e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
or
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o |
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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)
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Washington
(State or other jurisdiction of
incorporation or organization)
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91-1032187
(I.R.S. Employer
Identification No.) |
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201 W. North River Drive, Suite 100
Spokane Washington
(Address of principal executive offices)
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99201
(Zip Code) |
Registrants Telephone Number, Including Area Code: (509) 459-6100
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ 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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) |
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 þ
As of November 2, 2010, there were 18,654,263 shares of the registrants common stock
outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2010 and December 31, 2009
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September 30, |
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December 31, |
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2010 |
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2009 |
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(In thousands, except share data) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,046 |
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$ |
3,881 |
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Restricted cash |
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5,643 |
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3,801 |
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Accounts receivable, net |
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8,626 |
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6,993 |
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Inventories |
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1,329 |
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1,341 |
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Prepaid expenses and other |
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2,564 |
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3,199 |
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Assets of discontinued operations |
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61 |
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Total current assets |
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21,208 |
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19,276 |
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Property and equipment, net |
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278,340 |
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285,601 |
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Goodwill |
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28,042 |
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28,042 |
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Intangible assets, net |
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10,067 |
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10,199 |
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Other assets, net |
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7,211 |
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7,337 |
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Noncurrent assets of discontinued operations |
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181 |
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Total assets |
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$ |
344,868 |
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$ |
350,636 |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
9,570 |
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$ |
6,079 |
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Accrued payroll and related benefits |
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3,417 |
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2,402 |
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Accrued interest payable |
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263 |
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318 |
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Advance deposits |
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725 |
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496 |
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Other accrued expenses |
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10,638 |
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7,910 |
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Revolving credit facility, due within one year |
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16,000 |
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Current portion of long-term debt |
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20,481 |
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3,171 |
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Liabilities of discontinued operations |
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29 |
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Total current liabilities |
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61,094 |
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20,405 |
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Revolving credit facility |
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26,000 |
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Long-term debt, due after one year |
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57,483 |
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77,151 |
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Deferred income |
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8,068 |
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8,638 |
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Deferred income taxes |
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11,341 |
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12,595 |
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Debentures due Red Lion Hotels Capital Trust |
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30,825 |
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30,825 |
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Total liabilities |
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168,811 |
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175,614 |
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Commitments and contingencies |
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STOCKHOLDERS EQUITY |
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Red Lion Hotels Corporation stockholders equity |
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Preferred stock - 5,000,000 shares authorized; $0.01 par value;
no shares issued or outstanding |
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Common stock - 50,000,000 shares authorized; $0.01 par value;
18,578,423 and 18,180,104 shares issued and outstanding |
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186 |
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182 |
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Additional paid-in capital, common stock |
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144,901 |
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142,479 |
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Retained earnings |
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30,957 |
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32,346 |
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Total Red Lion Hotels Corporation stockholders equity |
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176,044 |
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175,007 |
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Noncontrolling interest |
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13 |
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15 |
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Total equity |
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176,057 |
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175,022 |
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Total liabilities and stockholders equity |
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$ |
344,868 |
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$ |
350,636 |
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The accompanying condensed notes are an integral part of the consolidated financial statements.
3
RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three and Nine Months Ended September 30, 2010 and 2009
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Three months ended |
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Nine months ended |
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September 30, |
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September 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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(In thousands, except per share data) |
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Revenue: |
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Hotels |
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$ |
46,221 |
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$ |
44,756 |
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$ |
115,473 |
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$ |
115,929 |
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Franchise |
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999 |
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1,046 |
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2,446 |
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2,845 |
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Entertainment |
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2,048 |
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3,861 |
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6,866 |
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8,968 |
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Other |
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575 |
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592 |
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1,815 |
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1,986 |
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Total revenues |
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49,843 |
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50,255 |
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126,600 |
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129,728 |
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Operating expenses: |
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Hotels |
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31,652 |
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30,233 |
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86,864 |
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85,357 |
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Franchise |
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789 |
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|
646 |
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2,177 |
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1,764 |
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Entertainment |
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1,545 |
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2,987 |
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5,544 |
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7,375 |
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Other |
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438 |
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528 |
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1,275 |
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1,609 |
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Depreciation and amortization |
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5,216 |
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|
5,322 |
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|
|
15,590 |
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|
|
15,544 |
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Hotel facility and land lease |
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1,987 |
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|
1,750 |
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5,512 |
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|
5,271 |
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Gain on asset dispositions, net |
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(118 |
) |
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|
(85 |
) |
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(273 |
) |
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(140 |
) |
Undistributed corporate expenses |
|
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1,431 |
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1,540 |
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5,237 |
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4,526 |
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|
|
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Total expenses |
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42,940 |
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|
|
42,921 |
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|
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121,926 |
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|
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121,306 |
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|
|
|
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Operating income |
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6,903 |
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|
|
7,334 |
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4,674 |
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8,422 |
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|
|
|
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Other income (expense): |
|
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|
|
|
|
|
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|
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|
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Interest expense |
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|
(2,282 |
) |
|
|
(2,268 |
) |
|
|
(6,832 |
) |
|
|
(6,297 |
) |
Other income, net |
|
|
265 |
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|
|
49 |
|
|
|
312 |
|
|
|
111 |
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|
|
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|
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|
|
|
|
|
|
|
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|
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|
|
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Income (loss) before taxes |
|
|
4,886 |
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|
|
5,115 |
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(1,846 |
) |
|
|
2,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income tax expense (benefit) |
|
|
1,729 |
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|
|
1,723 |
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|
|
(843 |
) |
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net Income (loss) from continuing operations |
|
|
3,157 |
|
|
|
3,392 |
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|
|
(1,003 |
) |
|
|
1,647 |
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|
|
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Discontinued Operations |
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Income (loss) from discontinued business units,
net of income tax benefit (expense) of $36 and $(128)
for the three months ended and $181 and $(97) for the
nine months ended September 30, 2010 and 2009, respectively |
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(68 |
) |
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|
248 |
|
|
|
(351 |
) |
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|
188 |
|
Income (loss) on disposal of discontinued business units, net of
income tax benefit (expense) of $20 and $0 for the three months
ended
and $20 and $3 for the nine months ended September 30, 2010
and 2009, respectively |
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(38 |
) |
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(38 |
) |
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|
(5 |
) |
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|
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Net income (loss) from discontinued operations |
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|
(106 |
) |
|
|
248 |
|
|
|
(389 |
) |
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net Income (loss) |
|
|
3,051 |
|
|
|
3,640 |
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|
|
(1,392 |
) |
|
|
1,830 |
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Net income (loss) attributable to noncontrolling interest |
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|
(7 |
) |
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|
(5 |
) |
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3 |
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(5 |
) |
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Net income (loss) attributable to Red Lion Hotels
Corporation |
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$ |
3,044 |
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|
$ |
3,635 |
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$ |
(1,389 |
) |
|
$ |
1,825 |
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Earnings per share Basic |
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Net income (loss) from continuing operations |
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$ |
0.17 |
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$ |
0.19 |
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|
$ |
(0.05 |
) |
|
$ |
0.09 |
|
Net income (loss) from discontinued operations |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
Net income (loss) attributable to Red Lion Hotels Corporation |
|
$ |
0.16 |
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|
$ |
0.20 |
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|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
Weighted average shares -basic |
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|
18,514 |
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|
18,157 |
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|
18,402 |
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|
18,089 |
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Earnings per share Diluted |
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|
|
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|
Net income (loss) from continuing operations |
|
$ |
0.17 |
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|
$ |
0.19 |
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|
$ |
(0.05 |
) |
|
$ |
0.09 |
|
Net income (loss) from discontinued operations |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
Net income (loss) attributable to Red Lion Hotels Corporation |
|
$ |
0.16 |
|
|
$ |
0.20 |
|
|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
Weighted average shares -diluted |
|
|
18,710 |
|
|
|
18,306 |
|
|
|
18,402 |
|
|
|
18,119 |
|
The accompanying condensed notes are an integral part of the consolidated financial statements.
4
RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2010 and 2009
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|
Nine months ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Operating activities: |
|
|
|
Net income (loss) |
|
$ |
(1,392 |
) |
|
$ |
1,830 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
15,624 |
|
|
|
15,603 |
|
Gain on disposition of property, equipment and other assets, net |
|
|
(273 |
) |
|
|
(132 |
) |
Impairment Loss |
|
|
58 |
|
|
|
|
|
Deferred income tax provision (benefit) |
|
|
(1,254 |
) |
|
|
872 |
|
Equity in investments |
|
|
11 |
|
|
|
16 |
|
Stock based compensation expense |
|
|
1,341 |
|
|
|
941 |
|
Provision for doubtful accounts |
|
|
196 |
|
|
|
103 |
|
Change in current assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
(1,842 |
) |
|
|
178 |
|
Accounts receivable |
|
|
(2,171 |
) |
|
|
1,531 |
|
Inventories |
|
|
21 |
|
|
|
123 |
|
Prepaid expenses and other |
|
|
680 |
|
|
|
(679 |
) |
Accounts payable |
|
|
3,490 |
|
|
|
(5,344 |
) |
Accrued payroll and related benefits |
|
|
1,252 |
|
|
|
(1,011 |
) |
Accrued interest payable |
|
|
(55 |
) |
|
|
1 |
|
Deferred income |
|
|
|
|
|
|
900 |
|
Other accrued expenses and advance deposits |
|
|
2,713 |
|
|
|
4,316 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
18,399 |
|
|
|
19,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(7,902 |
) |
|
|
(15,106 |
) |
Proceeds from disposition of property and equipment |
|
|
100 |
|
|
|
16 |
|
Advances to Red Lion Hotels Capital Trust |
|
|
(27 |
) |
|
|
(27 |
) |
Other, net |
|
|
395 |
|
|
|
(1,021 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(7,434 |
) |
|
|
(16,138 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility |
|
|
10,500 |
|
|
|
5,000 |
|
Repayment of revolving credit facility |
|
|
(20,500 |
) |
|
|
(19,000 |
) |
Repayment of long-term debt |
|
|
(2,358 |
) |
|
|
(2,237 |
) |
Proceeds from stock options exercised |
|
|
800 |
|
|
|
|
|
Proceeds from issuance of common stock under employee stock
purchase plan |
|
|
130 |
|
|
|
119 |
|
Additions to deferred financing costs |
|
|
(292 |
) |
|
|
(153 |
) |
Common stock redeemed |
|
|
(84 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(11,804 |
) |
|
|
(16,282 |
) |
|
|
|
|
|
|
|
Net cash in discontinued operations |
|
|
4 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
Change in cash and cash equivalents: |
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(835 |
) |
|
|
(13,187 |
) |
Cash and cash equivalents at beginning of period |
|
|
3,881 |
|
|
|
18,216 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,046 |
|
|
$ |
5,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during periods for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
|
|
|
$ |
|
|
Interest on long-term debt |
|
$ |
6,777 |
|
|
$ |
6,752 |
|
Cash received during periods for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
672 |
|
|
$ |
|
|
Noncash investing activities: |
|
|
|
|
|
|
|
|
Conversion of accounts receivable to note receivable |
|
$ |
377 |
|
|
$ |
|
|
The accompanying condensed notes are an integral part of the consolidated financial statements.
5
RED LION HOTELS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Red Lion Hotels Corporation (Red Lion or the Company) is a NYSE-listed hospitality and
leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, operation and
franchising of midscale full, select and limited service hotels under the Red Lion brand. As of
September 30, 2010, the Red Lion system of hotels contained 43 hotels located in eight states and
one Canadian province, with 8,384 rooms and 419,987 square feet of meeting space. As of that date,
the Company operated 31 hotels, of which 19 are wholly owned and 12 are leased, and franchised 12
hotels that were owned and operated by various third-party franchisees.
