
affected.
We own and lease to others over 162,000 square feet of
retail space in Kalispell, Montana. We are subject to the risk
that leases for this space might not be renewed upon their
expiration, the space may not be relet or the terms of renewal
or reletting such space, including the cost of required
renovations, might be less favorable to us than current lease
terms. Vacancies could result due to the termination of a
tenants tenancy, the tenants financial failure or a
breach of the tenants obligations. We may be unable to
locate tenants for rental spaces vacated in the future or we may
be limited to renting space on terms unfavorable to us. Delays
or difficulties in attracting tenants and costs incurred in
preparing for tenant occupancy could reduce cash flow, decrease
the value of a property and jeopardize our ability to pay our
expenses.
Item 1B. Unresolved
Staff Comments
None.
Our mix of business is balanced between group, business and
leisure travelers with the mix varying by location, with our
guest rooms well equipped with products important to them. Most
of our hotels offer flexible meeting space to service the group
and convention markets, as well as dining, fitness centers,
business services or other ancillary services. We are finished
with our major renovation initiative for our owned and leased
hotels that began in 2005. The capital investment program
represented one of the most significant facility improvement
programs in company history, and we remain committed to ongoing
capital improvements in order to continue to enhance the Red
Lion brand by improving our hotel quality to enhance our
guests experiences. In focus groups and market research,
the Red Lion name is associated with superior service and is
consistently identified by consumers when asked about their full
service lodging selection and habits.
Under the Red Lion name as of December 31, 2007, we owned
18 hotels, leased 13, managed one third-party owned hotel and
had franchise arrangements with 21 hotels owned and operated by
third parties. To support our owned, leased, managed and
franchised hotels, we provide all the services typical in our
industry: marketing, sales, advertising, frequency program,
revenue management, procurement, quality assurance, education
and training, design and construction management. We maintain
and manage our own 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, 2007.
19
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Total
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Meeting
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Available
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Space
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Property
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Location
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Rooms
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(sq. ft.)
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Red Lion Owned Hotels
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Red Lion Hotel Eureka
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Eureka, California
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175
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4,890
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Red Lion Hotel Redding
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Redding, California
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192
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6,800
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Red Lion Hotel Pocatello
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Pocatello, Idaho
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150
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13,000
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Red Lion Templins Hotel on the River
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Post Falls, Idaho
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163
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11,000
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Red Lion Hotel Canyon Springs
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Twin Falls, Idaho
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112
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5,085
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Red Lion Colonial Hotel
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Helena, Montana
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149
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15,500
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Red Lion Hotel Salt Lake Downtown
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Salt Lake City, Utah
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392
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12,000
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Red Lion Hotel Columbia Center
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Kennewick, Washington
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162
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9,700
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Red Lion Hotel Olympia
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Olympia, Washington
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192
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16,500
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Red Lion Hotel Pasco
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Pasco, Washington
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279
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17,240
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Red Lion Hotel Port Angeles
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Port Angeles, Washington
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186
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3,010
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Red Lion Hotel Richland Hanford House
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Richland, Washington
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149
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9,247
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Red Lion Bellevue
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Bellevue, Washington
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181
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5,700
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Red Lion Hotel on Fifth Avenue
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Seattle, Washington
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297
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13,800
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Red Lion Hotel Seattle Airport
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Seattle, Washington
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144
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4,500
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Red Lion Hotel at the Park
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Spokane, Washington
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400
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30,000
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Red Lion Hotel Yakima Center
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Yakima, Washington
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156
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11,000
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Red Lion Kalispell Center
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Kalispell, Montana
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170
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10,500
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Owned Hotels (18 properties)
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3,649
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199,472
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Red Lion Leased Hotels
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Red Lion Hotel Boise Downtowner
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Boise, Idaho
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182
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8,600
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Red Lion Inn Missoula
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Missoula, Montana
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76
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640
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Red Lion Inn Astoria
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Astoria, Oregon
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122
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5,118
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Red Lion Inn Bend North
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Bend, Oregon
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75
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2,000
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Red Lion Hotel Coos Bay
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Coos Bay, Oregon
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145
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5,000
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Red Lion Hotel Eugene
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Eugene, Oregon
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137
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5,600
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Red Lion Hotel Medford
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|
|
Medford, Oregon
|
|
|
|
185
|
|
|
|
9,552
|
|
Red Lion Hotel Pendleton
|
|
|
Pendleton, Oregon
|
|
|
|
170
|
|
|
|
9,769
|
|
Red Lion Hotel Kelso/Longview
|
|
|
Kelso, Washington
|
|
|
|
161
|
|
|
|
8,670
|
|
Red Lion River Inn
|
|
|
Spokane, Washington
|
|
|
|
245
|
|
|
|
2,800
|
|
Red Lion Hotel Vancouver (at the Quay)
|
|
|
Vancouver, Washington
|
|
|
|
160
|
|
|
|
14,785
|
|
Red Lion Hotel Wenatchee
|
|
|
Wenatchee, Washington
|
|
|
|
149
|
|
|
|
7,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased Hotels (12 properties)
|
|
|
|
|
|
|
1,807
|
|
|
|
80,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Leased Hotels
|
|
|
|
|
|
|
|
|
|
|
|
|
Anaheim Maingate(1)
|
|
|
Anaheim, California
|
|
|
|
310
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Leased Hotels (1 property)
|
|
|
|
|
|
|
310
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Meeting
|
|
|
|
|
|
|
Available
|
|
|
Space
|
|
Property
|
|
Location
|
|
|
Rooms
|
|
|
(sq. ft.)
|
|
|
Other Managed Hotels
|
|
|
|
|
|
|
|
|
|
|
|
|
The Grove(2)
|
|
|
Boise, Idaho
|
|
|
|
254
|
|
|
|
36,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Managed Hotels (1 property)
|
|
|
|
|
|
|
254
|
|
|
|
36,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Red Lion Franchised Hotels
|
|
|
|
|
|
|
|
|
|
|
|
|
Red Lion Inn & Suites Victoria
|
|
|
Victoria, BC Canada
|
|
|
|
85
|
|
|
|
450
|
|
Red Lion Hotel Bakersfield
|
|
|
Bakersfield, California
|
|
|
|
165
|
|
|
|
6,139
|
|
Red Lion Hotel Modesto
|
|
|
Modesto, California
|
|
|
|
186
|
|
|
|
6,600
|
|
Red Lion Hotel Denver Central
|
|
|
Denver, Colorado
|
|
|
|
297
|
|
|
|
15,206
|
|
Red Lion Hotel Denver Downtown(2)
|
|
|
Denver, Colorado
|
|
|
|
169
|
|
|
|
1,240
|
|
Red Lion Hotel Lewiston
|
|
|
Lewiston, Idaho
|
|
|
|
183
|
|
|
|
12,259
|
|
Red Lion Hotel & Casino Elko
|
|
|
Elko, Nevada
|
|
|
|
222
|
|
|
|
3,000
|
|
Red Lion Hotel & Casino Winnemucca
|
|
|
Winnemucca, Nevada
|
|
|
|
105
|
|
|
|
1,271
|
|
Red Lion Inn & Suites McMinnville
|
|
|
McMinnville, Oregon
|
|
|
|
67
|
|
|
|
1,312
|
|
Red Lion Inn Portland Airport
|
|
|
Portland, Oregon
|
|
|
|
136
|
|
|
|
3,000
|
|
Red Lion Hotel Portland Convention Center
|
|
|
Portland, Oregon
|
|
|
|
174
|
|
|
|
6,000
|
|
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 Tacoma
|
|
|
Tacoma, Washington
|
|
|
|
119
|
|
|
|
750
|
|
Red Lion Hotel Seattle South
|
|
|
Seattle, Washington
|
|
|
|
117
|
|
|
|
3,990
|
|
Selkirk Lodge at Schweitzer Mountain a Red Lion
Hotel(2)
|
|
|
Sandpoint, Idaho
|
|
|
|
82
|
|
|
|
8,784
|
|
White Pine Lodge at Schweitzer Mountain a Red Lion
Hotel(2)
|
|
|
Sandpoint, Idaho
|
|
|
|
50
|
|
|
|
4,000
|
|
Red Lion Hotel Idaho Falls
|
|
|
Idaho Falls, Idaho
|
|
|
|
138
|
|
|
|
8,800
|
|
Red Lion Klamath Falls
|
|
|
Klamath Falls, Oregon
|
|
|
|
108
|
|
|
|
1,200
|
|
Red Lion Hillsboro
|
|
|
Hillsboro, Oregon
|
|
|
|
123
|
|
|
|
3,200
|
|
Red Lion Hotel Sacramento at Arden Village(3)
|
|
|
Sacramento, California
|
|
|
|
376
|
|
|
|
19,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchised Hotels (21 properties)(4)
|
|
|
|
|
|
|
3,368
|
|
|
|
151,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total All Hotels (53 properties)
|
|
|
|
|
|
|
9,388
|
|
|
|
472,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Red Lion Hotels (51 properties)
|
|
|
|
|
|
|
8,824
|
|
|
|
431,529
|
|
|
|
|
(1) |
|
Represents a hotel acquired in the fourth quarter of 2007 that
is being repositioned as a Red Lion. It is currently flagged as
independent. |
|
(2) |
|
Subsequent to December 31, 2007, the franchise or
management agreements expired and were not renewed. Therefore,
these hotels will leave our system in 2008. |
|
(3) |
|
We entered into a sublease agreement for the Red Lion Hotel
Sacramento in July 2007 and simultaneously entered into a
long-term franchise agreement. |
|
(4) |
|
We entered into a long term franchise agreement for the Red Lion
Baton Rouge, a full service hotel that opened in January 2008
after a multi-million dollar renovation. This hotel has not been
included in the property count at December 31, 2007. |
21
Owned
and Leased Hotels
Owned hotels are those properties which we operate and manage
and have ownership of the hotel facility, equipment, personal
property, other structures and in most cases, the land. We
recognize revenues and expenses on these properties, including
depreciation where appropriate.
Leased hotels are those properties which we operate and manage
and may have ownership of some or all of the equipment and
personal property on site, however, the hotel facility and
usually underlying land is occupied under an operating lease
from a third party. We recognize revenues and expenses on these
properties, including lease expense. The most significant
leases, with expiration dates ranging from 2020 to 2035 and
having renewal provisions, typically require us to pay fixed
monthly rent and variable rent based on a percentage of revenue
if certain sales thresholds are reached. In addition, we are
responsible for repairs and maintenance, operating expenses and
management of operations. For additional information on leases,
refer to Note 13 of Notes to Consolidated Financial
Statements.
Managed
Hotels
Under the typical hotel management agreement, we manage
virtually all aspects of the hotels operations while the
hotel owner is responsible for operating and other expenses. Our
management fees are based on a percentage of the hotels
gross revenue plus an incentive fee based on operating
performance. As of December 31, 2007, we managed one
third-party owned hotel with a total of 254 rooms and
36,000 square feet of meeting space. Effective
January 1, 2008, this hotel did not renew its agreement and
left our system.
Franchised
Hotels
During the third quarter of 2007, we subleased the Red Lion
Hotel Sacramento to a third party and simultaneously entered
into a long-term franchise agreement. Including Sacramento, we
had 21 franchised hotels that were owned and operated by third
parties under our licensed brand name at December 31, 2007,
not including our franchised hotel in Baton Rouge, Louisiana,
which came on-line in January 2008. These hotels have a total of
3,368 rooms and 151,845 square feet of meeting space.
Under our franchise agreements, we receive royalties for the use
of the Red Lion brand name. 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 our system hotels and franchisees. We do not have
management or operational responsibility for these hotels.
All franchised hotels were required to meet Red Lions
upscale brand standards by the end of 2007. Sixteen of our
franchised hotels have met or are expected to meet our elevated
brand standards. We anticipate that between two and four
franchised hotels may not meet the elevated brand standards,
which may result in the termination of these franchises in the
first half of 2008. In addition, franchise agreements for three
hotels are terminating in the first quarter of 2008, resulting
in their removal from the system.
Discontinued
Operations and Assets Held For Sale
In November 2004, we announced our plan to divest non-strategic
assets, including eleven of our owned hotels, certain commercial
office buildings and certain other non-core properties including
condominium units and certain parcels of excess land
(collectively referred to as the divestment
properties). Each of the divestment properties met the
criteria to be classified as an asset held for sale. The
activities of the hotels and commercial office buildings were
considered discontinued operations under generally accepted
accounting principles and have been separately disclosed on our
consolidated statement of operations, comparative for all
periods presented when they existed. Likewise, the assets and
liabilities of the business units have been segregated and
separately stated on our consolidated balance sheet for all
periods presented when they existed.
During 2005, we sold seven of the eleven hotels included under
the November 2004 divestment plan and one commercial office
building, and during 2006 we sold three additional hotels.
During the second quarter of 2007, we sold the remaining hotel
located in Kalispell, Montana for gross proceeds of
$3.9 million. In total, we received
22
$72.6 million in gross proceeds from the sale of these
assets which were used primarily to finance a company-wide hotel
renovation program, to repay $20.0 million in debt and for
general corporate purposes.
We also hold undeveloped land that had been classified as held
for sale on the consolidated balance sheet. While continuing to
pursue the disposition of the assets, we determined the land no
longer met the accounting criteria for such classification.
During June 2007, approximately $0.7 million was
reclassified to property and equipment for all periods presented.
During the fourth quarter of 2006, we listed for sale a
commercial office complex located in Spokane, Washington that
was included as a component of discontinued operations on the
consolidated financial statements. In September 2007, we sold
the complex for $13.3 million and recognized a net gain on
the sale of $1.2 million. For additional information, see
Note 3 of Notes to Consolidated Financial Statements.
Other
Operations
In addition to the operations discussed above, we maintain a
direct ownership interest in a retail mall in Kalispell, Montana
that is attached to our Red Lion hotel and other miscellaneous
real estate investments.
|
|
Item 3.
|
Legal
Proceedings
|
At any given time, we are subject to claims and actions incident
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.
|
Submission
of Matters to a Vote of the Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2007.
|
|
Item 4A.
|
Executive
Officers of the Registrant
|
Set forth below is information regarding our directors,
executive officers and certain key employees as of
March 12, 2008:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Donald K. Barbieri
|
|
|
62
|
|
|
Chairman of the Board
|
Richard L. Barbieri
|
|
|
65
|
|
|
Director
|
Ryland P. Skip Davis
|
|
|
67
|
|
|
Director
|
Jon E. Eliassen
|
|
|
61
|
|
|
Director
|
Anupam Narayan
|
|
|
54
|
|
|
President, Chief Executive Officer, Chief Financial Officer and
Director
|
Peter F. Stanton
|
|
|
51
|
|
|
Director
|
Ronald R. Taylor
|
|
|
60
|
|
|
Director
|
John M. Taffin
|
|
|
44
|
|
|
Executive Vice President, Hotel Operations
|
Thomas L. McKeirnan
|
|
|
39
|
|
|
Senior Vice President, General Counsel and Secretary
|
Anthony F. Dombrowik
|
|
|
37
|
|
|
Senior Vice President, Corporate Controller and Principal
Accounting Officer
|
Jack G. Lucas
|
|
|
55
|
|
|
Vice President and President, TicketsWest
|
Donald K. Barbieri. Mr. Barbieri has been
a director since 1978 and Chairman of the Board since 1996. He
served as President and Chief Executive Officer from 1978 until
April 2003. Mr. Barbieri joined the Company in 1969 and was
responsible for its development activities in hotel,
entertainment and real estate areas. Mr. Barbieri is a past
Trustee of Gonzaga University; Chairman of the Board for the
Spokane Regional Chamber of Commerce; served as President of the
Spokane Chapter of the Building Owners and Managers Association;
as President of the
23
Spokane Regional Convention and Visitors Bureau and as Chairman
of the Spokane United Way Campaign. Barbieri chaired the State
of Washingtons Quality of Life Task Force. He has served
as board Chairman for the Inland Northwests largest
hospital system, Sacred Heart Medical Center and was founding
president of the Physician Hospital Community Organization. He
has served three governors on the Washington Economic
Development Board and currently chairs the Spokane County
Democratic Election Committee after being a candidate for the
Fifth District US Congressional Seat from the State of
Washington. Mr. Barbieri is brother to director Richard L.
Barbieri.
Richard L. Barbieri. Mr. Barbieri has
been a director since 1978. From 1994 until he retired in
December 2003, he served as the Companys full-time General
Counsel, first as Vice President, then Senior Vice President and
Executive Vice President. He currently serves as Chairman of the
Board of Puget Sound Neighborhood Health Centers and as a member
of the Board of the Pike Market Foundation, both non-profit
organizations. From 1978 to 1995, Mr. Barbieri served as
legal counsel and Secretary, during which time he was first
engaged in the private practice of law at Edwards and Barbieri,
a Seattle law firm, and then at Riddell Williams P.S., a Seattle
law firm. Mr. Barbieri has also served as chairman of
various committees of the Washington State Bar Association and
the King County (Washington) Bar Association, and as a member of
the governing board of the King County bar association. He also
served as Vice Chairman of the Citizens Advisory Committee
to the Major League Baseball Stadium Public Facilities District
in Seattle in 1996 and 1997. Mr. Barbieri is brother to
Donald K. Barbieri.
Ryland P. Skip Davis, Mr. Davis has been
a director since May 2005. He currently is the Chief Executive
Officer of Providence Strategic Ventures, a new division of
Providence Health and Services, the sixth largest Catholic
health system in the Unites States. From 1998 to 2007, he served
as Chief Executive Officer of Providence Health Care and from
1996 to 1998 as Chief Executive Officer of Sacred Heart Medical
Center in Spokane. From 1993 to 1996, Mr. Davis was Senior
Vice President for the Hunter Group, a hospital management firm
specializing in healthcare consulting and management nationally.
From 1988 to 1993, he was Chairman and CEO of Synergos
Neurological Centers, Inc., in Santa Ana and Sacramento,
California. From 1987 to 1988, he was President of Diversified
Health Group, Inc., of Sacramento. From 1982 to 1987, he worked
for American Health Group International as President and CEO of
Amerimed in Burbank, California, and as Executive Vice President
of Operations. From 1981 to 1982, he worked for Hospital
Affiliates International, as Group Vice President in Sacramento,
and as CEO of Winona Memorial Hospital in Indianapolis, Indiana.
From 1972 to 1975, he was Associate Administrator of
San Jose Hospital and Health Care Center in San Jose,
California and from 1968 to 1971, Assistant Administrator of
Alta Bates Hospital in Berkeley, California. He has done
numerous private business ventures related to healthcare.
Mr. Davis is a Fellow of the American College of Health
Care Executives and has published articles in Modern
Healthcare, Health Week, and other business
publications regarding healthcare issues and perspectives.
Mr. Davis is currently on the Board and is Chair of the
Spokane Area Chamber of Commerce, on the Boy Scouts of America
Inland Northwest Council Board, and a member of the Washington
State University Advisory Council.
Jon E. Eliassen. Mr. Eliassen has been a
director since September 2003. Mr. Eliassen was President
and CEO of the Spokane Area Economic Development Council from
2003 until 2007. Mr. Eliassen retired in 2003 from his
position as Senior Vice President and Chief Financial Officer of
Avista Corp., a publicly-traded diversified utility.
Mr. Eliassen spent 33 years at Avista, including the
last 16 years as its Chief Financial Officer. While at
Avista, Mr. Eliassen was an active participant in
development of a number of successful subsidiary company
operations including technology related startups Itron, Avista
Labs and Avista Advantage. Mr. Eliassen serves on the Board
of Directors of Itron Corporation, IT Lifeline, Inc, and is the
principal of Terrapin Capital Group, LLC.
Mr. Eliassens corporate accomplishments are
complemented by his extensive service to the community in roles
which have included director and President of the Spokane
Symphony Endowment Fund, director of The Heart Institute of
Spokane, Washington State University Research Foundation,
Washington Technology Center, Spokane Intercollegiate Research
and Technology Institute and past director of numerous other
organizations and energy industry associations.
Anupam Narayan. Effective February 11,
2008, Mr. Narayan was appointed President and Chief
Executive Officer. Prior to that, Mr. Narayan was our
Executive Vice President, Chief Investment Officer and Chief
Financial Officer since January 2005. He has been with the
company since November 2004, when he was first appointed
Executive Vice President and Chief Investment Officer.
Mr. Narayan has nearly 25 years of experience in the
24
hospitality industry. From 1998 to March 2004, he served in
various capacities as an executive officer of Best Western
International Inc., including his most recent position as Senior
Vice President, Global Brand Management and Chief Financial
Officer and a three-month period as Acting President and Chief
Executive Officer during 2002. From 1985 to 1998,
Mr. Narayan was employed by Doubletree Corporation and Red
Lion Hotels, Inc., serving as Senior Vice President and
Treasurer immediately prior to his move to Best Western. He has
served on the board of the International Hotel and Restaurant
Association and as Chairman of its Chains Council.
Peter F. Stanton. Mr. Stanton has been a
director since April 1998. Mr. Stanton has served as the
Chief Executive Officer of Washington Trust Bank since 1993
and its Chairman since 1997. Mr. Stanton previously served
as President of Washington Trust Bank from 1990 to 2000.
Mr. Stanton is also Chief Executive Officer, President and
Chairman of the Board of Directors of W.T.B. Financial
Corporation (a bank holding company). In addition to serving on
numerous state and local civic boards, Mr. Stanton was
President of the Washington Bankers Association from 1995 to
1996 and served as Washington state chairman of the American
Bankers Association in 1997 and 1998. He currently serves as a
National Trustee for the Boys and Girls Club of
America. Mr. Stanton is also a Trustee of Gonzaga
University, is on the Board of Trustees of Greater Spokane
Incorporated, as well as on the board of the Inland Northwest
Council, Boy Scouts of America.
Ronald R. Taylor. Mr. Taylor has been a
director since April 1998. Mr. Taylor is President of
Tamarack Bay, LLC, a private consulting firm and is currently a
director of two other public companies, Watson Pharmaceuticals,
Inc. (a pharmaceutical manufacturer) and ResMed, Inc. (a
manufacturer of equipment relating to the management of
sleep-disordered breathing). At Watson Pharmaceuticals, Inc.,
Mr. Taylor is a member of the Audit and Nominating and
Corporate Governance Committees and is Chairman of the
Compensation Committee. At ResMed, Inc., he is a member of the
Nominating and Corporate Governance Committees and Chairman of
the Compensation Committee. Mr. Taylor is also Chairman of
the Board of three privately held companies. From 1998 to 2002,
Mr. Taylor was a general partner of Enterprise Partners, a
venture capital firm. From 1996 to 1998, Mr. Taylor worked
as an independent business consultant. From 1987 to 1996,
Mr. Taylor was Chairman, President and Chief Executive
Officer of Pyxis Corporation (a health care service provider),
which he founded in 1987. Prior to founding Pyxis, he was an
executive with both Allergan Pharmaceuticals and Hybritech, Inc.
John M. Taffin. Mr. Taffin has been our
Executive Vice President, Hotel Operations since September 2003.
He originally joined us in 1995 and held the position of
Regional Manager from November 1995 to July 1997 and Vice
President Hotel Operations from August 1997 to September 2002.
From August 2002 to August 2003 he was managing partner of Yogo
Inn of Lewistown, Inc., a Montana based hotel company.
Mr. Taffin started his hospitality industry career with Red
Lion Hotels in 1982. During the period from 1982 to 1986 he held
mid-management positions with Red Lion Hotels in Idaho,
Washington and Oregon. In 1986 he was promoted to General
Manager and during the following nine years managed Red Lion
Hotels in Idaho, Washington and Oregon. In 1986 he was promoted
to General Manager and during the following nine years managed
Red Lion Hotels in Idaho, Washington, Oregon and California. In
2007, Mr. Taffin was appointed by the governor of the state
of Washington to the Washington State Tourism Commission. He has
served as the President of the Washington State Hotel and
Lodging Association and as a board member of the Spokane Public
Facilities District, the Spokane Lodging Tax Advisory Committee
and the Washington State Tourism Advisory Committee.
Thomas L. McKeirnan. Mr. McKeirnan has
been our Senior Vice President, General Counsel and Secretary
since February 2005. Prior to that he served as Vice President,
General Counsel and Secretary from January 2004 through February
2005 and Vice President, Assistant General Counsel from July
2003 to January 2004. Prior to joining us, Mr. McKeirnan
was a partner at the Spokane, Washington law firm of Paine
Hamblen Coffin Brooke & Miller LLP from January 2002
until July 2003 and an associate attorney at the same firm from
1999 to 2001. Mr. McKeirnan was an associate attorney with
the Seattle, Washington law firm of Riddell Williams P.S. from
1995 until 1999. Mr. McKeirnans private legal
practice focused on corporate, transactional, real estate and
securities law, with an emphasis on the hospitality industry.
While in private practice, Mr. McKeirnan represented us as
outside counsel on various strategic and transactional matters
and also represented WestCoast Hotels, Inc. prior to our
acquisition of that company.
Anthony F. Dombrowik. Mr. Dombrowik
serves as our Senior Vice President, Corporate Controller and
Principal Accounting Officer. Mr. Dombrowik has been with
Red Lion Hotels Corporations since May 2003 and is a
25
member of the senior management team. Mr. Dombrowik was
previously employed as senior manager at the public accounting
firm of BDO Seidman, LLP, where he served as an auditor,
certified public accountant and consultant from 1992 to 2003.
Mr. Dombrowiks public accounting practice focused on
auditing and consulting for mid-market public companies, with
particular attention to consolidations, capital and debt
transactions, mergers and acquisitions, and the hospitality
industry.
Jack G. Lucas. Mr. Lucas serves as Vice
President of Red Lion Hotels Corporation and President of
TicketsWest. He is in charge of overseeing all of the various
departments within our entertainment division. He has been
President of TicketsWest since February 2006 and Vice President
of Red Lion Hotels Corporation since August 1998. Mr. Lucas
has approximately 26 years of experience in the
entertainment industry, and has been employed by us since 1987.
Mr. Lucas previously spent 13 years on the management
staff of the City of Spokane Entertainment Facilities, which
included a 2,700-seat performing arts center, 30,000-seat
stadium, 8,500-seat coliseum, and convention center.
Mr. Lucas was awarded the 2004 International Ticketing
Professional of the Year award from the International Ticketing
Association.
