10-K 1 rlh12-31x201310k.htm 10-K RLH 12-31-2013 10K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 __________________________________________
FORM 10-K
 ______________________________________________________________
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
OR 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-13957 
 __________________________________________
RED LION HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
  __________________________________________
Washington
 
91-1032187
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
201 W. North River Drive, Suite 100
Spokane Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (509) 459-6100 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
 
Common Stock, par value $.01 per share
New York Stock Exchange
 
 
Guarantee with Respect to 9.5% Trust Preferred Securities
(Liquidation Amount of $25 per Trust Preferred
Security) of Red Lion Hotels Corporation Capital Trust
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes o     No ý 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o    No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
o
  
Accelerated filer
 
x
 
Non-accelerated filer
 
o
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  o    No  ý

The aggregate market value of the registrant's common stock as of June 30, 2013 was $120.1 million, of which 69.7% or $83.7 million was held by non-affiliates as of that date. As of February 28, 2014, there were 19,718,005 shares of the Registrant's common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for its 2014 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the Registrant's 2013 fiscal year, are incorporated by reference herein in Part III.



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



2


PART I
This annual report on Form 10-K includes forward-looking statements. We have based these statements on our current expectations and projections about future events. When words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "seek," "should," "will" and similar expressions or their negatives are used in this annual report, these are forward-looking statements. Many possible events or factors, including those discussed in "Risk Factors" under Item 1A of this annual report, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this annual report.

In this report, "we," "us," "our," "our company," "the Company" and "RLH" refer to Red Lion Hotels Corporation and, as the context requires, all of its wholly owned subsidiaries, including Red Lion Hotels Holdings, Inc., Red Lion Hotels Franchising, Inc. and Red Lion Hotels Limited Partnership. "Red Lion" refers to the Red Lion brand. The terms "the network", "system-wide hotels" or "network of hotels" refer to our entire group of owned, leased and franchised hotels.

Item 1.
Business

Introduction

We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, operation and franchising of hotels under our proprietary brands, including Red Lion Hotels, Red Lion Inns & Suites and Leo Hotel Collection (the “Red Lion Brands”). Established over 30 years ago, the Red Lion brand is regionally recognized and is particularly well known in the western United States, where our hotels are located. The Red Lion brand is typically associated with midscale full and select service hotels.

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

Red Lion Hotels and Red Lion Inns & Suites work to create an environment which allows customers to feel welcome and at home while they travel. Our properties are in both urban and smaller markets, and each property strives to highlight and reflect the unique character of its local market. Our focus is on locally inspired, friendly and personalized genuine customer service. Value and cleanliness underscore our brand promise of friendly service that’s locally inspired by the warm and authentic manner for which Red Lion has always been known. Our brand promise, which we refer to as Local.Wise. is focused on providing our guests with a uniquely local experience authentic to the regions in which our hotels are located. It positions each Red Lion as the traveler's advocate, drives relevance and loyalty, and differentiates us from our competition. This in turn helps us to deliver a consistent and differentiated guest experience to encourage customer loyalty and continually build brand equity.

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

3


As of December 31, 2013, our system of hotels was comprised of 55 hotels located in ten states and one Canadian province, with 12,451 rooms and 703,822 square feet of meeting space as provided below:  
 
 
 
Total
 
Meeting
 
 
 
Available
 
Space
 
Hotels
 
Rooms
 
(sq. ft.)
Red Lion Owned and Leased Hotels:
 
 
 
 
 
     Continuing Operations
18

 
3,739

 
169,572

     Discontinued Operations
7

 
1,027

 
60,733

Red Lion Franchised Hotels
28

 
4,429

 
232,517

Leo Hotel Collection
2

 
3,256

 
241,000

Total
55

 
12,451

 
703,822


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, 2013, we operated 25 hotels, seven of which are classified as discontinued operations and not included in any reported hotel statistics from continuing operations. Of our 25 hotels, 19 are wholly-owned and six are leased. During 2013 our hotel segment accounted for approximately 85.9% of total revenues.
The franchise segment is engaged primarily in licensing the Red Lion Brands to franchisees. This segment generates revenue from franchise fees that are typically based on a percent of room revenues and are charged to hotel owners in exchange for the use of our brands and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. As of December 31, 2013, we had 30 franchise hotels with 28 under the Red Lion brand and two hotels under the Leo Hotel Collection brand. During 2013 our franchise segment accounted for approximately 5.9% of total revenues.
The entertainment segment derives revenues from promotion and presentation of entertainment productions under the trade name WestCoast Entertainment, and from ticketing services under the trade name TicketsWest. The ticketing service business offers ticketing inventory management systems, call center services, and outlet/electronic channel distribution for event locations. During 2013 our entertainment segment accounted for approximately 7.9% of total revenues.
Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".
A summary of our reporting segment revenues from continuing operations is provided below (in thousands, except for percentages). For further information regarding our business segments, see Note 3 of Notes to Consolidated Financial Statements.
 
 
 
Year ended December 31,
 
 
2013
 
2012
 
2011
Hotels:
 
 
 
 
 
 
 
 
 
 
 
 
    Rooms
 
$
78,536

 
65.4
%
 
$
85,074

 
66.3
%
 
$
85,544

 
64.7
%
    Food and beverage
 
21,858

 
18.2
%
 
25,275

 
19.7
%
 
27,330

 
20.6
%
    Other department
 
2,744

 
2.3
%
 
3,161

 
2.5
%
 
3,757

 
2.8
%
        Total hotels segment revenue
 
103,138

 
85.9
%
 
113,510

 
88.5
%
 
116,631

 
88.1
%
Franchise
 
7,135

 
5.9
%
 
5,177

 
4.0
%
 
3,955

 
3.0
%
Entertainment
 
9,439

 
7.9
%
 
9,165

 
7.1
%
 
11,379

 
8.6
%
Other
 
343

 
0.3
%
 
442

 
0.4
%
 
423

 
0.3
%
Total Revenue
 
$
120,055

 
100.0
%
 
$
128,294

 
100.0
%
 
$
132,388

 
100.0
%
 

4


Revenue per available room ("RevPAR") for owned and leased hotels on a comparable basis from continuing operations increased 3.1% from 2013 to 2012 primarily due to a 3.9% increase in average daily rate ("ADR"), partially offset by a 40 basis point decrease in occupancy.
The increase in rate was primarily driven by an increase in the transient market segment. Management of occupancy from lower rated online travel agency channels and an increase in non-qualified retail revenues were the primary contributors to our ADR growth in 2013. Including franchised hotels, system-wide RevPAR on a comparable basis from continuing operations increased 4.5% year-over-year primarily due to a 3.5% increase in ADR and a 60 basis point increase in occupancy. Average occupancy, ADR and RevPAR statistics for comparable hotels from continuing operations are provided below:
 
 
 
2013
 
2012
 
 
Average Occupancy
 
ADR
 
RevPAR
 
Average
Occupancy
 
ADR
 
RevPAR
Owned and Leased Hotels
 
64.3
%
 
$
89.22

 
$
57.33

 
64.7
%
 
$
85.88

 
$
55.58

Franchised Hotels
 
56.9
%
 
$
87.46

 
$
49.74

 
55.1
%
 
$
84.88

 
$
46.80

Total System Wide (1)
 
60.8
%
 
$
88.45

 
$
53.78

 
60.2
%
 
$
85.45

 
$
51.48


Change from prior comparative periods:

 
 
2013 vs. 2012
 
 
Average Occupancy
 
ADR
 
RevPAR
Owned and Leased Hotels
 
(40
)
bps
 
3.9
%
 
3.1
%
Franchised Hotels
 
180

bps
 
3.0
%
 
6.3
%
Total System Wide (1)
 
60

bps
 
3.5
%
 
4.5
%

(1) Includes all hotels owned, leased and franchised, presented on a comparable basis. This excludes hotels classified as discontinued operations. This also excludes the two properties under the Leo Hotel Collection brand. The Red Lion Colonial Hotel in Helena, MT ("Helena property"), the Red Lion Hotel Denver Southeast in Aurora, CO ("Denver Southeast property"), the Red Lion Inn & Suites in Missoula, MT ("Missoula property") and the Red Lion Hotel Pendleton in Pendleton, Oregon ("Pendleton property") have been excluded from the owned and leased hotel statistics and included in the franchised statistics as we sold those previously owned properties during 2012 or 2013 and maintained franchise agreements on those properties.
Average occupancy, ADR and RevPAR, as defined below, are widely used in the hospitality industry and appear throughout this document as important measures to the discussion of our operating performance.
Average occupancy represents total paid rooms occupied divided by total available rooms. We use average occupancy as a measure of the utilization of capacity in our system of hotels.
RevPAR represents total room and related revenues divided by total available rooms. We use RevPAR as a measure of performance yield in our system of hotels.
ADR represents total room revenues divided by the total number of paid rooms occupied by hotel guests. We use ADR as a measure of room pricing in our system of hotels.
Total available rooms represents the number of rooms available multiplied by the number of days in the reported period. We use total available rooms as a measure of capacity in our system of hotels and do not adjust total available rooms for rooms temporarily out of service for remodel or other short-term periods.
Comparable hotels are hotels owned, leased or franchised by us and in operation throughout each of the full periods presented, excluding hotels classified as discontinued operations.

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

5



Company Strategy

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

Franchising and Third Party Management Agreements

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

As the owner of the Red Lion brand, we offer support programs that provide access to a full range of franchise services that we believe are valuable to hotel owners, including (i) central reservations, (ii) a guest loyalty program (iii) revenue management, (iv) national and regional sales, (v) marketing, (vi) systems, operations and customer service training, (vii) corporate purchasing programs and (viii) quality evaluations.