The Company is also engaged in entertainment operations, which includes TicketsWest.com, Inc.,
and through which the Company derives revenues from event ticket distribution and promotion and
presentation of a variety of entertainment productions. In addition to hotel operations, the
Company maintains a direct ownership interest in a retail mall that is attached to one of its
hotels and in other miscellaneous real estate investments.
The Company was incorporated in the state of Washington in April 1978, and operated hotels
until 1999 under various brand names including Cavanaughs Hotels. In 1999, the Company acquired
WestCoast Hotels, Inc., and rebranded its Cavanaughs hotels to the WestCoast brand changing the
Companys name to WestCoast Hospitality Corporation. In 2001, the Company acquired Red Lion
Hotels, Inc. In September 2005, after rebranding most of its WestCoast hotels to the Red Lion
brand, the Company changed its name to Red Lion Hotels Corporation. The financial statements
encompass the accounts of Red Lion Hotels Corporation and all of its consolidated subsidiaries,
including its 100% ownership of Red Lion Hotels Holdings, Inc., and Red Lion Hotels Franchising,
Inc., and its approximately 99% ownership of Red Lion Hotels Limited Partnership (RLHLP). The 1%
noncontrolling interest in RLHLP has been classified as a component of equity separate from equity
of Red Lion Hotels Corporation.
The financial statements also include an equity method investment in a 19.9% owned real estate
venture, as well as certain cost method investments in various entities included as other assets,
over which the Company does not exercise significant influence. In addition, the Company holds a
3% common interest in Red Lion Hotels Capital Trust (the Trust) that is considered a variable
interest entity. The Company is not the primary beneficiary of the Trust; thus, it is treated as
an equity method investment. As more fully discussed in Note 12, the consolidated financial
statements also include all of the activities of the Companys cooperative marketing fund, also a
variable interest entity.
All significant inter-company and inter-segment transactions and accounts have been eliminated
upon consolidation. Certain amounts disclosed in prior period statements have been reclassified to
conform to the current period presentation.
2. Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared by Red Lion
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and in
accordance with generally accepted accounting principles in the United States of America (GAAP).
Certain information and footnote disclosures normally included in financial statements have been
condensed or omitted as permitted by such rules and regulations.
The consolidated balance sheet as of December 31, 2009 has been compiled from the audited
balance sheet as of such date. The Company believes the disclosures included herein are adequate;
however, they should be read in conjunction with the consolidated financial statements and the
notes thereto for the year ended December 31, 2009, previously filed with the SEC on Form 10-K.
In the opinion of management, these unaudited consolidated financial statements contain all of
the adjustments of a normal and recurring nature necessary to present fairly the consolidated
financial position of the Company at September 30, 2010, the consolidated results of operations for
the three and nine months ended September 30, 2010 and 2009, and the consolidated cash flows for
the nine months ended September 30, 2010 and 2009. The results of operations for the periods
presented may not be indicative of those which may be expected for a full year.
Management makes estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements, the reported amounts of revenues and
expenses during the reporting period and the disclosures of contingent liabilities. Actual results
could materially differ from those estimates.
6
3. Liquidity, Financial Condition and Risks of Refinancing Debt
As of September 30, 2010 the Company had total long term debt maturing within one year of
$20.5 million. In addition, another $5.0 million of debt that matures in October 2011 is included
in the balance of long term debt, due after one year. Lastly, the outstanding balance under the
Companys revolving credit facility at September 30, 2010 of $16.0 million is included as a current
liability because the facility expires in September 2011.
The Companys current liabilities at September 30, 2010 exceeded its current assets by $39.9
million. The Company is actively pursuing financing alternatives to address maturing debts and to
supplement working capital. While the Company continues to be in compliance with its debt
agreements, to generate positive cash flow from operations and positive operating income, and to
have adequate liquidity to fund its ongoing operating activities, there can be no assurance that it
will be able to refinance its debts when they mature.
In addition to or in place of a new credit facility and new term debt, the Company may seek to
raise additional funds through public or private financings, strategic relationships, sale of
assets or other arrangements. The Company cannot assure that such funds, if needed, will be
available on terms attractive to it, or at all. Furthermore, any additional equity financings may
be dilutive to shareholders and debt financing, if available, may involve covenants that place
substantial restrictions on the Companys business. The Companys failure to raise capital as and
when needed could have a material adverse impact on its financial condition and its ability to
pursue business strategies.
4. Property and Equipment
Property and equipment used in continuing operations is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Buildings and equipment |
|
$ |
302,420 |
|
|
$ |
295,704 |
|
Furniture and fixtures |
|
|
46,822 |
|
|
|
46,226 |
|
Landscaping and land improvements |
|
|
9,022 |
|
|
|
8,959 |
|
|
|
|
|
|
|
|
|
|
|
358,264 |
|
|
|
350,889 |
|
Less accumulated depreciation and
amortization |
|
|
(148,667 |
) |
|
|
(134,063 |
) |
|
|
|
|
|
|
|
|
|
|
209,597 |
|
|
|
216,826 |
|
Land |
|
|
63,430 |
|
|
|
66,146 |
|
Construction in progress |
|
|
5,313 |
|
|
|
2,629 |
|
|
|
|
|
|
|
|
|
|
$ |
278,340 |
|
|
$ |
285,601 |
|
|
|
|
|
|
|
|
5. Notes Payable to Bank and Long-Term Debt
The Company has a revolving credit facility with a syndicate of banks led by Credit Agricole
Corporate and Investment Bank. Borrowings under the facility may be used to finance
acquisitions or capital expenditures, for working capital and for other general corporate purposes.
The obligations under the facility are collateralized by a company owned hotel, including a deed
of trust and security agreement covering all of its assets. Because the facility expires in less
than a year on September 13, 2011, the amounts owed under the facility at September 30, 2010 are
reflected as a current liability.
The credit facility requires the Company to comply with certain customary affirmative and
negative covenants, the most restrictive of which are financial covenants dealing with leverage,
interest coverage and debt service coverage. In February 2010, the Company amended the terms of
the facility to modify the total leverage ratio and senior leverage ratio covenants, increase the
interest rate on Eurodollar borrowings to LIBOR plus 3.25% and reduce borrowing capacity to $37.5
million. At September 30, 2010, $16.0 million was outstanding under the facility at an interest
rate of 3.51%, and the Company was in compliance with all of its covenants.
The Company also owes $12.6 million to a bank under a property note bearing interest at the
banks prime rate and having covenants mirroring those in the credit facility. The interest rate
on the outstanding balance at September 30, 2010 was 3.25%, and the Company was in compliance with
all covenants.
In addition to the credit facility, additional debt totaling $17.2 million under two notes
maturing in September 2011 moved into current liabilities in the third quarter of 2010. An
additional $5.0 million of debt matures in October 2011 and will move to current during the fourth
quarter of 2010. The Company is actively pursuing financing alternatives to address maturing debts
and to supplement working capital. This is more fully discussed in Note 3 Liquidity, Financial
Condition and Risks of Refinancing Debt.
7
6. Business Segments
As of September 30, 2010 and December 31, 2009, the Company had three operating segments
hotels, franchise and entertainment. The other segment consists primarily of a retail mall and
miscellaneous revenues and expenses, cash and cash equivalents, certain receivables and certain
property and equipment which are not specifically associated with an operating segment. Management
reviews and evaluates the operating segments exclusive of interest expense; therefore, it has not
been allocated to the segments. All balances have been presented after the elimination of
inter-segment and intra-segment revenues. Selected information with respect to continuing
operations is as provided below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
$ |
46,221 |
|
|
$ |
44,756 |
|
|
$ |
115,473 |
|
|
$ |
115,929 |
|
Franchise |
|
|
999 |
|
|
|
1,046 |
|
|
|
2,446 |
|
|
|
2,845 |
|
Entertainment |
|
|
2,048 |
|
|
|
3,861 |
|
|
|
6,866 |
|
|
|
8,968 |
|
Other |
|
|
575 |
|
|
|
592 |
|
|
|
1,815 |
|
|
|
1,986 |
|
|
|
|
|
|
|
|
$ |
49,843 |
|
|
$ |
50,255 |
|
|
$ |
126,600 |
|
|
$ |
129,728 |
|
|
|
|
|
|
Operating
income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
$ |
8,383 |
|
|
$ |
8,241 |
|
|
$ |
10,055 |
|
|
$ |
12,101 |
|
Franchise |
|
|
(97 |
) |
|
|
319 |
|
|
|
(224 |
) |
|
|
824 |
|
Entertainment |
|
|
416 |
|
|
|
777 |
|
|
|
1,049 |
|
|
|
1,279 |
|
Other |
|
|
(1,799 |
) |
|
|
(2,003 |
) |
|
|
(6,206 |
) |
|
|
(5,782 |
) |
|
|
|
|
|
|
|
$ |
6,903 |
|
|
$ |
7,334 |
|
|
$ |
4,674 |
|
|
$ |
8,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
|
Identifiable
assets: |
|
|
|
|
|
|
|
|
Hotels |
|
$ |
300,409 |
|
|
$ |
300,880 |
|
Franchise |
|
|
17,308 |
|
|
|
16,853 |
|
Entertainment |
|
|
5,094 |
|
|
|
5,143 |
|
Other |
|
|
22,057 |
|
|
|
27,518 |
|
|
|
|
|
|
$ |
344,868 |
|
|
$ |
350,394 |
|
|
|
|
7. Earnings (Loss) Per Share
The following table presents a reconciliation of the numerators and denominators used in the
basic and diluted income (loss) per share computations for the three and nine months ended
September 30, 2010 and 2009 (in thousands, except per share amounts):
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
Nine months ended September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Numerator basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
3,157 |
|
|
$ |
3,392 |
|
|
$ |
(1,003 |
) |
|
$ |
1,647 |
|
Net income (loss) from discontinued operations |
|
$ |
(106 |
) |
|
$ |
248 |
|
|
$ |
(389 |
) |
|
$ |
183 |
|
Net income (loss) attributable to noncontrolling interest |
|
|
(7 |
) |
|
|
(5 |
) |
|
|
3 |
|
|
|
(5 |
) |
Net income (loss) attributable to Red Lion Hotels Corporation |
|
$ |
3,044 |
|
|
$ |
3,635 |
|
|
$ |
(1,389 |
) |
|
$ |
1,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
18,514 |
|
|
|
18,157 |
|
|
|
18,402 |
|
|
|
18,089 |
|
Weighted average shares diluted |
|
|
18,710 |
|
|
|
18,306 |
|
|
|
18,402 |
|
|
|
18,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.17 |
|
|
$ |
0.19 |
|
|
$ |
(0.05 |
) |
|
$ |
0.09 |
|
Diluted |
|
$ |
0.17 |
|
|
$ |
0.19 |
|
|
$ |
(0.05 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
Diluted |
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
|
$ |
(0.02 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Red Lion Hotels Corporation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.16 |
|
|
$ |
0.20 |
|
|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
Diluted |
|
$ |
0.16 |
|
|
$ |
0.20 |
|
|
$ |
(0.07 |
) |
|
$ |
0.10 |
|
For the three months ended September 30, 2010, 109,924 of the 793,083 options to purchase
common shares outstanding as of that date were considered dilutive as were 42,619of the 229,547
restricted stock units outstanding. For the three months ended September 30, 2009, 72,258 of the
1,212,771 options to purchase common shares outstanding as of that date were considered dilutive.
Of the 250,195 restricted stock units outstanding, 31,310 shares were considered dilutive during
the third quarter of 2009. For both comparative periods, all of the 44,837 convertible operating
partnership units, respectively, were considered dilutive.
For the nine months ended September 30, 2010, none of the 793,083 options to purchase common
shares outstanding as of that date were considered dilutive due to the net loss reported.