PART II
|
|
Item 5.
|
Market
for Registrants 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 closing sale prices for our common stock on the
NYSE:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2007
|
|
|
|
|
|
|
|
|
Fourth Quarter (ended December 31, 2007)
|
|
$
|
10.80
|
|
|
$
|
9.52
|
|
Third Quarter (ended September 30, 2007)
|
|
$
|
12.94
|
|
|
$
|
8.87
|
|
Second Quarter (ended June 30, 2007)
|
|
$
|
13.04
|
|
|
$
|
12.10
|
|
First Quarter (ended March 31, 2007)
|
|
$
|
12.92
|
|
|
$
|
10.62
|
|
2006
|
|
|
|
|
|
|
|
|
Fourth Quarter (ended December 31, 2006)
|
|
$
|
13.06
|
|
|
$
|
10.50
|
|
Third Quarter (ended September 30, 2006)
|
|
$
|
11.13
|
|
|
$
|
9.50
|
|
Second Quarter (ended June 30, 2006)
|
|
$
|
14.00
|
|
|
$
|
10.60
|
|
First Quarter (ended March 31, 2006)
|
|
$
|
13.65
|
|
|
$
|
8.35
|
|
(b) The closing sale price of the common stock on the NYSE
on February 29, 2008 was $8.01. As of that date, there were
approximately 102 shareholders of record of the common
stock.
(c) We have not paid any cash dividends on our common stock
during the last two fiscal years and do not anticipate paying
any in the foreseeable future. We intend to retain earnings to
provide funds for the continued growth and development of our
business. Any determination to pay cash dividends in the future
will be at the discretion of our board of directors, who
periodically review our dividend policy on common shares.
26
(d) The following table provides information as of
December 31, 2007 on plans under which equity securities
may be issued to employees, directors or consultants:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
(a)
|
|
|
|
|
|
Number of Securities
|
|
|
|
Number of Securities
|
|
|
(b)
|
|
|
Remaining Available for
|
|
|
|
to be Issued Upon
|
|
|
Weighted-Average
|
|
|
Future Issuance Under Equity
|
|
|
|
Exercise of
|
|
|
Exercise Price of
|
|
|
Compensation Plans
|
|
|
|
Outstanding Options,
|
|
|
Outstanding Options,
|
|
|
(Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
Warrants and Rights
|
|
|
Reflected in Column (a))
|
|
|
Equity Compensation Plans Approved by Security Holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
1998 Stock Incentive Plan(1)
|
|
|
946,992
|
|
|
$
|
6.37
|
|
|
|
|
|
2006 Stock Incentive Plan
|
|
|
329,542
|
|
|
$
|
12.58
|
|
|
|
619,697
|
|
Equity Compensation Plans Not
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved by Security Holders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,276,534
|
|
|
$
|
7.98
|
|
|
|
619,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
No further grants will be made under the 1998 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 Composite Index and the
Standard & Poors 500 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.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN
Among Read Lion Hotels Corporation, The Russell 2000 Index
And The S&P Hotels, Tesorts & Cruise Lines
Index
27
Issuer
Purchases of Equity Securities
In September 2007, the Company announced a common stock
repurchase program for up to $10.0 million. As provided in
the below table and as discussed further in Note 10 of
Notes to Consolidated Financial Statements, the Company
repurchased 924,200 shares at a cost of $9.1 million
during the fourth quarter of 2007, excluding commissions paid.
During January 2008, the Company repurchased an additional
93,000 shares for an aggregate cost of $0.9 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar Value)
|
|
|
|
|
|
|
|
|
|
Total Number of Shares
|
|
|
of Shares that
|
|
|
|
|
|
|
Average
|
|
|
Purchased as Part of
|
|
|
May Yet be
|
|
|
|
Total Number of
|
|
|
Price Paid
|
|
|
Publicly Announced
|
|
|
Purchased Under the
|
|
Period
|
|
Shares Purchased
|
|
|
per Share
|
|
|
Plans or Programs
|
|
|
Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
10/1/07 10/31/07
|
|
|
20,700
|
|
|
$
|
9.95
|
|
|
|
20,700
|
|
|
$
|
9,794
|
|
11/1/07 11/30/07
|
|
|
383,800
|
|
|
$
|
9.85
|
|
|
|
383,800
|
|
|
$
|
6,014
|
|
12/1/07 12/31/07
|
|
|
519,700
|
|
|
$
|
9.85
|
|
|
|
519,700
|
|
|
$
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total for quarter
|
|
|
924,200
|
|
|
$
|
9.85
|
|
|
|
924,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Item 6.
|
Selected
Financial Data
|
The following table sets forth our selected consolidated
financial data as of and for the years ended December 31,
2007, 2006, 2005, 2004 and 2003. The selected consolidated
statement of operations and balance sheet data are derived from
our audited financial statements. The audited consolidated
financial statements for certain of these periods are included
elsewhere in this annual report. The selected consolidated
financial data set forth below should be read in conjunction
with, and are qualified in their entirety by, our consolidated
financial statements and related notes, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and other financial information included elsewhere in
this annual report. Operating activities and the balance sheet
of discontinued operations have been reflected on a comparable
basis for all years presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of Operations Data Continuing
Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
186,893
|
|
|
$
|
170,368
|
|
|
$
|
163,053
|
|
|
$
|
161,964
|
|
|
$
|
156,399
|
|
Operating expenses(1)
|
|
$
|
171,515
|
|
|
$
|
157,060
|
|
|
$
|
151,604
|
|
|
$
|
150,791
|
|
|
$
|
145,133
|
|
Operating income
|
|
$
|
15,378
|
|
|
$
|
13,308
|
|
|
$
|
11,449
|
|
|
$
|
11,173
|
|
|
$
|
11,266
|
|
Expense of early extinguishment of debt, net(2)
|
|
$
|
|
|
|
$
|
(5,266
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Net income (loss) from continuing operations(2)
|
|
$
|
5,231
|
|
|
$
|
(520
|
)
|
|
$
|
(977
|
)
|
|
$
|
(626
|
)
|
|
$
|
2,221
|
|
Net income (loss) from continuing operations applicable(2) to
common shareholders
|
|
$
|
5,231
|
|
|
$
|
(520
|
)
|
|
$
|
(977
|
)
|
|
$
|
(1,003
|
)
|
|
$
|
(319
|
)
|
Earnings (loss) per share applicable to common shareholders
before discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.27
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.02
|
)
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on disposal of discontinued business units, net
of income tax expense (benefit)(3)
|
|
$
|
932
|
|
|
$
|
(133
|
)
|
|
$
|
3,747
|
|
|
$
|
(5,770
|
)
|
|
$
|
|
|
Income (loss) from operations of discontinued business units,
net of income tax expense or benefit
|
|
$
|
(113
|
)
|
|
$
|
78
|
|
|
$
|
1,725
|
|
|
$
|
111
|
|
|
$
|
(1,002
|
)
|
Earnings (loss) on discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
$
|
0.05
|
|
|
$
|
|
|
|
$
|
0.42
|
|
|
$
|
(0.43
|
)
|
|
$
|
(0.08
|
)
|
Net Income (Loss)
|
|
$
|
6,050
|
|
|
$
|
(575
|
)
|
|
$
|
4,495
|
|
|
$
|
(6,285
|
)
|
|
$
|
1,219
|
|
Total Earnings (Loss) per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted(2)
|
|
$
|
0.32
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.34
|
|
|
$
|
(0.51
|
)
|
|
$
|
(0.10
|
)
|
Weighted Average Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,134
|
|
|
|
16,666
|
|
|
|
13,105
|
|
|
|
13,049
|
|
|
|
12,999
|
|
Diluted
|
|
|
19,506
|
|
|
|
16,666
|
|
|
|
13,105
|
|
|
|
13,049
|
|
|
|
12,999
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
34,594
|
|
|
$
|
23,133
|
|
|
$
|
33,570
|
|
|
$
|
18,268
|
|
|
$
|
25,269
|
|
EBITDA from continuing operations(2)
|
|
$
|
33,138
|
|
|
$
|
22,602
|
|
|
$
|
23,189
|
|
|
$
|
22,115
|
|
|
$
|
21,173
|
|
Net cash provided by operating activities
|
|
$
|
21,230
|
|
|
$
|
18,962
|
|
|
$
|
11,937
|
|
|
$
|
10,889
|
|
|
$
|
11,338
|
|
Net cash used in investing activities
|
|
$
|
(12,491
|
)
|
|
$
|
(14,000
|
)
|
|
$
|
(4,219
|
)
|
|
$
|
(21,876
|
)
|
|
$
|
(1,310
|
)
|
Net cash provided by (used in) financing activities
|
|
$
|
(7,014
|
)
|
|
$
|
(5,247
|
)
|
|
$
|
(4,025
|
)
|
|
$
|
12,777
|
|
|
$
|
(2,659
|
)
|
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital(4)
|
|
$
|
7,559
|
|
|
$
|
10,217
|
|
|
$
|
18,293
|
|
|
$
|
2,322
|
|
|
$
|
856
|
|
Assets of discontinued operations
|
|
$
|
|
|
|
$
|
14,539
|
|
|
$
|
28,041
|
|
|
$
|
68,992
|
|
|
$
|
70,759
|
|
Assets held for sale
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
884
|
|
|
$
|
|
|
Property and equipment, net
|
|
$
|
260,574
|
|
|
$
|
250,575
|
|
|
$
|
216,605
|
|
|
$
|
216,802
|
|
|
$
|
196,986
|
|
Total assets
|
|
$
|
344,509
|
|
|
$
|
351,438
|
|
|
$
|
344,083
|
|
|
$
|
364,612
|
|
|
$
|
353,225
|
|
Total long-term debt and capital lease obligation
|
|
$
|
77,673
|
|
|
$
|
83,005
|
|
|
$
|
118,844
|
|
|
$
|
129,513
|
|
|
$
|
124,824
|
|
Debentures due Red Lion Hotels Capital Trust
|
|
$
|
30,825
|
|
|
$
|
30,825
|
|
|
$
|
47,423
|
|
|
$
|
47,423
|
|
|
$
|
|
|
Liabilities of discontinued operations
|
|
$
|
|
|
|
$
|
4,112
|
|
|
$
|
7,015
|
|
|
$
|
26,650
|
|
|
$
|
27,511
|
|
Long-term debt included with discontinued operations
|
|
$
|
|
|
|
$
|
3,874
|
|
|
$
|
6,223
|
|
|
$
|
25,441
|
|
|
$
|
26,612
|
|
Total liabilities
|
|
$
|
162,014
|
|
|
$
|
167,647
|
|
|
$
|
222,836
|
|
|
$
|
248,225
|
|
|
$
|
201,036
|
|
Preferred stock and related additional paid-in capital
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
29,412
|
|
Total stockholders equity
|
|
$
|
182,495
|
|
|
$
|
183,791
|
|
|
$
|
121,247
|
|
|
$
|
116,387
|
|
|
$
|
152,189
|
|
|
|
|
(1) |
|
Operating expenses include all direct segment expenses,
depreciation and amortization, gain (loss) on asset disposals,
hotel facility and land lease, undistributed corporate expenses
and conversion expenses, if any. |
|
(2) |
|
During 2006, we reduced our debt by $59.1 million, some of
which resulted in expenses for early extinguishment. For 2006,
this line item impacted net income from continuing operations by
$3.4 million, EBITDA by $5.3 million and earnings per
share by $0.20. |
|
(3) |
|
In 2007, the balance includes a net gain on the sale of a
commercial office complex of $1.2 million and a net loss of
$0.3 million from the sale of the remaining hotel
identified in the November 2004 divestment plan. In 2006, the
balance includes a loss on disposition of assets of
$0.1 million. In 2005, the balance includes a gain on the
sale of seven hotels and an office building of
$10.2 million and a non-cash impairment charge of
$4.5 million on four hotels. In 2004, the balance includes
a non-cash impairment charge of $8.9 million on four hotels. |
|
(4) |
|
Represents current assets less current liabilities, excluding
assets and liabilities of discontinued operations and assets
held for sale. |
EBITDA represents net income (loss) before interest expense,
income tax benefit (expense) and depreciation and amortization.
We utilize EBITDA as a financial measure as management believes
investors find it a useful tool to perform more meaningful
comparisons of past, present and future operating results and as
a means to evaluate the results of core, on-going operations. We
believe it is a complement to net income (loss) and other
financial performance measures. EBITDA from continuing
operations is calculated in the same manner, but excludes the
operating activities of business units identified as
discontinued. EBITDA is not intended to represent net income
(loss) as defined by generally accepted accounting principles in
the United States, and such information should not be considered
as an alternative to net income (loss), cash flows from
operations or any other measure of performance prescribed by
generally accepted accounting principles in the United States
(GAAP).
30
We use EBITDA to measure the financial performance of our owned
and leased hotels because we believe interest, taxes and
depreciation and amortization bear little or no relationship to
our operating performance. By excluding interest expense, EBITDA
measures our financial performance irrespective of our capital
structure or how we finance our properties and operations. We
generally pay federal and state income taxes on a consolidated
basis, taking into account how the applicable taxing laws apply
to us in the aggregate. By excluding taxes on income, we believe
EBITDA provides a basis for measuring the financial performance
of our operations excluding factors that our hotels cannot
control. By excluding depreciation and amortization expense,
which can vary from hotel to hotel based on historical cost and
other factors unrelated to the hotels financial
performance, EBITDA measures the financial performance of our
hotels without regard to their historical cost. For all of these
reasons, we believe that EBITDA provides us and investors with
information that is relevant and useful in evaluating our
business. We believe that the presentation of EBITDA from
continuing operations is useful for the same reasons, in
addition to using it for comparative purposes for our intended
operations going forward.
However, because EBITDA excludes depreciation and amortization,
it does not measure the capital we require to maintain or
preserve our fixed assets. In addition, because EBITDA does not
reflect interest expense, it does not take into account the
total amount of interest we pay on outstanding debt nor does it
show trends in interest costs due to changes in our borrowings
or changes in interest rates. EBITDA from continuing operations
excludes the activities of operations we have determined to be
discontinued and does not reflect the totality of operations as
experienced for the periods presented. EBITDA, as defined by us,
may not be comparable to EBITDA as reported by other companies
that do not define EBITDA exactly as we define the term. Because
we use EBITDA to evaluate our financial performance, we
reconcile it to net income, which is the most comparable
financial measure calculated and presented in accordance with
GAAP. EBITDA does not represent cash generated from operating
activities determined in accordance with GAAP, and should not be
considered as an alternative to operating income or net income
(loss) determined in accordance with GAAP as an indicator of
performance or as an alternative to cash flows from operating
activities as an indicator of liquidity.
The following is a reconciliation of EBITDA and EBITDA from
continuing operations to net income (loss) for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
EBITDA from continuing operations
|
|
$
|
33,138
|
|
|
$
|
22,602
|
|
|
$
|
23,189
|
|
|
$
|
22,115
|
|
|
$
|
21,173
|
|
Income tax benefit (expense) continuing operations
|
|
|
(2,207
|
)
|
|
|
1,633
|
|
|
|
904
|
|
|
|
876
|
|
|
|
(51
|
)
|
Interest expense continuing operations
|
|
|
(9,172
|
)
|
|
|
(12,072
|
)
|
|
|
(13,987
|
)
|
|
|
(13,489
|
)
|
|
|
(9,324
|
)
|
Depreciation and amortization continuing operations
|
|
|
(16,528
|
)
|
|
|
(12,683
|
)
|
|
|
(11,083
|
)
|
|
|
(10,128
|
)
|
|
|
(9,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
5,231
|
|
|
|
(520
|
)
|
|
|
(977
|
)
|
|
|
(626
|
)
|
|
|
2,221
|
|
Income (loss) on discontinued operations
|
|
|
819
|
|
|
|
(55
|
)
|
|
|
5,472
|
|
|
|
(5,659
|
)
|
|
|
(1,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,050
|
|
|
$
|
(575
|
)
|
|
$
|
4,495
|
|
|
$
|
(6,285
|
)
|
|
$
|
1,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
34,594
|
|
|
$
|
23,133
|
|
|
$
|
33,570
|
|
|
$
|
18,268
|
|
|
$
|
25,269
|
|
Income tax benefit (expense)
|
|
|
(2,658
|
)
|
|
|
1,663
|
|
|
|
(2,083
|
)
|
|
|
3,781
|
|
|
|
132
|
|
Interest expense
|
|
|
(9,331
|
)
|
|
|
(12,263
|
)
|
|
|
(15,386
|
)
|
|
|
(15,507
|
)
|
|
|
(11,150
|
)
|
Depreciation and amortization
|
|
|
(16,555
|
)
|
|
|
(13,108
|
)
|
|
|
(11,606
|
)
|
|
|
(12,827
|
)
|
|
|
(13,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,050
|
|
|
$
|
(575
|
)
|
|
$
|
4,495
|
|
|
$
|
(6,285
|
)
|
|
$
|
1,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 7.
|
Managements
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 ownership,
operation, development and franchising of midscale and upscale
hotels. Established over 30 years
31
ago, the Red Lion brand is nationally recognized and
particularly well known in the western United States where most
of our hotels are located. The Red Lion brand is typically
associated with three and four-star hotels by our customers. As
of December 31, 2007, our hotel system contained 53 hotels
located in eight states and one Canadian province, with 9,388
rooms and 472,529 square feet of meeting space as provided
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Meeting
|
|
|
|
|
|
|
Available
|
|
|
Space
|
|
|
|
Hotels
|
|
|
Rooms
|
|
|
(sq. ft.)
|
|
|
Red Lion Owned and Leased Hotels (1)
|
|
|
30
|
|
|
|
5,456
|
|
|
|
279,684
|
|
Other Leased Hotel (2)
|
|
|
1
|
|
|
|
310
|
|
|
|
5,000
|
|
Managed Hotel (3)
|
|
|
1
|
|
|
|
254
|
|
|
|
36,000
|
|
Red Lion Franchised Hotels
|
|
|
21
|
|
|
|
3,368
|
|
|
|
151,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
53
|
|
|
|
9,388
|
|
|
|
472,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Red Lion Hotels
|
|
|
51
|
|
|
|
8,824
|
|
|
|
431,529
|
|
|
|
|
(1) |
|
Leased hotels are those properties which we operate and manage
and have ownership of some or all of the equipment and personal
property on site, however, the hotel facility and the underlying
land is subject to an operating lease from a third party. Our
lease expiration dates range from 2018 to 2035 and have renewal
provisions beyond that. |
|
(2) |
|
Represents a hotel acquired in the fourth quarter of 2007 that
is being repositioned as a Red Lion, and is currently being
operated as an independent hotel. |
|
(3) |
|
Subsequent to December 31, 2007, this hotel did not renew
its agreement with Red Lion and has since left our system of
hotels. |
Red Lion is about Staying Comfortable and our
product and service culture works in both large urban and
smaller markets. The character of our hotels strives to reflect
our individual local markets while maintaining consistent brand
standards, which we feel makes our hotels an attractive choice
for customers within the markets we currently operate. We
believe our adherence to consistent customer service standards
and brand touch-points makes guests feel at home no matter where
they are.
We operate in three reportable segments:
|
|
|
|
|
The hotels segment derives revenue primarily from guest
room rentals and food and beverage operations at our owned and
leased hotels.
|
|
|
|
The franchise and management segment is engaged primarily
in licensing the Red Lion brand to franchisees and managing
hotels for third-party owners. 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 brand and access to our central services
programs. These programs include the reservation system, guest
loyalty program, national and regional sales, revenue management
tools, quality inspections, advertising and brand standards. It
also reflects revenue from management fees charged to the owners
of our managed hotels, typically based on a percentage of the
hotels gross revenues plus an incentive fee based on
operating performance.
|
|
|
|
The entertainment segment derives revenue primarily from
ticketing services and promotion and presentation of
entertainment productions.
|
We have historically owned certain commercial real estate. We
also have engaged in traditional real estate related services,
including developing, managing and acting as a broker for sales
and leases of commercial and
multi-unit
residential properties (collectively referred to as the real
estate management business). Together, these operations
comprised our real estate segment. Effective April 30,
2006, we divested the real estate management business. In
addition, consistent with our strategy of divesting non-core
assets, during the fourth quarter of 2006, we listed one of our
two remaining wholly-owned commercial real estate properties for
sale and have classified its results of operations within
discontinued operations for all periods presented. In September
2007, we sold the
32
property for approximately $13.3 million and recognized a
pre-tax gain on sale of $1.9 million. For additional
information, see Note 3 of Notes to Consolidated Financial
Statements.
Our remaining activities, none of which constitutes a reportable
segment, have been aggregated into other, including
the remaining operations of our former real estate segment,
which have been reclassified for all comparative periods, where
appropriate.
Results
of Operations
For the year ended December 31, 2007, net income was
$6.1 million (or $0.32 per share), compared to a net loss
of approximately $0.6 million (or $0.03 per share) in 2006
and net income of $4.5 million (or $0.34 per share) in
2005. A summary of our consolidated statement of operations is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Total revenue
|
|
$
|
186,893
|
|
|
$
|
170,368
|
|
|
$
|
163,053
|
|
Operating expenses
|
|
|
171,515
|
|
|
|
157,060
|
|
|
|
151,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15,378
|
|
|
|
13,308
|
|
|
|
11,449
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(9,172
|
)
|
|
|
(12,072
|
)
|
|
|
(13,987
|
)
|
Expense of early extinguishment of debt
|
|
|
|
|
|
|
(5,266
|
)
|
|
|
|
|
Minority interest in partnerships, net
|
|
|
(34
|
)
|
|
|
56
|
|
|
|
(60
|
)
|
Other income, net
|
|
|
1,266
|
|
|
|
1,821
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes
|
|
|
7,438
|
|
|
|
(2,153
|
)
|
|
|
(1,881
|
)
|
Income tax expense (benefit)
|
|
|
2,207
|
|
|
|
(1,633
|
)
|
|
|
(904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
5,231
|
|
|
|
(520
|
)
|
|
|
(977
|
)
|
Income (loss) from discontinued operations
|
|
|
819
|
|
|
|
(55
|
)
|
|
|
5,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,050
|
|
|
$
|
(575
|
)
|
|
$
|
4,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share basic and diluted
|
|
$
|
0.32
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
34,594
|
|
|
$
|
23,133
|
|
|
$
|
33,570
|
|
EBITDA from continuing operations
|
|
$
|
33,138
|
|
|
$
|
22,602
|
|
|
$
|
23,189
|
|
Net income during 2007 improved over the comparative periods, a
direct result of an increase in hotel revenues during 2007 to
$166.2 million from $154.8 million in 2006 and
$146.1 million in 2005. Operating income increased to
$15.4 million during 2007, primarily driven by
profitability in the hotels segment due to strong gains in both
rate and occupancy at our owned and leased hotels. Positive
current year operating results were offset by increased
depreciation and amortization expense over 2006 and 2005 from
the completed hotel renovations. Included in 2006 results was a
$1.0 million gain from the sale of the real estate
management business.
Results for 2007 reflect the transition of the Red Lion Hotel
Sacramento from a leased hotel to a franchise during July 2007,
reducing 2007 revenues compared to 2006 by $4.0 million,
partially offset by the addition of $1.3 million in
revenues from our Anaheim property added during the fourth
quarter of 2007. Net income was also positively affected by
lower interest expense from the repayment of approximately
$50.0 million in long-term debt during the second and third
quarters of 2006, and from the non-recurring expense from the
early extinguishment of debt of approximately $5.3 million
included in 2006 discussed below.
33
The following table details the impact of certain of the items
described above on 2006 net loss from continuing
operations, loss per share from continuing operations and EBITDA
from continuing operations:
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Expense of early extinguishment of debt, net
|
|
$
|
(5,266
|
)
|
Gain on disposition of real estate management business
|
|
|
993
|
|
Income tax benefit
|
|
|
1,517
|
|
|
|
|
|
|
Impact of expense of early extinguishment of debt and gain on
asset disposition on loss from continuing operations
|
|
$
|
(2,756
|
)
|
|
|
|
|
|
Expense of early extinguishment of debt, net
|
|
$
|
(0.32
|
)
|
Gain on disposition of real estate management business
|
|
|
0.06
|
|
Income tax benefit
|
|
|
0.09
|
|
|
|
|
|
|
Impact of expense of early extinguishment of debt and gain on
asset disposition on loss per share from continuing
operations
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
Impact of expense of early extinguishment of debt and gain on
asset disposition on EBITDA from continuing operations
|
|
$
|
(4,273
|
)
|
|
|
|
|
|
Operating income from continuing operations increased 15.6% in
2007 from 2006 and 16.2% in 2006 from 2005, reflecting
comparative improvements in RevPAR, ADR and occupancy and
increased margins from our hotel segment. EBITDA from continuing
operations in 2007 increased $10.5 million to
$33.1 million, or 46.6%, compared to 2006. EBITDA in 2006
was lower by $0.6 million compared to 2005 due to the
expense of $5.3 million recorded in 2006 for the early
extinguishment of debt.
EBITDA represents net income (or loss) before interest expense,
income tax benefit (expense) and depreciation and amortization.
We utilize EBITDA as a financial measure because management
believes that investors find it to be a useful tool to perform
more meaningful comparisons of past, present and future
operating results and as a means to evaluate the results of core
on-going operations. We believe it is a complement to net income
and other financial performance measures. EBITDA from continuing
operations is calculated in the same manner, but excludes the
operating activities of business units identified as
discontinued. EBITDA is not intended to represent net income
(loss) as defined by generally accepted accounting principles in
the United States, and such information should not be considered
as an alternative to net income (loss), cash flows from
operations or any other measure of performance prescribed by
generally accepted accounting principles in the United States
(GAAP).
We use EBITDA to measure the financial performance of our owned
and leased hotels because we believe interest, taxes and
depreciation and amortization bear little or no relationship to
our operating performance. By excluding interest expense, EBITDA
measures our financial performance irrespective of our capital
structure or how we finance our properties and operations. We
generally pay federal and state income taxes on a consolidated
basis, taking into account how the applicable taxing laws apply
to us in the aggregate. By excluding taxes on income, we believe
EBITDA provides a basis for measuring the financial performance
of our operations excluding factors that our hotels cannot
control. By excluding depreciation and amortization expense,
which can vary from hotel to hotel based on historical cost and
other factors unrelated to the hotels financial
performance, EBITDA measures the financial performance of our
hotels without regard to their historical cost. For all of these
reasons, we believe that EBITDA provides us and investors with
information that is relevant and useful in evaluating our
business. We believe that the presentation of EBITDA from
continuing operations is useful for the same reasons, in
addition to using it for comparative purposes for our intended
operations going forward.