Sales & Marketing Initiatives

We have invested in sales and marketing talent and technology to improve our ability to manage the various channels which drive occupancy and rate at our hotels, including transient, group and preferred corporate business. Our focus on improving e-commerce revenue generation included redesigning the RedLion.com website, integrating mobile adaptivity and adding a new internet booking engine. In addition, we created individual micro-sites for each hotel in our network. Each of these interactive websites includes its own uniquely focused identity with information tailored specifically to that property and market location. As part of our Local.Wise. initiative, these micro-sites give our customers detailed local information while also improving the reservation process online or via mobile devices. As the revenue from these websites increases our ability to proactively manage the revenue from the lower rated online travel agency channels, our ADR and profitability can benefit.

Our sales and marketing initiatives including individual hotel websites, provide additional sales resources for expanding market reach and driving business in our owned and franchise properties. Seasonal transient business is supplemented by our group market, which comprises approximately 22% of total room revenue. The sales and marketing technology improves our ability to drive higher rated transient business as compression occurs with available room inventory due to higher group and preferred corporate occupancy. We will continue to focus on driving group and preferred corporate business to offset the vagaries of seasonal transient business, while at the same time seeking to grow our market share from the seasonal demand within each market.

6



Improve Performance of Owned and Leased Hotels
   
Most of our owned and leased hotel portfolio is located in primarily secondary and tertiary markets that are subject to seasonal demand fluctuations, while a few of our hotels are in larger markets such as Salt Lake City, Utah; Anaheim, California; and Bellevue, Seattle and Spokane, Washington. These larger markets also have seasonality factors and are also highly impacted by destination-based conventions and city-wide activities. We intend to remain competitive in the markets currently served by our owned and leased hotels while exploring the opportunities to expand our ownership of hotels into additional larger, urban MSAs. Such expansion may include adding additional brand options. We also believe having an ownership stake will assist us in this expansion and that such ownership will likely be through sliver equity or joint venture agreements that align our interests with major equity owners and investors. This investment structure, along with the potential offering of management contracting services, should improve our competitive proposition for the Red Lion brand in those markets.

We are committed to keeping our properties well maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. We will need to continue to fund significant renovations to our owned and leased hotels to improve our guest contact areas and maintain our real estate. We invested approximately $13 million in capital expenditures in 2013, primarily related to property hotel improvements including new bedding packages, large screen HDTVs and improved wireless internet access. We will continue to focus on improving our properties and overall operational capacity in 2014 through additional capital expenditures.

Funding of our capital expenditure needs requires ongoing access to capital for replacement of outdated furnishings as well as for facility repair, modernization and renovation. Over the last five to six years, our levels of capital expenditures for these purposes have been lower than normal due to the general economic conditions impacting our industry. As a result, we believe it will be necessary over the next 18 to 24 months to invest in hotel renovations, updates and maintenance at levels higher than the average capital expenditures over the last five to six years in our hotels in order to support the room rates we have historically charged.

To support the clarification of our Red Lion Brand and improve our financial performance, we have listed for sale six non-strategic hotel assets. Currently, we are marketing for sale the Red Lion Hotel Canyon Springs in Twin Falls, Idaho, the Red Lion Hotel Columbia Center in Kennewick, Washington, the Red Lion Hotel & Conference Center Kelso/Longview in Kelso, WA, the Red Lion Hotel Pocatello in Pocatello, Idaho, the Red Lion Hotel Wenatchee in Wenatchee, Washington and the Red Lion Hotel Yakima Center in Yakima, Washington. We will continue to operate these hotels under the Red Lion brand until their disposition. The listings for these properties do not require a continuing Red Lion franchise agreement. Potential buyers interested in retaining the Red Lion brand will need to make investments in the properties to maintain the brand standards and quality of product our guests expect. Proceeds from the sale of these assets are intended to provide additional capital for debt reduction and support of the growth initiatives for our hotel network.

Owned and Leased Hotel Operations Strategy

We will continue in 2014 to seek ways to improve the profitability of our owned and leased hotel portfolio through growth in revenue and cost efficiencies via the following:

Business Mix.  We have an opportunity to improve our profitability through a shift in our customer mix towards more profitable distribution channels and segments. A primary focus is to use proactive revenue management tools to strategically manage lower rated online travel agent and permanent business in an effort to improve the profitability of our transient segment. In addition, we will be exploring new or different technologies that will improve our ability to dynamically price our offering to online and near-stay guests. We are also focused on increasing the reservations received through our redesigned RedLion.com website and booking engine which were launched in January 2013. Online reservations made through our direct channels help improve profitability, as they do not require the commissions paid to online travel agents. We also continue to focus on growing group business through direct sales. Group business provides high levels of cash flow in room revenue and through group food and beverage revenue primarily derived from banquet demand.

Local.Wise. Brand Promise.  We believe the Red Lion brand is well known and recognized in the western United States for its friendly customer service. Our Local.Wise. initiative emphasizes our friendly service and our ability to deliver a uniquely local experience authentic to the region in which our hotels are located. Through marketing messaging, packages and promotions, our associates interact with our guests during their stay and position themselves as subject matter experts,

7


including personal favorites and recommendations on locally favored restaurants/nightlife, outdoor adventures, family fun, local landmarks and more. Today’s modern traveler is seeking experiences and memories from travel, and Local.Wise. delivers on this important and emerging trend.

Investment in Loyalty Program. We are evaluating options for optimizing our program to reward our most valuable guests through our R&R (“Recognition and Rewards”) Club. Our membership base increased in 2013 by 25% to over 615,000 members. We are planning to modify the program in 2014 to improve its rewards, efficiency and costs.

Expense Management and Other Revenue. Our largest daily investment in operations is in labor costs. We continue to focus on improved labor management and efficiency. We have many other ongoing expense improvement initiatives, including energy efficiency to offset rising utility rates, labor management, food and beverage cost management, and continued review and adjustment of our supply and purchasing contracts. During 2013, we had a decrease of 80 basis points in our comparable direct hotel operating margin from continuing operations despite an improvement in comparable hotel revenues of $2.1 million. The primary driver of the revenue increase was a 3.9% increase in ADR. We increased marketing expense to drive ADR growth. In addition, operating costs were negatively impacted by prior year labor cost reductions that did not recur in 2013 as well as a large workers compensation adjustment for claims from prior years.

Summary

Our current hotel network is primarily located in ten Western states, with the majority of our hotels in secondary and tertiary markets. We believe the growth opportunity for our business is through franchising as hotel owners seek to improve profitability through an affiliation with a hotel brand or franchise distribution network that both improves their flow-through profitability and adds value to their overall asset. We additionally believe we can improve our value proposition for hotel owners by offering sliver equity, joint venture agreements or management contract services and possibly adding additional brand offerings for hotels in larger urban MSAs. Those improvements may involve sales and marketing initiatives, including a focus on the local experience in our markets, improved hotel revenue technologies, additional emphasis on e-commerce revenue and marketing channels and improved operating efficiencies at our owned, leased and franchised hotels. We plan to continue to build on the strength and recognition of the Red Lion brand by seeking to grow our distribution, increase guest awareness and establish guest preference. In turn these initiatives will provide an opportunity for long-term profitability and returns to shareholders.

During 2014, we expect overall economic conditions in the United States will continue to improve, although we believe that conditions in the markets in which we operate will be challenging throughout the year, especially markets that have funded industries or other economic commerce which could be negatively impacted by the effects of federal budget sequestration. While our goal is to deliver improved profitability through the above-described initiatives, there can be no assurance our results of operations will improve.

Employees

As of December 31, 2013, we employed 1,847 people on a full-time or part-time basis, with 1,701 directly related to hotel operations. We also had 95 employees in other operating segments, primarily within our entertainment segment, and 51 employees in our corporate office. Our total number of employees fluctuates seasonally, and we employ many part-time employees.

At December 31, 2013, approximately 6.7% of our total workforce was covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and organized settlement of labor disputes. We believe our employee relations are satisfactory.

Available Information

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

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

8



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

Item 1A.
Risk Factors

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

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

We are committed to keeping our properties well-maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. We are also focused on working with our franchise hotel owners so that they maintain their properties to the same standards. This requires ongoing access to capital for both us and our franchisees for replacement of outdated furnishings as well as for facility repair, modernization and renovation. To the extent we or our franchisees cannot fund these expenditures from cash generated from operations, funds must be borrowed or otherwise obtained. If these funds cannot be obtained, the expenditures have to be deferred to a later period.

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

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

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

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

If we raise capital through issuance of additional common stock, preferred stock or convertible debt, current shareholders may experience significant dilution. Moreover, based on our history of reported net losses, it may be difficult to raise money through equity issuances.

If additional capital is obtained through financing, our leverage may increase. If our leverage increases, the resulting debt service could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions, including increases in interest rates.

We could also seek to raise capital by selling one or more of our owned hotels. However, there is no assurance that we would be able to sell properties at acceptable prices in time to satisfy our capital needs.

Any unanticipated delays or expenses incurred in connection with hotel maintenance and renovation and new project development could impact expected revenues and availability of funds, negatively affect our reputation among hotel customers,

9


owners and franchisees and otherwise adversely impact our results of operations and financial condition, including the carrying costs of our assets.

We have reported net losses from continuing operations from 2008 through 2013, and there is no assurance that we will be able to achieve profitability in the future.