Similarly, none of the 229,547 restricted stock units outstanding were considered dilutive due to
the net loss reported. For the nine months ended September 30, 2009, none of the 1,212,771 options
to purchase common shares outstanding as of that date were considered dilutive as the grant date
stock price of all of these options was above the weighted average price of the Companys common
stock during that period. Similarly, none of the 250,195 restricted stock units outstanding were
considered dilutive. For the nine months ended September 30, 2010 none of the 44,837 convertible
operating partnership units were considered dilutive due the net loss in the period. For the nine
months ended September 30, 2009, 29,946 of the 44,837 convertible operating partnership units were
considered dilutive.
8. Change in Executive Officers
In January 2010, the Company terminated the employment agreement of its President and Chief
Executive Officer, who was also a director. In connection therewith, the Company recorded expense
of $1.2 million for separation and other benefits during the first quarter of 2010, including $0.4
million in stock-based compensation expense. Under the terms of the agreement, 84,433 of the
former executives restricted stock units vested. Pursuant to a separate agreement entered into in
connection with the termination, the exercise period for 80,000 vested stock options was extended
for six months. Cash amounts due related to this transaction were paid in July 2010.
9. Stock Based Compensation
The 2006 Stock Incentive Plan authorizes the grant or issuance of various option and other
awards including restricted stock units and other stock-based compensation. The plan was approved
by the shareholders of the Company and allows awards of 2.0 million shares, subject to adjustments
for stock splits, stock dividends and similar events. In May 2010, the board of directors granted
to executive officers and other key employees 5,864 options to purchase common stock and 147,039
unvested restricted stock units, all of which will vest 25% each year for four years. In addition,
directors of the Company were granted an aggregate of 23,415 shares of common stock with a fair
value of $0.2 million as part of the existing director compensation arrangement. As of September
30, 2010, there were 1,122,163 shares of common stock available for issuance pursuant to future
stock option grants or other awards under the 2006 plan.
In the third quarter and first nine months of 2010, the Company recognized approximately $0.1
million and $0.3 million, respectively, in compensation expense related to options, compared to
$0.1 million and $0.3 million, respectively, during the same
9
periods in 2009. The 2010 nine month period included expense recorded upon the separation of
the Companys former President and Chief Executive Officer, as discussed above in Note 8. As
outstanding options vest, the Company expects to recognize approximately $0.3 million in additional
compensation expense, before the impact of income taxes, over a weighted average period of 19
months, including $0.1 million during the remaining three months of 2010.
A summary of stock option activity at September 30, 2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
|
of Shares |
|
|
Price |
|
Balance, December 31, 2009 |
|
|
1,194,460 |
|
|
$ |
7.36 |
|
Options granted |
|
|
5,864 |
|
|
$ |
7.10 |
|
Options exercised |
|
|
(150,754 |
) |
|
$ |
5.32 |
|
Options forfeited |
|
|
(256,487 |
) |
|
$ |
9.22 |
|
|
|
|
|
|
|
|
Balance, September 30, 2010 |
|
|
793,083 |
|
|
$ |
7.14 |
|
|
|
|
|
|
|
|
Exercisable, September 30, 2010 |
|
|
676,464 |
|
|
$ |
6.80 |
|
|
|
|
|
|
|
|
Additional information regarding stock options outstanding and exercisable as of September 30,
2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
Weighted |
|
Aggregate |
|
|
|
|
|
Weighted |
|
Aggregate |
Range of |
|
|
|
|
|
Remaining |
|
|
|
|
|
Average |
|
Intrinsic |
|
|
|
|
|
Average |
|
Intrinsic |
Exercise |
|
Number |
|
Contractual |
|
Expiration |
|
Exercise |
|
Value (1) |
|
Number |
|
Exercise |
|
Value (1) |
Prices |
|
Outstanding |
|
Life (Years) |
|
Date |
|
Price |
|
(in thousands) |
|
Exercisable |
|
Price |
|
(in thousands) |
|
$5.10 - 6.07 |
|
|
404,009 |
|
|
|
1.25 |
|
|
|
2011-2014 |
|
|
$ |
5.30 |
|
|
$ |
865,461 |
|
|
|
404,009 |
|
|
$ |
5.30 |
|
|
$ |
865,461 |
|
7.10 - 7.80 |
|
|
141,560 |
|
|
|
2.01 |
|
|
|
2011-2020 |
|
|
|
7.45 |
|
|
|
1,994 |
|
|
|
123,196 |
|
|
|
7.46 |
|
|
|
|
|
8.74 - 8.80 |
|
|
166,836 |
|
|
|
7.60 |
|
|
|
2018 |
|
|
|
8.76 |
|
|
|
|
|
|
|
86,159 |
|
|
|
8.76 |
|
|
|
|
|
10.88 |
|
|
5,974 |
|
|
|
5.82 |
|
|
|
2016 |
|
|
|
10.88 |
|
|
|
|
|
|
|
5,974 |
|
|
|
10.88 |
|
|
|
|
|
12.21-13.00 |
|
|
74,704 |
|
|
|
6.39 |
|
|
|
2016-2017 |
|
|
|
12.61 |
|
|
|
|
|
|
|
57,126 |
|
|
|
12.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
793,083 |
|
|
|
3.24 |
|
|
|
2011-2020 |
|
|
$ |
7.14 |
|
|
$ |
867,455 |
|
|
|
676,464 |
|
|
$ |
6.80 |
|
|
$ |
865,461 |
|
|
|
|
|
|
As of September 30, 2010 and 2009, there were 229,547 and 250,195 unvested restricted stock
units outstanding, respectively. Since the Company began issuing restricted stock units,
approximately 6.2% of total units granted have been forfeited. In the third quarter and first nine
months of 2010, the Company recognized approximately $0.1 million and $0.6 million, respectively,
in compensation expense related to restricted stock units compared to $0.2 million and $0.2
million, respectively, during the same periods in 2009. The 2010 nine month expense reflects $0.4
million recorded upon the separation of the Companys former President and Chief Executive Officer.
As the restricted stock units vest, the Company expects to recognize approximately $1.4
million in additional compensation expense over a weighted average period of 39 months, including
$0.1 million during the remaining three months of 2010.
10
A summary of restricted stock unit activity as of September 30, 2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Grant Date |
|
|
|
of Shares |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009 |
|
|
239,318 |
|
|
$ |
5.24 |
|
Granted |
|
|
147,039 |
|
|
$ |
7.10 |
|
Vested |
|
|
(124,622 |
) |
|
$ |
5.32 |
|
Forfeited |
|
|
(32,188 |
) |
|
$ |
5.99 |
|
|
|
|
|
|
|
|
Balance, September 30,
2010 |
|
|
229,547 |
|
|
$ |
6.29 |
|
|
|
|
|
|
|
|
In March 2010, the Company issued 35,937 shares of common stock to non-executive employees as
compensation for 2009 bonuses earned. Pursuant to the terms of the 2006 plan, this issuance was net
of 16,741 shares repurchased at $6.59 per share in order to cover the employees tax withholding
obligations.
In January 2008, the Company adopted the 2008 employee stock purchase plan (the 2008 ESPP)
upon the expiration of its previous plan. Under the 2008 ESPP, a total of 300,000 shares of common
stock are authorized for purchase by eligible employees at a discount through payroll deductions.
No employee may purchase more than $25,000 worth of shares in any calendar year, or more than
10,000 shares during any six-month purchase period under the plan. As allowed under the 2008 ESPP,
a participant may elect to withdraw from the plan, effective for the purchase period in progress at
the time of the election with all accumulated payroll deductions returned to the participant at the
time of withdrawal. In January and July 2010, 17,791 and 14,371 shares, respectively, were issued
to participants under the terms of the plan.
10. Fair Value of Financial Instruments
Estimated fair values of financial instruments (in thousands) are as indicated in the table
below. The carrying amounts for cash and cash equivalents, accounts receivable and current
liabilities are reasonable estimates of their fair values. The fair value of long-term debt is
estimated based on the discounted value of contractual cash flows using the estimated rates
currently offered for debt with similar remaining maturities. The debentures are valued at the
closing price on September 30, 2010, of the underlying trust preferred securities on the New York
Stock Exchange, plus the face value of the debenture amount representing the trust common
securities held by the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash |
|
$ |
8,689 |
|
|
$ |
8,689 |
|
|
$ |
7,682 |
|
|
$ |
7,682 |
|
Accounts receivable |
|
$ |
8,626 |
|
|
$ |
8,626 |
|
|
$ |
6,993 |
|
|
$ |
6,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities, excluding debt and
discontinued operations |
|
$ |
24,613 |
|
|
$ |
24,613 |
|
|
$ |
17,205 |
|
|
$ |
17,205 |
|
Total debt |
|
$ |
93,964 |
|
|
$ |
90,071 |
|
|
$ |
106,322 |
|
|
$ |
105,073 |
|
Debentures |
|
$ |
30,825 |
|
|
$ |
31,602 |
|
|
$ |
30,825 |
|
|
$ |
25,897 |
|
The fair values provided above are not necessarily indicative of the amounts the Company or
the debt holders could realize in a current market exchange. In addition, potential income tax
ramifications related to the realization of gains and losses that would be incurred in an actual
sale or settlement have not been taken into consideration.
11. Commitments and Contingencies
At any given time, the Company is subject to claims and actions incidental to the operations
of our business. During the second quarter of 2010, a federal court ruled in favor of the Company
in a lawsuit the Company filed against the owner of a former franchisee. The court awarded to the
Company approximately $0.6 million in damages, which will accrue interest at 18% per annum pending
the defendants appeal. During the first nine months of 2010, the Company incurred approximately
$0.3 million in legal expense in connection with this matter. The Company is actively pursuing this
action and cannot at this time reasonably predict the ultimate outcome of the proceedings. The
Company does not expect that any sums it may receive or have to pay in connection with this or any
other legal proceeding would have a materially adverse effect on its consolidated financial
position or net cash flows.
11
12. Change in Accounting Principle
Variable Interest Entities In June 2009, the FASB issued changes to the consolidation
guidance applicable to variable interest entities (VIE). These changes also amended the guidance
governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is,
therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a
quantitative analysis. The qualitative analysis is to include, among other things, consideration of
who has the power to direct the activities of the entity that most significantly impact the
entitys economic performance and who has the obligation to absorb losses or the right to receive
benefits of the VIE that could potentially be significant to the VIE.
Under the new guidance, the Company determined that the Companys cooperative marketing fund,
the Central Program Fund (CPF) now meets the definition of a VIE and should be included in its
consolidated financial statements. The Company adopted these changes retrospectively on January 1,
2010. For additional information on the CPF, see Note 2 of Notes to Consolidated Financial
Statements for the year ended December 31, 2009, previously filed with the SEC in the Companys
annual report on Form 10-K.
The CPF acts as an agent for the Companys owned and leased hotels and for its franchisees,
and was created to provide services to all member hotels including certain advertising services,
frequent guest program administration, reservation services, national sales promotions and brand
and revenue management services intended to increase sales and enhance the reputation of the Red
Lion brand. The activities of the CPF benefit the Companys owned and leased hotels as well as its
franchise properties; however, historically only the proportionate share of CPF expense for its
owned and leased hotels was recognized in the consolidated financial statements. Based on the new
guidance, the Company will now include all of the expenses and other balances of the CPF in its
consolidated financial statements, including revenue received from franchisees to support CPF
activities. There have been no changes to the organization, structure or operating activities of
the CPF since its inception in 2002.
The adoption of these changes was applied retrospectively, including the recording to retained
earnings of the $1.0 million net of tax impact of cumulative effect of change in accounting
principle as of January 1, 2008, and the consolidated financial statements have been adjusted to
conform to the new treatment. On January 1, 2010, total assets decreased by $0.9 million primarily
representing the consolidation of accounts receivable, and total liabilities increased $0.1
million. The impact of the CPF for the three and nine months ended September 30, 2010, added
additional expense before income tax of $0.1 million and $1.0 million, respectively, compared to
income of $0.6 million and expense of $0.4 million during the prior year comparable periods. The
activities of the CPF are cyclical throughout any one year. For the quarters ended September 30,
2009 and December 31, 2009, net income (loss) before income tax was positively impacted by $0.6
million and $0.4 million, respectively. The total impact on net loss before income tax for the year
ended December 31, 2009 related to the CPF was a negative adjustment of $24,000, compared to a
positive impact of $105,000 for the year ended December 31, 2008.