However, because EBITDA excludes depreciation and amortization,
it does not measure the capital we require to maintain or
preserve our fixed assets. In addition, because EBITDA does not
reflect interest expense, it does not take into account the
total amount of interest we pay on outstanding debt nor does it
show trends in interest costs due to changes in our borrowings
or changes in interest rates. EBITDA from continuing operations
excludes the activities of operations we have determined to be
discontinued and does not reflect the totality of operations as
34
experienced for the periods presented. EBITDA, as defined by us,
may not be comparable to EBITDA as reported by other companies
that do not define EBITDA exactly as we define the term. Because
we use EBITDA to evaluate our financial performance, we
reconcile it to net income, which is the most comparable
financial measure calculated and presented in accordance with
GAAP. EBITDA does not represent cash generated from operating
activities determined in accordance with GAAP, and should not be
considered as an alternative to operating income or net income
(loss) determined in accordance with GAAP as an indicator of
performance or as an alternative to cash flows from operating
activities as an indicator of liquidity.
The following is a reconciliation of EBITDA and EBITDA from
continuing operations to net income (loss) for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
EBITDA from continuing operations
|
|
$
|
33,138
|
|
|
$
|
22,602
|
|
|
$
|
23,189
|
|
Income tax benefit (expense) continuing operations
|
|
|
(2,207
|
)
|
|
|
1,633
|
|
|
|
904
|
|
Interest expense continuing operations
|
|
|
(9,172
|
)
|
|
|
(12,072
|
)
|
|
|
(13,987
|
)
|
Depreciation and amortization continuing operations
|
|
|
(16,528
|
)
|
|
|
(12,683
|
)
|
|
|
(11,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
5,231
|
|
|
|
(520
|
)
|
|
|
(977
|
)
|
Income (loss) on discontinued operations
|
|
|
819
|
|
|
|
(55
|
)
|
|
|
5,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,050
|
|
|
$
|
(575
|
)
|
|
$
|
4,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
34,594
|
|
|
$
|
23,133
|
|
|
$
|
33,570
|
|
Income tax benefit (expense)
|
|
|
(2,658
|
)
|
|
|
1,663
|
|
|
|
(2,083
|
)
|
Interest expense
|
|
|
(9,331
|
)
|
|
|
(12,263
|
)
|
|
|
(15,386
|
)
|
Depreciation and amortization
|
|
|
(16,555
|
)
|
|
|
(13,108
|
)
|
|
|
(11,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,050
|
|
|
$
|
(575
|
)
|
|
$
|
4,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Revenue
A breakdown of revenues from continuing operations is as follows
(in thousands, except for percentage changes):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 vs. 2006
|
|
|
2006 vs. 2005
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
Revenues From Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room revenue
|
|
$
|
114,312
|
|
|
$
|
103,677
|
|
|
$
|
96,296
|
|
|
|
10,635
|
|
|
|
10.3
|
%
|
|
|
7,381
|
|
|
|
7.7
|
%
|
Food and beverage revenue
|
|
|
48,061
|
|
|
|
47,517
|
|
|
|
45,659
|
|
|
|
544
|
|
|
|
1.1
|
%
|
|
|
1,858
|
|
|
|
4.1
|
%
|
Other hotels revenue
|
|
|
3,795
|
|
|
|
3,623
|
|
|
|
4,170
|
|
|
|
172
|
|
|
|
4.7
|
%
|
|
|
(547
|
)
|
|
|
(13.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hotels segment revenue
|
|
|
166,168
|
|
|
|
154,817
|
|
|
|
146,125
|
|
|
|
11,351
|
|
|
|
7.3
|
%
|
|
|
8,692
|
|
|
|
5.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise and management revenue
|
|
|
2,756
|
|
|
|
2,853
|
|
|
|
2,860
|
|
|
|
(97
|
)
|
|
|
(3.4
|
)%
|
|
|
(7
|
)
|
|
|
(0.2
|
)%
|
Entertainment revenue
|
|
|
14,839
|
|
|
|
10,791
|
|
|
|
9,827
|
|
|
|
4,048
|
|
|
|
37.5
|
%
|
|
|
964
|
|
|
|
9.8
|
%
|
Other revenue
|
|
|
3,130
|
|
|
|
1,907
|
|
|
|
4,241
|
|
|
|
1,223
|
|
|
|
64.1
|
%
|
|
|
(2,334
|
)
|
|
|
(55.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
186,893
|
|
|
$
|
170,368
|
|
|
$
|
163,053
|
|
|
$
|
16,525
|
|
|
|
9.7
|
%
|
|
$
|
7,315
|
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
Compared to 2006
Revenue from the hotels segment increased $11.4 million, or
7.3%, compared to 2006 primarily due to a 10.3% increase in
rooms revenue driven by a 6.6% increase in rate and a 3.1 point
increase in occupancy. In addition to generally strong demand
and a positive reaction to our renovated product, 2007 hotel
revenues were also higher than 2006 results due to the
displacement of rooms during renovations in 2006, largely
completed by the end of the second quarter of 2006. Our mix of
business during 2007 included increased room sales generated
from on-line promotional activity and concentrated efforts in
attracting high-yield contract business, offset by a shift from
lower rate volume and contract business. Food and beverage
revenue increased $0.5 million , or 1.1%, during 2007 from
2006. In October 2007, we added the Anaheim property and in July
2007 we subleased and franchised the Red Lion Sacramento
property. The net impact of these property changes was a
decrease in 2007 revenues of $2.7 million.
Revenue from the franchise and management segment decreased
$0.1 million primarily due to fewer franchisees in our
system during 2007 compared to 2006. Revenues increased
$4.0 million in the entertainment segment, primarily during
the fourth quarter of 2007 due to revenues generated from our
12-week production of Walt Disneys The Lion King in
Honolulu, Hawaii. Other segment revenues increased to
$3.1 million during 2007 from $1.9 million during
2006, impacted by our 50% increase in ownership of a retail and
hotel property in December 2006 and included in consolidation
during all of 2007 (for additional information, see Note 5
of Notes to Consolidated Financial Statements).
2006
Compared to 2005
During 2006, revenue from the hotels segment increased
$8.7 million, or 5.9%, compared to 2005. Rooms revenue
increased $7.4 million, or 7.7%, driven by rate increases.
Occupancy was slightly lower
year-on-year,
both due to the impact of rooms displaced by renovations in 2006
as well as to our decision to move from lower rate volume and
contract business to higher rate and more profitable corporate,
transient and group business. The rate increases were affected
both by the mix strategy and capital investment in our hotels.
Food and beverage revenue increased 4.1% in 2006 from 2005,
primarily due to increased banquet-related revenues. Incidental
revenues from
36
guest amenities and other sources of revenue for the hotel
segment were down 13.1% between comparative periods, primarily
due to the continued decrease in room telephone and movie
revenues and the closure of gift shops in two hotels; which have
subsequently been leased to third-party retail businesses.
In 2005, we completed the implementation of our Stay Comfortable
initiative and began major room renovations in several hotels
including new floor and wall coverings, tiled bathroom floors,
granite vanities and other bathroom upgrades, enhanced guest
room features including new plush pillow top mattresses and
upgraded linen and pillow packages, large work desks and
ergonomic chairs and amenities such as complimentary wireless
internet access . In 2006, this work was substantially completed
and work began on common areas such as lobbies and restaurants.
Guest reaction to renovations in the hotels was positive and we
experienced a period of strong growth in 2006 in our hotels
segment. The ADR increases between comparable periods
experienced in the first and second quarters of 2006 accelerated
in the second half of the year. Occupancy was lower in the first
half of 2006 due to displacement and slightly lower in the
second half of 2006 as we changed our mix of business. Overall
RevPAR from owned and leased hotels grew by 7.7% from that
experienced in 2005.
Revenue from the franchise and management segment remained
steady at $2.9 million in 2006 and 2005. Included in 2006
revenues is a franchise termination fee of $145,000, increased
revenues from the addition of franchises from previously
company-owned properties and increased revenues from increased
RevPAR at these hotels. This impact was offset by
$0.3 million received in 2005 for a management contract
termination fee triggered by the sale of a property that left
our system in 2003.
Entertainment segment revenue increased 9.8% in 2006 from 2005,
driven primarily by the result of differences in the type and
mix of shows presented. Ticketing revenue in aggregate was
relatively constant. The entertainment segment generates greater
revenue when it presents shows on a gross basis,
compared to net productions in which it only
receives commissions for tickets sold. During 2006, we presented
seven gross shows and two net shows,
compared to four gross and four net
shows during 2005. During the fourth quarter of 2005, we
presented a six week net production of Walt
Disneys The Lion King in Spokane, Washington, for which we
received commissions for tickets sold and other fees.
Other revenue decreased from 2005 to 2006 primarily as a result
of the sale of the real estate management business in 2006, as
well as the sale of 50% of the Kalispell mall in 2005.
Operating
Expenses
Operating expenses include direct operating expenses for each of
the operating segments, hotel facility and land lease expense,
depreciation and amortization, gain or loss on asset
dispositions and undistributed corporate expenses. In the
aggregate, operating expenses from continuing operations during
2007 increased $14.5 million over 2006, compared to a
$5.5 million increase from 2005 to 2006. A breakdown of our
operating expenses is
37
provided in the table below, as well as direct margins by
segment for each of the three years ending December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except for percentage changes)
|
|
|
Operating Expenses From Continuing Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels
|
|
$
|
127,431
|
|
|
$
|
122,596
|
|
|
$
|
118,375
|
|
Franchise and management
|
|
|
814
|
|
|
|
808
|
|
|
|
652
|
|
Entertainment
|
|
|
12,812
|
|
|
|
9,109
|
|
|
|
8,395
|
|
Other
|
|
|
2,037
|
|
|
|
1,866
|
|
|
|
3,523
|
|
Depreciation and amortization
|
|
|
16,528
|
|
|
|
12,683
|
|
|
|
11,083
|
|
Hotel facility and land lease
|
|
|
6,490
|
|
|
|
6,449
|
|
|
|
6,553
|
|
Gain on asset dispositions, net
|
|
|
(437
|
)
|
|
|
(1,705
|
)
|
|
|
(1,040
|
)
|
Undistributed corporate expenses
|
|
|
5,840
|
|
|
|
5,254
|
|
|
|
4,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
171,515
|
|
|
$
|
157,060
|
|
|
$
|
151,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels revenue owned(1)
|
|
$
|
114,364
|
|
|
$
|
104,495
|
|
|
$
|
97,823
|
|
Direct margin(2)
|
|
$
|
29,520
|
|
|
$
|
24,053
|
|
|
$
|
21,447
|
|
Direct margin%
|
|
|
25.8
|
%
|
|
|
23.0
|
%
|
|
|
21.9
|
%
|
Hotels revenue leased
|
|
$
|
51,804
|
|
|
$
|
50,322
|
|
|
$
|
48,302
|
|
Direct margin(2)
|
|
$
|
9,217
|
|
|
$
|
8,168
|
|
|
$
|
6,303
|
|
Direct margin%
|
|
|
17.8
|
%
|
|
|
16.2
|
%
|
|
|
13.0
|
%
|
Franchise and management revenue
|
|
$
|
2,756
|
|
|
$
|
2,853
|
|
|
$
|
2,860
|
|
Direct margin(2)
|
|
$
|
1,942
|
|
|
$
|
2,045
|
|
|
$
|
2,208
|
|
Direct margin%
|
|
|
70.5
|
%
|
|
|
71.7
|
%
|
|
|
77.2
|
%
|
Entertainment revenue
|
|
$
|
14,839
|
|
|
$
|
10,791
|
|
|
$
|
9,827
|
|
Direct margin(2)
|
|
$
|
2,027
|
|
|
$
|
1,682
|
|
|
$
|
1,432
|
|
Direct margin%
|
|
|
13.7
|
%
|
|
|
15.6
|
%
|
|
|
14.6
|
%
|
Other revenue
|
|
$
|
3,130
|
|
|
$
|
1,907
|
|
|
$
|
4,241
|
|
Direct margin(2)
|
|
$
|
1,093
|
|
|
$
|
41
|
|
|
$
|
718
|
|
Direct margin%
|
|
|
34.9
|
%
|
|
|
2.1
|
%
|
|
|
16.9
|
%
|
|
|
|
(1) |
|
Continuing operations only |
|
(2) |
|
Revenues less direct operating expenses. |
2007
Compared to 2006
Direct hotel expenses increased 3.9% during 2007 over 2006,
compared with a hotel segment revenue increase of 10.3%. Room
related expenses increased $2.3 million, or 7.5%, and food
and beverage costs increased $0.3 million, or 0.7%. Current
year results reflect the addition of Anaheim during the fourth
quarter of 2007, and the transition of the Red Lion Hotel
Sacramento from an owned/leased hotel to a franchise during July
2007, where we have included operating expenses for seven months
as compared to the full year of 2006. Hotel segment costs were
also affected by increased reservation, promotional and
marketing related costs directly related to the increase in
hotel revenue and occupied rooms, increased utility and general
maintenance costs and increased payroll and employee benefit
related costs. Overall, the hotel segment had a direct profit of
$38.7 million during 2007 compared to $32.2 million in
2006, for a direct margin improvement of 250 basis points.
Hotel direct margin was 23.3% in 2007 compared to 20.8% in 2006.
38
Direct costs for the franchise and management segment remained
approximately the same during 2007 compared to 2006.
Entertainment costs increased $3.7 million in 2007 over
2006 primarily related to The Lion King production in Honolulu
discussed above, as well as from a slower ticketing market in
some of our regions compared to 2006 and monthly fees that
commenced during the second quarter of 2007 associated with the
implementation of a new ticketing software platform. Overall,
segment profit from entertainment increased $0.3 million,
or 20.5%. Other segment expenses increased $0.2 million
during 2007, while segment profit grew by $1.1 million
during 2007 related to the repurchase of a 50% interest and
reconsolidation of the operating results of a retail and hotel
property in Kalispell, Montana in December 2006.
Depreciation and amortization increased 30.3% during 2007
compared to 2006, related directly to our hotel renovations.
The net gain on asset dispositions decreased by
$1.3 million in 2007 from 2006, primarily due to a
$1.0 million gain recorded during 2006 from the divestment
of the real estate management business in April of that year.
For additional information on the sale of the real estate
management business, see Note 4 of Notes to Consolidated
Financial Statements. In addition during 2007, we recorded a
loss of $0.3 million on sign dispositions at our hotels
that have all been replaced upon completion of renovations. The
net gain on asset dispositions also reflects the ongoing
recognition of deferred gains on a previously sold office
building and a hotel for which we entered into a long-term lease
arrangement.
Undistributed corporate expenses were $0.6 million higher
during 2007 compared to 2006 primarily attributable to increased
audit, legal and outside consultant fees, as well as increased
compensation levels, including employee medical costs and
SFAS 123(R) option and ESPP expenses, offset by lower
Sarbanes-Oxley related expenditures. Undistributed corporate
expenses include general and administrative charges such as
corporate payroll, legal expenses, charitable contributions,
director and officers insurance, bank service charges and
outside accountants and various other consultants expense.
We consider these expenses to be undistributed
because the costs are not directly related to our business
segments and therefore are not further distributed. However,
costs that can be identified to a particular segment are
distributed, such as accounting, human resources and information
technology, and are included in direct expenses.
2006
Compared to 2005
Direct hotel expenses increased 3.6% during 2006 from 2005,
compared with a hotel segment revenue increase of 5.9%. Room
related expenses increased $0.8 million, or 2.8%, and food
and beverage costs increased $0.5 million, or 1.3%. Costs
in 2006 were also affected by increased sales related costs,
including marketing charges and compensation related to revenue
performance, increased utility costs and payroll related costs
directly related to the hotels. Overall, the segment had a
direct profit of $32.2 million in 2006, compared to
$27.8 million in 2005, for a direct margin improvement of
182 basis points. Hotel direct margin was 20.8% in 2006
compared to 19.0% in 2005.
Direct costs for the franchise and management segment increased
23.9% in 2006 from 2005, primarily related to increased
advertising and trade show activities and the addition of
personnel, partially offset by a reduction in bad debt expense.
Segment profit during 2006 and 2005 was $2.0 million and
$2.2 million, respectively.
Entertainment costs increased 8.5% in 2006 from 2005, a direct
effect of the number of shows presented on a net basis instead
of a gross basis, for an overall segment direct profit of
$1.7 million in 2006 compared to $1.4 million in 2005.
Depreciation and amortization increased 14.4% in 2006 from 2005,
primarily related to increased capital additions in 2005 and
2006 related to hotel renovations.
The net gain on asset dispositions increased by
$0.7 million in 2006 from 2005, primarily due to a
$1.0 million gain on the divestment from the real estate
management business in April 2006. The net gain on asset
dispositions also includes the recognition of deferred gains on
a previously sold office building and a hotel for which we
entered into a long-term lease arrangement.
39
Undistributed corporate expenses were $1.2 million higher
in 2006 from 2005 primarily attributable to expenses associated
with equity compensation under SFAS No. 123(R), which
became effective for us on January 1, 2006, and costs to
comply with Section 404 of the Sarbanes-Oxley Act, which
became effective for us as of December 31, 2006.
Interest
Expense
2007
Compared to 2006
Interest expense for the year ended December 31, 2007,
decreased 24.0% to $9.2 million, compared to
$12.1 million recorded during 2006, a result of the
repayment of over $50 million in debt in 2006 as discussed
below. Our average pre-tax interest rate on debt during both
2007 and 2006 was 7.8%.
2006
Compared to 2005
Interest expense for the year ended December 31, 2006,
decreased 13.7% to $12.1 million, compared to
$14.0 million recorded in 2005, a result of the repayment
of debt discussed below. Our average pre-tax interest rate on
debt during 2006 was 7.8%, compared to 7.9% during 2005.
In June 2006, we repaid approximately $16.6 million of our
then outstanding 9.5% debentures due Red Lion Hotels
Capital Trust and a $0.8 million premium, as required by
the governing trust agreement in connection with our public
common stock offering in May 2006. In September 2006, we repaid
approximately $33.4 million of securitized debt related to
a hotel property through legal defeasance and paid approximately
$4.7 million in defeasance costs in connection therewith.
In addition, we expensed approximately $0.2 million related
to unamortized deferred loan fees associated with this debt.
These expenses for the early extinguishment of debt were
partially offset by a gain recognized of $0.5 million
related to an incentive achieved for meeting development targets
in connection with the renovation and expansion of a hotel. In
total during 2006, we recognized an expense for the early
extinguishment of debt of $5.3 million.
Other
Income (Expense)
The change in other income (expense) in 2006 from 2005 is
primarily due to interest income on invested cash balances
derived from the proceeds of asset sales in 2005 and 2006 and
from our public offering in May 2006. During 2007, cash balances
were lower than 2006, resulting in decreased interest income.
Income
Taxes
2007
Compared to 2006
In 2007, we recorded income tax expense of $2.2 million
compared to an income tax benefit of $1.6 million recorded
in 2006. In 2007, we realized additional taxable income compared
to 2006 although during 2006, we took advantage of certain tax
free investment income that resulted in the tax benefit during
that year. The experienced rate on pre-tax net income differed
from the statutory combined federal and state tax rates
primarily due to the utilization of certain incentive tax
credits allowed under federal law, certain tax free investment
income and the tax-free nature of the $1.0 million gain on
the divestment from the real estate management business in April
2006, as discussed below.
2006
Compared to 2005
Income tax benefit on continuing operations recognized for 2006
and 2005 was $1.6 million and $0.9 million,
respectively. The experienced rate on pre-tax net income
differed from the statutory combined federal and state tax rates
primarily due to the utilization of certain incentive tax
credits allowed under federal law. In addition, in 2006 we took
advantage of certain tax free investment income on cash balances
and reflected the tax-free nature of the $1.0 million gain
on the divestment from the real estate management business in
April 2006.
40
Discontinued
Operations
During 2005, we sold seven of the eleven hotels included under
our November 2004 divestment plan, as discussed in Note 3
of Notes to Consolidated Financial Statements, and one
commercial building. During 2006, we sold three additional
hotels. During the second quarter of 2007, we sold the remaining
hotel located in Kalispell, Montana for gross proceeds of
$3.9 million, and in total have received $72.6 million
in gross proceeds from the sale of these assets.
During the fourth quarter of 2006, we listed for sale a
commercial office complex located in Spokane, Washington that
was included as a component of discontinued operations on the
consolidated financial statements. In September 2007, we sold
the complex to Barbieri Real Estate Company, which is owned by a
former executive who is also the brother of two members of the
board of directors, for $13.3 million in a tax advantaged
transaction as a result of the surrender of operating
partnership units of Red Lion Hotels Limited Partnership
(OP units). The complex was marketed nationally and
we received multiple offers at or below that sales price. The
consideration for the sale was provided through a combination of
a payment of $4.2 million in cash, the exchange for
redemption of 97,826 OP Units and the assumption of
$7.6 million in long-term debt. This structure allows a
portion of our tax on the gain to be deferred, further enhancing
our economic return. The sale was approved by the independent
members of the board of directors.
During 2007, we recognized a gain on dispositions of
$1.4 million, or $0.9 million net of income tax
expense. The dispositions during 2006 resulted in a loss of
$0.1 million, and the dispositions in 2005 resulted in a
gain of $3.7 million, both net of income tax impact. The
2005 gain is net of an impairment loss of $2.9 million, net
of tax impact. Consolidated earnings from the activities of
discontinued operations resulted in income of approximately
$0.8 million during 2007, compared to a loss of
$0.1 million in 2006 and income of $5.5 million during
2005, respectively.
Liquidity
and Capital Resources
Our financial position is strong and we feel the turmoil in the
capital markets has created a favorable environment for
strategic buyers with strong balance sheets. We believe we have
low leverage and strong credit ratios which will allow us to
access capital. Our short-term liquidity needs over the next
twelve months will be met through funds generated from operating
activities and from existing cash and cash equivalents of
$15.0 million at December 31, 2007. We may also draw
upon our $50 million credit facility, which can be
increased to $100 million subject to satisfaction of
various conditions. At December 31, 2007, we had an
additional $4.4 million of restricted cash under
securitized borrowing arrangements for future payment of
furniture, fixtures and equipment, repairs, insurance premiums
and real and personal property taxes. A comparative summary of
our balance sheets at December 31, 2007 and 2006 is
provided below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Consolidated balance sheet data (in thousands):
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,044
|
|
|
$
|
13,262
|
|
Working capital(1)
|
|
$
|
7,559
|
|
|
$
|
10,217
|
|
Assets of discontinued operations
|
|
$
|
|
|
|
$
|
14,539
|
|
Property and equipment, net
|
|
$
|
260,574
|
|
|
$
|
250,575
|
|
Total assets
|
|
$
|
344,509
|
|
|
$
|
351,438
|
|
Liabilities of discontinued operations
|
|
$
|
|
|
|
$
|
4,112
|
|
Total long-term debt
|
|
$
|
83,220
|
|
|
$
|
85,272
|
|
Debentures due Red Lion Hotels Capital Trust
|
|
$
|
30,825
|
|
|
$
|
30,825
|
|
Total liabilities
|
|
$
|
162,014
|
|
|
$
|
167,647
|
|
Total stockholders equity
|
|
$
|
182,495
|
|
|
$
|
183,791
|
|
|
|
|
(1) |
|
Represents current assets less current liabilities, excluding
assets and liabilities of discontinued operations and assets
held for sale. |
41
During 2008, we expect cash expenditures to primarily include
the funding of operating activities, interest payments on our
outstanding indebtedness, additional capital expenditures and
the program for repurchasing common stock which was completed in
January of 2008. We expect to meet our long-term liquidity
requirements for the funding of future property acquisitions and
other investments and continued hotel and other various capital
improvements through net cash provided by operations, long-term
secured and unsecured indebtedness, including our
$50 million credit facility, and joint ventures.
We are finished with our major renovation initiative for our
owned and leased hotels that began in 2005. The capital
investment program represented one of the most significant
facility improvement programs in company history, and we remain
committed to ongoing capital improvements in order to continue
to enhance the Red Lion brand by improving our hotel quality to
enhance our guests experiences. We believe that by
continuing to improve upon the quality of our existing product
in areas where customers quality expectations are growing,
we position our hotels well in our existing markets and make the
Red Lion brand more attractive for franchise and other growth
opportunities. During 2007, 2006 and 2005, we spent
approximately $50 million on hotel renovations, in addition
to ongoing maintenance and hotel improvements, and
$8.3 million for the purchase of the Anaheim asset
acquisition during the fourth quarter of 2007. During 2008, we
anticipate spending $16.7 million to fund ongoing
maintenance and hotel improvement capital expenditures and
Anaheim renovation costs.
Operating
Activities
Net cash provided by operations during 2007 totaled
$21.2 million, a 12.0% improvement compared to
$19.0 million during 2006. Non-cash income statement
expenses including depreciation and amortization, provision for
deferred tax and stock based compensation, totaled
$19.0 million during 2007 compared to $18.5 million in
2006, offset by negative working capital changes, including
restricted cash, receivables, accruals, payables and
inventories, that resulted in cash flow that was
$4.9 million less during the 2007 period than in 2006. In
July 2007, we received $3.0 million in deferred lease
income as part of the sublease agreement for the Red Lion Hotel
Sacramento that will be recognized over the life of the sublease
agreement. At December 31, 2007, restricted cash held in
escrow for future payments of insurance, property taxes, repairs
and other items as required by debt agreements, increased by
$1.7 million from December 31, 2006.
Investing
Activities
Net cash used in investing activities totaled $12.5 million
during 2007, compared to $14.0 million used in 2006. Cash
additions to property and equipment decreased 26.8% in 2007 from
2006, although current year results include $8.3 million
for the acquisition of the Anaheim assets. Proceeds from the
disposition of discontinued operations were $5.2 million
less in 2007 than in 2006. During the first quarter of 2007, we
liquidated all variable rate demand notes recorded at
December 31, 2006, totaling $7.6 million, compared to
net liquidations of $7.2 million during 2006. Current year
results include $2.2 million held at December 31,
2007, related to cash restricted to fulfill our commitment of
$3.0 million in tenant improvements at the Red Lion Hotel
Sacramento in connection with its 2007 sublease. During the 2006
period, we also received $0.5 million in proceeds from the
repayment of a portion of our investment in Red Lion Hotels
Capital Trust.
Financing
Activities
Net financing activities used approximately $7.0 million in
cash during 2007 compared to $5.2 million during 2006. In
2006, we generated proceeds of $60.4 million through a
common stock offering of 5.8 million shares, which was
offset by repayment of debentures totaling $17.4 million
including expense of early extinguishment, defeasance of
$33.4 million under a term note, $4.7 million of
defeasance costs, repayment of debt on a sold property of
$1.9 million and scheduled principal payments of
$3.4 million. During 2007, $2.5 million was repaid in
scheduled principal long-term debt payments, offset by
additional borrowings of $3.9 million in June 2007 that
were later assumed by the buyers of the commercial office
complex sold in September 2007. Net financing activities during
the 2007 and 2006 periods benefited from the exercise by
employees of stock options resulting in proceeds to the company
of $0.5 million and $0.7 million, respectively, during
the comparative periods. We had no net activity under any credit
facility for either period.