During the years 2008 through 2013, we reported net losses from continuing operations. Not only have these losses had a direct adverse effect on our financial condition, they have also increased our costs of borrowing and could well impair our ability to raise capital needed for hotel maintenance and other corporate purposes. Our 2013 financial statements include net income from discontinued operations of $1.3 million, which was generated by our six hotels that are currently held for sale. If these hotels are sold, it will be difficult to replace these earnings. For all of these reasons, there is no assurance that we will be able to achieve profitability in the future.

At December 31, 2013, as a result of our net operating losses and federal tax credit carryovers, our consolidated balance sheets included deferred tax assets of $18.9 million. Based on our current assessment of future taxable income, we have anticipated that it is more likely than not that we will not generate sufficient taxable income to utilize our net operating losses and federal tax credit carryovers in full, and we therefore recorded a valuation allowance of $5.9 million against these deferred tax assets.

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

Many businesses, including Red Lion, have been adversely affected by the state of the economy. Discretionary travel has decreased because of economic pressures, and this in turn has hurt the hospitality industry and our company. Over the last several years, high unemployment, lower family income, low corporate earnings, lower business investments and lower consumer and government spending all have reduced the demand for hotel rooms and related lodging services and put pressure on industry room rates and occupancy. Although the economy appears to be gradually improving, we still expect the operations of hotels in our network and financial results in 2014 will continue to be negatively impacted by general economic conditions, and weak hospitality occupancy and rates. These factors could also negatively impact our ability to obtain future financing and our liquidity in general. While we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital and debt service for the foreseeable future, if our cash flow or capital resources prove inadequate or we do not meet our financial debt covenants, we could potentially face liquidity problems that could have a material adverse effect on our results of operations and financial condition.

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

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

Changes in demand for transient rooms and related lodging services, including reductions in business and federal, state and local government travel that may result due to budgetary constraints, increase in the use of video conferencing services, or general economic conditions;
Extended periods of low occupancy demand, which may negatively impact our ability to increase rates;
Changes in travel patterns, extreme weather conditions and cancellation of or changes in events scheduled to occur in our markets;
The attractiveness of our hotels to consumers and competition from other hotels and the significant investment in hotel maintenance and renovation needed due to the last five to six years of reduced capital expenditure levels;
The need to periodically repair and renovate the hotels in our hotel network, including the ongoing need to refresh hotels to meet current industry standards and guest expectations;
Insufficient available capital to us or our franchise hotel owners to fund renovations and investments needed to maintain our competitive position;
The quality and performance of the employees of the hotels in our network;
Increases in transportation and fuel costs, the financial condition of the airline industry and the resulting impacts on travel, including possible cancellation or reduction of scheduled flights into our markets and reductions in our business with airlines crews, which regularly stay at our hotels in many markets;
Increases in operating costs due to inflation and other factors such as minimum wage requirements, overtime, healthcare, working conditions, work permit requirements and other labor-related costs, energy prices, insurance and property taxes, as well as increases in construction or associated renovation costs;
Regulations and changes therein relating to the preparation and sale of food and beverages, liquor service and health and safety of premises;
Impact of war, actual or threatened terrorist attacks, heightened security measures and other national, regional or international political and geopolitical conditions;

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Travelers' fears of exposure to contagious diseases or foodborne illness;
The impact of internet intermediaries and competitor pricing;
New supply or oversupply of hotel rooms in markets in which we operate;
Restrictive changes in zoning and similar land use laws and regulations, or in health, safety and environmental laws, rules and regulations;
Recently enacted, pending and possible future requirements to make substantial modifications to our hotels to comply with the Americans with Disabilities Act of 1990 or other governmental or regulatory requirements;
The financial condition of third-party property owners and franchisees, which may impact their ability to fund renovations and meet their financial obligations to us as required under franchise agreements;
Changes in guest expectations with respect to amenities at network hotels that require additional capital to meet; and
Improvements in technology that require capital investment by us or our franchise hotel owners in infrastructure to implement and maintain.

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

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

Of the 55 hotels in our system at December 31, 2013, 36 are located in Oregon, Washington, Idaho and Montana. Accordingly, our results of operations and financial condition may be impacted by the economy of the Pacific Northwest, which is dependent in large part on a limited number of major industries, including agriculture, tourism, technology, timber and aerospace. These industries may be affected by:

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

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

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

The expenses of owning and operating a hotel are not necessarily reduced when circumstances such as market factors and competition cause a reduction in its revenues. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our expenses are unlikely to decrease proportionately. In addition, we have recently been investing in sales and marketing, technology, franchising and personnel resources in an effort to position our company for future growth. These investments may not produce returns we anticipate or the returns may take longer to achieve than expected.

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

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

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

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

We do not currently manage any hotels in our system other than the hotels that we own or lease. However, we have in the past managed hotels that were owned by third parties and operated under the Red Lion brand. We plan going forward to explore the feasibility of offering management contracting services as an additional tool for expanding our hotel network. Management of non-owned hotels would also allow us to take advantage of economies of scale with our infrastructure and resources that will be freed up as we sell additional hotels.

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

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

Competition with other hotel companies, many of which have more franchised and managed hotels in their systems and more resources to assist owners of new franchised and managed hotels with capital expenditures needed to satisfy brand standards;
Our ability to attract and retain qualified franchisees and hotel owners who want us to operate their hotels under one or more of our brands;
The recognition in the market and the reputation of the Red Lion or Leo Hotel Collection brands;
Access to financial resources necessary to open or rebrand hotels;
The ability of the owners of franchised and managed hotels to open and operate additional hotels profitably. Factors affecting the opening of new hotels, or the conversion of existing hotels to the Red Lion or Leo Hotel Collection brands, include, among others:
The availability of hotel management, staff and other personnel;
The cost and availability of suitable hotel locations;
The availability and cost of capital to allow hotel owners and developers to fund investments;
Cost effective and timely construction of hotels (which can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions); and
Securing required governmental permits;
Our ability to continue to maintain and enhance our central reservation system to support additional franchised and managed hotels in a timely, cost-effective manner; and
The effectiveness and efficiency of our development organization.

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

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

As of December 31, 2013, there were 30 hotels in our system that were owned by others and operated under franchise agreements. Franchise agreements generally specify a fixed term and contain an early termination provision for the franchisee to terminate at specific intervals or for specific reasons with or without penalty by providing notice to us. There is no assurance that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms.


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The franchise for the Red Lion Hotel on Fifth Avenue in Seattle is scheduled to terminate in June of 2014. This hotel generated approximately 15% of our total franchise segment revenue during 2013. In addition, we have been notified by one franchise they intend to exit the system in the first few months of 2014. We have two franchise agreements expiring in 2014 and one franchise agreement that provides the ability to exit without penalty in 2014. We have one franchise agreement expiring in 2015. We have five franchise agreements that provide the licensee the ability to terminate without penalty in 2015. We also have one franchise agreement that provides the licensee the ability to terminate at any time without penalty.  

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

The lodging industry is comprised of numerous national, regional and local hotel companies and is highly competitive. Competition for occupancy is focused on three major categories of travelers: business travelers, convention and group business travelers and leisure travelers. All three categories are significant occupancy drivers for our hotel system and our marketing efforts are geared towards attracting their business.

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

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

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

Joint venture arrangements we might enter into may not reflect solely our best interests and may subject these investments to increased risks.

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

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

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

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

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

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

Our entertainment division, which comprised 7.9% of our revenues from continuing operations in 2013, engages in event ticketing and the presentation of various entertainment productions. Our entertainment division is vulnerable to risks associated with general regional and economic conditions, significant competition and changing consumer trends, among others. The overall economy in the markets we serve has impacted the ticketing division through lower demand for concerts, events and sporting activities. Also, we face the risk that entertainment productions will not tour the regions in which we operate or that the productions will not choose us as a presenter or promoter.

Certain of our shareholders, including our largest shareholder which currently owns more than 28% of our stock, have in the past encouraged us to sell our company. These or other shareholders may seek to impact our corporate policy and strategy, and their interests may differ from those of other shareholders. In addition, given the amount of stock held by our largest shareholder, we would likely need its approval in order to undertake any sale or other disposition of all or substantially all of our assets. If any of our larger shareholders or any group of shareholders decided to sell their shares, this would likely result in a significant decline in the trading price of our common stock.

As of December 10, 2012, Columbia Pacific Opportunity Fund, L.P. ("Columbia Pacific") held more than 28% of our outstanding shares of common stock. In June of 2008, Columbia Pacific filed a Schedule 13D with the SEC disclosing that it had communicated to us that it believed we would be better able to maximize shareholder value through a liquidation or sale. It has subsequently filed numerous amendments to the Schedule 13D disclosing additional communications with our company. An amendment filed by Columbia Pacific on February 28, 2012 included a copy of a letter to our board of directors encouraging us to sell our company in its entirety or in parts. A number of other significant shareholders have also expressed to us similar sentiments.

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

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

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

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

Failure to comply with debt covenants could adversely affect our financial results or condition.

Our current credit facility with Wells Fargo is secured by 19 of our properties and contains customary affirmative and negative covenants, the most restrictive of which are financial covenants related to leverage and debt service coverage. We were in compliance with all of these covenants on December 31, 2013. There is no assurance that we will be able to comply with these covenants in the future. Any failure to do so could result in a demand for immediate repayment of our obligations under the facility and any other indebtedness for which such failure or repayment demand constitutes an event of default, which would adversely affect our results of operation and financial condition, and limit our ability to obtain financing. For additional information, see Note 8 of Notes to Consolidated Financial Statements.

We have incurred debt financing and may incur increased indebtedness in connection with capital expenditures, other corporate purposes or growth of our system of hotels.