13. Recent Accounting Pronouncements
Fair Value Measurements In January 2010, the FASB released Accounting Standards Update No.
2010-06. , The Company adopted this accounting guidance that requires disclosure of significant
transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for these transfers
and the reasons for any transfers in or out of Level 3 of the fair value hierarchy. In addition,
the guidance clarifies certain existing disclosure requirements. This standard did not have a
material impact on the Companys disclosures in its consolidated financial statements.
14. Discontinued Operations
During the three months ended September 30, 2010, the Company concluded that one of its leased
hotels in Astoria, Oregon had reached the end of its useful life. Accordingly, the operations of
this hotel have been classified as discontinued operations in the Companys financial statements.
The Company has segregated the assets and liabilities and operating results of this hotel from
continuing operations on the Companys balance sheet and in the consolidated statements of
operations for this quarter and any comparable periods presented.
12
The following table summarizes results of discontinued operations for the periods indicated
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
$ |
|
|
|
$ |
870 |
|
|
$ |
|
|
|
$ |
1,457 |
|
Operating expenses |
|
|
(97 |
) |
|
|
(475 |
) |
|
|
(498 |
) |
|
|
(1,112 |
) |
Depreciation and amortization |
|
|
(7 |
) |
|
|
(19 |
) |
|
|
(34 |
) |
|
|
(60 |
) |
Income tax benefit (expense) |
|
|
36 |
|
|
|
(128 |
) |
|
|
181 |
|
|
|
(97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from operations |
|
|
(68 |
) |
|
|
248 |
|
|
|
(351 |
) |
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal of discontinued business units |
|
|
(58 |
) |
|
|
|
|
|
|
(58 |
) |
|
|
(8 |
) |
Income tax benefit |
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss on disposal of discontinued business
units |
|
|
(38 |
) |
|
|
|
|
|
|
(38 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from discontinued operations |
|
$ |
(106 |
) |
|
$ |
248 |
|
|
$ |
(389 |
) |
|
$ |
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following assets and liabilities have been segregated and classified as assets and
liabilities of discontinued operations in the consolidated balance sheets as of September 30, 2010
and December 31, 2009 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2010 |
|
2009 |
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
|
|
|
$ |
4 |
|
Accounts receivable, net |
|
|
|
|
|
|
2 |
|
Inventory |
|
|
|
|
|
|
9 |
|
Prepaid expenses and other |
|
|
|
|
|
|
46 |
|
|
|
|
Total current assets of discontinued
operations |
|
|
|
|
|
|
61 |
|
Property and equipment, net |
|
|
|
|
|
|
181 |
|
|
|
|
Total assets of discontinued operations |
|
$ |
|
|
|
$ |
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
|
|
|
$ |
1 |
|
Accrued payroll and related benefits |
|
|
|
|
|
|
2 |
|
Other accrued expenses |
|
|
|
|
|
|
26 |
|
|
|
|
Current liabilities of discontinued operations |
|
$ |
|
|
|
$ |
29 |
|
|
|
|
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q includes forward-looking statements. We have based these
statements on our current expectations and projections about future events. When words such as
anticipate, believe, estimate, expect, intend, may, plan, seek, should, will
and similar expressions or their negatives are used in this quarterly report, these are
forward-looking statements. Many possible events or factors, including those discussed in Risk
Factors under Item 1A of our annual report filed on Form 10-K for the year ended December 31,
2009, could affect our future financial results and performance, and could cause actual results or
performance to differ materially from those expressed. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date of this quarterly
report.
In this report, we, us, our, our company and the company refer to Red Lion Hotels
Corporation and, as the context requires, all of its wholly and partially owned subsidiaries,
including, but not limited to, its 100% ownership of Red Lion Hotels Holdings, Inc. and Red Lion
Hotels Franchising, Inc. and its approximate 99% ownership of Red Lion Hotels Limited Partnership.
Red Lion refers to the Red Lion brand. The term the system, system-wide hotels or system of
hotels refers to our entire group of owned, leased and franchised hotels.
The following discussion and analysis should be read in connection with our unaudited
consolidated financial statements and the condensed notes thereto and other financial information
included elsewhere in this quarterly report, as well as in conjunction with the consolidated
financial statements and the notes thereto for the year ended December 31, 2009, previously filed
with the SEC on Form 10-K.
Introduction
We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily
engaged in the ownership, operation and franchising of midscale, full, select and limited service
hotels under our proprietary Red Lion brand. Established over 30 years ago, the Red Lion brand is
nationally recognized and particularly well known in the western United States, where most of our
hotels are located. The Red Lion brand is typically associated with three star, full and select
service hotels.
The discussion and information given below excludes the results related to the Companys
leased hotel in Astoria, Oregon. The results related to the Astoria hotel have been segregated from
continuing operations and reflected as discontinued operations for all periods presented. See Note
14 Discontinued Operations of Condensed Notes to Consolidated Financial Statements.
As of September 30, 2010, our hotel system contained 43 hotels located in eight states and one
Canadian province, with 8,384 rooms and 419,987 square feet of meeting space as provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Meeting |
|
|
|
|
|
|
Available |
|
Space |
|
|
Hotels |
|
Rooms |
|
(sq. ft.) |
|
|
|
Owned and Leased Hotels |
|
|
31 |
|
|
|
6,121 |
|
|
|
304,566 |
|
Franchised Hotels |
|
|
12 |
|
|
|
2,263 |
|
|
|
115,421 |
|
|
|
|
Total Red Lion Hotels |
|
|
43 |
|
|
|
8,384 |
|
|
|
419,987 |
|
|
|
|
We operate in three reportable segments:
|
|
|
The hotels segment derives revenue primarily from guest room rentals and food and
beverage operations at our owned and leased hotels. |
|
|
|
|
The franchise segment is engaged primarily in licensing the Red Lion brand to
franchisees, and generates revenue from franchise fees that are typically based on a
percent of room revenues and are charged to hotel owners. It has also historically
reflected revenue from management fees charged to the owners of managed hotels, although
we have not managed any hotels for third parties since January 2008. |
|
|
|
|
The entertainment segment derives revenue primarily from ticketing services and
promotion and presentation of entertainment productions. |
Our remaining activities, none of which constitute a reportable segment, have been aggregated
into other, and are primarily related to our retail mall direct ownership interest that is
attached to one of our hotels and other miscellaneous real estate investments.
14
Executive Summary
Our company strategy is to focus on initiatives to grow revenues at our owned and leased
hotels and expand our current franchise base, with an ongoing commitment to cost management and
margin control. During the first quarter we announced the addition of resources to support our
objectives, including executive leadership to concentrate on franchise development in markets
where we have strong brand awareness which may augment our sales and marketing capabilities.
During the third quarter and nine months ended September 30, 2010, we experienced some margin
erosion compared to the prior year comparable periods due to revenue challenges combined with our
investments made in sales, marketing and franchising that we believe will position us for
long-term profitability and growth for shareholders.
Our hotel operational strategy is to increase group, preferred corporate and higher-rated
transient business to reduce reliance on discount on-line travel agent (OTA) and permanent
business. We are also implementing centralized revenue management across our system of hotels to
create greater consistency in pricing, to improve value perception and capture market share. We
have added sales personnel at our properties and at the corporate office to expand our local and
national reach in an effort to grow our mix of group and preferred corporate customer base.
Non-qualified retail and preferred corporate room business increased during the first nine months
of 2010 compared to the prior year, offset by targeted declines in room nights from heavily
discounted segments. While these efforts are in their early stages, and pricing and guest capture
continues to be highly competitive, we are encouraged by the gains we are reporting compared to
the prior year period.
RevPAR in the third quarter of 2010 for our owned and leased properties increased 8.3% from
the third quarter of 2009, and increased 3.9% for the first nine months of 2010 from the same
period of the prior year. Occupancy was up 160 basis points quarter-on-quarter and up 90 basis
points year-over-year. ADR for the three months ended September 30, 2010 has increased to $90.50
from the prior year same quarter ADR of $85.57. ADR for the nine months ended September 30, 2010
was $85.74 compared to $83.74 for the same period of the prior year. Average occupancy, average
daily rate and revenue per available room statistics are provided below on a comparable basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
For the nine months ended September 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
|
|
Average
(1) |
|
|
|
|
|
RevPAR |
|
Average
(1) |
|
|
|
|
|
RevPAR |
|
Average
(1) |
|
|
|
|
|
RevPAR |
|
Average
(1) |
|
|
|
|
|
RevPAR |
|
|
Occupancy |
|
ADR (2) |
|
(3) |
|
Occupancy |
|
ADR (2) |
|
(3) |
|
Occupancy |
|
ADR (2) |
|
(3) |
|
Occupancy |
|
ADR (2) |
|
(3) |
|
|
|
|
|
|
|
|
|
Owned and Leased Hotels |
|
|
70.1 |
% |
|
$ |
90.50 |
|
|
$ |
63.46 |
|
|
|
68.5 |
% |
|
$ |
85.57 |
|
|
$ |
58.58 |
|
|
|
59.3 |
% |
|
$ |
85.74 |
|
|
$ |
50.83 |
|
|
|
58.4 |
% |
|
$ |
83.74 |
|
|
$ |
48.90 |
|
Franchised Hotels |
|
|
63.9 |
% |
|
$ |
78.24 |
|
|
$ |
50.03 |
|
|
|
62.6 |
% |
|
$ |
77.26 |
|
|
$ |
48.39 |
|
|
|
54.1 |
% |
|
$ |
77.49 |
|
|
$ |
41.91 |
|
|
|
54.8 |
% |
|
$ |
78.40 |
|
|
$ |
42.96 |
|
|
|
|
|
|
|
|
|
|
Total Red Lion Hotels |
|
|
68.5 |
% |
|
$ |
87.50 |
|
|
$ |
59.93 |
|
|
|
66.9 |
% |
|
$ |
83.53 |
|
|
$ |
55.90 |
|
|
|
57.9 |
% |
|
$ |
83.72 |
|
|
$ |
48.49 |
|
|
|
57.5 |
% |
|
$ |
82.40 |
|
|
$ |
47.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from prior comparative period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and Leased Hotels |
|
|
1.6 |
|
|
|
5.8 |
% |
|
|
8.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
2.4 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Franchised Hotels |
|
|
1.3 |
|
|
|
1.3 |
% |
|
|
3.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
-1.2 |
% |
|
|
-2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Red Lion Hotels |
|
|
1.6 |
|
|
|
4.8 |
% |
|
|
7.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
1.6 |
% |
|
|
2.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average occupancy represents total paid rooms divided by total available rooms. Total available rooms represents the number of rooms available multiplied by the number of days in the reported period and includes rooms taken out of service for renovation. |
|
(2) |
|
Average daily rate (ADR) represents total room revenues divided by the total number of paid rooms occupied by hotel guests. |
|
(3) |
|
Revenue per available room (RevPAR) represents total room and related revenues divided by total available rooms. |
We expect economic conditions will continue to challenge our industry and create a difficult
operating environment through the remainder of 2010. While our goal is to deliver bottom-line
profitability through the above described initiatives, there can be no assurance that we will
achieve this goal if economic conditions do not improve.
Results of Operations
During the third quarter of 2010, we reported net income from continuing operations of $3.2
million compared to net income of $3.4 million during the third quarter of 2009. EBITDA from
continuing operations decreased $0.3 million to $12.4 million, impacted primarily by our
investments in direct sales and franchise development activities, and competitive rate pressures.