42
In September 2007, we announced a common stock repurchase
program for up to $10 million through open market
purchases, block purchases or privately negotiated transactions,
subject to certain conditions. As of December 31, 2007, we
had repurchased 924,200 shares at a cost of
$9.1 million. During January 2008, we completed our share
repurchase program with the purchase of an additional
93,000 shares for an aggregate cost of $0.9 million.
At December 31, 2007, we had total debt obligations of
$114.0 million, of which $63.4 million was securitized
debt collateralized by individual hotels with fixed interest
rates ranging from 6.7% to 8.1%. Included within outstanding
debt are debentures due to the Red Lion Hotels Capital Trust of
$30.8 million, which are uncollateralized and due to the
trust at a fixed rate of 9.5%.
Of the $63.4 million in securitized debt, three pools of
cross securitized debt exist: (i) one consisting of five
properties with total borrowings of $21.0 million;
(ii) a second consisting of two properties with total
borrowings of $18.9 million; and (iii) a third
consisting of four properties with total borrowings of
$23.5 million. Each pool of securitized debt and the other
collateralized hotel borrowings include defeasance provisions
for early repayment.
Contractual
Obligations
The following table summarizes our significant contractual
obligations as of December 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
Long-term debt(1)
|
|
$
|
109,935
|
|
|
$
|
11,512
|
|
|
$
|
16,324
|
|
|
$
|
34,538
|
|
|
$
|
47,561
|
|
Operating leases(2)
|
|
|
69,585
|
|
|
|
7,971
|
|
|
|
14,426
|
|
|
|
10,849
|
|
|
|
36,339
|
|
Service agreements
|
|
|
1,375
|
|
|
|
275
|
|
|
|
550
|
|
|
|
550
|
|
|
|
|
|
Debentures due Red Lion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels Capital Trust(1)
|
|
|
153,816
|
|
|
|
2,928
|
|
|
|
5,857
|
|
|
|
5,857
|
|
|
|
139,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations(3)
|
|
$
|
334,711
|
|
|
$
|
22,686
|
|
|
$
|
37,157
|
|
|
$
|
51,794
|
|
|
$
|
223,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Including estimated interest payments and commitment fees over
the life of the debt agreement. |
|
(2) |
|
Operating lease amounts are net of estimated sublease income of
$11.3 million annually. |
|
(3) |
|
With regard to purchase obligations, we are not party to any
material agreements to purchase goods or services that are
enforceable or legally binding as to fixed or minimum quantities
to be purchased or stated price terms. |
In July 2007, we entered into an agreement to sublease the Red
Lion Hotel Sacramento to a third party with an initial lease
term expiring in 2020. In connection with the sublease
agreement, we received deferred lease income of
$3.0 million, which will be amortized over the life of the
sublease agreement. The sublease agreement provides for annual
rent payments to us of $1.4 million, which has been
included above to reduce our consolidated annual lease expense
by that amount. As part of the agreement, we have committed to
$3.0 million in tenant improvements and as of
December 31, 2007, had spent approximately
$0.8 million of that amount.
In October 2007, we completed an acquisition of a
100-year
including extension periods leasehold interest in a
hotel in Anaheim, California for $8.3 million, including
costs of the acquisition. As required under the terms of the
leasehold agreement, we will pay $1.8 million per year in
lease payments through April 2011, the amounts of which have
been reflected in the above table. At our option, we are
entitled to extend the lease for 19 additional terms of five
years each, with increases in lease payments tied directly to
the Consumer Price Index. Beyond the monthly payments through
April 2011, we have not included any additional potential future
lease commitment related to the Anaheim property in the table
above.
Off-balance
Sheet Arrangements
As of December 31, 2007, we had no off-balance sheet
arrangements, as defined by SEC regulations, that have or are
reasonably likely to have a current or future effect on our
financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources
that are material to investors.
43
Other
Matters
Franchise
and Management Contracts
At December 31, 2007, our system of hotels included one
hotel under a management contract and 21 hotels under franchise
agreements, representing a total of 3,622 rooms. Franchise
agreements for three hotels are terminating in the first quarter
of 2008, resulting in their removal from the system. Subsequent
to December 31, 2007, our one hotel under a management
contract did not renew its agreement and has since left our
system of hotels.
In July 2007, we entered into an agreement to sublease and
franchise the Red Lion Hotel Sacramento to a third party with an
initial lease term expiring in 2020. The sublease agreement
provides for annual sublease payments to us of
$1.4 million, which will effectively reduce our
consolidated annual hotel facility and land lease expense by
that amount. The franchise agreement provides for royalty fees
and the third party has committed to make a multi-million dollar
investment to further improve and reposition the hotel. Overall,
this transaction will have a positive impact on EBITDA, as the
sublease payment, coupled with the new franchise fees, will
exceed the hotels current EBITDA before lease expense.
Revenues at the hotel in 2006 and through July 25, 2007,
the date of transition from an owned/leased property to a
franchise, were $8.6 million and $4.6 million,
respectively, with EBITDA at the hotel before lease expense of
$0.7 million and $43,000, respectively, during those same
periods. The sublease also provides the third party a two-year
option to purchase the property.
In 2007, we executed new franchise agreements with new owners of
two hotels: the Red Lion Hotel Elko, Nevada, and the Red Lion
Hotel Tacoma, Washington. As part of the agreements, the hotels
will undergo renovations to comply with our enhanced Red Lion
brand standards. During the third quarter of 2007, we entered
into a long-term franchise agreement with the Red Lion Hotel
Hillsboro, Oregon. All franchised hotels were required to meet
Red Lions upscale brand standards by the end of 2007.
Currently, we expect sixteen franchised hotels to meet our
elevated brand standards. We anticipate that between two and
four franchised hotels may not meet the elevated brand
standards, which may result in the termination of these
franchises in the first half of 2008.
During 2007, the temporary franchise agreement for a hotel in
Portland, Oregon expired and the hotel left the system. In
addition, a limited service property in Vancouver, Washington
left the system following a sale and a franchised hotel in
San Diego, California ceased being a member of the Red Lion
system during the second quarter of 2007. Also during the second
quarter, a franchised hotel in Butte, Montana left the system in
connection with a legal settlement relating to our acquisition
of Red Lion Hotels, Inc. in 2001.
Seasonality
Our business is subject to seasonal fluctuations, with more
revenues and profits realized from May through October than
during the rest of the year. During 2007, revenues during the
second and third quarters approximated 26.2% and 29.2%,
respectively, of total revenues for the year, compared to
revenues of 21.0% and 23.6% of total revenues during the first
and fourth quarters.
Inflation
The effect of inflation, as measured by fluctuations in the
U.S. Consumer Price Index, has not had a material impact on
our revenues or net income (loss) during the periods under
review.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect: (i) the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates
of the financial statements, and (ii) the reported amounts
of revenues and expenses during the reporting periods. Actual
results could differ materially from those estimates. We
consider a critical accounting policy to be one that is both
important to the portrayal of our financial condition and
results of operations and requires managements most
subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are
inherently uncertain. Our significant accounting policies are
described in Note 2 of Notes to Consolidated Financial
Statements; however, we have also identified our most critical
accounting policies
44
and estimates below. Management has discussed the development
and selection of our critical accounting policies and estimates
with the audit committee of our board of directors, and the
audit committee has reviewed the disclosures presented below.
Revenue
Recognition and Receivables
Revenue is generally recognized as services are provided. When
we receive payment from customers before our services have been
performed, the amount received is recorded as deferred revenue
until the service has been completed. We recognize revenue from
the following sources:
|
|
|
|
|
Hotels Room rental and food and beverage
sales from owned and leased hotels. Revenues are recognized when
our services have been performed, generally at the time of the
hotel stay or guests visit to the restaurant. This
treatment is consistent with others within our industry. Our
revenues are significantly impacted by global, national and
regional economic conditions affecting the travel and
hospitality industry, as well as the relative market share of
our hotels compared with our competitors.
|
|
|
|
Franchise and Management Fees received in
connection with the franchise of our brand names and management
fees we earn from managing third-party owned hotels. Franchise
and management revenues are recognized as earned in accordance
with the contractual terms of the franchise or management
agreements.
|
|
|
|
Entertainment Computerized event ticketing
services and promotion of Broadway style shows and other special
events. Where we act as an agent and receive a net fee or
commission, it is recognized as revenue in the period the
services are performed. When we are the promoter of an event and
are at-risk for the production, revenues and expenses are
recorded in the period of the event performance.
|
|
|
|
Other Primarily from rental income received
from our direct ownership interest in a retail mall in
Kalispell, Montana that is attached to our Red Lion hotel.
|
We review the ability to collect individual accounts receivable
on a routine basis. We record an allowance for doubtful accounts
based on specifically identified amounts that we believe to be
uncollectible and amounts that are past due beyond a certain
date. The receivable is written off against the allowance for
doubtful accounts if collection attempts fail. Our estimate of
the allowance for doubtful accounts is impacted by, among other
things, national and regional economic conditions.
Long-lived
Assets
Property and equipment is stated at cost less accumulated
depreciation. The assessment of long-lived assets for possible
impairment requires us to make judgments regarding estimated
future cash flows from the respective properties, which is
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, if available and
appropriate, current estimated net sales proceeds from pending
offers or net sales proceeds from previous, comparable
transactions. If the expected undiscounted future cash flows are
less than the net book value of the assets, the excess of the
net book value over the estimated fair value is charged to
current earnings.
We review the recoverability of our long-lived assets annually
or more frequently as events or circumstances indicate that the
carrying amount of an asset may not be recoverable. Changes to
our plans, including a decision to sell, dispose of or change
the intended use of an asset, could have a material impact on
the carrying value of the asset.
Intangible
Assets
Our intangible assets include brands and goodwill which we
account for in accordance with SFAS No. 142
Goodwill and Other Intangible Assets. We do not
amortize our brands and goodwill. Instead, we test for
impairment annually or more frequently as events or
circumstances indicate the carrying amount of an asset may not
be recoverable. Our goodwill and other intangible asset
impairment test requires judgment, including the identification
of reporting units, assignment of assets and liabilities to
reporting units, assignment of goodwill to
45
reporting units, and determination of the fair value of each
reporting unit, subject to the same general assumptions
discussed above for long-lived assets. At December 31, 2007
and 2006, our recorded goodwill and other intangible assets not
subject to amortization remained unchanged at
$28.0 million. While we have not recognized an impairment
loss since we originally recorded goodwill, changes in our
estimates and assumptions could affect, potentially materially,
our financial condition or results of operations in the future.
Our other intangible assets include management, marketing and
lease contracts, the value of which is amortized on a
straight-line basis over the weighted average life of the
agreements and totaled $11.6 million and
$12.1 million, respectively, at December 31, 2007 and
2006. The assessment of these contracts requires us to make
certain judgments, including estimated future cash flow from the
applicable properties.
New
Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes by establishing minimum
standards for the recognition and measurement of tax positions
taken or expected to be taken in a tax return. Under the
requirements of FIN 48, a company must review all of its
uncertain tax positions and make a determination as to whether
its position is more-likely-than-not to be sustained upon
examination by regulatory authorities. If a position meets the
more-likely-than-not criterion, then the related tax benefit is
measured based on the cumulative probability analysis of the
amount that is more-likely-than-not to be realized upon ultimate
settlement. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The adoption of the provisions of
FIN 48 did not have an impact on our financial condition or
results of operations.
In June 2006, the Emerging Issues Task Force (EITF)
issued EITF
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43, Accounting for
Compensated Absences. Under EITF
No. 06-2,
the compensation cost associated with a sabbatical or other
similar benefit arrangement should be accrued over the requisite
service period if an employees right to such absence
(a) requires the completion of a minimum service period and
(b) in which the benefit does not increase with additional
years of service pursuant to paragraph 6(b) of
SFAS No. 43 for arrangements in which the individual
continues to be a compensated employee and is not required to
perform duties for the entity during the absence. EITF
No. 06-2
was effective for us on January 1, 2007, and the adoption
of the provisions of EITF
No. 06-2
did not materially impact our financial condition or results of
operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements itself. However, this statement applies under other
accounting pronouncements that require or permit fair value
measurements and may therefore change current practice if an
alternative measure of fair value has been used.
SFAS No. 157 applies an exchange price notion for fair
value consistent with previously preferred practice, with a
focus on exit price and market-based measurements as compared to
entry price and entity-specific measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007.
However, in December 2007, the FASB issued proposed FSP
FAS 157-b,
which would delay the effective date of SFAS No. 157
for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
This proposed FSP partially defers the effective date of
SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years for items within the scope of this FSP. Effective
January 1, 2008, we adopted SFAS No. 157 except
as it applies to those nonfinancial assets and nonfinancial
liabilities as noted in proposed FSP
FAS 157-b.
The partial adoption of SFAS No. 157 did not
materially impact our financial condition or results of
operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS No. 159).
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value, the objective of which is to improve financial reporting
by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting
46
provisions. This statement is expected to expand the use of fair
value measurement, which is consistent with FASBs
long-term measurement objectives for accounting for financial
instruments. SFAS No. 159 is effective as of the
beginning of an entitys first fiscal year that begins
after November 15, 2007. The adoption of
SFAS No. 159 on January 1, 2008, did not
materially impact our financial condition or results of
operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51.
SFAS No. 141R will change how business acquisitions
are accounted for and will impact financial statements both on
the acquisition date and in subsequent periods.
SFAS No. 160 will change the accounting and reporting
for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity. SFAS No. 141R and SFAS No. 160 are
effective for annual periods beginning after December 15,
2008, and early adoption is not permitted. We are currently
evaluating the impact that the adoption of
SFAS No. 141R and SFAS No. 160 could have on
our consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Historically we have been exposed to market risk from changes in
interest rates and we may be again in the future. We have
managed our exposure to these risks by monitoring available
financing alternatives and do not foresee any significant
changes in our exposure to fluctuations in interest rates or in
how such exposure is managed in the future. However, at
December 31, 2007, all of our outstanding debt was subject
to fixed interest rates. The below table summarizes our debt
obligations at December 31, 2007 on our consolidated
balance sheet (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
Total
|
|
|
Value
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
5,547
|
|
|
$
|
2,597
|
|
|
$
|
2,785
|
|
|
$
|
24,911
|
|
|
$
|
1,639
|
|
|
$
|
45,741
|
|
|
$
|
83,220
|
|
|
$
|
84,565
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.8
|
%
|
|
|
|
|
Debentures due Red Lion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels Capital Trust
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
30,825
|
|
|
$
|
30,825
|
|
|
$
|
29,342
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.5
|
%
|
|
|
|
|
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
See Item 15 of this annual report for certain information
with respect to the financial statements filed as a part hereof,
including financial statements filed pursuant to the
requirements of this Item 8.
The following table sets forth supplementary financial data (in
thousands except per share amounts) for each quarter for the
years ended December 31, 2007 and 2006, derived from our
unaudited financial statements. The data
47
set forth below should be read in conjunction with and is
qualified in its entirety by reference to our consolidated
financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room revenue
|
|
$
|
22,655
|
|
|
$
|
31,238
|
|
|
$
|
36,851
|
|
|
$
|
23,568
|
|
|
$
|
114,312
|
|
Food and beverage revenue
|
|
|
10,962
|
|
|
|
12,706
|
|
|
|
12,007
|
|
|
|
12,386
|
|
|
|
48,061
|
|
Other hotel revenue
|
|
|
764
|
|
|
|
895
|
|
|
|
1,181
|
|
|
|
955
|
|
|
|
3,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hotels segment revenue
|
|
|
34,381
|
|
|
|
44,839
|
|
|
|
50,039
|
|
|
|
36,909
|
|
|
|
166,168
|
|
Franchise and management revenue
|
|
|
789
|
|
|
|
782
|
|
|
|
701
|
|
|
|
483
|
|
|
|
2,756
|
|
Entertainment revenue
|
|
|
3,347
|
|
|
|
2,642
|
|
|
|
3,030
|
|
|
|
5,820
|
|
|
|
14,839
|
|
Other revenue
|
|
|
787
|
|
|
|
731
|
|
|
|
750
|
|
|
|
862
|
|
|
|
3,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
39,304
|
|
|
$
|
48,994
|
|
|
$
|
54,520
|
|
|
$
|
44,074
|
|
|
$
|
186,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
$
|
(1,265
|
)
|
|
$
|
5,811
|
|
|
$
|
10,737
|
|
|
$
|
95
|
|
|
$
|
15,378
|
|
Income (loss) from continuing operations before income tax
|
|
$
|
(3,186
|
)
|
|
$
|
3,772
|
|
|
$
|
8,757
|
|
|
$
|
(1,904
|
)
|
|
$
|
7,438
|
|
Net income (loss) from continuing operations
|
|
$
|
(1,980
|
)
|
|
$
|
2,509
|
|
|
$
|
5,799
|
|
|
$
|
(1,097
|
)
|
|
$
|
5,231
|
|
Net income (loss) from discontinued operations
|
|
$
|
(26
|
)
|
|
$
|
(311
|
)
|
|
$
|
1,306
|
|
|
$
|
(150
|
)
|
|
$
|
819
|
|
Net income (loss)
|
|
$
|
(2,006
|
)
|
|
$
|
2,198
|
|
|
$
|
7,105
|
|
|
$
|
(1,247
|
)
|
|
$
|
6,050
|
|
Earnings (loss) per common share basic
|
|
$
|
(0.10
|
)
|
|
$
|
0.11
|
|
|
$
|
0.37
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.32
|
|
Earnings (loss) per common share diluted
|
|
$
|
(0.10
|
)
|
|
$
|
0.11
|
|
|
$
|
0.36
|
|
|
$
|
(0.07
|
)
|
|
$
|
0.32
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room revenue
|
|
$
|
19,749
|
|
|
$
|
27,138
|
|
|
$
|
34,719
|
|
|
$
|
22,071
|
|
|
$
|
103,677
|
|
Food and beverage revenue
|
|
|
10,380
|
|
|
|
12,400
|
|
|
|
11,990
|
|
|
|
12,747
|
|
|
|
47,517
|
|
Other hotel revenue
|
|
|
900
|
|
|
|
913
|
|
|
|
1,053
|
|
|
|
757
|
|
|
|
3,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hotels segment revenue
|
|
|
31,029
|
|
|
|
40,451
|
|
|
|
47,762
|
|
|
|
35,575
|
|
|
|
154,817
|
|
Franchise and management revenue
|
|
|
577
|
|
|
|
641
|
|
|
|
847
|
|
|
|
788
|
|
|
|
2,853
|
|
Entertainment revenue
|
|
|
3,370
|
|
|
|
2,488
|
|
|
|
2,519
|
|
|
|
2,414
|
|
|
|
10,791
|
|
Other revenue
|
|
|
773
|
|
|
|
137
|
|
|
|
282
|
|
|
|
715
|
|
|
|
1,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
35,749
|
|
|
$
|
43,717
|
|
|
$
|
51,410
|
|
|
$
|
39,492
|
|
|
$
|
170,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) from continuing operations
|
|
$
|
(1,317
|
)
|
|
$
|
5,701
|
|
|
$
|
9,057
|
|
|
$
|
(133
|
)
|
|
$
|
13,308
|
|
Income (loss) from continuing operations before income tax
|
|
$
|
(4,261
|
)
|
|
$
|
2,184
|
|
|
$
|
1,799
|
|
|
$
|
(1,875
|
)
|
|
$
|
(2,153
|
)
|
Net income (loss) from continuing operations
|
|
$
|
(2,685
|
)
|
|
$
|
1,932
|
|
|
$
|
1,338
|
|
|
$
|
(1,105
|
)
|
|
$
|
(520
|
)
|
Net income (loss) from discontinued operations
|
|
$
|
(288
|
)
|
|
$
|
149
|
|
|
$
|
114
|
|
|
$
|
(30
|
)
|
|
$
|
(55
|
)
|
Net income (loss)
|
|
$
|
(2,973
|
)
|
|
$
|
2,081
|
|
|
$
|
1,452
|
|
|
$
|
(1,135
|
)
|
|
$
|
(575
|
)
|
Earnings (loss) per common share basic
|
|
$
|
(0.22
|
)
|
|
$
|
0.14
|
|
|
$
|
0.08
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.03
|
)
|
Earnings (loss) per common share diluted
|
|
$
|
(0.22
|
)
|
|
$
|
0.13
|
|
|
$
|
0.07
|
|
|
$
|
(0.06
|
)
|
|
$
|
(0.03
|
)
|
Through September 30, 2006, we reported a Real
Estate segment that historically included the ownership of
commercial real estate properties and the management of
commercial and residential projects. During 2006, we divested
our real estate management business. In the fourth quarter of
2006, we listed for sale a commercial office and retail complex
located in Spokane, Washington, and have classified its assets,
liabilities and results of operations within discontinued
operations for the periods presented above. Our remaining office
and retail properties no longer constitute a separate reportable
segment and their operating results for the periods presented
have been reclassified to Other.
48
Financial
Statements
The 2007
Consolidated Financial Statements of Red Lion Hotels Corporation
are
presented on pages 51 to 81 of this annual report.