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 hotel renovations, repairs and replacements, for general corporate purposes or for hotel acquisitions. If our leverage increases, the resulting debt service could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions, including increases in interest rates, and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise. Our indebtedness is, and will likely continue to be, secured by mortgages on our owned hotels. If we are not able to meet our debt service obligations, we risk the loss of some or all of our assets, including our hotels, to foreclosure.

Adverse economic conditions could cause needed capital to be unavailable. In such circumstances, if we had to repay indebtedness, we could be required to sell one or more of our owned hotels at unattractive prices. Economic conditions could result in higher interest rates, which would increase debt service on our variable rate credit facilities and could reduce the amount of cash available for general corporate purposes.

Government regulation could impact our franchise business.

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

Our success depends on the value of our name, image and brands. If demand for our hotels decreases or the value of our name, image or brands 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 presenting 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 actions of any of the hotels in our network. Our brand names and trademarks are integral to our marketing efforts. If the value of our name, image or brands were diminished, our business and operations would be harmed.

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We may be unable to sell our properties that are currently listed for sale or that we might list for sale in the future.

We have listed a number of our properties for sale, including the Red Lion Hotel Wenatchee in Wenatchee, Washington, the Red Lion Hotel Kennewick in Kennewick, Washington, the Red Lion Pocatello in Pocatello, Idaho, the Red Lion Hotel Kelso in Kelso, Washington, the Red Lion Hotel Canyon Springs in Twin Falls, Idaho and the Red Lion Hotel Yakima Center in Yakima, Washington. In addition, we may in the future choose to list other properties for sale. The real estate market, including the market for our hotels, is affected by general economic conditions, availability of financing, interest rates and other factors, including supply and demand, that are beyond our control. Sales of one or more of our properties now or hereafter listed for sale may take longer than anticipated, may not occur at all, or may occur at price points that do not meet all of our objectives for the sales. 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, the sale of hotels may negatively impact the value of the Red Lion brand or our ability to obtain new franchises, particularly if the purchasers continue with the Red Lion flag and do not maintain the hotels in a manner that meets brand standards or guest expectations.

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

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

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

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

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

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

These adverse conditions could potentially cause the terms of our borrowings to change unfavorably. Unfavorable changes in one or more of these conditions could also result in unanticipated expenses and higher operating costs, thereby reducing operating margins and otherwise adversely affecting our results of operations and financial condition.

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

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

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

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

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

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

We launched a new corporate website in January 2013 and subsequently created a new online presence where each of our hotels has its own uniquely focused web identity with information tailored specifically to its region. Our goal with this investment is to increase the number of reservations received directly through our websites, since these are more profitable than those obtained through high commission or fee-based third-party channels. There can be no assurance that this investment will result in an increase of direct reservations through our websites, nor that such increase, if it occurs, will be sufficient to offset the cost of the investment.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We collect and maintain information relating to our guests for various business purposes, including credit card information and information on guest preferences that we use to enhance customer service and for marketing and promotional purposes. The collection and use of personal data are governed by privacy laws and regulations enacted in the U.S., as well as by various contracts under which we operate. Privacy regulation is an evolving area in which different jurisdictions may have inconsistent compliance requirements. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services. In addition, noncompliance with applicable privacy regulations, either by us or in some circumstances by third parties engaged by us or our franchise hotel owners, could result in fines or restrictions on our use or transfer of data.

We are subject to environmental regulations.

Our results of operations may be affected by the cost of complying with existing and future environmental laws, ordinances and regulations. Under federal, state and local environmental laws, ordinances and regulations, a current or previous owner or

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operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under or in the property. These laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances, or the failure to remediate a contaminated property properly, may prevent the owner from selling a property or using it as collateral for a loan. Environmental laws may also restrict the use or transfer of a property as well as the operation of businesses at the property, and they may also impose remedial or compliance costs. The costs of defending against claims of liability or remediating contaminated property and the cost of complying with environmental laws could have an adverse effect on our results of operations and financial condition.

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

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

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

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

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

We have reported the subsurface information for the Pasco property to the Washington State Department of Ecology (“DOE”) under its Voluntary Clean-up Program (“VCP”). The contamination does not appear to be an immediate threat to human health or the environment, and the groundwater does not appear to be threatened. In addition, the soil is capped with asphalt, which limits the exposure to humans or biota from petroleum vapors and reduces the risk of direct contact with contaminated soil. Therefore, we have requested a NFA designation from the DOE. We plan to continue to monitor the affected area and ensure the asphalt cap is maintained. If the DOE does not agree to the NFA designation, we will comply with the DOE requirements for clean-up. Our consultant estimates that clean-up costs will range from $60,000 to $90,000.

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


19


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

We have reported the contamination identified at the Port Angeles property to the DOE under the VCP. We have requested a NFA designation from the DOE. We plan to continue to monitor the affected area and ensure that the asphalt cap is maintained. If the DOE denies the request for a NFA designation, we will comply with the DOE requirements for clean-up of the contaminated area. Our consultant estimates that clean-up costs will range from $250,000 to $350,000, which is higher than the Pasco estimate because of a greater volume of contaminated soil and because groundwater is impacted.

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

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 or operate significant properties. We carry comprehensive liability, public area liability, fire, 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, flood, terrorism and environmental hazards, may exceed or not be covered by our insurance coverage. 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, threatened or actual terrorist activity, war, epidemics, travel-related accidents, geopolitical uncertainty, international conflict and similar events that impact domestic and international travel have caused in the past, and may cause in the future, our results to differ materially from anticipated results. In addition, depending on the severity, a major incident or crisis may prevent operational continuity at hotels in our network and consequently impact the value of our brand or the reputation of our business.

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

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

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.


20


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

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

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

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

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

At the end of 2013 and 2012, our recorded goodwill amount was $8.5 million at the end of each year, and other intangible assets totaled $7.0 million at the end of each year. Market conditions in the future could adversely impact the fair value of one or more of our hotel, franchise and entertainment reporting units, which could result in future impairments of their goodwill, intangibles and other long-lived assets.

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

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

In accordance with the guidance for the impairment of long-lived assets, if the expected undiscounted future cash flows are less than net book value, the excess of net book value over estimated fair value of the assets is charged to current earnings. As discussed further in Note 5 and Note 6 of Notes to Consolidated Financial Statements, during the year ended December 31, 2013, assets, including assets that were held for sale with a carrying amount of $24.9 million were written down to their estimated fair value, resulting in pre-tax impairment charges to discontinued operations of $8.9 million. During the year ended December 31, 2012, assets that were held for sale with a carrying amount of $61.1 million were written down to their estimated fair value, resulting in pre-tax impairment charges to continuing operations of $9.4 million and pre-tax impairment charges to discontinued operations of $6.9 million. During the year ended December 31, 2011 assets that were held for sale with a carrying amount of $39.8 million were written down to their estimated fair value, resulting in pre-tax impairment charges to continuing operations of $8.9 million and pre-tax impairment charges to discontinued operations of $0.6 million. In addition, during our annual impairment testing, we determined that the carrying amount of the hotel reporting unit exceeded its fair value and accordingly, a goodwill impairment charge of the remaining $14.2 million in the hotel reporting unit was recognized. Changes in our estimates and assumptions as they relate to valuation of goodwill, intangibles and other long-lived assets could affect, potentially materially, our financial condition or results of operations in the future.

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The market price for our common stock may be volatile.

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

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

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

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

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Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

Under the Red Lion Brands as of December 31, 2013, we owned 19 hotels, leased six, and had franchise arrangements with 30 hotels owned and operated by third parties. To support our owned, leased and franchised hotels, we provide all the services typical in our industry: marketing, sales, advertising, frequency program, revenue management, procurement, quality assurance, education and training, design and construction management. We maintain a central reservation call center with links to various travel agent global distribution systems and electronic distribution channels on the internet, including our branded website. The table below reflects our hotel properties and locations, total available rooms per hotel, as well as meeting space availability, as of December 31, 2013.

 
  
 
  
Total
 
Meeting
 
 
 
 
Available
 
Space
Property
 
Location
 
Rooms
 
(sq. ft.)
Red Lion Owned Hotels
 
 
 
 
 
 
Red Lion Hotel Eureka
  
Eureka, California
  
175

  
4,890

Red Lion Hotel Redding
  
Redding, California
  
192

  
6,800

Red Lion Hotel Boise Downtowner
  
Boise, Idaho
  
182

  
8,600

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

  
11,000

Red Lion Hotel Pocatello(1)
  
Pocatello, Idaho
  
150

  
13,000

Red Lion Hotel Canyon Springs(1)
  
Twin Falls, Idaho
  
112

  
5,085

Red Lion Hotel Bend
  
Bend, Oregon
  
75

  
2,000

Red Lion Hotel Coos Bay
  
Coos Bay, Oregon
  
145

  
5,000

Red Lion Hotel Salt Lake Downtown
  
Salt Lake City, Utah
  
393

  
12,000

Red Lion Hotel Olympia
  
Olympia, Washington
  
192

  
16,500

Red Lion Hotel Pasco
  
Pasco, Washington
  
279

  
17,240

Red Lion Hotel Port Angeles
  
Port Angeles, Washington
  
186

  
3,010

Red Lion Hotel Richland Hanford House
  
Richland, Washington
  
149

  
9,247

Red Lion Bellevue
  
Bellevue, Washington
  
181

  
5,700

Red Lion Hotel at the Park
  
Spokane, Washington
  
400

  
30,000

Red Lion Hotel Columbia Center(1)
  
Kennewick, Washington
  
162

  
9,700

Red Lion Hotel & Conference Center Kelso/Longview(1)
  