For the first nine months of 2010, we reported a net loss from continuing operations of $1.0
million compared to net income of $1.6 million during the first nine months of 2009. In January
2010, we terminated the employment agreement of our President and Chief Executive Officer, which
resulted in recorded expense of $1.2 million for separation and other benefits. The $1.2 million
recorded during the first quarter of 2010 included $0.4 million in stock-based compensation expense
related to the immediate vesting of 84,433 of the former executives restricted stock units, as
well as for the extension of the exercise period for certain vested stock options. The following
table details the impact of the $1.2 million in separation costs for the nine months ended
September 30, 2010 on net loss, loss per share and EBITDA:
15
|
|
|
|
|
|
|
Nine months ended |
|
|
|
September 30, 2010 |
|
|
|
(in thousands) |
|
Separation costs |
|
$ |
(1,219 |
) |
Income tax benefit |
|
|
433 |
|
|
|
|
|
Impact of separation costs on net income |
|
$ |
(786 |
) |
|
|
|
|
Separation costs |
|
|
(0.06 |
) |
Income tax benefit |
|
|
0.02 |
|
|
|
|
|
Impact of separation costs on earnings per share |
|
$ |
(0.04 |
) |
|
|
|
|
Impact of separation costs on EBITDA |
|
$ |
(1,219 |
) |
|
|
|
|
A summary of our consolidated statement of operations is provided below (in thousands, except
per share data). Certain amounts disclosed in the prior period have been reclassified to conform to
the current period presentation as it relates to the consolidation of the Central Program Fund
(CPF) as discussed in Note 12 in Condensed Notes to Consolidated Financial Statements and also
discontinued operations as discussed in Note 14 in Condensed Notes to Consolidated Financial
Statements. As a result, franchise segment revenue increased $0.6 million during the third quarter
of 2010 and increased $0.7 million during the third quarter of 2009. Hotel and franchise segment
expenses increased $0.6 million in the third quarter of 2010 and decreased $0.1 million in the
third quarter of 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Total revenue |
|
$ |
49,843 |
|
|
$ |
50,255 |
|
|
$ |
126,600 |
|
|
$ |
129,728 |
|
Operating expenses |
|
|
42,940 |
|
|
|
42,921 |
|
|
|
121,926 |
|
|
|
121,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
6,903 |
|
|
|
7,334 |
|
|
|
4,674 |
|
|
|
8,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2,282 |
) |
|
|
(2,268 |
) |
|
|
(6,832 |
) |
|
|
(6,297 |
) |
Other income, net |
|
|
265 |
|
|
|
49 |
|
|
|
312 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes |
|
|
4,886 |
|
|
|
5,115 |
|
|
|
(1,846 |
) |
|
|
2,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
1,729 |
|
|
|
1,723 |
|
|
|
(843 |
) |
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) from continuing operations |
|
|
3,157 |
|
|
|
3,392 |
|
|
|
(1,003 |
) |
|
|
1,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued business units,
net of income tax benefit (expense) of $36 and $(128)
for the three months ended and $181and $(97) for the
nine months ended September 30, 2010 and 2009, respectively |
|
|
(68 |
) |
|
|
248 |
|
|
|
(351 |
) |
|
|
188 |
|
Loss on disposal of discontinued business units, net of income
tax benefit of $20 and $0 for the three months ended and
$20 and $3 for the nine months ended September 30, 2010
and 2009, respectively |
|
|
(38 |
) |
|
|
|
|
|
|
(38 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss) |
|
|
3,051 |
|
|
|
3,640 |
|
|
|
(1,392 |
) |
|
|
1,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to noncontrolling interest |
|
|
(7 |
) |
|
|
(5 |
) |
|
|
3 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Red Lion Hotels Corporation |
|
$ |
3,044 |
|
|
$ |
3,635 |
|
|
$ |
(1,389 |
) |
|
$ |
1,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
12,221 |
|
|
$ |
13,094 |
|
|
$ |
20,021 |
|
|
$ |
24,409 |
|
EBITDA as a percentage of revenues |
|
|
24.5 |
% |
|
|
26.1 |
% |
|
|
15.8 |
% |
|
|
18.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA from continuing operations |
|
$ |
12,377 |
|
|
$ |
12,700 |
|
|
$ |
20,579 |
|
|
$ |
24,072 |
|
EBITDA from continuing operations
as a percentage of revenues |
|
|
24.8 |
% |
|
|
25.3 |
% |
|
|
16.3 |
% |
|
|
18.6 |
% |
EBITDA represents net income (loss) attributable to Red Lion Hotels Corporation before
interest expense, income tax expense (benefit) and depreciation and amortization. We utilize EBITDA
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, on-going operations. We believe it is a complement to net income
(loss) attributable to Red Lion Hotels
16
Corporation and other financial performance measures. EBITDA
is not intended to represent net income (loss) attributable to Red Lion Hotels Corporation as
defined by generally accepted accounting principles in the United States (GAAP), and such
information should not be considered as an alternative to net income (loss), cash flows from
operations or any other measure of performance prescribed by GAAP.
We use EBITDA to measure the financial performance of our owned and leased hotels because we
believe interest, taxes and depreciation and amortization bear little or no relationship to our
operating performance. By excluding interest expense, EBITDA measures our financial performance
irrespective of our capital structure or how we finance our properties and operations. We generally
pay federal and state income taxes on a consolidated basis, taking into account how the applicable
taxing laws apply to us in the aggregate. By excluding taxes on income, we believe EBITDA provides
a basis for measuring the financial performance of our operations excluding factors that our hotels
cannot control. By excluding depreciation and amortization expense, which can vary from hotel to
hotel based on historical cost and other factors unrelated to the hotels financial performance,
EBITDA measures the financial performance of our hotels without regard to their historical cost.
For all of these reasons, we believe EBITDA provides us and investors with information that is
relevant and useful in evaluating our business.
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 or net
income (loss) determined in accordance with GAAP as an indicator of performance or as an
alternative to cash flows from operating activities as an indicator of liquidity.
The following is a reconciliation of EBITDA to net income (loss) attributable to Red Lion
Hotels Corporation for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
EBITDA |
|
$ |
12,221 |
|
|
$ |
13,094 |
|
|
$ |
20,021 |
|
|
$ |
24,409 |
|
Income tax (expense) benefit |
|
|
(1,674 |
) |
|
|
(1,852 |
) |
|
|
1,046 |
|
|
|
(683 |
) |
Interest expense |
|
|
(2,282 |
) |
|
|
(2,268 |
) |
|
|
(6,832 |
) |
|
|
(6,297 |
) |
Depreciation and amortization |
|
|
(5,221 |
) |
|
|
(5,339 |
) |
|
|
(15,624 |
) |
|
|
(15,604 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Red Lion
Hotels Corporation |
|
$ |
3,044 |
|
|
$ |
3,635 |
|
|
$ |
(1,389 |
) |
|
$ |
1,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
EBITDA from continuing operations |
|
$ |
12,377 |
|
|
$ |
12,700 |
|
|
$ |
20,579 |
|
|
$ |
24,072 |
|
Income tax (expense) benefit |
|
|
(1,729 |
) |
|
|
(1,723 |
) |
|
|
843 |
|
|
|
(589 |
) |
Interest expense |
|
|
(2,282 |
) |
|
|
(2,268 |
) |
|
|
(6,832 |
) |
|
|
(6,297 |
) |
Depreciation and amortization |
|
|
(5,216 |
) |
|
|
(5,322 |
) |
|
|
(15,590 |
) |
|
|
(15,544 |
) |
Discontinued operations, net of tax |
|
|
(106 |
) |
|
|
248 |
|
|
|
(389 |
) |
|
|
183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Red Lion
Hotels Corporation |
|
$ |
3,044 |
|
|
$ |
3,635 |
|
|
$ |
(1,389 |
) |
|
$ |
1,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Revenue
A breakdown of our revenues for the three and nine months ended September 30, 2010 and 2009 is
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating revenue |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Hotels: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rooms |
|
$ |
35,734 |
|
|
$ |
32,988 |
|
|
$ |
84,934 |
|
|
$ |
81,722 |
|
Food and beverage |
|
|
9,048 |
|
|
|
10,453 |
|
|
|
26,914 |
|
|
|
31,037 |
|
Other department |
|
|
1,439 |
|
|
|
1,315 |
|
|
|
3,625 |
|
|
|
3,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hotels segment |
|
|
46,221 |
|
|
|
44,756 |
|
|
|
115,473 |
|
|
|
115,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise |
|
|
999 |
|
|
|
1,046 |
|
|
|
2,446 |
|
|
|
2,845 |
|
Entertainment |
|
|
2,048 |
|
|
|
3,861 |
|
|
|
6,866 |
|
|
|
8,968 |
|
Other |
|
|
575 |
|
|
|
592 |
|
|
|
1,815 |
|
|
|
1,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Revenue |
|
$ |
49,843 |
|
|
$ |
50,255 |
|
|
$ |
126,600 |
|
|
$ |
129,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2010 and 2009
During the third quarter of 2010, revenue from the hotels segment increased $1.5 million, or
3.3%, compared to the third quarter of 2009. The increase in rooms revenue in the current period
was driven by an increase in both ADR and occupancy. Third quarter 2010 ADR was up 5.8% from third
quarter of 2009 primarily driven by group room rate increases and a decreased reliance on
discounted OTA rooms. Occupancy for the third quarter of 2010 was 70.1% representing an increase of
160 basis points compared to the third quarter of 2009. The occupancy increase was primarily driven
by the implementation of our mix change initiatives. Food and beverage revenues declined $1.4
million, or 13.4%, during the third quarter of 2010 compared to the third quarter of 2009,
reflecting the impact of our breakfast-inclusive sales strategy and the decision to modify food and
beverage offerings in select markets.
Revenue from the franchise segment decreased $0.1 million compared to the prior year due to
the fact that there was one less franchised hotel in the system. Revenues from the entertainment
segment decreased $1.8 million, or 47.0%, quarter-over-quarter as a result of the impact of one
less Best of Broadway production in the third quarter of 2010 than in the third quarter of 2009.
Nine Months Ended September 30, 2010 and 2009
In the first nine months of 2010, revenue from the hotels segment decreased $0.5 million, or
0.4%, compared to the first nine months of 2009, driven by a $4.1 million, or 13.3%, drop in food
and beverage revenue. Room revenues in the first nine months of 2010 were positively impacted by
our focus on higher-rated transient and preferred corporate guests and reduced room bookings from
discount OTA channels. Compared to the first nine months of 2009, RevPAR increased 3.9% for owned
and leased hotels on a 90 basis point increase in occupancy and a 2.4% increase in ADR. Current
period results were also impacted by the introduction of our Variable Dining Option concept that
includes a system-wide breakfast initiative to compete with the limited and select service hotels
that offer free breakfast in our markets.
Revenue from the franchise segment decreased $0.4 million compared to the first nine months of
2009, due to a one-time settlement received in 2009. Entertainment revenue was down 23.4% to $6.9
million as a result of the impact of one less Best of Broadway production in the nine month
period ended September 30, 2010.