49
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Red Lion Hotels Corporation
Spokane, Washington
We have audited the accompanying consolidated balance sheets of
Red Lion Hotels Corporation as of December 31, 2007 and
2006 and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Red Lion Hotels Corporation as of December 31,
2007 and 2006, and the results of its operations and its cash
flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 10 to the consolidated financial
statements, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment, as of
January 1, 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Red
Lion Hotels Corporations internal control over financial
reporting as of December 31, 2007, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report
dated March 12, 2008 expressed an unqualified opinion
thereon.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Spokane, Washington
March 12, 2008
50
RED LION
HOTELS CORPORATION
December 31,
2007 and 2006
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
15,044
|
|
|
$
|
13,262
|
|
Investments
|
|
|
|
|
|
|
7,635
|
|
Restricted cash
|
|
|
4,439
|
|
|
|
2,756
|
|
Accounts receivable, net
|
|
|
10,330
|
|
|
|
9,309
|
|
Inventories
|
|
|
1,416
|
|
|
|
1,523
|
|
Prepaid expenses and other
|
|
|
3,352
|
|
|
|
3,907
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
14,539
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
34,581
|
|
|
|
52,931
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
260,574
|
|
|
|
250,575
|
|
Goodwill
|
|
|
28,042
|
|
|
|
28,042
|
|
Intangible assets, net
|
|
|
11,582
|
|
|
|
12,097
|
|
Other assets, net
|
|
|
9,730
|
|
|
|
7,793
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
344,509
|
|
|
$
|
351,438
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,189
|
|
|
$
|
8,732
|
|
Accrued payroll and related benefits
|
|
|
6,166
|
|
|
|
6,058
|
|
Accrued interest payable
|
|
|
356
|
|
|
|
422
|
|
Advance deposits
|
|
|
345
|
|
|
|
315
|
|
Other accrued expenses
|
|
|
10,419
|
|
|
|
10,381
|
|
Long-term debt, due within one year
|
|
|
5,547
|
|
|
|
2,267
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
4,112
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
27,022
|
|
|
|
32,287
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, due after one year
|
|
|
77,673
|
|
|
|
83,005
|
|
Deferred income
|
|
|
9,169
|
|
|
|
7,017
|
|
Deferred income taxes
|
|
|
17,294
|
|
|
|
14,259
|
|
Minority interest in partnerships
|
|
|
31
|
|
|
|
254
|
|
Debentures due Red Lion Hotels Capital Trust
|
|
|
30,825
|
|
|
|
30,825
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
162,014
|
|
|
|
167,647
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY
|
Preferred stock 5,000,000 shares authorized;
$0.01 par value; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock 50,000,000 shares authorized;
$0.01 par value; 18,312,756 and 19,118,692 shares
issued and outstanding
|
|
|
183
|
|
|
|
191
|
|
Additional paid-in capital, common stock
|
|
|
140,553
|
|
|
|
147,891
|
|
Retained earnings
|
|
|
41,759
|
|
|
|
35,709
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
182,495
|
|
|
|
183,791
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
344,509
|
|
|
$
|
351,438
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
51
RED LION
HOTELS CORPORATION
For the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels
|
|
$
|
166,168
|
|
|
$
|
154,817
|
|
|
$
|
146,125
|
|
Franchise and management
|
|
|
2,756
|
|
|
|
2,853
|
|
|
|
2,860
|
|
Entertainment
|
|
|
14,839
|
|
|
|
10,791
|
|
|
|
9,827
|
|
Other
|
|
|
3,130
|
|
|
|
1,907
|
|
|
|
4,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
186,893
|
|
|
|
170,368
|
|
|
|
163,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels
|
|
|
127,431
|
|
|
|
122,596
|
|
|
|
118,375
|
|
Franchise and management
|
|
|
814
|
|
|
|
808
|
|
|
|
652
|
|
Entertainment
|
|
|
12,812
|
|
|
|
9,109
|
|
|
|
8,395
|
|
Other
|
|
|
2,037
|
|
|
|
1,866
|
|
|
|
3,523
|
|
Depreciation and amortization
|
|
|
16,528
|
|
|
|
12,683
|
|
|
|
11,083
|
|
Hotel facility and land lease
|
|
|
6,490
|
|
|
|
6,449
|
|
|
|
6,553
|
|
Gain on asset dispositions, net
|
|
|
(437
|
)
|
|
|
(1,705
|
)
|
|
|
(1,040
|
)
|
Undistributed corporate expenses
|
|
|
5,840
|
|
|
|
5,254
|
|
|
|
4,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
171,515
|
|
|
|
157,060
|
|
|
|
151,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
15,378
|
|
|
|
13,308
|
|
|
|
11,449
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(9,172
|
)
|
|
|
(12,072
|
)
|
|
|
(13,987
|
)
|
Expense of early extinguishment of debt, net
|
|
|
|
|
|
|
(5,266
|
)
|
|
|
|
|
Minority interest in partnerships, net
|
|
|
(34
|
)
|
|
|
56
|
|
|
|
(60
|
)
|
Other income, net
|
|
|
1,266
|
|
|
|
1,821
|
|
|
|
717
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes
|
|
|
7,438
|
|
|
|
(2,153
|
)
|
|
|
(1,881
|
)
|
Income tax (benefit) expense
|
|
|
2,207
|
|
|
|
(1,633
|
)
|
|
|
(904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
5,231
|
|
|
|
(520
|
)
|
|
|
(977
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations of discontinued business units,
net of income tax (benefit) expense of $(62), $43 and $917,
respectively
|
|
|
(113
|
)
|
|
|
78
|
|
|
|
1,725
|
|
Net gain (loss) on disposal of discontinued business units, net
of income tax (benefit) expense of $513, $(73) and $2,070,
respectively
|
|
|
932
|
|
|
|
(133
|
)
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations
|
|
|
819
|
|
|
|
(55
|
)
|
|
|
5,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,050
|
|
|
$
|
(575
|
)
|
|
$
|
4,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
0.27
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
Income from discontinued operations
|
|
|
0.05
|
|
|
|
|
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.32
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
19,134
|
|
|
|
16,666
|
|
|
|
13,105
|
|
Weighted average shares diluted
|
|
|
19,506
|
|
|
|
16,666
|
|
|
|
13,105
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
52
RED LION
HOTELS CORPORATION
For the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Retained
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In Capital
|
|
|
Earnings
|
|
|
|
(In thousands, except share data)
|
|
|
Balances, January 1, 2005
|
|
|
13,064,626
|
|
|
$
|
131
|
|
|
$
|
84,467
|
|
|
$
|
31,789
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,495
|
|
Stock issued under employee stock purchase plan
|
|
|
31,456
|
|
|
|
|
|
|
|
152
|
|
|
|
|
|
Stock issued under option plan
|
|
|
31,493
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
Stock based compensation
|
|
|
3,707
|
|
|
|
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2005
|
|
|
13,131,282
|
|
|
|
131
|
|
|
|
84,832
|
|
|
|
36,284
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(575
|
)
|
Stock issued for cash, net of issuance costs
|
|
|
5,845,302
|
|
|
|
58
|
|
|
|
60,361
|
|
|
|
|
|
Stock issued under employee stock purchase plan
|
|
|
22,400
|
|
|
|
|
|
|
|
149
|
|
|
|
|
|
Stock issued under option plan
|
|
|
60,526
|
|
|
|
1
|
|
|
|
367
|
|
|
|
|
|
Stock based compensation
|
|
|
9,995
|
|
|
|
1
|
|
|
|
700
|
|
|
|
|
|
Tax benefits related to exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
340
|
|
|
|
|
|
OP Units exchanged for common stock
|
|
|
143,498
|
|
|
|
1
|
|
|
|
2,273
|
|
|
|
|
|
Stock redeemed for sale of business
|
|
|
(94,311
|
)
|
|
|
(1
|
)
|
|
|
(1,131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006
|
|
|
19,118,692
|
|
|
|
191
|
|
|
|
147,891
|
|
|
|
35,709
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,050
|
|
Stock redeemed under repurchase plan
|
|
|
(924,200
|
)
|
|
|
(9
|
)
|
|
|
(9,096
|
)
|
|
|
|
|
Stock issued under employee stock purchase plan
|
|
|
19,246
|
|
|
|
|
|
|
|
195
|
|
|
|
|
|
Stock issued under option plan
|
|
|
81,668
|
|
|
|
1
|
|
|
|
489
|
|
|
|
|
|
Stock based compensation
|
|
|
17,350
|
|
|
|
|
|
|
|
899
|
|
|
|
|
|
Tax benefits related to exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2007
|
|
|
18,312,756
|
|
|
$
|
183
|
|
|
$
|
140,553
|
|
|
$
|
41,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
53
RED LION
HOTELS CORPORATION
For the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,050
|
|
|
$
|
(575
|
)
|
|
$
|
4,495
|
|
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
16,556
|
|
|
|
13,108
|
|
|
|
11,606
|
|
Gain on disposition of property, equipment and other assets, net
|
|
|
(437
|
)
|
|
|
(1,704
|
)
|
|
|
(935
|
)
|
(Gain) loss on disposition of discontinued operations, net
|
|
|
(1,445
|
)
|
|
|
207
|
|
|
|
(5,714
|
)
|
Expense of early extinguishment of debt, net
|
|
|
|
|
|
|
5,266
|
|
|
|
|
|
Deferred income tax provision (benefit)
|
|
|
3,210
|
|
|
|
838
|
|
|
|
(2,572
|
)
|
Minority interest in partnerships
|
|
|
34
|
|
|
|
(57
|
)
|
|
|
60
|
|
Equity in investments
|
|
|
(40
|
)
|
|
|
(152
|
)
|
|
|
63
|
|
Imputed interest expense
|
|
|
212
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
901
|
|
|
|
700
|
|
|
|
142
|
|
Provision for doubtful accounts
|
|
|
53
|
|
|
|
334
|
|
|
|
466
|
|
Change in current assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(1,683
|
)
|
|
|
1,047
|
|
|
|
(2,045
|
)
|
Accounts receivable
|
|
|
(941
|
)
|
|
|
(281
|
)
|
|
|
(686
|
)
|
Inventories
|
|
|
133
|
|
|
|
341
|
|
|
|
223
|
|
Prepaid expenses and other
|
|
|
714
|
|
|
|
(2,297
|
)
|
|
|
1,808
|
|
Accounts payable
|
|
|
(4,889
|
)
|
|
|
1,430
|
|
|
|
2,075
|
|
Accrued payroll and related benefits
|
|
|
88
|
|
|
|
50
|
|
|
|
930
|
|
Accrued interest payable
|
|
|
(87
|
)
|
|
|
(241
|
)
|
|
|
(44
|
)
|
Other accrued expenses and advance deposits
|
|
|
2,801
|
|
|
|
948
|
|
|
|
2,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
21,230
|
|
|
|
18,962
|
|
|
|
11,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(25,509
|
)
|
|
|
(34,851
|
)
|
|
|
(22,724
|
)
|
Proceeds from disposition of property and equipment
|
|
|
22
|
|
|
|
34
|
|
|
|
4,904
|
|
Proceeds from disposition of discontinued operations
|
|
|
7,918
|
|
|
|
13,155
|
|
|
|
27,892
|
|
Proceeds from short-term liquid investments
|
|
|
7,635
|
|
|
|
7,165
|
|
|
|
(14,800
|
)
|
Proceeds from (advances to) Red Lion Hotels Capital Trust
|
|
|
(17
|
)
|
|
|
515
|
|
|
|
(20
|
)
|
Non-current restricted cash for sublease tenant improvements, net
|
|
|
(2,151
|
)
|
|
|
|
|
|
|
|
|
Distributions from equity investee
|
|
|
|
|
|
|
|
|
|
|
93
|
|
Proceeds from collections under note receivable
|
|
|
|
|
|
|
|
|
|
|
502
|
|
Other, net
|
|
|
(389
|
)
|
|
|
(18
|
)
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(12,491
|
)
|
|
|
(14,000
|
)
|
|
|
(4,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
54
RED LION
HOTELS CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS (CONTINUED)
For the
Years Ended December 31, 2007, 2006 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable to bank
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Repayment of note payable to bank
|
|
|
|
|
|
|
|
|
|
|
(50
|
)
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
7,874
|
|
Repayment of long-term debt including expense of early
|
|
|
|
|
|
|
|
|
|
|
|
|
extinguishment
|
|
|
(2,479
|
)
|
|
|
(48,179
|
)
|
|
|
(11,724
|
)
|
Borrowings on long-term debt
|
|
|
3,926
|
|
|
|
|
|
|
|
|
|
Common stock redeemed
|
|
|
(9,107
|
)
|
|
|
|
|
|
|
|
|
Proceeds from common stock offering
|
|
|
|
|
|
|
60,420
|
|
|
|
|
|
Repayment of debentures including expense of early extinguishment
|
|
|
|
|
|
|
(17,403
|
)
|
|
|
|
|
Proceeds from issuance of common stock under employee stock
|
|
|
|
|
|
|
|
|
|
|
|
|
purchase plan
|
|
|
196
|
|
|
|
150
|
|
|
|
152
|
|
Proceeds from stock option exercises
|
|
|
489
|
|
|
|
708
|
|
|
|
71
|
|
Distributions to operating partnership unit holders
|
|
|
(8
|
)
|
|
|
|
|
|
|
(24
|
)
|
Additions to deferred financing costs
|
|
|
(31
|
)
|
|
|
(943
|
)
|
|
|
(374
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(7,014
|
)
|
|
|
(5,247
|
)
|
|
|
(4,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash from discontinued operations
|
|
|
57
|
|
|
|
14
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
1,782
|
|
|
|
(271
|
)
|
|
|
3,622
|
|
Cash and cash equivalents at beginning of period
|
|
|
13,262
|
|
|
|
13,533
|
|
|
|
9,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
15,044
|
|
|
$
|
13,262
|
|
|
$
|
13,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during periods for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on long-term debt
|
|
$
|
9,206
|
|
|
$
|
12,502
|
|
|
$
|
15,648
|
|
Income taxes
|
|
$
|
1,100
|
|
|
$
|
1,812
|
|
|
$
|
2,408
|
|
Cash received during periods for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,514
|
|
|
$
|
691
|
|
|
$
|
1,339
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax effect on conversion of stock
|
|
$
|
175
|
|
|
$
|
|
|
|
$
|
|
|
Exchange of property and equipment for minority interest
|
|
$
|
657
|
|
|
$
|
|
|
|
$
|
|
|
Exchange of common stock for minority interest in partnership
|
|
$
|
|
|
|
$
|
2,273
|
|
|
$
|
|
|
Exchange of common stock for real estate management business
|
|
$
|
|
|
|
$
|
1,131
|
|
|
$
|
|
|
Note receivable on disposition of discontinued operations
|
|
$
|
|
|
|
$
|
|
|
|
$
|
300
|
|
Sale of equipment under note receivable
|
|
$
|
|
|
|
$
|
|
|
|
$
|
37
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
55
RED LION
HOTELS CORPORATION
Red Lion Hotels Corporation (RLH, Red
Lion or the Company) is a NYSE-listed
hospitality and leisure company (ticker symbols RLH and RLH-pa)
primarily engaged in the ownership, operation and franchising of
midscale and upscale, full service hotels under the Red Lion
brand. As of December 31, 2007, the Red Lion system of
hotels contained 53 hotels located in eight states and one
Canadian province, with 9,388 rooms and 477,529 square feet
of meeting space. As of that date, the Company operated 31
hotels, of which 18 are wholly-owned and 13 are leased, managed
one hotel owned by a third-party and franchised 21 hotels that
were owned and operated by various third-party franchisees.
In addition to hotel operations, the Company is engaged in
entertainment operations. Through the entertainment division,
which includes TicketsWest.com, Inc., the Company engages in
event ticket distribution and promotion and presents a variety
of entertainment productions.
Historically, the Company owned certain commercial real estate
and engaged in traditional real estate related services,
including developing, managing and acting as a broker for sales
and leases of commercial and
multi-unit
residential properties (collectively referred to as the real
estate management business). Together with commercial retail and
office properties the Company owned, these operations comprised
the Real Estate segment. Effective April 30,
2006, the Company divested the real estate management business.
Any former Real Estate segment activities still part of
continuing operations have been included within the
Other segment for all periods presented. During the
third quarter of 2007, the Company sold a wholly-owned
commercial real estate property recorded as a discontinued
operation, as discussed further in Note 3.
The Company was incorporated in the state of Washington in April
1978, and has operated hotels under various brand names
including, until 1999, Cavanaughs Hotels. In 1999, the Company
acquired WestCoast Hotels, Inc., and rebranded its Cavanaughs
hotels to the WestCoast brand changing the
Companys name to WestCoast Hospitality Corporation. In
2001, the Company acquired Red Lion Hotels, Inc. In September
2005, after rebranding most of its WestCoast hotels to the Red
Lion brand, the Company changed its name to Red Lion Hotels
Corporation. The financial statements encompass the accounts of
Red Lion Hotels Corporation and all of its consolidated
subsidiaries, including its 100% ownership of Red Lion Hotels
Holdings, Inc., and Red Lion Hotels Franchising, Inc., and its
more than 99% ownership of Red Lion Hotels Limited Partnership
(RLHLP) further discussed in Note 6.
Up to July 22, 2005, the Company wholly owned a retail and
hotel property and included it in consolidation. At that date,
the Company sold a 50%
tenancy-in-common
interest in the property to a third party and reflected its
remaining interest in the property as an equity method
investment. In December 2006, the Company increased its
ownership in the property to 100%. From that date forward, the
property was again consolidated.
The financial statements include an equity method investment in
a 19.9% owned real estate venture, as well as certain cost
method investments in various entities included as other assets,
over which the Company does not exercise significant influence.
In addition, the Company hold a 3% common interest in Red Lion
Hotels Capital Trust (the Trust) that is considered
a variable interest entity under FIN-46(R) Consolidation
of Variable Interest Entities, as revised. The Company is
not the primary beneficiary of the Trust; thus, it is treated as
an equity method investment.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the
United States of America (GAAP), and include all
accounts and wholly and majority-owned subsidiaries
accounts. All significant inter-company transactions and
accounts have been eliminated upon consolidation. In addition,
certain other amounts disclosed in prior period statements have
been reclassified to
56
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
conform to the current period presentation; however, this
reclassification had no effect on net income (loss) or retained
earnings as previously reported.
Cash
and Cash Equivalents
All highly liquid investments purchased with an original
maturity of three months or less are considered to be cash
equivalents. At times, cash balances at banks and other
financial institutions may be in excess of federal insurance
limits.
Investments
At December 31, 2006, the Company included variable rate
demand notes as current investments on the consolidated balance
sheet. Variable rate demand notes are highly liquid short-term
investments with maturities of less than one year, and were all
liquidated during the first quarter of 2007. The variable rate
demand notes were recorded at cost, which approximated fair
value at December 31, 2006. Gross realized gains and losses
were immaterial in all periods presented.
Restricted
Cash
In accordance with the Companys various borrowing
arrangements, at December 31, 2007 and 2006, cash of
approximately $4.4 million and $2.8 million,
respectively, was held in escrow for the future payment of
insurance, property taxes, repairs and furniture and fixtures.
Allowance
for Doubtful Accounts
The ability to collect individual accounts receivable is
reviewed on a routine basis. Allowances for doubtful accounts
are recorded based on specifically identified amounts believed
to be uncollectible and for those accounts past due beyond a
certain date, generally 90 days. If actual collection
experience changes, revisions to the allowance may be required
and if all attempts to collect a receivable fail, it is recorded
against the allowance. The estimate of the allowance for
doubtful accounts is impacted by, among other things, national
and regional economic conditions.
The following schedule summarizes the activity in the allowance
account for trade accounts receivable for the past three years
for continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts, continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
434
|
|
|
$
|
342
|
|
|
$
|
295
|
|
Additions to allowance
|
|
|
83
|
|
|
|
375
|
|
|
|
451
|
|
Write-offs, net of recoveries
|
|
|
(231
|
)
|
|
|
(283
|
)
|
|
|
(404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
286
|
|
|
$
|
434
|
|
|
$
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories consist primarily of food and beverage products held
for sale at the company operated restaurants and guest supplies.
Inventories are valued at the lower of cost, determined on a
first-in,
first-out basis, or net realizable value.
57
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Assets
Held for Sale
Assets held for sale are accounted for in accordance with
Statement of Financial Accounting Standards Number
(SFAS No.) 144 Accounting for the
Impairment and Disposal of Long-Lived Assets, and are
recorded at the lower of their historical cost less accumulated
depreciation or market value less costs to sell. In accordance
with SFAS No. 144, depreciation is suspended when the
asset is determined to be held for sale. If the assets are
ultimately not sold, depreciation would be recaptured. For
additional information with regard to assets held for sale, as
well as discontinued operations, see Note 3 of Notes to
Consolidated Financial Statements.
Property
and Equipment
Property and equipment are stated at cost. The cost of
improvements that extend the life of property and equipment are
capitalized. Interest costs are capitalized as incurred during
the construction period for qualifying assets. During 2006 and
2005, the Company capitalized approximately $173,000 and
$32,000, respectively. No interest was capitalized in 2007.
Repairs and maintenance charges are expensed as incurred.
Depreciation is provided using the straight-line method over the
estimated useful life of each asset, which range as follows:
|
|
|
|
|
Buildings
|
|
|
25 to 39 years
|
|
Equipment
|
|
|
2 to 20 years
|
|
Furniture and fixtures
|
|
|
5 to 15 years
|
|
Landscaping and improvements
|
|
|
15 years
|
|
Valuation
of Long-Lived Assets
Management reviews the carrying value of property, equipment and
other long-lived assets at least annually, or upon the
occurrence of other events or changes in circumstances that
indicate the related carrying amounts may not be recoverable.
Estimated undiscounted future cash flows are compared with the
assets current carrying value. Reductions to the carrying
value, if necessary, are recorded to the extent the net book
value of the asset exceeds the greater of estimated future
discounted cash flows or fair value less selling costs, in
accordance with SFAS No. 144. During 2005, the Company
recorded impairment charges in connection with the sale of
certain discontinued operations, as discussed in Note 3 of
Notes to Consolidated Financial Statements. No asset impairment
charges were recorded during 2007 or 2006.
Goodwill
and Intangible Assets
Goodwill represents the excess of the estimated fair value of
the net assets acquired during business combinations over the
net tangible and identifiable intangible assets acquired.
Goodwill is tested for impairment at least annually, or when
circumstances dictate, and is not otherwise amortized.
The Red Lion brand name is an identifiable, indefinite life
intangible asset that represents the separable legal right to a
trade name acquired in a business combination the Company
entered into in 2001. Remaining intangible assets consist
primarily of the net amortized cost of lease, management and
franchise contracts acquired in business combinations, including
the one in 2001. The costs of these contracts are amortized over
the weighted-average remaining term of the related agreements.
58
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the cost and accumulated
amortization of goodwill and other intangible assets (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Goodwill
|
|
$
|
28,042
|
|
|
|
N/A
|
|
|
$
|
28,042
|
|
|
$
|
28,042
|
|
|
|
N/A
|
|
|
$
|
28,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise and management contracts
|
|
$
|
4,087
|
|
|
$
|
(2,959
|
)
|
|
$
|
1,128
|
|
|
$
|
5,882
|
|
|
$
|
(4,377
|
)
|
|
$
|
1,505
|
|
Brand name
|
|
|
6,878
|
|
|
|
N/A
|
|
|
|
6,878
|
|
|
|
6,878
|
|
|
|
N/A
|
|
|
|
6,878
|
|
Lease contracts
|
|
|
4,332
|
|
|
|
(866
|
)
|
|
|
3,466
|
|
|
|
4,332
|
|
|
|
(722
|
)
|
|
|
3,610
|
|
Trademarks
|
|
|
110
|
|
|
|
N/A
|
|
|
|
110
|
|
|
|
104
|
|
|
|
N/A
|
|
|
|
104
|
|
Other intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
15,407
|
|
|
$
|
(3,825
|
)
|
|
$
|
11,582
|
|
|
$
|
17,262
|
|
|
$
|
(5,165
|
)
|
|
$
|
12,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was
approximately $0.5 million, $0.8 million and
$0.8 million during the years ended December 31, 2007,
2006 and 2005. Estimated amortization expense for intangible
assets over the next five years is as follows (in thousands):
|
|
|
|
|
Year Ending
|
|
|
|
December 31,
|
|
Amount
|
|
|
2008
|
|
$
|
520
|
|
2009
|
|
|
520
|
|
2010
|
|
|
520
|
|
2011
|
|
|
144
|
|
2012
|
|
|
144
|
|
|
|
|
|
|
|
|
$
|
1,848
|
|
|
|
|
|
|
Goodwill and other intangible assets attributable to each of the
Companys business segments at December 31, 2007 and
2006, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Other
|
|
|
|
Goodwill
|
|
|
Intangibles
|
|
|
Goodwill
|
|
|
Intangibles
|
|
|
Hotels
|
|
$
|
19,530
|
|
|
$
|
8,103
|
|
|
$
|
19,530
|
|
|
$
|
8,200
|
|
Franchise and management
|
|
|
5,351
|
|
|
|
3,473
|
|
|
|
5,351
|
|
|
|
3,891
|
|
Entertainment
|
|
|
3,161
|
|
|
|
6
|
|
|
|
3,161
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,042
|
|
|
$
|
11,582
|
|
|
$
|
28,042
|
|
|
$
|
12,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
Other assets primarily include deferred loan fees, straight-line
rental income, long-term notes receivable and equity method and
cost method investments discussed in Note 1. Deferred loan
fees are amortized using the effective interest method over the
term of the related loan agreement. During 2007 and in
connection with the sublease of the Red Lion Hotel Sacramento
and subsequent long-term franchise agreement as discussed
further in Note 13, the Company committed to approximately
$3.0 million in tenant improvements that was segregated as
59
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
long-term restricted cash and included in other assets on the
consolidated balance sheet. At December 31, 2007, the cash
balance remaining undisbursed in that account was
$2.2 million.
Cost method investments are carried at their original purchase
price, less any impairment recognized to date. Equity method
investments are carried at cost, adjusted for the Companys
proportionate share of earnings and any investment
disbursements. At each of December 31, 2007 and 2006, the
Company had a $0.3 million note receivable that bore
interest at 7.05% related to its investment in a real estate
venture. The note was originally due in August 2007, and was
later amended for payment due in February 2011.
Income
Taxes
Deferred tax assets and liabilities and income tax expenses and
benefits are recognized for the expected future income tax
consequences of events that have been recognized in the
consolidated financial statements. The deferred tax assets and
liabilities are determined based on the temporary differences
between the carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in
which the temporary differences are expected to reverse. Certain
wholly or partially-owned entities, including RLHLP, do not
directly pay income taxes. Instead, their taxable income either
flows through to the Company or to the other respective owners
of the entities. A valuation allowance against the deferred tax
assets has not been established as its more likely than
not that these assets will be realized.
Revenue
Recognition and Receivables
Revenue is generally recognized as services are provided. When
payments from customers are received before services have been
performed, the amount received is recorded as deferred revenue
until the service has been completed. The Company recognizes
revenue from the following sources:
|
|
|
|
|
Hotels Room rental and food and beverage
sales from owned and leased hotels. Revenues are recognized when
services have been performed, generally at the time of the hotel
stay or guests visit to the restaurant.
|
|
|
|
Franchise and Management Fees received in
connection with the franchise of the Red Lion brand name,
management fees earned from managing third-party owned hotels
and termination fees. Franchise and management revenues are
recognized as earned in accordance with the contractual terms of
the franchise or management agreements, while termination fees
are recorded as revenues as if the agreements were terminated at
that date when the provisions of the franchise or management
agreements provide for receipt of incentive fees upon
termination.
|
|
|
|
Entertainment Computerized event ticketing
services and promotion of Broadway-style shows and other special
events. Where the Company acts as an agent and receives a net
fee or commission, it is recognized as revenue in the period the
services are performed. When the Company is the promoter of an
event and is at-risk for the production, revenues and expenses
are recorded in the period of the event performance.
|
In June 2006, the EITF reached a consensus on EITF
No. 06-03,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That is, Gross versus Net Presentation)
(EITF
No. 06-03).
EITF
No. 06-03
provides that the presentation of taxes assessed by a
governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer on
either a gross basis (included in revenues and costs) or on a
net basis (excluded from revenues) is an accounting policy
decision that should be disclosed. The provisions of EITF
No. 06-03
became effective as of December 31, 2006, and did not
change the Companys accounting policy of net presentation,
nor have an effect on the Companys financial position or
results of operations.
60
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
and Promotion
Costs associated with advertising and promotional efforts are
generally expensed as incurred. During the years ended
December 31, 2007, 2006 and 2005, the Company incurred
approximately $2.1 million, $1.9 million and
$1.9 million, respectively, in advertising expense for
continuing operations. In addition, the Company incurred
advertising expenses associated with discontinued operations of
approximately $0.1 million and $0.2 million,
respectively, during 2006 and 2005, and a deminimus amount in
2007. These amounts are exclusive of advertising and promotion
spent by the Red Lion Central Program Fund discussed below.
Central
Program Fund
In 2002, the Company established the Central Program Fund
(CPF) in accordance with the Companys various
domestic franchise agreements. The CPF is responsible for
certain advertising services, frequent guest program
administration, reservation services, national sales promotions
and brand and revenue management services intended to increase
sales and enhance the reputation of the Red Lion brand. CPF
contributions for company owned and managed hotels and those
made by the franchisees, based on the individual franchise
agreements, total up to 4.5% of room revenue or in some cases
are based on reservation fees, frequent guest program dues and
other services. The net assets and transactions of the CPF are
not included in the accompanying financial statements in
accordance with SFAS No. 45, Accounting for
Franchise Fee Revenue.
For the years ended December 31, 2007, 2006 and 2005, the
Company recorded operating expenses of $7.0 million,
$6.2 million, and $6.4 million, respectively, based on
contributions for the period to the CPF. At December 31,
2007 and 2006, the Company had a net current receivable from the
CPF of approximately $1.5 million and $1.6 million,
respectively.
Basic
and Diluted Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income
(loss) by the weighted-average number of shares outstanding
during the period. Diluted earnings (loss) per share gives
effect to all dilutive potential shares that are outstanding
during the period and includes outstanding stock options and
other outstanding employee equity grants, as well as the effect
of minority interests related to operating partnership units of
RLHLP (OP Units), by increasing the
weighted-average number of shares outstanding by their effect.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could
materially differ from those estimates.
New
Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes by establishing minimum
standards for the recognition and measurement of tax positions
taken or expected to be taken in a tax return. Under the
requirements of FIN 48, a company must review all of its
uncertain tax positions and make a determination as to whether
its position is more-likely-than-not to be sustained upon
examination by regulatory authorities. If a position meets the
more-likely-than-not criterion, then the related tax benefit is
measured based on the cumulative probability analysis of the
amount that is more-likely-than-not to be realized upon ultimate
settlement. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The adoption of the provisions of
FIN 48 did not have an impact on the Companys
financial condition or results of operations.
61
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In June 2006, the Emerging Issues Task Force (EITF)
issued EITF
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43, Accounting for
Compensated Absences. Under EITF
No. 06-2,
the compensation cost associated with a sabbatical or other
similar benefit arrangement should be accrued over the requisite
service period if an employees right to such absence
(a) requires the completion of a minimum service period and
(b) in which the benefit does not increase with additional
years of service pursuant to paragraph 6(b) of
SFAS No. 43 for arrangements in which the individual
continues to be a compensated employee and is not required to
perform duties for the entity during the absence. EITF
No. 06-2
was effective for the Company on January 1, 2007, and the
adoption of the provisions of EITF
No. 06-2
did not materially impact its financial condition or results of
operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS No. 157). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements.
SFAS No. 157 does not require any new fair value
measurements itself. However, this statement applies under other
accounting pronouncements that require or permit fair value
measurements and may therefore change current practice if an
alternative measure of fair value has been used.