Kelso, Washington
  
161

  
8,670

Red Lion Hotel Wenatchee(1)
  
Wenatchee, Washington
  
149

  
7,678

Red Lion Hotel Yakima Center(1)
  
Yakima, Washington
  
156

  
11,000

Owned Hotels (19 properties)
  
 
  
3,602

 
187,120

 
 
 
 
 
 
 
Red Lion Leased Hotels
  
 
  
 
 
 
Red Lion Anaheim
  
Anaheim, California
  
308

  
5,000

Red Lion Hotel Kalispell (5)
  
Kalispell, Montana
  
170

  
10,500

Red Lion Hotel Eugene(6)
  
Eugene, Oregon
  
137

  
5,600

Red Lion River Inn
  
Spokane, Washington
  
245

  
2,800

Red Lion Hotel Seattle Airport
  
Seattle, Washington
  
144

  
4,500

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

  
14,785

Leased Hotels (6 properties)
 
 
 
1,164

  
43,185



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

  
 450

Red Lion Inn & Suites Phoenix/Tempe - ASU
 
Tempe, Arizona
 
162

 
1,300

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

 
750

Red Lion Hotel Oakland International Airport
  
Oakland, California
  
189

  
4,400

Red Lion Hotel Woodlake Conference Center Sacramento
 
Sacramento, California
 
306

 
60,000

Red Lion Inn Rancho Cordova
  
Rancho Cordova, California
  
109

  

Red Lion Hotel Ontario Airport
 
Ontario, California
 
107

 
687

Red Lion Inn & Suites Perris
 
Perris, California
 
105

 

Red Lion Hotel Denver Southeast(3)
  
Aurora, Colorado
  
478

  
25,000

Red Lion Inn & Suites Denver Airport
 
Denver, Colorado
 
87

 

Red Lion Hotel Lewiston
  
Lewiston, Idaho
  
183

  
12,259

Red Lion Colonial Hotel(3)
  
Helena, Montana
  
149

  
15,500

Red Lion Inn Missoula(4)
  
Missoula, Montana
  
76

  
640

Red Lion Hotel Farmington
  
Farmington, New Mexico
  
192

  
10,000

Red Lion Hotel Gallup
  
Gallup, New Mexico
  
126

  
9,000

Red Lion Hotel Grants
  
Grants, New Mexico
  
126

  
9,000

Red Lion Hotel & Casino Elko
  
Elko, Nevada
  
222

  
3,000

Red Lion Inn & Suites McMinnville
  
McMinnville, Oregon
  
67

  
1,312

Red Lion Hotel Portland Airport
  
Portland, Oregon
  
136

  
3,000

Red Lion Hotel 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 Pendleton(4)
  
Pendleton, Oregon
  
170

  
9,769

Red Lion Hotel on Fifth Avenue(2)
  
Seattle, Washington
  
297

  
13,800

Red Lion Hotel Tacoma
  
Tacoma, Washington
  
119

  
750

Red Lion Inn & Suites Kennewick
 
Kennewick, Washington
 
61

 
300

Red Lion Inn & Suites Kent
 
Kent, Washington
 
60

 
600

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

 

Las Vegas Hotel and Casino - LVH(7)
 
Las Vegas, Nevada
 
2,956

 
220,000

The Riverside Hotel - Boise(7)
 
Boise, Idaho
 
300

 
21,000

Franchised Hotels (30 properties)
  
 
  
7,685

  
473,517

 
  
 
  
 
 
 
Total — All Hotels (55 properties)
  
 
  
12,451

  
703,822

__________ 
(1) At December 31, 2013 these hotels were listed for sale and identified as discontinued operations.
(2) This hotel was previously owned by our company but was sold in June 2011 and upon sale the purchaser entered into a franchise agreement.
(3) These hotels were previously owned by our company but were sold in 2012 and upon sale the purchasers entered into franchise agreements.
(4) These hotels were previously owned by our company but were sold in 2013 and upon sale the purchasers entered into franchise agreements.
(5) In April 2013, we sold the Kalispell Center Mall property to which this hotel was attached. Concurrent with the sale, we entered into a lease agreement to continue operating the hotel.
(6) In the fourth quarter of 2013, we entered into an agreement to assign the ground lease for our hotel in Eugene, Oregon and cease operating the hotel in January 2014.
(7) These properties are part of the Leo Hotel Collection.

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Owned and Leased Hotels

Owned hotels are those properties which we operate and manage and have ownership of the hotel facility, other structures and the land. We recognize revenues and expenses on these properties, including depreciation where appropriate.

Leased hotels are properties we operate and manage where we may have ownership of some or all of the equipment and personal property on site, but where either the land and hotel facility or the underlying land is under an operating lease from a third party. We recognize revenues and expenses on these properties, including lease expense. These leases require us to pay fixed monthly rent and have expiration dates in 2016 and beyond. In addition, we are responsible for repairs and maintenance, operating expenses and management of operations. For additional information on leases, refer to Note 15 of Notes to Consolidated Financial Statements.

Franchised Hotels

Under our franchise agreements, we receive royalties for the use of the Red Lion Brands. We also make available certain services to those hotels including reservation systems, advertising and national sales, our guest loyalty program, revenue management tools, quality inspections and brand standards, as well as administer central services programs for the benefit of all the hotels in our network.
 
At December 31, 2013, our network of hotels included 30 hotels under franchise agreements, representing a total of 7,685 rooms and 473,517 square feet of meeting space.
Discontinued Operations
 
During the fourth quarter of 2013, we listed the following properties for sale: Red Lion Hotel Canyon Springs in Twin Falls, Idaho ("Canyon Springs property") , the Red Lion Hotel Columbia Center in Kennewick, Washington ("Kennewick property"), the Red Lion Hotel & Conference Center Kelso/Longview in Kelso, Washington ("Kelso property"), the Red Lion Hotel Pocatello in Pocatello, Idaho ("Pocatello property"), the Red Lion Hotel Wenatchee in Wenatchee, Washington ("Wenatchee property") and the Red Lion Hotel Yakima Center in Yakima, Washington ("Yakima property"). We do not expect to maintain significant involvement with the listed properties after they are sold. Additionally in the fourth quarter, we entered into an agreement to assign our lease related to our Red Lion Hotel Eugene in Eugene, Oregon ("Eugene property") to a third party and cease operation of the hotel in January 2014. Therefore we have classified the operating results of these hotels as discontinued operations in the consolidated statements of comprehensive income (loss) for all periods presented.

During the third quarter of 2013 we sold the Red Lion Hotel Medford in Medford, Oregon ("Medford property") for $2.8 million. This property was listed for sale in the fourth quarter of 2011. We no longer have continuing involvement in this property; therefore the operations of this property remain classified as discontinued operations for all periods presented.

During the second quarter of 2013 we closed on the sale of the Kalispell Center Mall property in Kalispell, Montana ("Kalispell Mall property") for $11.6 million. This property was listed for sale in the third quarter of 2012. As required by the terms of our credit facility, we made a principal payment in the amount of $8.8 million when the sale closed. Concurrent with the sale, we entered into a lease agreement with the buyer under which we are leasing and operating the attached Red Lion Hotel Kalispell for an initial term of 15 years with options for three renewal terms of five years each. The agreement provides for lease payments of $0.5 million per year for the first 45 months, with annual increases thereafter of 2% per year. The operating results from the ownership of the Kalispell Mall property have been appropriately classified as discontinued operations in the consolidated statements of comprehensive income (loss) for all periods presented.

During the first quarter of 2013, we terminated a catering contract in Yakima, Washington. Accordingly, all operations under this contract have been classified as discontinued operations in our consolidated statements of comprehensive income (loss) for all periods presented. Certain property and equipment related to these operations were considered abandoned and a pre-tax loss on disposition of assets of $70,000 has been recognized in discontinued operations.

During the third quarter of 2012, we sold our real estate property in Sacramento, California to its tenant and the Company reclassified the real estate and land into assets held for sale.  The operating results from the ownership of this real estate and land have been appropriately classified as discontinued operations in the consolidated statements of comprehensive income (loss) for all periods presented.


25


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

For additional information, see Note 5 and Note 6 of Notes to Consolidated Financial Statements.

Item 3.
Legal Proceedings

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

Item 4.
Mine Safety Disclosures

Not applicable.

Item 4A.
Executive Officers of the Registrant

Name
 
Age
 
Position
Gregory T. Mount
 
 
53

 
 
President and Chief Executive Officer
Julie Shiflett
 
 
46

 
 
Executive Vice President, Chief Financial Officer
Harry G. Sladich
 
 
52

 
 
Executive Vice President, Hotel Operations and Sales
William J. Linehan
 
 
48

 
 
Executive Vice President, Chief Marketing Officer
Thomas L. McKeirnan
 
 
45

 
 
Executive Vice President, General Counsel and Secretary
Jack G. Lucas
 
 
61

 
 
Vice President and President, TicketsWest

Gregory T. Mount. Mr. Mount joined our company as President and Chief Executive Officer in January 2014. From November 2009 to January 2014, he served as President of Richfield Hospitality, Inc., a hotel management company based in Denver, Colorado. From January 2007 to November 2009, he served as a Senior Vice President of Acquisitions at Sage Hospitality Resources, LLC, a hotel management, investment and development company. From 1998 to 2006, Mr. Mount held various senior development and operations positions with Starwood Hotels & Resorts Worldwide, Inc. From 1990 to 1998, he served in several management positions at Interstate Hotels & Resorts, Inc. From 1982 to 1990, he worked in various operational roles at Marriott International, Inc. In early 2011, a staffing services company operated by Mr. Mount’s wife filed a petition for reorganization under federal bankruptcy laws. That case was administratively consolidated with a second reorganization case filed by the Mounts, who had personally guaranteed the commercial loan used to acquire the company. A joint plan of reorganization was confirmed in the fall of 2011, and in 2012 orders were entered finding both cases fully administered and discharging the individual debtors.