Operating Expenses
Operating expenses include direct expenses for each of the operating segments, hotel facility
and land lease expense, depreciation and amortization, gain or loss on asset dispositions and
undistributed corporate expenses. In the aggregate, operating expenses during the third quarter of
2010 compared to the third quarter of 2009 were essentially flat, while during the first nine
months they increased $0.6 million year-over-year, as shown below:
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Expenses |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
$ |
31,652 |
|
|
$ |
30,233 |
|
|
$ |
86,864 |
|
|
$ |
85,357 |
|
Franchise |
|
|
789 |
|
|
|
646 |
|
|
|
2,177 |
|
|
|
1,764 |
|
Entertainment |
|
|
1,545 |
|
|
|
2,987 |
|
|
|
5,544 |
|
|
|
7,375 |
|
Other |
|
|
438 |
|
|
|
528 |
|
|
|
1,275 |
|
|
|
1,609 |
|
Depreciation and amortization |
|
|
5,216 |
|
|
|
5,322 |
|
|
|
15,590 |
|
|
|
15,544 |
|
Hotel facility and land lease |
|
|
1,987 |
|
|
|
1,750 |
|
|
|
5,512 |
|
|
|
5,271 |
|
Gain on asset dispositions, net |
|
|
(118 |
) |
|
|
(85 |
) |
|
|
(273 |
) |
|
|
(140 |
) |
Undistributed corporate expenses |
|
|
1,431 |
|
|
|
1,540 |
|
|
|
5,237 |
|
|
|
4,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
42,940 |
|
|
$ |
42,921 |
|
|
$ |
121,926 |
|
|
$ |
121,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels revenue owned |
|
$ |
33,316 |
|
|
$ |
32,354 |
|
|
$ |
83,582 |
|
|
$ |
84,545 |
|
Direct margin (1) |
|
$ |
10,674 |
|
|
$ |
11,044 |
|
|
$ |
21,603 |
|
|
$ |
24,437 |
|
Direct margin % |
|
|
32.0 |
% |
|
|
34.1 |
% |
|
|
25.8 |
% |
|
|
28.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels revenue leased |
|
$ |
12,904 |
|
|
$ |
12,402 |
|
|
$ |
31,891 |
|
|
$ |
31,384 |
|
Direct margin (1) |
|
$ |
3,895 |
|
|
$ |
3,478 |
|
|
$ |
7,006 |
|
|
$ |
6,134 |
|
Direct margin % |
|
|
30.2 |
% |
|
|
28.0 |
% |
|
|
22.0 |
% |
|
|
19.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise revenue |
|
$ |
999 |
|
|
$ |
1,046 |
|
|
$ |
2,446 |
|
|
$ |
2,845 |
|
Direct margin (1) |
|
$ |
210 |
|
|
$ |
400 |
|
|
$ |
269 |
|
|
$ |
1,081 |
|
Direct margin % |
|
|
21.0 |
% |
|
|
38.2 |
% |
|
|
11.0 |
% |
|
|
38.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment revenue |
|
$ |
2,048 |
|
|
$ |
3,861 |
|
|
$ |
6,866 |
|
|
$ |
8,968 |
|
Direct margin (1) |
|
$ |
503 |
|
|
$ |
874 |
|
|
$ |
1,322 |
|
|
$ |
1,593 |
|
Direct margin % |
|
|
24.6 |
% |
|
|
22.6 |
% |
|
|
19.3 |
% |
|
|
17.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
$ |
575 |
|
|
$ |
592 |
|
|
$ |
1,815 |
|
|
$ |
1,986 |
|
Direct margin (1) |
|
$ |
137 |
|
|
$ |
64 |
|
|
$ |
540 |
|
|
$ |
377 |
|
Direct margin % |
|
|
23.8 |
% |
|
|
10.8 |
% |
|
|
29.8 |
% |
|
|
19.0 |
% |
|
|
|
(1) |
|
Revenues less direct operating expenses. |
Three Months Ended September 30, 2010 and 2009
Direct hotel expenses in the third quarter of 2010 increased by $1.4 million, or 4.7%,
compared to the third quarter of 2009. Room related expenses increased $1.4 million, or 15.6%,
compared with a room revenue increase of $2.7 million. Food and beverage costs decreased $0.9
million, or 10.5%, compared with a food and beverage revenue decrease of $1.4 million.
Quarter-on-quarter, the hotel segment reported a 15.8% increase in expense related to sales
personnel and technology expense. Overall, the hotels segment had a direct profit of $14.6 million
during the third quarter of 2010 compared to $14.5 million during the third quarter of 2009,
providing for a direct operating margin in the current period of 31.5%, a 90 basis point decline
compared to 32.4% during the same period in 2009.
As discussed in Note 12 of Condensed Notes to Consolidated Financial Statements, in June 2009,
the FASB issued changes to the consolidation guidance applicable to variable interest entities
(VIE). Under the new guidance, we determined that our Central Program Fund (CPF) now meets the
definition of a VIE and should be included in our consolidated financial statements. We adopted
these changes retrospectively on January 1, 2010.
The CPF acts as an agent for our owned and leased hotels and for our franchisees, and was
created to provide services to all member hotels including certain advertising services, frequent
guest program administration, reservation services, national sales promotions and brand and revenue
management services intended to increase sales and enhance the reputation of the Red Lion brand.
The activities of the CPF benefit our owned and leased hotels as well as our franchise properties.
Historically, only the proportionate share of CPF expense for our owned and leased hotels was
recognized in the consolidated financial statements. Based on the new guidance, we now include all
of the expenses and other balances of the CPF in our consolidated financial statements, including
revenue received from franchisees to support CPF activities. There have been no changes to the
organization, structure or operating activities of the CPF since its inception in 2002.
The adoption of these changes were applied retrospectively, including the recording to
retained earnings of the $1.0 million impact of cumulative effect of change in accounting principle
as of the earliest period presented, and the consolidated financial
19
statements have been adjusted
to conform to the new treatment. The table below represents the impact on consolidation of the CPF
for the three months ended September 30, 2010 and 2009 (in thousands, except per share data), which
added additional net loss of $0.1 million and net income of $0.6 million, respectively, before the
impact of income tax expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2010 |
|
Three months ended September 30, 2009 |
|
|
Amounts |
|
|
|
|
|
|
|
|
|
Amounts |
|
|
|
|
|
|
before |
|
Impact of |
|
|
|
|
|
before |
|
Impact of |
|
|
|
|
CPF |
|
CPF |
|
As reported |
|
CPF |
|
CPF |
|
As reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
$ |
46,221 |
|
|
$ |
|
|
|
$ |
46,221 |
|
|
$ |
44,756 |
|
|
$ |
|
|
|
$ |
44,756 |
|
Franchise |
|
|
393 |
|
|
|
606 |
|
|
|
999 |
|
|
|
389 |
|
|
|
657 |
|
|
|
1,046 |
|
Entertainment |
|
|
2,048 |
|
|
|
|
|
|
|
2,048 |
|
|
|
3,861 |
|
|
|
|
|
|
|
3,861 |
|
Other |
|
|
575 |
|
|
|
|
|
|
|
575 |
|
|
|
592 |
|
|
|
|
|
|
|
592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
49,237 |
|
|
|
606 |
|
|
|
49,843 |
|
|
|
49,598 |
|
|
|
657 |
|
|
|
50,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
|
31,720 |
|
|
|
(67 |
) |
|
|
31,652 |
|
|
|
30,854 |
|
|
|
(621 |
) |
|
|
30,233 |
|
Franchise |
|
|
159 |
|
|
|
630 |
|
|
|
789 |
|
|
|
154 |
|
|
|
492 |
|
|
|
646 |
|
Entertainment |
|
|
1,545 |
|
|
|
|
|
|
|
1,545 |
|
|
|
2,987 |
|
|
|
|
|
|
|
2,987 |
|
Other |
|
|
438 |
|
|
|
|
|
|
|
438 |
|
|
|
528 |
|
|
|
|
|
|
|
528 |
|
Depreciation and amortization |
|
|
5,216 |
|
|
|
|
|
|
|
5,216 |
|
|
|
5,322 |
|
|
|
|
|
|
|
5,322 |
|
Hotel facility and land lease |
|
|
1,987 |
|
|
|
|
|
|
|
1,987 |
|
|
|
1,750 |
|
|
|
|
|
|
|
1,750 |
|
Gain on asset dispositions, net |
|
|
(118 |
) |
|
|
|
|
|
|
(118 |
) |
|
|
(85 |
) |
|
|
|
|
|
|
(85 |
) |
Undistributed corporate expenses |
|
|
1,431 |
|
|
|
|
|
|
|
1,431 |
|
|
|
1,540 |
|
|
|
|
|
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
42,378 |
|
|
|
563 |
|
|
|
42,940 |
|
|
|
43,050 |
|
|
|
(129 |
) |
|
|
42,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
6,859 |
|
|
|
44 |
|
|
|
6,903 |
|
|
|
6,548 |
|
|
|
786 |
|
|
|
7,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2,282 |
) |
|
|
|
|
|
|
(2,282 |
) |
|
|
(2,268 |
) |
|
|
|
|
|
|
(2,268 |
) |
Other income, net |
|
|
368 |
|
|
|
(103 |
) |
|
|
265 |
|
|
|
189 |
|
|
|
(140 |
) |
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
4,945 |
|
|
|
(59 |
) |
|
|
4,886 |
|
|
|
4,469 |
|
|
|
646 |
|
|
|
5,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
1,729 |
|
|
|
|
|
|
|
1,729 |
|
|
|
1,723 |
|
|
|
|
|
|
|
1,723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
3,216 |
|
|
$ |
(59 |
) |
|
$ |
3,157 |
|
|
$ |
2,746 |
|
|
$ |
646 |
|
|
$ |
3,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share from continuing operations |
|
$ |
0.17 |
|
|
$ |
(0.00 |
) |
|
$ |
0.17 |
|
|
$ |
0.15 |
|
|
$ |
0.03 |
|
|
$ |
0.19 |
|
|
|
|
|
|
Weighted-average shares outstanding diluted |
|
|
18,710 |
|
|
|
18,710 |
|
|
|
18,710 |
|
|
|
18,306 |
|
|
|
18,306 |
|
|
|
18,306 |
|
EBITDA from continuing operations |
|
$ |
12,436 |
|
|
$ |
(59 |
) |
|
$ |
12,377 |
|
|
$ |
12,054 |
|
|
$ |
646 |
|
|
$ |
12,700 |
|
Direct costs for the franchise segment increased $0.1 million in the third quarter of 2010
compared to the third quarter of 2009, resulting in a direct margin decrease of $0.2 million from
the decreased revenue as discussed above, due to an increase in legal fees quarter-over-quarter and
the addition of personnel as part of our operating strategy of growing our franchise base. The
entertainment segment reported decreased expenses of $1.4 million, or 48.3%, in-line with the
revenue decrease of 47.0% during the third quarter of
2010 compared to the same period in 2009. Overall, the entertainment segment reported a direct
margin profit of $0.5 million during the third quarter of 2010, a 42.4% decline from the third
quarter of 2009.
Depreciation and amortization expense decreased 2.0% quarter over quarter to $5.2 million, and
total undistributed corporate expenses decreased 7.0% to $1.4 million. Undistributed corporate
expenses include general and administrative charges such as corporate payroll, legal expenses,
charitable contributions, director and officers insurance, bank service charges and outside
accountants and various other consultants expense. We consider these expenses to be
undistributed because the costs are not directly related to our business segments and therefore
are not further distributed. However, costs that can be identified with a particular segment are
distributed, such as accounting, human resources and information technology, and are included in
direct expenses.
Nine Months Ended September 30, 2010 and 2009
Direct hotel expenses during the first nine months of 2010 were $86.9 million compared to
$85.4 million for the first nine months of 2009, representing a 1.8% increase year over year. Rooms
related expenses increased $2.9 million, offset by a food and beverage cost decrease of $2.9
million during the comparable periods, reflecting the impact of our breakfast-inclusive sales
strategy and the
20
decision to modify food and beverage offerings in select markets. As part of our
operations strategy, the hotel segment reported a 15.9%, or $1.3 million, increase in expense
related to sales personnel and technology expense during the first nine months of 2010 compared to
the first nine months of 2009. Overall, the segment recorded direct profit during the first nine
months of 2010 of $28.6 million compared to $30.6 million during the first nine months of 2009.
As discussed above and in Note 12 of Condensed Notes to Consolidated Financial Statements, we
have included our CPF in our consolidated financial statements retrospectively on January 1, 2010.