SFAS No. 157 applies an exchange price notion for fair
value consistent with previously preferred practice, with a
focus on exit price and market-based measurements as compared to
entry price and entity-specific measurements.
SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007.
However, in December 2007, the FASB issued proposed FSP
FAS 157-b,
which would delay the effective date of SFAS No. 157
for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually).
This proposed FSP partially defers the effective date of
SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years for items within the scope of this FSP. Effective
January 1, 2008, the Company adopted SFAS No. 157
except as it applies to those nonfinancial assets and
nonfinancial liabilities as noted in proposed FSP
FAS 157-b.
The partial adoption of SFAS No. 157 did not
materially impact its financial condition or results of
operations.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS No. 159).
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value, the objective of which is to improve financial reporting
by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. This statement is expected
to expand the use of fair value measurement, which is consistent
with FASBs long-term measurement objectives for accounting
for financial instruments. SFAS No. 159 is effective
as of the beginning of an entitys first fiscal year that
begins after November 15, 2007. The adoption of
SFAS No. 159 on January 1, 2008, did not
materially impact the Companys financial condition or
results of operations.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS No. 141R) and
SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of Accounting
Research Bulletin No. 51
(SFAS No. 160). SFAS No. 141R
will change how business acquisitions are accounted for and will
impact financial statements both on the acquisition date and in
subsequent periods. SFAS No. 160 will change the
accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a
component of equity. SFAS No. 141R and
SFAS No. 160 are effective for annual periods
beginning after December 15, 2008, and early adoption is
not permitted. The Company is currently evaluating the impact
that the adoption of SFAS No. 141R and
SFAS No. 160 could have on its consolidated financial
statements.
|
|
3.
|
Assets
Held For Sale and Discontinued Operations
|
In November 2004, the Company announced its plan to divest
non-strategic assets, including eleven of its owned hotels,
certain commercial office buildings and certain other non-core
properties including condominium
62
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
units and certain parcels of excess land (collectively referred
to as the divestment properties). Each of the
divestment properties met the criteria to be classified as an
asset held for sale. The activities of the hotels and commercial
office buildings were considered discontinued operations under
generally accepted accounting principles and have been
separately disclosed on the consolidated statement of
operations, comparative for all periods presented when they
existed. Likewise, the assets and liabilities of the business
units have been segregated and separately stated on the
consolidated balance sheet for all periods presented when they
existed. Depreciation of these assets, if previously
appropriate, was suspended.
During 2005, the Company sold seven of the eleven hotels
included under the November 2004 divestment plan and one
commercial building, and during 2006 the Company sold three
additional hotels. During the second quarter of 2007, the
Company sold the remaining hotel located in Kalispell, Montana
for gross proceeds of $3.9 million. In 2006 and 2005, the
Company received gross proceeds of approximately
$15.8 million and $52.8 million, respectively, and
recognized a loss on the disposition of discontinued operations
of $0.1 million in 2006 and a gain of $3.7 million in
2005, both net of income tax expense. Proceeds from the sales
have been used to finance the company-wide hotel renovation
program, to repay $20.0 million in debt and for general
corporate purposes. The net impact on consolidated earnings from
the activities of these operations resulted in income from
discontinued operations of $0.8 million in 2007, compared
to a loss of $0.1 million in 2006 and income of
$5.5 million in 2005, net of income tax expense.
The 2005 gain on the sale accounted for $6.6 million, net
of tax expense, of net income from discontinued operations,
offset by the recording of an impairment loss of
$2.9 million, net of tax expense, for the four hotel
properties. The Company evaluated the divestment properties for
potential impairment in accordance with the provisions of
SFAS No. 144 Accounting for the Impairment or
Disposal of Long-lived Assets. The impairment amounts were
calculated using expected sales prices, less expected
transaction costs, as compared to the carrying value at the date
of the evaluation. No impairment loss was recorded during 2007
or 2006.
The Company holds undeveloped land that had been classified as
held for sale on the consolidated balance sheet in 2006. While
continuing to pursue the disposition of the assets, the Company
determined the land no longer meets the accounting criteria for
such classification. During June 2007, approximately
$0.7 million was reclassified to property and equipment for
all periods presented.
During the fourth quarter of 2006, the Company listed for sale a
commercial office and retail complex located in Spokane,
Washington that was included as a component of discontinued
operations on the consolidated financial statements, comparative
for all periods presented. In June 2007, the Company borrowed an
additional $3.9 million available on an existing
construction loan collateralized by the commercial office
complex. In September 2007, the Company sold the complex to
Barbieri Real Estate Company, which is owned by a former
executive who is also the brother of two members of the
Companys board of directors, for $13.3 million in a
tax advantaged transaction as a result of the surrender of
operating partnership units of RLHLP (OP units). The
consideration for the sale was provided through a combination of
a payment of $4.2 million in cash, the exchange for
redemption of 97,826 OP Units (for further information, see
Note 10), and the assumption of $7.6 million of debt.
The Company recognized a gain on the sale of $1.9 million.
The structure of the sale allowed a portion of the tax on the
gain to be deferred, further enhancing the economic return to
the Company. The sale was approved by the independent members of
the Companys board of directors.
63
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the results of operations for the discontinued
operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Hotel
|
|
|
|
|
|
|
|
|
Hotel
|
|
|
|
|
|
|
|
|
Hotel
|
|
|
|
|
|
|
|
|
|
Properties
|
|
|
Other
|
|
|
Combined
|
|
|
Properties
|
|
|
Other
|
|
|
Combined
|
|
|
Properties
|
|
|
Other
|
|
|
Combined
|
|
|
Revenues
|
|
$
|
623
|
|
|
$
|
785
|
|
|
$
|
1,408
|
|
|
$
|
6,327
|
|
|
$
|
1,008
|
|
|
$
|
7,335
|
|
|
$
|
21,169
|
|
|
$
|
4,846
|
|
|
$
|
26,015
|
|
Operating expenses
|
|
|
(853
|
)
|
|
|
(546
|
)
|
|
|
(1,399
|
)
|
|
|
(5,918
|
)
|
|
|
(689
|
)
|
|
|
(6,607
|
)
|
|
|
(18,672
|
)
|
|
|
(2,297
|
)
|
|
|
(20,969
|
)
|
Depreciation and amortization
|
|
|
(1
|
)
|
|
|
(25
|
)
|
|
|
(26
|
)
|
|
|
(7
|
)
|
|
|
(418
|
)
|
|
|
(425
|
)
|
|
|
(24
|
)
|
|
|
(742
|
)
|
|
|
(766
|
)
|
Gain on asset dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
12
|
|
Interest expense
|
|
|
|
|
|
|
(159
|
)
|
|
|
(159
|
)
|
|
|
(122
|
)
|
|
|
(69
|
)
|
|
|
(191
|
)
|
|
|
(481
|
)
|
|
|
(1,051
|
)
|
|
|
(1,532
|
)
|
Interest income
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
9
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
97
|
|
|
|
92
|
|
Minority interest in partnerships
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153
|
)
|
|
|
(153
|
)
|
Income tax benefit (expense)
|
|
|
82
|
|
|
|
(20
|
)
|
|
|
62
|
|
|
|
(43
|
)
|
|
|
|
|
|
|
(43
|
)
|
|
|
(715
|
)
|
|
|
(259
|
)
|
|
|
(974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from operations
|
|
|
(148
|
)
|
|
|
35
|
|
|
|
(113
|
)
|
|
|
246
|
|
|
|
(168
|
)
|
|
|
78
|
|
|
|
1,284
|
|
|
|
441
|
|
|
|
1,725
|
|
Gain (loss) on disposal of discontinued business units
|
|
|
(396
|
)
|
|
|
1,841
|
|
|
|
1,445
|
|
|
|
(206
|
)
|
|
|
|
|
|
|
(206
|
)
|
|
|
1,145
|
|
|
|
4,672
|
|
|
|
5,817
|
|
Income tax benefit (expense)
|
|
|
140
|
|
|
|
(653
|
)
|
|
|
(513
|
)
|
|
|
73
|
|
|
|
|
|
|
|
73
|
|
|
|
(413
|
)
|
|
|
(1,657
|
)
|
|
|
(2,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on disposal of discontinued business units
|
|
|
(256
|
)
|
|
|
1,188
|
|
|
|
932
|
|
|
|
(133
|
)
|
|
|
|
|
|
|
(133
|
)
|
|
|
732
|
|
|
|
3,015
|
|
|
|
3,747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(404
|
)
|
|
$
|
1,223
|
|
|
$
|
819
|
|
|
$
|
113
|
|
|
$
|
(168
|
)
|
|
$
|
(55
|
)
|
|
$
|
2,016
|
|
|
$
|
3,456
|
|
|
$
|
5,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the above table, the comparability of the divestment
properties activity between periods is impacted by the
cessation of operations on the date of sale, as applicable.
64
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
There were no remaining discontinued operations at
December 31, 2007. A summary of the assets and liabilities
of discontinued operations as of December 31, 2006 is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
Hotel
|
|
|
|
|
|
|
|
|
|
Properties
|
|
|
Other
|
|
|
Combined
|
|
|
Cash and cash equivalents
|
|
$
|
7
|
|
|
$
|
50
|
|
|
$
|
57
|
|
Accounts receivable, net
|
|
|
107
|
|
|
|
35
|
|
|
|
142
|
|
Inventories
|
|
|
5
|
|
|
|
|
|
|
|
5
|
|
Prepaid expenses and other
|
|
|
77
|
|
|
|
7
|
|
|
|
84
|
|
Buildings and equipment
|
|
|
2,758
|
|
|
|
11,914
|
|
|
|
14,672
|
|
Furniture and fixtures
|
|
|
682
|
|
|
|
146
|
|
|
|
828
|
|
Landscaping and land improvements
|
|
|
113
|
|
|
|
37
|
|
|
|
150
|
|
Land
|
|
|
2,400
|
|
|
|
1,493
|
|
|
|
3,893
|
|
Construction in progress
|
|
|
66
|
|
|
|
3,178
|
|
|
|
3,244
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,939
|
)
|
|
|
(6,931
|
)
|
|
|
(8,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
4,080
|
|
|
|
9,837
|
|
|
|
13,917
|
|
Other assets, net
|
|
|
87
|
|
|
|
247
|
|
|
|
334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
4,363
|
|
|
$
|
10,176
|
|
|
$
|
14,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
72
|
|
|
$
|
10
|
|
|
$
|
82
|
|
Accrued payroll and related benefits
|
|
|
20
|
|
|
|
|
|
|
|
20
|
|
Accrued interest payable
|
|
|
|
|
|
|
21
|
|
|
|
21
|
|
Advanced deposits
|
|
|
5
|
|
|
|
16
|
|
|
|
21
|
|
Other accrued expenses
|
|
|
94
|
|
|
|
|
|
|
|
94
|
|
Long-term debt
|
|
|
|
|
|
|
3,874
|
|
|
|
3,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
191
|
|
|
$
|
3,921
|
|
|
$
|
4,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.
|
Real
Estate Management Business
|
On April 30, 2006, the Company divested on a tax-free basis
the real estate management portion of its real estate division
for $1.1 million, to an existing company executive and a
former company executive who is also the brother of two members
of the Companys board of directors. The sale was in
exchange for 94,311 shares of unrestricted Red Lion Hotels
Corporation common stock that was subsequently retired. The
transaction resulted in a gain on sale of approximately
$1.0 million. The new entity continues to manage the
Companys office and retail real estate assets through
specific management agreements. For the full year 2005, the real
estate management business contributed $2.3 million and
$0.1 million to the Companys revenue and operating
income, respectively.
65
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Property
and Equipment
|
Property and equipment for continuing operations is summarized
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Buildings and equipment
|
|
$
|
253,905
|
|
|
$
|
226,164
|
|
Furniture and fixtures
|
|
|
37,557
|
|
|
|
34,505
|
|
Landscaping and land improvements
|
|
|
5,322
|
|
|
|
2,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
296,784
|
|
|
|
263,433
|
|
Less accumulated depreciation and amortization
|
|
|
(99,605
|
)
|
|
|
(84,450
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
197,179
|
|
|
|
178,983
|
|
Land
|
|
|
58,928
|
|
|
|
58,497
|
|
Construction in progress
|
|
|
4,467
|
|
|
|
13,095
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
260,574
|
|
|
$
|
250,575
|
|
|
|
|
|
|
|
|
|
|
In October 2007, the Company completed an asset acquisition of a
long-term leasehold interest in a 310-room hotel in Anaheim,
California for $8.3 million, including costs of the
acquisition. As required under the terms of the assumed
leasehold agreement, the Company will pay $1.8 million per
year for five years in lease payments, to be adjusted every five
years thereafter based on the terms of the agreement and tied
directly to the Consumer Price Index. The Company plans to spend
approximately $10.0 million on extensive renovations to
guest rooms and public areas and reposition the hotel to meet
Red Lion brand standards, of which approximately
$5.0 million will be spent in 2008.
In July 2005, the Company sold a 50% interest in its Kalispell
Center retail and hotel complex to an unrelated third party for
$6.3 million, resulting in a net gain of $0.3 million
included in continuing operations. The Company continued to
manage the retail component of the complex and leased back the
WestCoast Kalispell Center Hotel, which was re-branded the Red
Lion Kalispell Hotel after undergoing expansion and renovation.
The Companys remaining 50% ownership interest of
$6.1 million was reflected as an equity method investment
from the date of the sale, as discussed in Note 1. In
December 2006, the Company increased its ownership to 100% for
approximately $2.0 million in cash and a $3.3 million
note payable due in 2008.
In 2003, the Company sold one of its hotels to an unrelated
party in a sale-operating leaseback transaction. The pre-tax
gain on the transaction of approximately $7.0 million was
deferred and is being amortized into income over the period of
the lease term, which expires in November 2018 and is renewable
for three, five-year terms at the Companys option. During
2007, 2006 and 2005, the Company recognized income of
approximately $0.5 million each year for the amortization
of the deferred gain. The remaining balance at December 31,
2007, was $5.1 million.
In 2002, the Company sold an 80.1% interest in its corporate
office building, retaining a lease of office space and the
remaining ownership interest. A portion of the gain on sale was
deferred over the six-year lease term, which concluded
amortization at December 31, 2007. The 19.9% interest in
the partnership is accounted for under the equity method of
accounting and is included as an investment in other noncurrent
assets on the consolidated balance sheet, as discussed in
Note 6 below. During 2007, 2006 and 2005, the Company
recognized income of approximately $0.3 million each year
for the amortization of the deferred gain, with no amount
outstanding at December 31, 2007.
As of December 31, 2007 and 2006, aggregate investments
recorded as noncurrent assets on the consolidated balance sheet
totaled $1.3 million and $1.4 million, respectively.
During 2007, the Company recorded income from investments of
$40,000, compared to losses of $152,000 and $63,000 in 2006 and
2005, respectively.
66
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, the Company holds more than a 99%
interest in RLHLP. Partners who hold operating partnership units
(OP Units) have the right to put those units to
RLHLP, in which event either (i) RLHLP must redeem the
units for cash, or (ii) the Company, as general partner,
may elect to acquire the OP Units for cash or in exchange
for a like number of shares of its common stock. In September
2007 and as a component of a commercial office complex discussed
above in Note 3, the Company accepted 97,826 OP Units
held by limited partners for a fair market value of $9.27 per
OP Unit, based upon the trading price for the
Companys common stock during the five days before the
sale. The redemption resulted in a non-cash adjustment of the
minority interest balance of $0.3 million and an increase
of $0.6 million to property and equipment as a result of
the step-up
in value of the Companys investment in RLHLP. At
December 31, 2007, 44,837 OP Units held by limited
partners remained outstanding.
During the first quarter of 2006, the Company elected to issue
143,498 shares of its common stock in exchange for a like
number of OP Units that then certain limited partners put
to RLHLP. The exchange resulted in a non-cash adjustment of the
minority interest balance of $2.2 million, with a
corresponding increase to common stock and additional
paid-in-capital.
Beginning March 2002, the Company owned a 19.9% partnership
interest in its corporate office building as discussed above in
Note 5. At both December 31, 2007 and 2006, the
Companys investment balance was approximately
$0.7 million. Summarized unaudited financial information
with respect to the office building, on a 100% basis, is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current assets
|
|
$
|
280
|
|
|
$
|
322
|
|
Total assets
|
|
$
|
12,433
|
|
|
$
|
12,747
|
|
Current liabilities
|
|
$
|
129
|
|
|
$
|
172
|
|
Total liabilities
|
|
$
|
9,481
|
|
|
$
|
9,624
|
|
Total equity
|
|
$
|
2,952
|
|
|
$
|
3,122
|
|
Revenues
|
|
$
|
2,019
|
|
|
$
|
1,905
|
|
Net income
|
|
$
|
40
|
|
|
$
|
36
|
|
The Company maintains a 3% common security interest in the Red
Lion Hotels Capital Trust (the Trust), as discussed
below in Note 7. The Companys 3% interest represents
all of the common ownership of the Trust. The Trust is
considered a variable interest entity under FIN-46(R) and the
Company is not considered its primary beneficiary. At
December 31, 2007 and 2006, the Companys equity
method investment in the Trust had a balance of
$0.6 million and $0.7 million, respectively, after
adjusting for trust earnings and operating expenses.
|
|
7.
|
Debentures
of Red Lion Hotels Capital Trust
|
Together with the Trust, the Company completed a public offering
of $46.0 million of trust preferred securities in 2004. The
securities are listed on the New York Stock Exchange and entitle
holders to cumulative cash distributions at a 9.5% annual rate
with maturity in February 2044. The cost of the offering totaled
$2.3 million, which the Trust paid through an advance by
the Company. The advance to the Trust is included with other
noncurrent assets on the consolidated balance sheet.
The Company borrowed all of the proceeds from the offering,
including the Companys original 3% trust common investment
of $1.4 million, on the same day through
9.5% debentures that are included as a long-term liability
on the consolidated balance sheet. The payment terms mirror the
distribution terms of the trust securities and mature in 2044.
The debenture agreement required the mandatory redemption of 35%
of the then outstanding trust securities at 105% of issued value
if the Company completed an offering of common shares with gross
proceeds of greater than $50 million. In accordance
therewith and in connection with the offering of common stock
67
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
further described in Note 10, the Company repaid
approximately $16.6 million of the debentures due the
Trust. The Trust then redeemed 35% of the outstanding trust
preferred securities and trust common securities at a price of
$26.25 per share, a 5% premium over the issued value of the
securities. Of the $16.6 million, approximately
$0.5 million was received back by the Company for its trust
common securities and was reflected as a reduction of its
investment in the Trust. The $0.8 million premium paid to
retire the debentures has been included on the consolidated
statement of operations as a component of expense of early
extinguishment of debt. At December 31, 2007, debentures
due the Trust totaled $30.8 million.
In addition to the debentures discussed in Note 7, the
Company has long-term debt consisting of mortgage notes payable
and notes and contracts payable, collateralized by real
property, equipment and the assignment of certain rental income.
A summary of long-term debt from continuing operations as of
December 31, 2007 and 2006, monthly installment and
interest amounts, if applicable, interest rate and maturity date
is as follows (in thousands, except monthly payment amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Last
|
|
|
Last
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Applicable
|
|
|
Applicable
|
|
|
|
|
|
Maturity/
|
|
|
|
|
December 31,
|
|
|
Monthly
|
|
|
Interest
|
|
|
|
|
|
Balloon
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Installment
|
|
|
Rate
|
|
|
Type
|
|
|
Payment Due
|
|
Security
|
|
Note payable(1)
|
|
$
|
3,139
|
|
|
$
|
2,927
|
|
|
$
|
|
|
|
|
7.00
|
%
|
|
|
Fixed
|
|
|
June 2008
|
|
Unsecured
|
Note payable
|
|
|
12,713
|
|
|
|
12,966
|
|
|
$
|
108,797
|
|
|
|
8.08
|
%
|
|
|
Fixed
|
|
|
September 2011
|
|
Real Property
|
Note payable
|
|
|
6,175
|
|
|
|
6,298
|
|
|
$
|
52,844
|
|
|
|
8.08
|
%
|
|
|
Fixed
|
|
|
September 2011
|
|
Real Property
|
Note payable
|
|
|
5,497
|
|
|
|
5,607
|
|
|
$
|
46,695
|
|
|
|
8.00
|
%
|
|
|
Fixed
|
|
|
October 2011
|
|
Real Property
|
Industrial revenue bonds payable
|
|
|
2,780
|
|
|
|
3,395
|
|
|
$
|
66,560
|
|
|
|
5.90
|
%
|
|
|
Fixed
|
|
|
October 2011
|
|
Real Property
|
Note payable
|
|
|
9,533
|
|
|
|
9,728
|
|
|
$
|
70,839
|
|
|
|
6.70
|
%
|
|
|
Fixed
|
|
|
July 2013
|
|
Real Property
|
Note payable
|
|
|
8,422
|
|
|
|
8,595
|
|
|
$
|
62,586
|
|
|
|
6.70
|
%
|
|
|
Fixed
|
|
|
July 2013
|
|
Real Property
|
Note payable
|
|
|
5,553
|
|
|
|
5,667
|
|
|
$
|
41,265
|
|
|
|
6.70
|
%
|
|
|
Fixed
|
|
|
July 2013
|
|
Real Property
|
Note payable
|
|
|
4,720
|
|
|
|
4,817
|
|
|
$
|
35,076
|
|
|
|
6.70
|
%
|
|
|
Fixed
|
|
|
July 2013
|
|
Real Property
|
Note payable
|
|
|
4,627
|
|
|
|
4,722
|
|
|
$
|
34,388
|
|
|
|
6.70
|
%
|
|
|
Fixed
|
|
|
July 2013
|
|
Real Property
|
Note payable
|
|
|
3,795
|
|
|
|
3,872
|
|
|
$
|
28,198
|
|
|
|
6.70
|
%
|
|
|
Fixed
|
|
|
July 2013
|
|
Real Property
|
Note payable
|
|
|
2,776
|
|
|
|
2,833
|
|
|
$
|
20,633
|
|
|
|
6.70
|
%
|
|
|
Fixed
|
|
|
July 2013
|
|
Real Property
|
Note payable
|
|
|
2,776
|
|
|
|
2,833
|
|
|
$
|
20,633
|
|
|
|
6.70
|
%
|
|
|
Fixed
|
|
|
July 2013
|
|
Real Property
|
Note payable
|
|
|
2,314
|
|
|
|
2,360
|
|
|
$
|
17,194
|
|
|
|
6.70
|
%
|
|
|
Fixed
|
|
|
July 2013
|
|
Real Property
|
Note payable
|
|
|
8,400
|
|
|
|
8,652
|
|
|
$
|
74,480
|
|
|
|
7.42
|
%
|
|
|
Fixed
|
|
|
August 2023
|
|
Real Property
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
83,220
|
|
|
|
85,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within one year
|
|
|
(5,547
|
)
|
|
|
(2,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt due after one year
|
|
$
|
77,673
|
|
|
$
|
83,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
$3.25 million note payable due in one balloon payment in
June 2008, without interest. Balance at December 31, 2007,
reflects a 7.0% effective interest rate. |
68
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Contractual maturities for long-term debt from continuing
operations outstanding at December 31, 2007, are summarized
by year as follows (in thousands):
|
|
|
|
|
Year Ending
|
|
|
|
December 31,
|
|
Amount
|
|
|
2008
|
|
$
|
5,547
|
|
2009
|
|
|
2,597
|
|
2010
|
|
|
2,785
|
|
2011
|
|
|
24,911
|
|
2012
|
|
|
1,639
|
|
Thereafter
|
|
|
45,741
|
|
|
|
|
|
|
|
|
$
|
83,220
|
|
|
|
|
|
|
In September 2006, immediately prior to entering into the credit
agreement discussed below in Note 9, the Company retired
securitized debt with a principal balance of approximately
$33.4 million. The note carried an interest rate of 7.93%,
required monthly payments and a balloon payment through June
2011 and was collateralized by a company owned hotel. In
connection with the retirement of the debt, the Company paid
defeasance, legal and other related costs of $4.7 million
and recorded its remaining unamortized deferred loan fees of
$0.2 million, both of which were included as a component of
expense of early extinguishment of debt on the consolidated
statement of operations during 2006.
In September 2006, the Company entered into a revolving credit
facility for up to $50 million with a syndication of banks
led by Calyon New York Branch. Subject to certain conditions,
including the provision of additional collateral acceptable to
the lenders, the size of the facility may be increased at the
Companys request to up to $100 million. The initial
maturity date for the facility is September 13, 2009, but
the Company has the right to extend the maturity for two
additional one year terms. Borrowings under the facility may be
used to finance acquisitions or capital expenditures, for
working capital and for other general corporate purposes. The
obligations under the facility are collateralized by a company
owned hotel, including a deed of trust and security agreement
covering all of its assets, as well as by unsecured guaranties
of the Company and certain of its other subsidiaries. In
connection with this transaction, the Company paid loan fees and
related costs of approximately $0.9 million, which have
been deferred and are being amortized over the initial term of
the facility.
Outstanding borrowings under the facility accrue interest as
Eurodollar loans with rates ranging from 150 to 225 basis
points over LIBOR, with an option for base rate loans based upon
the federal funds rate or prime rate. The credit facility
requires the Company to comply with certain customary
affirmative and negative covenants, the most restrictive of
which are financial covenants dealing with leverage, interest
coverage and debt service coverage. At December 31, 2007
and 2006, no amounts were outstanding and the Company was in
compliance with all of its covenants.
Up to the date of the new revolving credit facility, the Company
maintained a revolving credit facility with Wells Fargo Bank,
National Association (Wells Fargo). No amounts were
borrowed under any portion of the credit facility with Wells
Fargo, which was terminated in September 2006.
The Company is authorized to issue 50 million common
shares, par value $0.01 per share, and 5.0 million shares
of preferred stock, par value $0.01 per share. As of
December 31, 2007, there were 18,312,756 shares of
common stock issued and outstanding and no shares of preferred
stock issued and outstanding. The board of directors has the
authority, without action by the shareholders, to designate and
issue preferred stock in one or more
69
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
series and to designate the rights, preferences and privileges
of each series, which may be greater than the rights of the
common stock.
Each holder of common stock is entitled to one vote for each
share held on all matters to be voted upon by the shareholders
with no cumulative voting rights. Holders of common stock are
entitled to receive ratably the dividends, if any, that are
declared from time to time by the board of directors out of
funds legally available for that purpose. The rights,
preferences and privileges of the holders of common stock are
subject to, and may be adversely affected by, the rights of the
holders of shares of any series of preferred stock that the
Company may designate in the future.