Julie Shiflett.  Ms. Shiflett was appointed Executive Vice President, Chief Financial Officer effective September 1, 2011. Ms. Shiflett has been with Red Lion Hotels since October 2010 when she was hired under a contract to serve as Vice President of Finance. She is a principal of NW CFO, a financial consulting company she founded in 2008 which assists emerging and mid-market companies with activities including strategic planning, forecasting, and recapitalization. She served as Chief Financial Officer of Signature Genomic Laboratories in Spokane, Washington, in 2009 and 2010. Prior to that, Ms. Shiflett was Vice President and Chief Financial Officer of Columbia Paint and Coatings from 2006 to 2009 and Vice President of Finance and Administration of Riley Creek Lumber Company from 2001 until 2006. Her accounting career began at Coopers & Lybrand in Spokane. Ms. Shiflett also currently serves on two boards, Northwest Farm Credit Services, ACA, an $8 billion financial institution and American Chemet Corporation, a chemical manufacturing company.

Harry G. Sladich.   Mr. Sladich has served as Executive Vice President, Hotel Operations and Sales since February 2014. He previously had served as Executive Vice President of Sales, Marketing & Distribution since joining our company in March 2010.  A 35-year veteran of the hospitality industry, Mr. Sladich served as President and CEO of the Spokane Regional Convention and Visitors Bureau from 2005 to 2010, where he played a key role in building and selling the Washington State image.  Earlier in his career, Mr. Sladich was Vice President of Sales and Marketing for Sterling Hospitality, hotel developers and operators of several franchises including Holiday Inn Express, Hampton Inn and Quality Inn.  Before working for Sterling Hospitality, he was General Manager of Hotel Lusso, an upscale boutique hotel in Spokane, and was Vice President of National Sales for Guestmark International (GMI), a national hotel marketing company based in Boston.  Mr. Sladich has also worked for Sheraton Hotels in both hotel operations and food and beverage. Mr. Sladich serves on two prominent national industry boards, including the U.S.

26


Travel Association and Destination & Travel Foundation Board of Trustees.  In addition, former Washington State Governor Christine Gregoire appointed Mr. Sladich to the board of Washington Filmworks, which manages the state incentive programs for films produced in Washington, and to the Washington State Convention Center Board of Directors.  He has also served on the board for the Western Association of Convention & Visitors Bureaus (WACVB) and the Boys & Girls Clubs of Spokane County.
 
William J. Linehan. Mr. Linehan joined our company as Executive Vice President, Chief Marketing Officer in February 2014. From 2009 until he joined us, he served as Chief Marketing Officer of Richfield Hospitality, Inc., a hotel management company based in Denver, Colorado. From 2006 to 2008, he served as Vice President, Global Marketing of InterContinental Hotels Group. From 2002 to 2006, Mr. Linehan was the Global Vice President of Marketing, Brand Alignment and Partnership at Starwood Hotels & Resorts Worldwide, Inc. Prior to joining Starwood, he had since 1987 held various hotel management positions.

Thomas L. McKeirnan.    Mr. McKeirnan has been Executive Vice President, General Counsel and Secretary since February 2013. He served as Senior Vice President, General Counsel and Secretary from February 2005 through January 2013. He has been with our company since July 2003. 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. McKeirnan's 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. Mr. McKeirnan serves as a director and Chairman of the Nominating and Corporate Governance Committee of the Board of Directors of St. Augustine Gold & Copper Ltd. He also serves on the Executive Committee of the Board of Trustees of Gonzaga Preparatory School.

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 29 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. In 2013, Mr. Lucas earned the prestigious International Ticketing Association INTIX Patricia Spira Lifetime Achievement Award.

PART II

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

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

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

 
$
5.10

     Third Quarter (ended September 30, 2013)
$
6.73

 
$
5.22

     Second Quarter (ended June 30, 2013)
$
7.15

 
$
5.85

     First Quarter (ended March 31, 2013)
$
9.30

 
$
5.63

2012
 
 
 
     Fourth Quarter (ended December 31, 2012)
$
8.13

 
$
5.52

     Third Quarter (ended September 30, 2012)
$
8.65

 
$
5.97

     Second Quarter (ended June 30, 2012)
$
8.73

 
$
7.76

     First Quarter (ended March 31, 2012)
$
8.80

 
$
6.75

(b) The closing sale price of the common stock on the NYSE on February 28, 2014 was $5.97. As of that date, there were approximately 125 shareholders of record of the common stock.

27


(c) We did not pay any cash dividends on our common stock during the last two fiscal years. The board of directors periodically reviews our dividend policy and our longer-term objectives of maximizing shareholder value. Any determination to pay cash dividends in the future will be at the discretion of our board.
(d) The following table provides information as of December 31, 2013 on plans under which equity securities may be issued to employees, directors or consultants:
 
 
  
(a)
 
(b)
 
(c)
 
 
 
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders:
  
 
  
 
 
 
 
1998 Stock Incentive Plan(1)
  
13,000

  
$
6.55

 

 
2006 Stock Incentive Plan
  
154,607

(2)
$
9.74

 
639,953

Equity Compensation Plans Not Approved by Security Holders
  

  
$

 

 
 
 
 
 
 
 
 
 
Total
  
167,607

  
$
9.49

 
639,953


__________
(1) No further grants will be made under the 1998 Stock Incentive Plan.
(2) Includes 303,749 restricted stock units under the 2006 Stock Incentive Plan, which are not included in the calculation of the Weighted-Average Exercise Price column.

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



* $100 invested on December 31, 2008 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

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, 2013, 2012, 2011, 2010 and 2009. The selected consolidated statements of comprehensive income (loss) and balance sheet data are derived from our audited consolidated financial statements. The audited consolidated financial statements for certain of these periods are included elsewhere in this annual report. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified in their entirety by, our consolidated financial statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this annual report and in our prior filings with the SEC.
 
 
 
 
Year ended December 31,
 
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
(In thousands, except per share data)
Consolidated Statements of Comprehensive Income (Loss) Data
 
 
 
 
 
 
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
120,055

 
$
128,294

 
$
132,388

 
$
136,558

 
$
136,416

 
Goodwill impairment  (4)
 

 

 
14,236

 

 

 
Asset impairment  (3,4,6)
 

 
9,440

 
8,417

 

 
8,509

 
Gain on asset dispositions (4)
 
(148
)
 
(164
)
 
(33,379
)
 
(48
)
 
(269
)
 
Restructuring expenses (6)
 

 

 

 

 
136

 
Operating expenses (1,2,3,4,5,6)
 
124,483

 
139,064

 
124,577

 
135,728

 
138,818

 
Operating income (loss) (2,3,4,5,6)
 
(4,428
)
 
(10,770
)
 
7,811

 
830

 
(2,402
)
 
Income (loss) from continuing operations (2,3,4,5,6)
 
(8,719
)
 
(11,161
)
 
(5,884
)
 
(5,042
)
 
(6,642
)
 
Earnings (loss) per share attributable to Red Lion
 
 
 
 
 
 
 
 
 
 
 
  Hotels Corporation from continuing operations:
 
 
 
 
 
 
 
 
 
 
 
  Basic (2,3,4,5,6)
 
$
(0.45
)
 
$
(0.58
)
 
$
(0.31
)
 
$
(0.27
)
 
$
(0.37
)
 
  Diluted (2,3,4,5,6)
 
$
(0.45
)
 
$
(0.58
)
 
$
(0.31
)
 
$
(0.27
)
 
$
(0.37
)
Discontinued Operations:
 
 
 
 
 
 
 
 
 
 
 
Loss on disposal and impairment of the assets of the discontinued business units, net of income tax expense (benefit) (7)
 
$
(9,631
)
 
$
(4,526
)
 
$
(369
)
 
$
(3,696
)
 
$
(116
)
 
Income (loss) from operations of discontinued business units, net of income tax expense (benefit)
 
1,303

 
1,006

 
(809
)
 
118

 
95

 
Earnings (loss) per share from discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 Basic (7)
 
$
(0.42
)
 
$
(0.18
)
 
$
(0.07
)
 
$
(0.20
)
 
$

 
 Diluted (7)
 
$
(0.42
)
 
$
(0.18
)
 
$
(0.07
)
 
$
(0.20
)
 
$

Net Income (Loss) attributable to Red Lion Hotels Corporation
 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
 
$
(8,610
)
 
$
(6,663
)
Earnings (Loss) per share attributable to Red Lion Hotels Corporation
 
 
 
 
 
 
 
 
 
 
 
Basic (2,3,4,5,6,7)
 
$
(0.87
)
 
$
(0.76
)
 
$
(0.38
)
 
$
(0.47
)
 
$
(0.37
)
 
Diluted (2,3,4,5,6,7)
 
$
(0.87
)
 
$
(0.76
)
 
$
(0.38
)
 
$
(0.47
)
 
$
(0.37
)
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
19,575

 
19,327

 
19,053

 
18,485

 
18,106

 
Diluted
 
19,575

 
19,327

 
19,053

 
18,485

 
18,106



29


 
 
 
Year ended December 31,
 
 
 
2013
 
2012
 
2011
 
2010
 
2009
 
 
 