The table below represents the impact on consolidation of the CPF for the nine months ended
September 30, 2010 and 2009 (in thousands, except per share data), which added additional net loss
of $1.0 million and $0.4 million, respectively, before the impact of income tax benefit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2010 |
|
|
Nine months ended September 30, 2009 |
|
|
|
Amounts |
|
|
|
|
|
|
|
|
|
|
Amounts |
|
|
|
|
|
|
|
|
|
before |
|
|
Impact of |
|
|
|
|
|
|
before |
|
|
Impact of |
|
|
|
|
|
|
CPF |
|
|
CPF |
|
|
As reported |
|
|
CPF |
|
|
CPF |
|
|
As reported |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
$ |
115,473 |
|
|
$ |
|
|
|
$ |
115,473 |
|
|
$ |
115,929 |
|
|
$ |
|
|
|
$ |
115,929 |
|
Franchise |
|
|
1,022 |
|
|
|
1,424 |
|
|
|
2,446 |
|
|
|
1,397 |
|
|
|
1,448 |
|
|
|
2,845 |
|
Entertainment |
|
|
6,866 |
|
|
|
|
|
|
|
6,866 |
|
|
|
8,968 |
|
|
|
|
|
|
|
8,968 |
|
Other |
|
|
1,815 |
|
|
|
|
|
|
|
1,815 |
|
|
|
1,986 |
|
|
|
|
|
|
|
1,986 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
125,176 |
|
|
|
1,424 |
|
|
|
126,600 |
|
|
|
128,280 |
|
|
|
1,448 |
|
|
|
129,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
|
86,352 |
|
|
|
512 |
|
|
|
86,864 |
|
|
|
85,383 |
|
|
|
(26 |
) |
|
|
85,357 |
|
Franchise |
|
|
595 |
|
|
|
1,582 |
|
|
|
2,177 |
|
|
|
300 |
|
|
|
1,464 |
|
|
|
1,764 |
|
Entertainment |
|
|
5,544 |
|
|
|
|
|
|
|
5,544 |
|
|
|
7,375 |
|
|
|
|
|
|
|
7,375 |
|
Other |
|
|
1,275 |
|
|
|
|
|
|
|
1,275 |
|
|
|
1,609 |
|
|
|
|
|
|
|
1,609 |
|
Depreciation and amortization |
|
|
15,590 |
|
|
|
|
|
|
|
15,590 |
|
|
|
15,544 |
|
|
|
|
|
|
|
15,544 |
|
Hotel facility and land lease |
|
|
5,512 |
|
|
|
|
|
|
|
5,512 |
|
|
|
5,271 |
|
|
|
|
|
|
|
5,271 |
|
Gain on asset dispositions, net |
|
|
(273 |
) |
|
|
|
|
|
|
(273 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
(140 |
) |
Undistributed corporate expenses |
|
|
5,237 |
|
|
|
|
|
|
|
5,237 |
|
|
|
4,526 |
|
|
|
|
|
|
|
4,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
119,832 |
|
|
|
2,094 |
|
|
|
121,926 |
|
|
|
119,868 |
|
|
|
1,438 |
|
|
|
121,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
5,344 |
|
|
|
(670 |
) |
|
|
4,674 |
|
|
|
8,412 |
|
|
|
10 |
|
|
|
8,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(6,832 |
) |
|
|
|
|
|
|
(6,832 |
) |
|
|
(6,297 |
) |
|
|
|
|
|
|
(6,297 |
) |
Other income, net |
|
|
653 |
|
|
|
(341 |
) |
|
|
312 |
|
|
|
537 |
|
|
|
(426 |
) |
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(835 |
) |
|
|
(1,011 |
) |
|
|
(1,846 |
) |
|
|
2,652 |
|
|
|
(416 |
) |
|
|
2,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) expense |
|
|
(843 |
) |
|
|
|
|
|
|
(843 |
) |
|
|
589 |
|
|
|
|
|
|
|
589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
$ |
8 |
|
|
$ |
(1,011 |
) |
|
$ |
(1,003 |
) |
|
$ |
2,063 |
|
|
$ |
(416 |
) |
|
$ |
1,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share from continuing operations |
|
$ |
0.00 |
|
|
$ |
(0.05 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.11 |
|
|
$ |
(0.02 |
) |
|
$ |
0.09 |
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
18,402 |
|
|
|
18,402 |
|
|
|
18,402 |
|
|
|
18,119 |
|
|
|
18,119 |
|
|
|
18,119 |
|
EBITDA from continuing operations |
|
$ |
21,590 |
|
|
$ |
(1,011 |
) |
|
$ |
20,579 |
|
|
$ |
24,488 |
|
|
$ |
(416 |
) |
|
$ |
24,072 |
|
Direct costs for the franchise segment increased $0.4 million during the first nine months of
2010 over the 2009 period, for a segment margin decline of $0.8 million year over year.
Entertainment costs decreased $1.8 million, or 24.8%, on a revenue decline of $2.1 million from the
prior year period. Overall, the entertainment segment reported a direct margin profit decrease of
17.0% to $1.3 million during the first nine months of 2010 compared to the first nine months of
2009.
Undistributed corporate expenses during the first nine months of 2010 increased $0.7 million,
or 15.7%, over the prior year period. These expenses included the $1.2 million expense recorded
during the first quarter of 2010 upon the separation of our former President and Chief Executive
Officer as discussed above.
Income Taxes
During the third quarter of 2010, we reported income tax expense of $1.7 million on income
from continuing operations compared to income tax expense of $1.7 million during the third quarter
of 2009. During the first nine months of 2010, we recognized an income tax benefit of $0.8 million
compared to $0.6 million income tax expense during the same period in 2009. The experienced
21
rate on pre-tax net income differed from the statutory combined federal and state rates
primarily due to the utilization of certain incentive tax credits allowed under federal law.
Liquidity and Capital Resources
As of September 30, 2010 we had total long term debt maturing within one year of $20.5
million. In addition, another $5.0 million of debt that matures in October 2011 is included in the
balance of long term debt, due after one year. Lastly, the outstanding balance under our revolving
credit facility at September 30, 2010 of $16.0 million is included as a current liability because
the facility expires in September 2011.
Our current liabilities at September 30, 2010 exceeded our current assets by $39.9 million.
We are actively pursuing financing alternatives to address maturing liabilities and to supplement
working capital. While we continue to be in compliance with our debt agreements, to generate
positive cash flow from operations and positive operating income, and to have adequate liquidity to
fund our ongoing operating activities, there can be no assurance that we will be able to refinance
our debts when they mature.
In addition to or in place of a new credit facility and new term debt, we may seek to raise
additional funds through public or private financings, strategic relationships, sale of assets or
other arrangements. We cannot assure that such funds, if needed, will be available on terms
attractive to us, or at all. Furthermore, any additional equity financings may be dilutive to
shareholders and debt financing, if available, may involve covenants that place substantial
restrictions on our business. Our failure to secure funding as and when needed could have a
material adverse impact on our financial condition and our ability to pursue business strategies.
At September 30, 2010, outstanding debt was $124.8 million. In addition to the $16.0 million
outstanding under the credit facility, we had other outstanding bank debt of $12.6 million under a
variable rate note, $30.8 million in the form of trust preferred securities and a total of $65.4
million in 13 fixed-rate notes collateralized by individual properties. Our average pre-tax
interest rate on debt was 6.9% at September 30, 2010, of which 77.1% was fixed at an average rate
of 7.9% and 22.9% was at an average variable rate of 3.4%. In July 2010, we extended the maturity
date for the credit facility to September 2011 under the terms of the agreement. Our first
fixed-rate term debt maturity is in September 2011. Only the credit facility and a variable rate
bank note have financial covenants, with which we were in compliance as of September 30, 2010.
In February 2010, we signed an amendment to our credit facility in order to increase our
financial flexibility. The amendments to the facility, secured by our Seattle Red Lion Hotel on
Fifth Avenue property, modified our total leverage ratio and senior leverage ratio covenants for
2010 and 2011, increased the interest rate on Eurodollar borrowings to LIBOR plus 3.25% and reduced
borrowing capacity to $37.5 million from the previous $50 million. We also have a prime rate
property note secured by our Red Lion Bellevue location, with a balance of $12.6 million at
September 30, 2010 and due in 2013. This note has financial covenants that mirror those of our
credit facility, and was also amended in February 2010. The interest rate on this note was 3.25%
at September 30, 2010.
A comparative summary of our balance sheets at September 30, 2010 and December 31, 2009 is
provided below:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2010 |
|
2009 |
Consolidated balance sheet data (in thousands): |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
3,046 |
|
|
$ |
3,881 |
|
Working capital (1) |
|
$ |
(39,886 |
) |
|
$ |
(1,161 |
) |
Assets of discontinued operations |
|
$ |
|
|
|
$ |
242 |
|
Property and equipment, net |
|
$ |
278,340 |
|
|
$ |
285,601 |
|
Total assets |
|
$ |
344,868 |
|
|
$ |
350,636 |
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
|
|
|
$ |
29 |
|
Total debt |
|
$ |
93,964 |
|
|
$ |
106,322 |
|
Debentures due Red Lion Hotels Capital Trust |
|
$ |
30,825 |
|
|
$ |
30,825 |
|
Total liabilities |
|
$ |
168,811 |
|
|
$ |
175,614 |
|
Total stockholders equity |
|
$ |
176,057 |
|
|
$ |
175,022 |
|
|
|
|
(1) |
|
Represents current assets less current liabilities. |
During the remaining three months of 2010, we expect cash expenditures to primarily include
the funding of operating activities, interest payments on our outstanding indebtedness and capital
expenditures.
22
Operating Activities
Net cash provided by operations totaled $18.4 million during the first nine months of 2010, a
4.4% decrease from the net cash provided by operations of $19.2 million during the first nine
months of 2009. The net income, adjusted for non-cash income statement expenses, including
depreciation and amortization, provision for deferred tax and stock based compensation, provided
cash from operations of $14.3 million compared to $19.2 million during the first nine months of
2009. Working capital changes, including restricted cash, receivables, accruals, payables and
inventories, were $4.1 million positive during the first nine months of 2010 compared with a net
zero change during the comparable period of 2009. During the first nine months of 2010 and 2009,
the changes in accounts payable and accrued payroll balances were $4.7 million and ($6.4) million,
respectively, were due to timing of payments, offset by an increase in our accounts receivable and
restricted cash balances of $4.0 million and a decrease of accounts receivable and restricted cash
balances of $1.7 million, respectively. We realized a $5.3 million negative change in accounts
payable in the first nine months of 2009, primarily as a result of renovation activities that were
completed at our Red Lion Anaheim property in February 2009, offset by a $1.5 million positive
change in accounts receivable in 2009. In June 2009, we received $0.9 million in deferred lease
income pursuant to an amendment to the sublease agreement for the Red Lion Hotel Sacramento. The
$0.9 million will be recognized over the life of the sublease agreement.
Investing Activities
Net cash used in investing activities totaled $7.4 million during the first nine months of
2010 compared to $16.1 million during 2009. Cash additions to property and equipment decreased
$7.2 million from the first nine months of 2009, as the prior year period included the completion
of renovations at our Red Lion Anaheim, Seattles Fifth Avenue and Denver properties. Capital
expenditures in 2010 are expected to be $10.8 million, and will primarily support essential
investments in maintenance, technology and basic hotel improvement projects. For the remainder of
2010, we will continue to manage our capital and expect our cash expenditures to primarily include
the funding of operating activities and interest payments on our outstanding indebtedness. We may
reduce our anticipated level of capital spending to match appropriate needs and circumstances.
During 2009, we utilized $0.3 million of restricted cash to fulfill our commitment of $0.9
million in tenant improvements at the Red Lion Hotel Sacramento in connection with an amendment to
the sublease agreement. This commitment was completed by the end of 2009.