Share
Repurchases
In September 2007, the Company announced a common stock
repurchase program for up to $10.0 million. Any stock
repurchases were to be made through open market purchases, block
purchases or privately negotiated transactions. The timing and
actual number of share repurchases were dependent on several
factors including price, corporate and regulatory requirements
and other market conditions. As of December 31, 2007, the
Company had repurchased 924,200 shares at a cost of
$9.1 million as provided in the below table by month:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Repurchase
|
|
Period
|
|
of Shares
|
|
|
Price
|
|
|
10/1/07 10/31/07
|
|
|
20,700
|
|
|
$
|
9.95
|
|
11/1/07 11/30/07
|
|
|
383,800
|
|
|
|
9.85
|
|
12/1/07 12/31/07
|
|
|
519,700
|
|
|
|
9.85
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
924,200
|
|
|
$
|
9.85
|
|
|
|
|
|
|
|
|
|
|
During January 2008, the Company repurchased an additional
93,000 shares for an aggregate cost of $0.9 million.
Common
Stock Offering
In May 2006, the Company completed a public offering of
5 million shares of common stock at $11.00 per share,
resulting in net proceeds of $51.6 million after an
underwriting discount and other offering costs totaling
approximately $3.4 million. In June 2006, the underwriter
of the offering exercised its over-allotment option and an
additional 845,302 shares of common stock were issued at
$11.00 per share, resulting in additional net proceeds of
approximately $8.8 million net of an underwriting discount.
The proceeds were primarily used to retire existing long-term
debt, pay related defeasance costs and to fund the retirement of
debentures. All remaining proceeds were used for general working
capital purposes. An additional 635,344 shares were sold in
the May 2006 offering by certain shareholders; however, the
Company received no proceeds from sale of these shares.
Stock
Incentive Plans
The 1998 Stock Incentive Plan and the 2006 Stock Incentive Plan
(the Plans) authorize the grant or issuance of
various option or other awards including stock appreciation
rights (SARs), restricted stock grants and other
stock-based compensation. The plans were approved by the common
shareholders of the Company. The 2006 plan allows awards up to a
maximum number of 1.0 million shares, subject to
adjustments for stock splits, stock dividends and similar
events. The 1998 plan allowed for a maximum number of
1.4 million shares, although as a condition to the approval
of the 2006 plan, the Company will no longer grant or issue
awards under this plan. The compensation committee of the board
of directors administers the 2006 plan and establishes to whom,
and the type and terms and conditions, including the exercise
period, of the awards that may be granted. As of
December 31,
70
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2007, there were 619,697 shares of common stock available
for issuance pursuant to future stock option grants or other
awards under the 2006 plan.
Effective January 1, 2006, the Company adopted the
provisions of SFAS 123(R) Share Based Payments
for accounting for stock based compensation, including options
and other awards issued under its stock incentive plan and
shares issued under the employee stock purchase plan. Stock
options issued are valued based upon the Black-Scholes option
pricing model and the Company recognizes this value as an
expense over the periods in which the options vest. Use of the
Black-Scholes option-pricing model requires that the Company
make certain assumptions, including expected volatility,
forfeiture rate, risk-free interest rate, expected dividend
yield and expected life of the options, based on historical
experience. Volatility is based on historical information with
terms consistent with the expected life of the option. The risk
free interest rate is based on the quoted daily treasury yield
curve rate at the time of grant, with terms consistent with the
expected life of the option. During 2007, 2006 and 2005, the
following weighted-average assumptions were used:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average fair value of options granted
|
|
$
|
4.36
|
|
|
$
|
4.18
|
|
|
$
|
2.81
|
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
33
|
%
|
|
|
34
|
%
|
|
|
33
|
%
|
Forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Risk free interest rates
|
|
|
4.85
|
%
|
|
|
5.02
|
%
|
|
|
4.60
|
%
|
Expected option lives
|
|
|
4 years
|
|
|
|
4 years
|
|
|
|
4 years
|
|
Under SFAS No. 123(R), stock based compensation
expense reflects the fair value of stock based awards measured
at grant date, including an estimated forfeiture rate, and is
recognized over the relevant service period. The Company elected
to use the modified prospective transition method and has
applied the provisions of SFAS No. 123(R) to new
awards and to awards modified, repurchased or cancelled after
January 1, 2006. In accordance with the modified
prospective transition method, the consolidated financial
statements for 2005 have not been restated to reflect, and do
not include, the impact of SFAS No. 123(R).
Stock-based compensation expense recognized under
SFAS No. 123(R) during 2007 and 2006 was approximately
$0.8 million and $0.6 million, respectively. In
addition, the Company recognized tax benefits related to the
exercise of stock options of $0.2 million and
$0.3 million. As options and units vest, the Company
expects to recognize approximately $2.0 million in
additional compensation expense as required by
SFAS No. 123(R), including $0.9 million during
2008.
All options granted prior to 2003 were designated as
nonqualified options, with an exercise price equal to or in
excess of fair market value on the date of grant, and for a term
of ten years. For substantially all options granted, fifty
percent of each recipients options will vest on the fourth
anniversary of the date of grant and the remaining 50% will vest
on the fifth anniversary of the date of grant. For options
issued prior to 2004, the vesting schedule will change if,
beginning one year after the option grant date, the stock price
of the common stock reaches the following target levels
(measured as a percentage increase over the exercise price) for
60 consecutive trading days. During 2007, 12,293 and 400 options
granted in 2003 and 2002, respectively, vested and became
eligible for exercise in accordance with these provisions.
|
|
|
|
|
|
|
Percent of
|
|
Stock
|
|
Options
|
|
Price
|
|
Shares
|
|
Increase
|
|
Vested
|
|
|
25%
|
|
|
25
|
%
|
50%
|
|
|
50
|
%
|
75%
|
|
|
75
|
%
|
100%
|
|
|
100
|
%
|
71
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
For options issued in 2004 and 2005, the vesting schedule will
change if, between the two year anniversary and the four year
anniversary of the option grant date, the stock price of the
common stock reaches the following target levels (measured as a
percentage increase over the exercise price) for 60 consecutive
trading days. During 2007, 25% of the options granted in 2004,
or 114,726 options, vested and became eligible for exercise in
accordance with these provisions.
|
|
|
|
|
|
|
Percent of
|
|
Stock
|
|
Options
|
|
Price
|
|
Shares
|
|
Increase
|
|
Vested
|
|
|
100%
|
|
|
25
|
%
|
200%
|
|
|
50
|
%
|
In May 2007, the board of directors granted 166,249 options to
purchase common stock to executive officers and other key
employees. These options, as well as those issued in 2006, vest
25% each year for four years with no stock price acceleration
provision. During 2007, 41,784 options granted in 2006 vested
and became eligible for exercise.
A summary of stock option activity at December 31, 2007, is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
|
|
|
Exercise
|
|
|
|
of Shares
|
|
|
Price
|
|
|
Balance, January 1, 2007
|
|
|
1,256,874
|
|
|
$
|
7.14
|
|
Options granted
|
|
|
166,249
|
|
|
$
|
13.00
|
|
Options exercised
|
|
|
(81,668
|
)
|
|
$
|
6.00
|
|
Options forfeited
|
|
|
(64,921
|
)
|
|
$
|
7.14
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
1,276,534
|
|
|
$
|
7.98
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2007
|
|
|
466,889
|
|
|
$
|
7.37
|
|
|
|
|
|
|
|
|
|
|
During 2007 and 2006, the total intrinsic value of the 81,668
and 60,526 stock options exercised, respectively, was
$0.5 million and $0.3 million. From those exercises,
the Company issued new shares of common stock and received
approximately $0.5 million and $0.4 million in gross
proceeds.
Additional information regarding stock options outstanding and
exercisable as of December 31, 2007, is below. As of
December 31, 2007, the fair value of options vested was
approximately $1.5 million. Total unrecognized stock-based
compensation expense related to non-vested stock options, as of
December 31, 2007, was approximately $1.6 million
before the impact of income taxes and is expected to be
recognized over a weighted average period of 33 months.
72
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
Range of
|
|
Number
|
|
|
Contractual
|
|
|
Expiration
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Number
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise Prices
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Date
|
|
|
Price
|
|
|
Value(1)
|
|
|
Exercisable
|
|
|
Price
|
|
|
Value(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
5.10 - 6.07
|
|
|
659,676
|
|
|
|
6.23
|
|
|
|
2011-2014
|
|
|
$
|
5.30
|
|
|
$
|
3,063
|
|
|
|
324,426
|
|
|
$
|
5.52
|
|
|
$
|
1,437
|
|
7.46 - 8.31
|
|
|
227,508
|
|
|
|
6.80
|
|
|
|
2009-2015
|
|
|
|
7.56
|
|
|
|
543
|
|
|
|
41,508
|
|
|
|
8.03
|
|
|
|
80
|
|
10.88-10.94
|
|
|
26,120
|
|
|
|
2.74
|
|
|
|
2009-2016
|
|
|
|
10.93
|
|
|
|
|
|
|
|
21,640
|
|
|
|
10.94
|
|
|
|
|
|
12.21 - 15.00
|
|
|
363,230
|
|
|
|
8.17
|
|
|
|
2008-2017
|
|
|
|
12.87
|
|
|
|
|
|
|
|
79,315
|
|
|
|
13.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,276,534
|
|
|
|
6.81
|
|
|
|
2008-2017
|
|
|
$
|
7.98
|
|
|
$
|
3,606
|
|
|
|
466,889
|
|
|
$
|
7.37
|
|
|
$
|
1,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value is before applicable income taxes
and represents the amount option recipients would have received
if all options had been available to be exercised on the last
trading day of 2007, or December 31, 2007, based upon the
Companys closing stock price of $9.95. |
As permitted by SFAS No. 123 Accounting for
Stock-Based Compensation, as amended by Statement
SFAS No. 148 Accounting for Stock-Based
Compensation Transition and Disclosure,
through December 31, 2005, the Company chose to measure
compensation cost for stock-based employee compensation plans
using the intrinsic value method of accounting prescribed by
Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees, and to provide the
disclosure only requirements of SFAS No. 123. Had
compensation costs been recorded on the consolidated statements
of operations, reported net income and earnings per share during
2005 would have been changed to the amount indicated below (in
thousands, except per share amounts):
|
|
|
|
|
|
|
2005
|
|
|
Income applicable to common shareholders
|
|
$
|
4,495
|
|
Add back: stock-based employee compensation expense, net of
related tax effects
|
|
|
92
|
|
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net of
related tax effects
|
|
|
(343
|
)
|
|
|
|
|
|
Pro Forma
|
|
$
|
4,244
|
|
|
|
|
|
|
Basic and diluted earnings per share:
|
|
|
|
|
Reported net income
|
|
$
|
0.34
|
|
Stock-based employee compensation, fair value
|
|
|
(0.02
|
)
|
|
|
|
|
|
Pro Forma
|
|
$
|
0.32
|
|
|
|
|
|
|
In May 2007, November 2006 and November 2004, the Company
granted 18,670, 18,389 and 18,535 restricted shares of common
stock, respectively, to members of senior management as
compensation. The Company did not grant restricted shares of
common stock in 2005. While all of the shares are considered
granted, they are not considered issued or outstanding until
vested. The 2007 and 2006 awards vests 25% on each anniversary
of the grant date. The 2004 award vested 20%, or
3,707 shares, upon grant and vests an additional 20% at
each subsequent anniversary date. Since grant, less than 1% of
total shares have been forfeited.
During December 2007, 8,304 restricted shares were issued and
are outstanding. Under the terms of the plan and upon vesting,
the Company authorized a net settlement of distributable shares
to employees after consideration of individual employees
tax withholding obligations, at the election of each employee.
In December 2007, we repurchased 193 shares for
approximately $9.68 per share to cover the participants
tax liability.
As of December 31, 2007 and 2006, there were 36,169 and
25,657 unvested shares outstanding, respectively. The shares
awarded had a fair value of $0.2 million, $0.2 million
and $0.1 million on grant date, respectively, based
73
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
on grant date prices of $13.00 for the May 2007 awards, $12.21
for the November 2006 awards and $5.04 for the November 2004
awards. During 2007, 2006 and 2005, the Company recognized
approximately $110,000, $23,000 and $19,000, respectively, in
compensation expense related to these grants, and will record an
additional $0.4 million over the remaining vesting periods.
During the years ended December 31, 2007 and 2006, 9,234
and 6,288 shares of common stock, respectively, were issued
in aggregate to non-management directors as compensation for
service. During 2005, 17,994 options to purchase common stock
(and included in the tables above) were issued to non-management
directors. During 2007, 2006 and 2005, the Company recognized
compensation expense of approximately $0.1 million each
year. In 2005, the options were issued at an exercise price of
$0.01, compared to the fair market value of $6.88 per share on
the date of grant, and were immediately exercised by each of the
recipients.
Employee
Stock Purchase Plan
In 1998, the Company adopted an employee stock purchase plan
(the ESPP) to assist its employees in acquiring a
stock ownership interest in the Company. Under this ESPP,
300,000 shares of common stock were authorized for
purchase, of which 73,508 shares remained available at the
time the ESPP terminated on December 31, 2007, in
accordance with its terms. During the years ended
December 31, 2007, 2006 and 2005, 19,246, 22,400 and
31,456 shares, respectively, were issued out of the ESPP.
During 2007, 2006 and 2005, the Company recorded compensation
expense of approximately $18,000, $85,000 and $152,000,
respectively, determined by the difference between the fair
value on the day the shares were issued and cash price paid
under the ESPP for those shares granted prior to January 1,
2006. Compensation expense for shares granted subsequent to
January 1, 2006, were based on the grant date fair value
estimated in accordance with the provisions of
SFAS No. 123(R).
Due to the expiration of the current ESPP and subject to
shareholder approval in May 2008, the Company has adopted the
2008 Employee Stock Purchase Plan (the 2008 ESPP).
The terms of the 2008 ESPP will remain essentially the same as
its predecessor, with 300,000 shares of common stock
authorized for purchase. The common stock will be offered during
twenty consecutive six-month periods, the first of which began
on January 1, 2008 and will end on June 30, 2008.
Thereafter, the purchase periods will begin on the first day and
end on the last day of each subsequent six-month period. The
2008 ESPP will permit eligible employees to purchase common
stock at a discount through payroll deductions, with no employee
purchasing more than $25,000 worth in any calendar year. As
allowed under the 2008 ESPP, a participant may elect to withdraw
from the plan, effective for the purchase period in progress at
the time of the election, with all of the participants
accumulated payroll deductions returned to them at the time of
withdrawal. In the event the 2008 ESPP is not approved by the
shareholders, all participants accumulated payroll deductions
will promptly be returned to them.
Minority
Interest and Operating Partnership Units
As discussed in Note 6, the Company is a general partner of
RLHLP and at December 31, 2006, the Company held an
approximate 99% interest in that entity. Partners who hold
operating partnership units (OP Units) have the
right to put those OP Units to RLHLP, in which event either
(i) RLHLP must redeem the units for cash, or (ii) the
Company, as general partner, may elect to acquire the
OP Units for cash or in exchange for a like number of
shares of its common stock. At December 31, 2007, 44,837
OP Units held by limited partners were outstanding.
In September 2007 and as a component of the sale of a commercial
office complex discussed in Note 3 above, the Company
accepted 97,826 OP Units held by limited partners for a
fair market value of $9.27 per share, based upon the trading
price five days before the sale. The redemption resulted in a
non-cash adjustment of the minority interest balance of
$0.3 million and an increase of $0.6 million to
property and equipment as a result of the
step-up in
value of the Companys investment in RLHLP. During the
first quarter of 2006, the Company elected to issue
143,498 shares of its common stock in exchange for a like
number of OP Units that then certain limited partners put
to RLHLP. The exchange resulted in a non-cash adjustment of the
minority interest balance of $2.2 million, with a
corresponding increase to common stock and additional
paid-in-capital.
74
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Major components of the income tax expense (benefit) for the
years ended December 31, 2007, 2006 and 2005, are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal expense (benefit)
|
|
$
|
(502
|
)
|
|
$
|
(2,441
|
)
|
|
$
|
4,337
|
|
State expense (benefit)
|
|
|
124
|
|
|
|
(60
|
)
|
|
|
317
|
|
Deferred expense (benefit)
|
|
|
3,036
|
|
|
|
838
|
|
|
|
(2,572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,658
|
|
|
|
(1,663
|
)
|
|
|
2,082
|
|
Amount reflected as a component of discontinued operations
|
|
|
(451
|
)
|
|
|
30
|
|
|
|
(2,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
2,207
|
|
|
$
|
(1,633
|
)
|
|
$
|
(904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The income tax expense (benefits) shown in the consolidated
statements of operations differ from the amounts calculated
using the federal statutory rate applied to income before income
taxes as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Amount
|
|
|
%
|
|
|
Provision (benefit) at federal statutory rate
|
|
$
|
2,960
|
|
|
|
34.0
|
%
|
|
$
|
(761
|
)
|
|
|
34.0
|
%
|
|
$
|
2,236
|
|
|
|
34.0
|
%
|
State tax (benefit)
|
|
|
124
|
|
|
|
1.4
|
%
|
|
|
(252
|
)
|
|
|
11.3
|
%
|
|
|
(252
|
)
|
|
|
(3.8
|
)%
|
Effect of tax credits
|
|
|
(266
|
)
|
|
|
(3.1
|
)%
|
|
|
(40
|
)
|
|
|
1.8
|
%
|
|
|
209
|
|
|
|
3.2
|
%
|
Tax exempt interest
|
|
|
(173
|
)
|
|
|
(2.0
|
)%
|
|
|
(260
|
)
|
|
|
11.6
|
%
|
|
|
|
|
|
|
|
|
Real estate tax-free gain
|
|
|
|
|
|
|
0.0
|
%
|
|
|
(338
|
)
|
|
|
15.1
|
%
|
|
|
|
|
|
|
|
|
Other
|
|
|
13
|
|
|
|
0.1
|
%
|
|
|
(12
|
)
|
|
|
0.5
|
%
|
|
|
(111
|
)
|
|
|
(1.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,658
|
|
|
|
30.4
|
%
|
|
|
(1,663
|
)
|
|
|
74.3
|
%
|
|
|
2,082
|
|
|
|
31.7
|
%
|
Amount reflected as a component of discontinued operations
|
|
|
(451
|
)
|
|
|
(15.2
|
)%
|
|
|
30
|
|
|
|
(1.3
|
)%
|
|
|
(2,986
|
)
|
|
|
(45.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
$
|
2,207
|
|
|
|
15.2
|
%
|
|
$
|
(1,633
|
)
|
|
|
73.0
|
%
|
|
$
|
(904
|
)
|
|
|
(13.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the net deferred tax assets and
liabilities at December 31, 2007 and 2006, are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Property and equipment
|
|
$
|
|
|
|
$
|
16,927
|
|
|
$
|
|
|
|
$
|
15,693
|
|
Rental income
|
|
|
|
|
|
|
359
|
|
|
|
|
|
|
|
487
|
|
Brand name
|
|
|
|
|
|
|
2,476
|
|
|
|
|
|
|
|
2,463
|
|
Other intangible assets
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
131
|
|
Gain on sale leaseback
|
|
|
2,254
|
|
|
|
|
|
|
|
2,512
|
|
|
|
|
|
Impairment charge
|
|
|
|
|
|
|
|
|
|
|
1,866
|
|
|
|
|
|
Other
|
|
|
301
|
|
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,555
|
|
|
$
|
19,849
|
|
|
$
|
4,516
|
|
|
$
|
18,774
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIN 48 requires the Company to recognize in its financial
statements uncertainties in tax positions taken that may not be
sustained upon examination by the taxing authorities. Upon
adoption of FIN 48 and subsequently, the Company determined
that no adjustments were necessary in implementing FIN 48.
|
|
12.
|
Operating
Lease Income
|
The Company leases commercial retail and office space to various
tenants over terms ranging through 2017. The leases generally
provide for fixed minimum monthly rent as well as tenants
payments for their pro rata share of taxes and insurance and
common area maintenance and expenses. Rental income for the
years ended December 31, 2007, 2006 and 2005, from
continuing operations was approximately $2.8 million
$1.3 million and $2.0 million, respectively, which
included contingent rents of approximately $0.3 million,
$0.2 million and $0.2 million, respectively, for each
of the three years. Future minimum lease income under existing
non-cancelable leases as of December 31, 2007, from
continuing operations is anticipated to be as follows (in
thousands):
|
|
|
|
|
2008
|
|
$
|
2,232
|
|
2009
|
|
|
1,634
|
|
2010
|
|
|
1,144
|
|
2011
|
|
|
857
|
|
2012
|
|
|
250
|
|
Thereafter
|
|
|
246
|
|
|
|
|
|
|
|
|
$
|
6,363
|
|
|
|
|
|
|
76
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
13.
|
Operating
Lease Commitments
|
Total future minimum payments due under all current term
operating leases at December 31, 2007, were as indicated
below (in thousands), net of $11.3 million of sublease
income to be earned annually through 2020. Total rent expense
from continuing operations, net of sublease income under the
leases for the years ended December 31, 2007, 2006 and
2005, respectively, was $7.0 million, $7.0 million and
$7.1 million, respectively, which included
$6.5 million, $6.4 million and $6.6 million of
hotel facility and land lease expense, as presented on the
Consolidated Statements of Operations.
|
|
|
|
|
2008
|
|
$
|
7,971
|
|
2009
|
|
|
7,097
|
|
2010
|
|
|
7,329
|
|
2011
|
|
|
5,646
|
|
2012
|
|
|
5,203
|
|
Thereafter
|
|
|
36,339
|
|
|
|
|
|
|
|
|
$
|
69,585
|
|
|
|
|
|
|
In 2001, the Company assumed a master lease agreement for 17
hotel properties, including 12 which were part of the Red Lion
acquisition. Subsequently, the Company entered into an agreement
with Doubletree DTWC Corporation whereby Doubletree DTWC
Corporation is subleasing five of these hotel properties from
Red Lion. The master lease agreement requires minimum monthly
payments of $1.3 million plus contingent rents based on
gross receipts from the 17 hotels, of which approximately
$0.8 million per month is paid by a sub-lease tenant. The
lease agreement expires in December 2020, although the Company
has the option to extend the term on a
hotel-by-hotel
basis for three additional five-year terms.
Through June 2007, the Company operated a leased hotel property,
the Red Lion Hotel Sacramento, which is included under the
master lease agreement discussed in the above paragraph. In July
2007, the Company entered into an agreement to turnover
operations and sublease the Red Lion Hotel Sacramento to an
unrelated third party with an initial lease term expiring in
2020. The sublease agreement provides for annual sublease
payments to the Company of $1.4 million, which will
effectively reduce the Companys consolidated annual hotel
facility and land lease expense by that amount. In addition as
part of the agreement, the Company received deferred lease
income of $3.0 million, which will be recognized over the
life of the sublease agreement. For 2006 and through
July 25, 2007, the date of transition from an owned/leased
property to a franchise, the Company recorded revenues from the
hotel of $8.6 million and $4.6 million, respectively.
The third-party subleasing the hotel has entered into a
franchise agreement and committed to make a multi-million dollar
investment to further improve and reposition the hotel. As part
of the agreement, the Company committed to $3.0 million in
tenant improvements and as of December 31, 2007, had spent
approximately $0.8 million of that amount. Also, the
sublease provides the third party a two-year option to purchase
the property.
As discussed in Note 5, in October 2007 the Company
completed an acquisition of a
100-year
including extension periods leasehold interest in a
hotel in Anaheim, California for $8.3 million, including
costs of the acquisition. As required under the terms of the
leasehold agreement, the Company will pay $1.8 million per
year in lease payments through April 2011, the amounts of which
have been reflected in the above table. At the Companys
option, the lease term may be extended for 19 additional terms
of five years each, with the increases in lease payments tied
directly to the Consumer Price Index. Beyond the monthly
payments through April 2011, the Company has not been included
any additional potential further lease commitments related to
the Anaheim property in the table above.
77
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Related-Party
Transactions
|
The Company conducted various business transactions during 2007,
2006 and 2005 in which the counterparty was considered a related
party due to common ownership by its directors
and/or
shareholders. The nature of the transactions was limited to
performing certain management and administrative functions for
the related entities, commissions for real estate sales, leased
office space and purchased product for use in the hotels and
restaurants from related entities. The total aggregate value of
these transactions in 2007, 2006 and 2005 was $0.3 million,
$0.5 million and $0.3 million, respectively.
During 2007, 2006 and 2005, the Company held certain cash and
investment accounts in a bank and had notes payable to the same
bank. The banks chairman and chief executive officer is a
member of Red Lions board of directors. At
December 31, 2007 and 2006, total cash and investments held
were approximately $0.9 million and $0.5 million,
respectively, with outstanding notes payable totaling
approximately $2.8 million and $3.4 million,
respectively. Net interest expense of $0.2 million,
$0.5 million and $0.2 million, respectively, related
to an outstanding note payable to this bank was recorded during
2007, 2006 and 2005. Additionally, up until the sale of the real
estate management business in April 2006, as discussed further
in Note 4, the Company managed the banks corporate
office building under the terms of a management agreement.
Aggregate management fees received from this agreement during
2006 and 2005 were approximately $43,000 in 2006 and $127,000 in
2005.
|
|
15.
|
Employee
Defined Contribution Plan
|
The Company maintains the Red Lion Hotels Corporation Amended
and Restated Retirement and Savings Plan, the Companys
401k plan, to which it and substantially all employees may
contribute. The Company makes contributions of up to 3% of an
employees compensation based on a vesting schedule and
eligibility requirements set forth in the plan document. During
2007, 2006 and 2005, the Company made contributions to the plan
of approximately $0.4 million, $0.4 million and
$0.4 million, respectively.
|
|
16.
|
Fair
Value of Financial Instruments
|
The estimated fair values of financial instruments of continuing
operations are as indicated below (in thousands). The carrying
amounts for cash and cash equivalents, current investments,
accounts receivable, current liabilities and variable rate
long-term debt are reasonable estimates of their fair values.