(In thousands, except per share data)
Non-GAAP Data (8)
 
 
 
 
 
 
 
 
 
 
 
EBITDA (2,3,4,5,6,7)
 
$
1,865

 
$
(422
)
 
$
25,139

 
$
16,444

 
$
18,724

 
EBITDA from continuing operations (2,3,4,6)
 
8,394

 
2,407

 
23,708

 
18,004

 
14,693

Consolidated Statement of Cash Flow Data
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
7,087

 
$
13,470

 
$
1,797

 
$
19,487

 
$
15,692

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

 
12,347

 
21,611

 
(10,428
)
 
(16,970
)
 
Net cash (used in) provided by financing activities
 
(6,947
)
 
(21,321
)
 
(25,439
)
 
(8,932
)
 
(13,059
)
Consolidated Balance Sheet Data
 
 
 
 
 
 
Cash
 
$
13,058

 
$
6,477

 
$
1,981

 
$
4,012

 
$
3,881

 
Assets held for sale
 
18,346

 
18,288

 
30,380

 

 

 
Property and equipment, net
 
166,356

 
195,012

 
232,589

 
272,030

 
285,601

 
Total assets
 
234,626

 
260,942

 
304,896

 
331,482

 
350,636

 
Total debt
 
43,058

 
49,178

 
70,496

 
95,152

 
106,322

 
Debentures due Red Lion Hotels Capital Trust
 
30,825

 
30,825

 
30,825

 
30,825

 
30,825

 
Total liabilities
 
97,417

 
108,034

 
139,031

 
160,717

 
175,614

 
Total Red Lion Hotels Corporation stockholders' equity
 
137,209

 
152,908

 
165,865

 
170,765

 
175,022

__________
(1)
Operating expenses include all direct segment expenses, depreciation and amortization, gain (loss) on asset disposals from continuing operations, hotel facility and land lease and undistributed corporate expenses.
(2)
During 2013, the Company recorded $0.6 million in pre-tax separation costs in continuing operations. Of this, $0.4 million relates to the costs associated with the retirement of the former President and Chief Executive Officer and the remaining $0.2 million relates to the separation of the former Executive Vice President and Chief Operating Officer.
(3)
During 2012, we recorded $9.4 million in pre-tax impairment charges related to the Missoula, Helena, Denver Southeast and Pendleton properties.
(4)
During 2011, we recorded a $14.2 million pre-tax impairment charge to our goodwill and $8.4 million in pre-tax impairment charges related to the Helena, Missoula and Denver Southeast and the Red Lion Hotel Vancouver at the Quay in Vancouver, Washington ("Vancouver property") properties. Additionally, we recorded a pre-tax gain of $33.5 million from the sale of the Seattle property.
(5)
During 2010, we recorded $1.2 million in pre-tax costs resulting from the separation of our former President and Chief Executive Officer.
(6)
During 2009, we recorded an $8.5 million pre-tax impairment charge related to the Denver Southeast property, as well as $0.1 million in restructuring charges.
(7)
Items included in discontinued operations: The 2013 balance includes pre-tax impairment charges of $8.9 million related to the Yakima, Canyon Springs, Pocatello, Kelso, Wenatchee and Eugene properties. The 2012 balance includes pre-tax impairment charges of $6.9 million on the Medford, Sacramento and Kalispell Mall properties. The 2011 balance includes a pre-tax impairment charge of $0.6 million on the Medford property. The 2010 balance includes a $5.7 million pre-tax impairment charge related to the termination of a sublease agreement. The 2009 balance includes a pre-tax impairment charge of $0.2 million on one hotel property.     
(8)
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is a non-GAAP measure that represents net income (loss) attributable to Red Lion Hotels Corporation 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, ongoing operations. We believe it is a complement to net income (loss) attributable to Red Lion Hotels Corporation and other financial performance measures.
We use EBITDA to measure our financial performance because we believe interest, taxes and depreciation and amortization bear little or no relationship to our operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. We generally pay federal and state income taxes on a consolidated basis, taking into account how the applicable taxing laws apply to us in the aggregate. By excluding taxes on income, we believe EBITDA provides a basis for measuring the financial performance of our operations

30


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. In addition, we believe financial performance measurements from continuing operations provide more relevant information as they reflect results of our ongoing operations.
However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as defined by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net income (loss) attributable to Red Lion Hotels Corporation, 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 (loss), net income (loss), cash flow from operating activities or any other measure of performance prescribed by GAAP.
The following is a reconciliation of EBITDA and EBITDA from continuing operations to net income (loss) attributable to Red Lion Hotels Corporation for the periods presented:
 
 
Year ended December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
EBITDA from continuing operations
 
$
8,394

 
$
2,407

 
$
23,708

 
$
18,004

 
$
14,693

       Income tax (expense) benefit - continuing operations
 
751

 
6,339

 
(5,771
)
 
2,727

 
3,851

       Interest expense - continuing operations
 
(5,516
)
 
(6,959
)
 
(8,355
)
 
(9,012
)
 
(8,399
)
       Depreciation and amortization - continuing operations
 
(12,348
)
 
(12,941
)
 
(15,552
)
 
(16,751
)
 
(16,787
)
Income (loss) attributable to Red Lion Hotels Corporation from continuing operations
 
(8,719
)
 
(11,154
)
 
(5,970
)
 
(5,032
)
 
(6,642
)
Income (loss) from discontinued operations
 
(8,328
)
 
(3,520
)
 
(1,178
)
 
(3,578
)
 
(21
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
 
$
(8,610
)
 
$
(6,663
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 
 
2013
 
2012
 
2011
 
2010
 
2009
EBITDA
 
$
1,865

 
$
(422
)
 
$
25,139

 
$
16,444

 
$
18,724

Income tax (expense) benefit
 
751

 
8,522

 
(4,893
)
 
4,937

 
4,070

Interest expense
 
(5,516
)
 
(6,959
)
 
(8,373
)
 
(9,073
)
 
(8,503
)
Depreciation and amortization
 
(14,147
)
 
(15,815
)
 
(19,021
)
 
(20,917
)
 
(20,954
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
 
$
(8,609
)
 
$
(6,663
)

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

Introduction

We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, operation and franchising of hotels under our proprietary brands, including Red Lion Hotels, Red Lion Inns & Suites, and the Leo Hotel Collection (the “Red Lion Brands”). Established over 30 years ago, the Red Lion brand is regionally recognized and is particularly well known in the western United States, where our hotels are located.


31


As of December 31, 2013, our hotel network was comprised of 55 hotels located in 10 states and one Canadian province, with 12,451 rooms and 703,822 square feet of meeting space as provided below:
 
 
Hotels
 
Total
Available
Rooms
 
Meeting
Space
(sq. ft.)
Red Lion Owned and Leased Hotels:
 
 
 
 
 
 
   Continuing Operations
 
18

 
3,739

 
169,572

   Discontinued Operations
 
7

 
1,027

 
60,733

Red Lion Franchised Hotels
 
30

 
7,685

 
473,517

Total
 
55

 
12,451

 
703,822


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, 2013, we operated 25 hotels, seven of which are classified as discontinued operations and not included in any reported hotel statistics from continuing operations. Of our 25 hotels, 19 are wholly-owned and six are leased. During 2013 our hotel segment accounted for approximately 85.9% of total revenues.
The franchise segment is engaged primarily in licensing the Red Lion Brands to franchisees. This segment generates revenue from franchise fees that are typically based on a percent of room revenues and are charged to hotel owners in exchange for the use of our brands and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. As of December 31, 2013, we had 30 franchise hotels with 28 under the Red Lion brand and two hotels under the Leo Hotel Collection. During 2013 our franchise segment accounted for approximately 5.9% of total revenues.
The entertainment segment derives revenues from promotion and presentation of entertainment productions under the trade name WestCoast Entertainment, and from ticketing services under the trade name TicketsWest. The ticketing service business offers ticketing inventory management systems, call center services, and outlet/electronic channel distribution for event locations. During 2013 our entertainment segment accounted for approximately 7.9% of total revenues.

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

Results of Operations

Our reported numbers for the periods presented in this report reflect results of the Seattle, Helena, Denver Southeast, Missoula and Pendleton properties for the full years prior to their sales, but only for partial years in the years in which they were sold. These properties were reported in continuing operations since we have significant continuing involvement in the operations of these properties that now operate as franchised hotels. In order to help investors distinguish changes from results of continuing operations versus changes due to the sales of these hotel properties, we will discuss operating results from continuing operations as reported and also discuss certain operating results and data for periods included in the report on a comparable hotel basis. Comparable hotels are properties reported in continuing operations that are owned or leased by us for the entirety of the reporting periods being compared. Therefore, the Seattle, Helena, Denver Southeast, Missoula and Pendleton properties are excluded from the comparable owned and leased hotel statistics and operating results.

During the year ended December 31, 2013, we reported a net loss of $17.0 million or $0.87 per share. The net loss includes non-cash, pre-tax impairment charges of $8.9 million on the Yakima, Canyon Springs, Pocatello, Kelso, Wenatchee and Eugene properties which are included in discontinued operations. In addition, the net loss is impacted by a $5.9 million valuation allowance recorded during the year related to our deferred tax assets. The 2013 net loss also includes $0.6 million of expense related to the retirement of our former President and Chief Executive Officer and the separation of our former Executive Vice President and Chief Operating Officer.

For the year ended December 31, 2012, our net loss was $14.7 million or $0.76 per share, which includes an aggregate of $9.4 million in non-cash, pre-tax asset impairment charges related to the Helena, Denver Southeast, Missoula and Pendleton properties. The net loss also includes non-cash, pre-tax impairment charges of $6.9 million on the Medford and Kalispell Mall properties and the Red Lion Hotel Sacramento ("Sacramento" property) which are included in discontinued operations.