Financing Activities
Net cash used in financing activities was $11.8 million during the first nine months of 2010
compared to $16.3 million used during the first nine months of 2009. Net financing activities
during the first nine months of 2010 benefited from the exercise by employees of stock options
resulting in proceeds to us of $0.8 million, with no options having been exercised during 2009.
During the current period, we had a net repayment on our credit facility of $10.0 million, and made
scheduled long-term debt principal payments similar to the prior year period of $2.4 million.
At September 30, 2010, we had total debt obligations of $124.8 million, of which $65.4 million
was under 13 notes collateralized by individual hotels with fixed interest rates ranging from 5.9%
to 8.1%. These 13 notes mature beginning in 2011 and continuing through 2013. Included within
outstanding debt are debentures due to the Red Lion Hotels Capital Trust of $30.8 million, which
are uncollateralized and due to the trust in 2044 at a fixed rate of 9.5%. Our average pre-tax
interest rate on debt was 6.9% at September 30, 2010.
Of the $124.8 million in total debt obligations, three pools of cross securitized debt exist:
(i) one consisting of five properties with total borrowings of $19.7 million; (ii) a second
consisting of two properties with total borrowings of $17.7 million; and (iii) a third consisting
of four properties with total borrowings of $22.0 million. Each pool of securitized debt and the
other collateralized hotel borrowings include defeasance provisions for early repayment.
23
Contractual Obligations
The following table summarizes our significant contractual obligations as of September 30,
2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Long-term debt (1) |
|
$ |
105,223 |
|
|
$ |
42,094 |
|
|
$ |
63,129 |
|
|
$ |
|
|
|
$ |
|
|
Operating leases (2) |
|
|
65,003 |
|
|
|
8,692 |
|
|
|
14,032 |
|
|
|
12,014 |
|
|
|
30,265 |
|
Service agreements |
|
|
1,689 |
|
|
|
655 |
|
|
|
1,034 |
|
|
|
|
|
|
|
|
|
Debentures due Red Lion
Hotels Capital Trust (1) |
|
|
128,681 |
|
|
|
2,928 |
|
|
|
5,857 |
|
|
|
5,857 |
|
|
|
114,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations (3) |
|
$ |
300,596 |
|
|
$ |
54,369 |
|
|
$ |
84,052 |
|
|
$ |
17,871 |
|
|
$ |
144,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Including estimated interest payments and commitment fees over the life of the debt agreement. |
|
(2) |
|
Operating lease amounts are net of estimated sublease income of $10.5 million annually. |
|
(3) |
|
With regard to purchase obligations, we are not party to any material agreements to purchase goods or services that are enforceable or
legally binding as to fixed or minimum quantities to be purchased or stated price terms. |
In 2001, we assumed a master lease agreement for 17 hotel properties, including 12 that were
part of the Red Lion acquisition. Subsequently, we entered into an agreement with Doubletree DTWC
Corporation whereby Doubletree DTWC Corporation is subleasing five of these hotel properties from
Red Lion. During the second quarter of 2010, we amended the master lease agreement to exclude the
Astoria, Oregon property due to its closure earlier in the year. Total fees paid to amend the
agreement were $0.3 million. The master lease agreement requires minimum monthly payments of $1.2
million plus contingent rents based on gross receipts from the 16 hotels, of which approximately
$0.8 million per month is paid by a sub-lease tenant. The lease agreement expires in December 2020,
although we have the option to extend the term on a hotel-by-hotel basis for three additional
five-year terms.
In October 2007, we completed an acquisition of a 100-year (including extension periods)
leasehold interest in a hotel in Anaheim, California for $8.3 million, including costs of
acquisition. As required under the terms of the leasehold agreement, we will pay $1.8 million per
year in lease payments through April 2011, the amounts of which have been reflected in the above
table. At our option, we are entitled to extend the lease for 19 additional terms of five years
each, with increases in lease payments tied directly to the Consumer Price Index. Beyond the
monthly payments through April 2011, we have not included any additional potential future lease
commitment related to the Anaheim property in the table above.
In May 2008, we completed an acquisition of a hotel in Denver, Colorado. In connection
with the purchase agreement, we assumed an office lease used by guests contracted to stay at the
hotel for approximately $0.7 million annually. As part of this contract business, we are reimbursed
the entire lease expense amount. The lease expires in August 2012, and its expense has been
included in the table above.
Franchise Contracts
At September 30, 2010, our system of hotels included 12 hotels under franchise agreements,
representing a total of 2,263 rooms and 115,421 square feet of meeting space. During the second
quarter of 2010, a franchise agreement for the Red Lion Hotel Bakersfield (165 rooms) ended by
agreement and was not renewed, and this property left our system of hotels. Subsequent to the end
of the quarter and prior to the filing of this quarterly report, we signed two more hotels into the
Red Lion system. Both properties are located in Northern California. The first will be a Red Lion
Inn located in Rancho Cordova, a suburb of Sacramento, California. This 111 room limited service
hotel is expected to open as a Red Lion Inn in January 2011. The second will be the Red Lion
Hotel, Oakland International Airport. This property is an independent full service airport hotel
with 189 rooms, and is expected to be converted to the Red Lion flag in early 2011.
Off-balance Sheet Arrangements
As of September 30, 2010, we had no off-balance sheet arrangements, as defined by SEC
regulations, which have or are reasonably likely to have a current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to investors.
24
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial statements, and (ii)
the reported amounts of revenues and expenses during the reporting periods. Actual results could
differ materially from those estimates. We consider a critical accounting policy to be one that is
both important to the portrayal of our financial condition and results of operations and requires
managements most subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Our significant accounting policies are
described in Note 2 of Notes to Consolidated Financial Statements included in our annual report on
Form 10-K for the year ended December 31, 2009.
Management has discussed the development and selection of our critical accounting policies and
estimates with the audit committee of our board of directors, and the audit committee has reviewed
the disclosures presented on Form 10-K for the year ended December 31, 2009. Since the date of our
2009 Form 10-K, there have been no material changes to our critical accounting policies, nor have
there been any changes to our methodology and assumptions applied to these policies.
New Accounting Pronouncements
Variable Interest Entities In June 2009, the FASB issued changes to the consolidation
guidance applicable to variable interest entities (VIE). These changes also amended the guidance
governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is,
therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a
quantitative analysis. The qualitative analysis is to include, among other things, consideration
of who has the power to direct the activities of the entity that most significantly impact the
entitys economic performance and who has the obligation to absorb losses or the right to receive
benefits of the VIE that could potentially be significant to the VIE. Under the new guidance, we
determined that our Central Program Fund (CPF) now meets the definition of a VIE and should be
included in our consolidated financial statements. We adopted these changes retrospectively on
January 1, 2010.
The CPF acts as an agent for our owned and leased hotels and for our franchisees, and was
created to provide services to all member hotels including certain advertising services, frequent
guest program administration, reservation services, national sales promotions and brand and revenue
management services intended to increase sales and enhance the reputation of the Red Lion brand.
The activities of the CPF benefit our owned and leased hotels as well as our franchise properties;
however, historically only the proportionate share of CPF expense for our owned and leased hotels
was recognized in the consolidated financial statements. Based on the new guidance, we will now
include all of the expenses and other balances of the CPF in our consolidated financial statements,
including revenue received from franchisees to support CPF activities. There have been no changes
to the organization, structure or operating activities of the CPF since its inception in 2002.
The adoption of these changes were applied retrospectively, including the recording to
retained earnings of the $1.0 million net of tax impact of cumulative effect of change in
accounting principle as of January 1, 2008, and the consolidated financial statements have been
adjusted to conform to the new treatment. On January 1, 2010, total assets decreased by $0.9
million primarily representing the consolidation of accounts receivable, and total liabilities
increased $0.1 million. The impact of the CPF for the three and nine months ended September 30,
2010 and 2009, added additional expense before income tax of $0.1 million and income of $0.6
million, and expense of $1.0 million and $0.4 million, respectively. The activities of the CPF are
cyclical throughout any one year. For the quarters ended September 30, 2009 and December 31, 2009,
net income (loss) before income tax was positively impacted by $0.6 million and $0.4 million,
respectively. The total impact on net loss before income tax for the year ended December 31, 2009
related to the CPF was a negative adjustment of $24,000, compared to a positive impact of $105,000
for the year ended December 31, 2008. We anticipate the activities of the CPF will not have a
material impact on the consolidated financial statements for the full year 2010.
Fair Value Measurements In January 2010, the FASB released Accounting Standards Update No.
2010-06 (ASU 2010-06), we adopted new accounting guidance that requires disclosure of significant
transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for these transfers
and the reasons for any transfers in or out of Level 3 of the fair value hierarchy. In addition,
the guidance clarifies certain existing disclosure requirements. This standard did not have a
material impact on our disclosures in its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2010, $96.2 million of our outstanding debt was subject to currently fixed
interest rates and was not exposed to market risk from rate changes. In February 2010, we amended
the terms of our credit facility to modify our total leverage ratio and senior leverage ratio
covenants for 2010 and 2011, increase the interest rate on Eurodollar borrowings to LIBOR plus
3.25% and reduce borrowing capacity to $37.5 million from the previous $50 million. At the same
time, we also amended the variable rate property note secured by our Red Lion Bellevue location.
The interest rate on the $12.6 million outstanding under that note is now based on Prime at 3.25%.
Outside of these changes, we do not foresee any other changes of significance in our exposure to
25
fluctuations in interest rates, although we will continue to manage our exposure to this risk
by monitoring available financing alternatives.
The below table summarizes our debt obligations at September 30, 2010 on our consolidated
balance sheet (in thousands). During the first nine months of 2010, principal payments of $12.4
million were made that were included as debt obligations at December 31, 2009, including $10.0
million in net repayments on our credit facility.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
|
Thereafter |
|
Total |
|
Fair Value |
|
|
|
Long-term debt |
|
$ |
812 |
|
|
$ |
41,275 |
|
|
$ |
1,974 |
|
|
$ |
49,903 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
93,964 |
|
|
$ |
90,071 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures due Red Lion
Hotels Capital Trust |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
30,825 |
|
|
$ |
30,825 |
|
|
$ |
31,602 |
|
Average interest rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.5 |
% |
|
|
|
|
Item 4. Controls and Procedures
As of September 30, 2010, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO) and our former Chief
Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our management, including the CEO and CFO,
concluded that our disclosure controls and procedures were effective to ensure that material
information required to be disclosed by us in the reports filed or submitted by us under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within time periods
specified in Securities and Exchange Commission rules and forms.
There were no changes in internal control over financial reporting, as defined in Exchange Act
Rule 13a-15(f), during the first nine months of 2010 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting.
26
PART II OTHER INFORMATION
Item 1. Legal Proceedings
At any given time, we are subject to claims and actions incidental to the operation of our
business. For additional information on our commitments and contingencies, see Note 11 of
Condensed Notes to Consolidated Financial Statements. 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 1A.Risk Factors
In addition to the other information set forth in this report, you should carefully consider
the risk factors discussed in Part I, Item 1A Risk Factors in our annual report on Form 10-K for
the year ended December 31, 2009, which could materially affect our business, financial condition
or future results. The risks described in our annual report may not be the only risks facing our
company. Additional risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial condition and/or
operating results in the future.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Reserved
Item 5. Other Information
None.
27
Item 6. Exhibits
Index to Exhibits
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
31.2
|
|
Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
32.1
|
|
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14(b) |
32.2
|
|
Certification of Principal Financial Officer pursuant to Exchange Act Rule 13(a)-14(b) |
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Red Lion Hotels Corporation
Registrant
|
|
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
By:
|
|
/s/ Jon E. Eliassen
Jon E. Eliassen
|
|
President and Chief Executive Officer
(Principal Executive Officer) and
(Principal Financial Officer)
|
|
November 8, 2010 |
29