The fair value of fixed-rate long-term debt is estimated based
on the discounted value of contractual cash flows using the
estimated rates currently offered for debt with similar
remaining maturities. The debentures are valued at the closing
price on December 31, 2007, of the underlying trust
preferred securities, as discussed in Note 7, on the New
York Stock Exchange, plus the face value of the debenture amount
representing the trust common securities held by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
19,483
|
|
|
$
|
19,483
|
|
|
$
|
16,018
|
|
|
$
|
16,018
|
|
Current investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,635
|
|
|
$
|
7,635
|
|
Accounts receivable
|
|
$
|
10,330
|
|
|
$
|
10,330
|
|
|
$
|
9,309
|
|
|
$
|
9,309
|
|
Cash included in other assets
|
|
|
2,151
|
|
|
|
2,151
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities, excluding debt
|
|
$
|
21,475
|
|
|
$
|
21,475
|
|
|
$
|
25,908
|
|
|
$
|
25,908
|
|
Long-term debt
|
|
$
|
83,220
|
|
|
$
|
84,565
|
|
|
$
|
85,272
|
|
|
$
|
83,221
|
|
Debentures
|
|
$
|
30,825
|
|
|
$
|
29,342
|
|
|
$
|
30,825
|
|
|
$
|
32,403
|
|
78
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair values provided above are not necessarily indicative of
the amounts the Company could realize in a current market
exchange. In addition, potential income tax ramifications
related to the realization of gains and losses that would be
incurred in an actual sale or settlement have not been taken
into consideration.
As of December 31, 2007, the Company had three operating
segments hotels, franchise and management and
entertainment. The other segment consists primarily
of miscellaneous revenues and expenses, cash and cash
equivalents, certain receivables and certain property and
equipment which are not specifically associated with an
operating segment. Management reviews and evaluates the
operating segments exclusive of interest expense; therefore, it
has not been allocated to the segments.
The Company has historically owned certain commercial properties
and has also engaged in traditional real estate related
services, including developing, managing and acting as a broker
for sales and leases of commercial and
multi-unit
residential properties (collectively referred to as the real
estate management business). Together, these operations
comprised the real estate segment. Effective April 30,
2006, the Company divested the real estate management business.
In addition, consistent with company strategy of divesting
non-core assets, during the fourth quarter of 2006 the Company
listed one of its two remaining wholly-owned commercial real
estate properties for sale and classified its results of
operations within discontinued operations for all periods
presented. As discussed above in Note 3, the Company sold
the commercial office building in September 2007. The remaining
operations of that segment have been reclassified to
Other for 2006 and for all comparative periods,
where appropriate.
The franchise and management segment had intra-segment revenues
with the hotels segment for management fees which were
eliminated in the consolidated financial statements. Likewise,
the entertainment segment had inter-segment revenues which were
eliminated in the consolidated financial statements. Management
reviews and evaluates the operations of all of its segments
including the inter-segment and intra-segment revenues. All
balances have been presented after the elimination of
inter-segment and intra-segment revenues and expenses. Selected
information with respect to continuing operations is as provided
below (in thousands). For similar information with regard to
discontinued operations, see Note 3.
79
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels
|
|
$
|
166,168
|
|
|
$
|
154,817
|
|
|
$
|
146,125
|
|
Franchise and management
|
|
|
2,756
|
|
|
|
2,853
|
|
|
|
2,860
|
|
Entertainment
|
|
|
14,839
|
|
|
|
10,791
|
|
|
|
9,827
|
|
Other
|
|
|
3,130
|
|
|
|
1,907
|
|
|
|
4,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
186,893
|
|
|
$
|
170,368
|
|
|
$
|
163,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels
|
|
$
|
18,668
|
|
|
$
|
15,568
|
|
|
$
|
12,415
|
|
Franchise and management
|
|
|
1,467
|
|
|
|
1,083
|
|
|
|
1,424
|
|
Entertainment
|
|
|
1,609
|
|
|
|
1,168
|
|
|
|
970
|
|
Other
|
|
|
(6,366
|
)
|
|
|
(4,511
|
)
|
|
|
(3,360
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,378
|
|
|
$
|
13,308
|
|
|
$
|
11,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels (1)
|
|
$
|
24,271
|
|
|
$
|
29,792
|
|
|
$
|
19,422
|
|
Franchise and management
|
|
|
194
|
|
|
|
230
|
|
|
|
1,214
|
|
Entertainment
|
|
|
905
|
|
|
|
227
|
|
|
|
705
|
|
Other
|
|
|
762
|
|
|
|
1,834
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,132
|
|
|
$
|
32,083
|
|
|
$
|
21,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels
|
|
$
|
13,634
|
|
|
$
|
10,651
|
|
|
$
|
9,837
|
|
Franchise and management
|
|
|
570
|
|
|
|
943
|
|
|
|
325
|
|
Entertainment
|
|
|
418
|
|
|
|
511
|
|
|
|
461
|
|
Other
|
|
|
1,906
|
|
|
|
578
|
|
|
|
460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,528
|
|
|
$
|
12,683
|
|
|
$
|
11,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Identifiable assets:
|
|
|
|
|
|
|
|
|
Hotels
|
|
$
|
281,117
|
|
|
$
|
275,913
|
|
Franchise and management
|
|
|
18,260
|
|
|
|
12,804
|
|
Entertainment
|
|
|
6,279
|
|
|
|
5,259
|
|
Other
|
|
|
38,853
|
|
|
|
42,923
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
344,509
|
|
|
$
|
336,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the hotel asset acquisition in the fourth quarter of
2007, for total costs of $8.3 million |
80
RED LION
HOTELS CORPORATION
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
18.
|
Earnings
(Loss) Per Share
|
The following table presents a reconciliation of the numerators
and denominators used in the basic and diluted earnings (loss)
per common share computations for the years ended
December 31, 2007, 2006 and 2005 (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Numerator basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
$
|
5,231
|
|
|
$
|
(520
|
)
|
|
$
|
(977
|
)
|
Income (loss) on discontinued operations
|
|
|
819
|
|
|
|
(55
|
)
|
|
|
5,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
6,050
|
|
|
$
|
(575
|
)
|
|
$
|
4,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic
|
|
|
19,134
|
|
|
|
16,666
|
|
|
|
13,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares diluted
|
|
|
19,506
|
|
|
|
16,666
|
|
|
|
13,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
$
|
0.27
|
|
|
$
|
(0.03
|
)
|
|
$
|
(0.08
|
)
|
Income on discontinued operations
|
|
$
|
0.05
|
|
|
$
|
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.32
|
|
|
$
|
(0.03
|
)
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, the effect of converting 44,837 of
the outstanding OP Units was considered dilutive and
included within the above calculation. At December 31, 2006
and 2005, the effect of converting 142,664 and 286,161 of the
outstanding OP Units, respectively, were anti-dilutive and
therefore excluded from the above calculations.
At December 31, 2007, 2006 and 2005, 1,276,534, 1,256,874
and 1,219,520 options to purchase common shares, respectively,
were outstanding. At December 31, 2007, 290,570 of the
1,276,534 options to purchase common shares outstanding as of
that date were considered dilutive and included in the above
calculation. At December 31, 2006 and 2005, all of the
options to purchase common shares were considered anti-dilutive
and excluded from the above calculations. At December 31,
2007, 36,169 of the total outstanding but unissued shares of
restricted stock units were dilutive and included within the
above calculation. At December 31, 2006 and 2005, all
25,657 and 11,121 outstanding but unissued shares of restricted
stock units, respectively, were considered anti-dilutive.
All convertible debt instruments outstanding at
December 31, 2005 were considered anti-dilutive. In
December 2006, all outstanding convertible debt was repaid.
In February 2008, the President and Chief Executive Officer of
the Company, who was also a director, retired. In connection
therewith, the Company entered into a written retirement
agreement with the executive that includes separation payments
and benefits of $2.2 million in value. Under the terms of
the agreement, all of the former executives 545,117 stock
options and 12,990 restricted stock units immediately vested,
resulting in expense of $0.9 million and $0.1 million,
respectively, in 2008. In addition, under the terms of the
retirement agreement, the exercise period for 414,191 of the
options was extended to be exercisable until February 2011 or
until the earlier expiration of their original
10-year
term. The remaining 130,926 stock options will expire in March
2008. The modification to the terms of the previously granted
equity awards resulted in additional stock based compensation
expense of $0.4 million. In total, the Company will
recognize $3.7 million in expense during the first quarter
of 2008.
Also in February 2008, the board of directors granted 5,769
restricted shares of common stock and 52,734 options to purchase
common stock in connection with the appointment of the
Companys new President, Chief Executive Officer and
director.
81
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosures
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
As of December 31, 2007, we carried out an evaluation,
under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief
Financial Officer (CEO and CFO), of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our
management, including the CEO and CFO, concluded that our
disclosure controls and procedures were effective to ensure that
material information required to be disclosed by us in the
reports filed or submitted by us under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported
within time periods specified in Securities and Exchange
Commission rules and forms.
There were no changes in internal control over financial
reporting, as defined in Exchange Act
Rules 13a-15(f)
and
15d-15(f),
during the fourth fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal
controls over financial reporting.
Managements
Annual Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over our financial reporting, which is
designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles in the United States of
America.
Because of its inherent limitations, any system of internal
controls over financial reporting, no matter how well designed,
may not prevent or detect misstatements due to the possibility
that a control can be circumvented or overridden or that
misstatements due to error or fraud may occur that are not
detected. Also, because of changes in conditions, internal
control effectiveness may vary over time.
Management assessed the effectiveness of our internal control
over financial reporting as of December 31, 2007, using
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and concluded that we
have maintained effective internal control over financial
reporting as of December 31, 2007, based on these criteria.
For purposes of evaluating internal controls over financial
reporting, management determined that the internal controls over
financial reporting of the Anaheim Maingate Hotel, of which Red
Lion Hotels Corporation acquired a leasehold interest in October
2007, would be excluded from the internal control assessment as
of December 31, 2007, as permitted by the rules and
regulations of the Securities and Exchange Commission. In
October 2007, the Company acquired the leasehold interest in the
310-room, full service hotel in Anaheim, California, for
$8.3 million, including costs of the acquisition. During
the fourth quarter of 2007, the Anaheim Maingate Hotel
contributed approximately 0.7% of the Companys total
revenue during 2007 and accounted for approximately 2.8% of
total assets at December 31, 2007.
Our internal control over financial reporting as of
December 31, 2007, of the effectiveness of our internal
control over financial reporting as of December 31, 2007,
have been audited by BDO Seidman, LLP, an independent registered
public accounting firm, as stated in the report which is
included herein.
There have been no changes in our internal control over
financial reporting during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
82
Report
of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Red Lion Hotels Corporation
Spokane, Washington
We have audited Red Lion Hotels Corporations internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Red Lion Hotel Corporations management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting, including in the accompanying
Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an
opinion on the companys internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Managements Annual
Report on Internal Control over Financial Reporting,
managements assessment of and conclusion on the
effectiveness of internal control over financial reporting did
not include the internal controls of the Anaheim Maingate Hotel,
which was acquired in October 2007 and which is included in the
consolidated balance sheets of Red Lion Hotels Corporation as of
December 31, 2007, and the related consolidated statements
of operations, stockholders equity, and cash flows for the
year then ended. The Anaheim Maingate Hotel constituted 2.8% of
total assets as of December 31, 2007, and 0.7% of total
revenues for the year then ended. Management did not assess the
effectiveness of internal control over financial reporting of
the Anaheim Maingate Hotel because of the timing of the
acquisition which was completed in October 2007. Our audit of
internal control over financial reporting of Red Lion Hotels
Corporation also did not include an evaluation of the internal
control over financial reporting of the Anaheim Maingate Hotel.
In our opinion, Red Lion Hotels Corporation maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO
criteria.
83
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Red Lion Hotels Corporation as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2007 and our report dated March 12, 2008
expressed an unqualified opinion thereon.
BDO Seidman, LLP
Spokane, Washington
March 12, 2008
84
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
|
|
Item 10.
|
Directors
and Executive Officers and Corporate Governance
|
A portion of the information required by this item is contained
in, and incorporated by reference from, the proxy statement for
our 2008 Annual Meeting of Shareholders under the captions
Proposal 1: Election of Directors,
Section 16(a) Beneficial Ownership Reporting
Compliance and Corporate Governance. We make
available free of charge on our website (www.redlion.com) the
charters of all of the standing committees of our board of
directors (including those of the audit, nominating and
corporate governance and compensation committees), the code of
business conduct and ethics for our directors, officers and
employees, and our corporate governance guidelines. We will
furnish copies of these documents to any shareholder upon
written request sent to our General Counsel,
201 W. North River Drive, Suite 100, Spokane,
Washington
99201-2293.
See Item 4A of this Annual Report on
Form 10-K
for information regarding our directors and executive officers.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is contained in, and
incorporated by reference from, the Proxy Statement for our 2008
Annual Meeting of Shareholders under the captions
Compensation Discussion and Analysis,
Executive Compensation and Director
Compensation.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
A portion of the information required by this item is contained
in, and incorporated by reference from, the Proxy Statement for
our 2008 Annual Meeting of Shareholders under the captions
Security Ownership of Certain Beneficial Owners and
Management.
See Item 5 of this Annual Report on
Form 10-K
for information regarding our equity compensation plans.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item is contained, and
incorporated by reference from, the Proxy Statement for our 2008
Annual Meeting of Shareholders under the captions Certain
Relationships and Related Transactions, and
Corporate Governance Director
Independence.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is contained, and
incorporated by reference from, the Proxy Statement for our 2008
Annual Meeting of Shareholders under the caption Principal
Accountant Fees and Services.
85
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
List of documents filed as part of this report:
1. Index to Red Lion Hotels Corporation financial
statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
a.
|
|
|
Consolidated Balance Sheets
|
|
|
51
|
|
|
b.
|
|
|
Consolidated Statements of Operations
|
|
|
52
|
|
|
c.
|
|
|
Consolidated Statements of Changes in Stockholders Equity
|
|
|
53
|
|
|
d.
|
|
|
Consolidated Statements of Cash Flows
|
|
|
54
|
|
|
e.
|
|
|
Notes to Consolidated Financial Statements
|
|
|
56
|
|
2. Index to financial statement schedules:
All schedules for which provisions are made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable or the information is contained in the Financial
Statements and therefore has been omitted.
3. Index to exhibits:
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1(1)
|
|
Amended and Restated Articles of Incorporation
|
|
3
|
.2(2)
|
|
Amended and Restated By-Laws
|
|
4
|
.1(3)
|
|
Specimen Common Stock Certificate
|
|
4
|
.2(4)
|
|
Certificate of Trust of Red Lion Hotels Capital Trust
|
|
4
|
.3(4)
|
|
Declaration of Trust of Red Lion Hotels Capital Trust
|
|
4
|
.4(5)
|
|
Amended and Restated Declaration of Trust of Red Lion Hotels
Capital Trust
|
|
4
|
.5(5)
|
|
Indenture for 9.5% Junior Subordinated Debentures Due
February 24, 2044
|
|
4
|
.6(5)
|
|
Form of Certificate for 9.5% Trust Preferred Securities
(Liquidation Amount of $25 per Trust Preferred Security) of
Red Lion Hotels Capital Trust (included in Exhibit 4.4 as
Exhibit A-1)
|
|
4
|
.7(5)
|
|
Form of 9.5% Junior Subordinated Debenture Due February 24,
2044 (included in Exhibit 4.5 as Exhibit A)
|
|
4
|
.8(5)
|
|
Trust Preferred Securities Guarantee Agreement dated
February 24, 2004
|
|
4
|
.9(5)
|
|
Trust Common Securities Guarantee Agreement dated
February 24, 2004
|
Executive Compensation Plans and Agreements
|
|
10
|
.1(6)
|
|
Employee Stock Purchase Plan
|
|
10
|
.2(7)
|
|
1998 Stock Incentive Plan
|
|
10
|
.3(8)
|
|
Form of Restricted Stock Award Agreement for the 1998 Stock
Incentive Plan
|
|
10
|
.4(9)
|
|
Form of Notice of Grant of Stock Options and Option Agreement
for the 1998 Stock Incentive Plan
|
|
10
|
.5(10)
|
|
2006 Stock Incentive Plan
|
|
10
|
.6(11)
|
|
Form of Restricted Stock Unit Agreement Notice of
Grant for the 2006 Stock Incentive Plan
|
|
10
|
.7(12)
|
|
Form of Notice of Grant of Stock Options and Option Agreement
for the 2006 Stock Incentive Plan
|
|
10
|
.8(8)
|
|
Employment Agreement dated March 1, 1998 between the
Registrant and David M. Bell
|
|
10
|
.9(13)
|
|
Executive Employment Agreement dated April 13, 2003 between
the Registrant and Arthur M. Coffey
|
|
10
|
.10(12)
|
|
Executive Employment Agreement dated August 10, 2006
between the Registrant and Thomas McKeirnan
|
|
10
|
.11(14)
|
|
Executive Employment Agreement dated November 22, 2004
between the Registrant and Anupam Narayan
|
|
10
|
.12(15)
|
|
Executive Employment Agreement dated July 24, 2006 between
the Registrant and John M. Taffin
|
|
10
|
.13(16)
|
|
Executive Officers Variable Pay Plan Effective January 1,
2005
|
86
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.14(17)
|
|
Executive Employment Agreement dated April 12, 2007 between
the Registrant and Arthur M. Coffey
|
|
10
|
.15(17)
|
|
Executive Employment Agreement dated April 12, 2007 between
the Registrant and Thomas McKeirnan
|
|
10
|
.16(17)
|
|
Executive Employment Agreement dated April 12, 2007 between
between the Registrant and Anupam Narayan
|
|
10
|
.17(17)
|
|
Executive Employment Agreement dated July 24, 2006 between
the Registrant and John M. Taffin
|
|
10
|
.18
|
|
Summary Sheet for Director Compensation and Executive Cash
Compensation and Performance Criteria Under Executive Officers
Variable Pay Plan
|
Other Material Contracts
|
|
10
|
.19(18)
|
|
Amended and Restated Agreement of Limited Partnership of Red
Lion Hotels Limited Partnership dated November 1, 1977
|
|
10
|
.20(4)
|
|
First Amendment dated January 1, 1998 to Amended and Restated
Agreement of Limited Partnership of Red Lion Hotels Limited
Partnership dated November 1, 1997
|
|
10
|
.21(4)
|
|
Second Amendment dated April 20, 1998 to Amended and Restated
Agreement of Limited Partnership of Red Lion Hotels Limited
Partnership dated November 1, 1997
|
|
10
|
.22(4)
|
|
Third Amendment dated April 28, 1998 to Amended and Restated
Agreement of Limited Partnership of Red Lion Hotels Limited
Partnership dated November 1, 1997
|
|
10
|
.23(4)
|
|
Fourth Amendment dated May 14, 1999 to Amended and Restated
Agreement of Limited Partnership of Red Lion Hotels Limited
Partnership dated November 1, 1997
|
|
10
|
.24(4)
|
|
Fifth Amendment dated January 1, 2000 to Amended and Restated
Agreement of Limited Partnership of Red Lion Hotels Limited
Partnership dated November 1, 1997
|
|
10
|
.25(4)
|
|
Sixth Amendment dated June 30, 2000 to Amended and Restated
Agreement of Limited Partnership of Red Lion Hotels Limited
Partnership dated November 1, 1997
|
|
10
|
.26(4)
|
|
Seventh Amendment dated January 1, 2001 to Amended and Restated
Agreement of Limited Partnership of Red Lion Hotels Limited
Partnership dated November 1, 1997
|
|
10
|
.27(19)
|
|
Eighth Amendment dated September 20, 2005 to Amended and
Restated Agreement of Limited Partnership of Red Lion Hotels
Limited Partnership dated November 1, 1997
|
|
10
|
.28(19)
|
|
Ninth Amendment dated September 20, 2005 to Amended and Restated
Agreement of Limited Partnership of Red Lion Hotels Limited
Partnership dated November 1, 1997
|
|
10
|
.29(20)
|
|
Tenth Amendment dated September 20, 2005 to Amended and Restated
Agreement of Limited Partnership of Red Lion Hotels Limited
Partnership dated November 1, 1997
|
|
10
|
.30(19)
|
|
Registration Rights Agreement dated February 2, 2006 between the
Registrant and Dunson Ridpath Hotel Associates Limited
Partnership
|
|
10
|
.31(21)
|
|
Purchase and Sale Agreement dated December 17, 1999 with respect
to WC Coast Holdings, Inc.
|
|
10
|
.32(21)
|
|
Membership Interest Purchase Agreement dated December 17, 1999
with respect to October Hotel Investors, LLC
|
|
10
|
.33(21)
|
|
First Amendment dated December 30, 1999 to Membership Interest
Purchase Agreement with respect to October Hotel Investors, LLC
|
|
10
|
.34(4)
|
|
Fixed Rate Note effective as of June 14, 2001, in the original
principal amount of $36,050,000 issued by WHC809, LLC, a
Delaware limited liability company indirectly controlled by the
Registrant, to Morgan Guaranty Trust Company of New York
|
|
10
|
.35(22)
|
|
Deed Of Trust and Security Agreement effective as of June 14,
2001, with WHC809, LLC, as grantor, and Morgan Guaranty Trust
Company of New York, as beneficiary
|
87
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.36(23)
|
|
Promissory Note dated effective as of June 27, 2003, in the
original principal amount of $5,100,000 issued by WHC807, LLC, a
Delaware limited liability company indirectly controlled by the
Registrant (WHC807), to Column Financial, Inc.
(Column) (the WHC807 Promissory Note).
Nine other Delaware limited liability companies indirectly
controlled by the Registrant (the Other LLCs)
simultaneously issued nine separate Promissory Notes to Column
in an aggregate original principal amount of $50,100,000 and
otherwise on terms and conditions substantially similar to those
of the WHC807 Promissory Note (these Promissory Notes and their
respective issuers and principal amounts are identified in
Exhibit D to the Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing filed as Exhibit 10.34).
|
|
10
|
.37(23)
|
|
Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing dated effective as of June 27,
2003, with WHC807 as grantor and Column as beneficiary (the
WHC807 Deed of Trust). Each of the Other LLCs
simultaneously executed a separate Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Fixture Filing as
grantor with Column as beneficiary and otherwise on terms and
conditions substantially similar to those of the WHC807 Deed of
Trust (these nine other documents and their respective grantors
and the respective parcels of real property encumbered thereby
are identified in Exhibit E to the WHC807 Deed of Trust).
|
|
10
|
.38(23)
|
|
Indemnity and Guaranty Agreement dated effective as of June 27,
2003, between the Registrant and Column with respect to the
WHC807 Promissory Note and the WHC807 Deed of Trust. The
Registrant and Column have entered into nine separate Indemnity
and Guaranty Agreements on substantially similar terms and
conditions with respect to the Other LLCs Promissory Notes
and Deeds of Trust, Assignments of Leases and Rents, Security
Agreements and Fixture Filings referred to in Exhibits 10.33 and
10.34, respectively.
|
|
10
|
.39(24)
|
|
Second Amendment and Restated Credit Agreement dated February 1,
2006 between the Registrant and Wells Fargo Bank, N.A.
|
|
10
|
.40(25)
|
|
Credit Agreement dated September 13, 2006 among the Registrant,
Calyon New York Branch, Sole Lead Arranger and Administrative
Agent, KeyBank National Association, Documentation Agent, CIBC,
Inc., Union Bank of California, N.A. and Wells Fargo Bank, N.A.
|
|
21
|
|
|
List of Subsidiaries of Red Lion Hotels Corporation
|
|
23
|
|
|
Consent of BDO Seidman, LLP
|
|
31
|
.1
|
|
Certification of principal executive officer pursuant to
Exchange Act Rule 13a-14(a) Certification of principal executive
officer pursuant to
|
|
31
|
.2
|
|
Exchange Act Rule 13a-14(a)
|
|
32
|
.1
|
|
Certification of principal executive officer pursuant to
Exchange Act Rule 13a-14(b)
|
|
32
|
.2
|
|
Certification of principal executive officer pursuant to
Exchange Act Rule 13a-14(b)
|
Footnotes to index to exhibits:
|
|
|
(1) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 8-K
filed by us on September 20, 2005. |
|
(2) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 10-K
filed by us on March 31, 2003. |
|
(3) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form S-3/A
filed by us on May 15, 2006. |
|
(4) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form S-1
filed by us on November 4, 2003. |
|
(5) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 8-K
filed by us on March 19, 2004. |
|
(6) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form S-1
filed by us on January 20, 1998. |
88
|
|
|
(7) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 10-Q
filed by us on May 15, 2001. |
|
(8) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form S-1/A
filed by us on March 10, 1998. |
|
(9) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit the
Form 8-K
filed by us on November 15, 2005. |
|
(10) |
|
Previously filed with the Securities and Exchange Commission as
an appendix to the Schedule 14A filed by us on
April 20, 2006. |
|
(11) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 8-K
filed by us on November 22, 2006. |
|
(12) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 10-Q
filed by us on August 14, 2006. |
|
(13) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 10-Q
filed by us on August 14, 2003. |
|
(14) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 10-Q
filed by us on November 22, 2004. |
|
(15) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 8-K
filed by us on July 26, 2006. |
|
(16) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 8-K
filed by us on March 23, 2005. |
|
(17) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 10-Q
filed by us on May 9, 2007. |
|
(18) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form S-1/A
filed by us on February 27, 1998. |
|
(19) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 8-K
filed by us on February 8, 2006. |
|
(20) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 8-K
filed by us on February 22, 2006. |
|
(21) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 8-K
filed by us on January 19, 2000. |
|
(22) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 10-Q
filed by us on August 14, 2001. |
|
(23) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 10-Q
filed by us on August 14, 2003. |
|
(24) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit the
Form 10-K
filed by us on April 3, 2006. |
|
(25) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the
Form 8-K
filed by us on September 18, 2006. |
89
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
RED LION HOTELS CORPORATION
Registrant
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
By: /s/ Anupam
Narayan
Anupam
Narayan
|
|
President, Chief Executive Officer, Chief Financial Officer and
Director (Principal Executive and Financial Officer)
|
|
March 12, 2008
|
|
|
|
|
|
By: /s/ Anthony
F. Dombrowik
Anthony
F. Dombrowik
|
|
Senior Vice President, Corporate Controller (Principal
Accounting Officer)
|
|
March 12, 2008
|
|
|
|
|
|
By: /s/ Donald
K. Barbieri
Donald
K. Barbieri
|
|
Chairman of the Board of Directors
|
|
March 12, 2008
|
|
|
|
|
|
By: /s/ Richard
L. Barbieri
Richard
L. Barbieri
|
|
Director
|
|
March 12, 2008
|
|
|
|
|
|
By: /s/ Ryland
P. Davis
Ryland
P. Davis
|
|
Director
|
|
March 12, 2008
|
|
|
|
|
|
By: /s/ Jon
E. Eliassen
Jon
E. Eliassen
|
|
Director
|
|
March 12, 2008
|
|
|
|
|
|
By: /s/ Peter
F. Stanton
Peter
F. Stanton
|
|
Director
|
|
March 12, 2008
|
|
|
|
|
|
By: /s/ Ronald
R. Taylor
Ronald
R. Taylor
|
|
Director
|
|
March 12, 2008
|
90