32


For the year ended December 31, 2011, our net loss was $7.1 million or $0.38 per share, which includes non-cash, pre-tax goodwill and asset impairment charges in continuing operations of $14.2 million and $8.9 million respectively and a $33.5 million pre-tax gain on the sale of the Seattle property. During the fourth quarter of 2011, we determined that the carrying amount of the hotel reporting unit exceeded its fair value, which was estimated based on a combined income and market approach. Accordingly, a pre-tax goodwill impairment charge of $14.2 million was recognized in the hotel reporting unit. The goodwill did not have any tax basis, which resulted in a permanent difference between book and tax income and the unusual situation of having income tax expense for the year on a book loss. The pre-tax asset impairment charges to continuing operations were on the Helena, Denver Southeast, Missoula and Vancouver properties. The Helena and Denver Southeast properties were listed for sale (and subsequently sold in 2012) and were written down to their estimated fair value less estimated costs to sell. The Missoula property was listed for sale in 2011 (and was sold in the first quarter of 2013) and was written down to its estimated fair value less estimated costs to sell. The Vancouver property is subject to a right of way acquisition by the state to build a replacement bridge, and we have determined the carrying value is not recoverable. The net loss in 2011 also includes a $0.6 million pre-tax asset impairment charge in discontinued operations related to the Medford property.

For the year ended December 31, 2013, earnings before interest, taxes, depreciation and amortization ("EBITDA") from continuing operations was $8.4 million, compared to $2.4 million for the year ended December 31, 2012, which includes the $9.4 million in pre-tax asset impairment charges. EBITDA from continuing operations can be found in a separate table below.

A summary of our consolidated statements of comprehensive income (loss) is provided below (in thousands):
 
 
Year ended December 31,
 
 
2013
 
2012
 
2011
Total revenue
 
$
120,055

 
$
128,294

 
$
132,388

Total operating expenses
 
124,483

 
139,064

 
124,577

Operating income (loss)
 
(4,428
)
 
(10,770
)
 
7,811

Other income (expense):
 
 
 
 
 
 
Interest expense
 
(5,516
)
 
(6,959
)
 
(8,355
)
Other income, net
 
474

 
229

 
431

Income (loss) from continuing operations before taxes
 
(9,470
)
 
(17,500
)
 
(113
)
Income tax expense (benefit)
 
(751
)
 
(6,339
)
 
5,771

Income (loss) from continuing operations
 
(8,719
)
 
(11,161
)
 
(5,884
)
Income (loss) from discontinued operations
 
(8,328
)
 
(3,520
)
 
(1,178
)
Net income (loss)
 
$
(17,047
)
 
$
(14,681
)
 
$
(7,062
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
Earnings (loss) per share - basic & diluted
 
$
(0.87
)
 
$
(0.76
)
 
$
(0.38
)
Non-GAAP data:
 
 
 
 
 
 
EBITDA
 
$
1,865

 
$
(422
)
 
$
25,139

EBITDA from continuing operations
 
$
8,394

 
$
2,407

 
$
23,708

The following table (in thousands) details the impact to EBITDA from continuing operations of certain unusual items as discussed below:
 
 
2013
 
2012
 
2011
Asset impairment charges (2,3)
 
$

 
$
(9,440
)
 
$
(8,871
)
Goodwill impairment  (3)
 

 

 
(14,236
)
Gain on asset disposition (3)
 

 

 
33,549

Separation costs (1)
 
(582
)
 

 

Impact on EBITDA from continuing operations
 
$
(582
)
 
$
(9,440
)
 
$
10,442

__________

(1)
During the third quarter of 2013, the Company recorded $0.6 million in pre-tax separation costs in continuing operations. Of this, $0.4 million relates to the costs associated with the retirement of the former President and Chief Executive officer and the remaining $0.2 million relates to the separation of the former Executive Vice President and Chief Operating Officer.

33



(2)
During 2012, we recorded $9.4 million in pre-tax impairment charges related to the Helena, Denver Southeast, Missoula and Pendleton properties. At December 31, 2012, the Helena and Denver Southeast properties had been sold and the Missoula and Pendleton properties were sold during the year ended December 31, 2013.

(3)
During 2011, we recorded a $14.2 million pre-tax impairment charge to our hotel segment goodwill and $8.9 million in pre-tax impairment charges related to the Helena, Denver Southeast, Missoula and Vancouver properties. During the second quarter of 2011, we recorded a pre-tax gain of $33.5 million from the sale of the Seattle property.

Revenue

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

Revenue From Continuing Operations

 
 
 
2013 vs. 2012
 
2012 vs. 2011
 
2013
 
2012
 
2011
 
$ Change
% Change
 
$ Change
% Change
Hotels:
 
 
 
 
 
 
 
 
 
 
 
Rooms
$
78,536

 
$
85,074

 
$
85,544

 
$
(6,538
)
(7.7
)%
 
$
(470
)
(0.5
)%
Food and beverage
21,858

 
25,275

 
27,330

 
(3,417
)
(13.5
)%
 
(2,055
)
(7.5
)%
Other department
2,744

 
3,161

 
3,757

 
(417
)
(13.2
)%
 
(596
)
(15.9
)%
Total hotels segment revenue
103,138

 
113,510

 
116,631

 
(10,372
)
(9.1
)%
 
(3,121
)
(2.7
)%
Franchise
7,135

 
5,177

 
3,955

 
1,958

37.8
 %
 
1,222

30.9
 %
Entertainment
9,439

 
9,165

 
11,379

 
274

3.0
 %
 
(2,214
)
(19.5
)%
Other
343

 
442

 
423

 
(99
)
(22.4
)%
 
19

4.5
 %
Total Revenue
$
120,055

 
$
128,294

 
$
132,388

 
$
(8,239
)
(6.4
)%
 
$
(4,094
)
(3.1
)%

Our reported numbers for the periods presented in this report reflect results of the Seattle, Helena, Denver Southeast, Missoula and Pendleton properties for the full years prior to their sales, but only for partial years in the years in which they were sold. These properties were reported in continuing operations since we have significant continuing involvement in the operations of these properties that now operate as franchised hotels. In order to help investors distinguish changes in our results from continuing operations versus changes due to the sale of these properties, we will discuss our operating results as reported and also on a comparable hotel basis to exclude the results of these sold properties from the hotel segment.

Comparable Hotel Revenue From Continuing Operations (Non-GAAP Data)

Comparable hotel revenue from continuing operations represents reported hotel segment revenue less the impact of the Seattle, Helena, Denver Southeast, Missoula and Pendleton properties' revenue. We utilize comparable hotel revenue from continuing operations as a financial measure because management believes that investors find it a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe it is a complement to reported revenue and other financial performance measures. Comparable hotel revenue from continuing operations is a non-GAAP measure and is not intended to represent reported hotel revenue defined by GAAP, and such information should not be considered as an alternative to reported hotel revenue or any other measure of performance prescribed by GAAP.

34



A breakdown of our comparable hotel revenues is as follows (in thousands, except for percentage changes):

 
 
 
2013 vs. 2012
 
2012 vs. 2011
 
2013
 
2012
 
2011
 
$ Change
% Change
 
$ Change
% Change
Room revenue from continuing operations (GAAP)
$
78,536

 
$
85,074

 
$
85,544

 
$
(6,538
)
 
 
$
(470
)
 
less: room revenue from Seattle, Helena, Denver Southeast, Missoula and Pendleton properties
(308
)
 
(9,014
)
 
(15,206
)
 
8,706

 
 
6,192

 
Comparable room revenue
$
78,228

 
$
76,060

 
$
70,338

 
$
2,168

2.9
 %
 
$
5,722

8.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Food and beverage revenue from continuing operations (GAAP)
$
21,858

 
$
25,275

 
$
27,330

 
$
(3,417
)
 
 
$
(2,055
)
 
less: food and beverage revenue from Seattle, Helena, Denver Southeast, Missoula and Pendleton properties
(59
)
 
(3,112
)
 
(5,407
)
 
3,053

 
 
2,295

 
Comparable food and beverage revenue
$
21,799

 
$
22,163

 
$
21,923

 
$
(364
)
(1.6
)%
 
$
240

1.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Other hotel revenue from continuing operations (GAAP)
$
2,744

 
$
3,161

 
$
3,757

 
$
(417
)
 
 
$
(596
)
 
less: other hotel revenue from Seattle, Helena, Denver Southeast, Missoula and Pendleton properties
(6
)
 
(719
)
 
(1,533
)
 
713

 
 
814

 
Comparable other hotel revenue
$
2,738

 
$
2,442

 
$
2,224

 
$
296

12.1
 %
 
$
218

9.8
%
 
 
 
 
 
 
 
 
 
 
 
 
Total hotel revenue from continuing operations (GAAP)
$
103,138

 
$
113,510

 
$
116,631

 
$
(10,372
)
 
 
$
(3,121
)
 
less: Total hotel revenue from Seattle, Helena, Denver Southeast, Missoula and Pendleton properties
(373
)
 
(12,845
)
 
(22,146
)
 
12,472

 
 
9,301

 
Comparable total hotel revenue
$
102,765

 
$
100,665

 
$
94,485

 
$
2,100

2.1
 %
 
$
6,180

6.5
%

2013 Compared to 2012

During 2013, revenue from the hotel segment decreased $10.4 million or 9.1% from 2012. The primary reason for the decline is the sale of properties in 2013. On