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 March 31, 2007
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
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91-1032187 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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201 W. North River Drive, Suite 100
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99201 |
Spokane Washington
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(Zip Code) |
(Address of principal executive offices) |
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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 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
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 April 30, 2007, there were 19,191,433 shares of the registrants common stock
outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, 2007 and December 31, 2006
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March 31, |
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December 31, |
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2007 |
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2006 |
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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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$ |
13,600 |
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$ |
13,262 |
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Investments |
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7,635 |
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Restricted cash |
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4,052 |
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2,756 |
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Accounts receivable, net |
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10,154 |
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9,309 |
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Inventories |
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1,493 |
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1,523 |
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Prepaid expenses and other |
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4,846 |
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3,907 |
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Assets held for sale: |
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Assets of discontinued operations |
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14,656 |
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14,539 |
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Other assets held for sale |
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715 |
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715 |
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Total current assets |
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49,516 |
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53,646 |
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Property and equipment, net |
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250,980 |
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249,860 |
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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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11,966 |
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12,097 |
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Other assets, net |
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7,402 |
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7,793 |
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Total assets |
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$ |
347,906 |
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$ |
351,438 |
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LIABILITIES |
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Current liabilities: |
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Accounts payable |
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$ |
7,482 |
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$ |
8,732 |
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Accrued payroll and related benefits |
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4,357 |
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6,058 |
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Accrued interest payable |
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364 |
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422 |
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Advance deposits |
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715 |
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315 |
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Other accrued expenses |
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11,344 |
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10,381 |
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Long-term debt, due within one year |
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2,261 |
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2,267 |
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Liabilities of discontinued operations |
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4,148 |
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4,112 |
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Total current liabilities |
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30,671 |
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32,287 |
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Long-term debt, due after one year |
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82,491 |
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83,005 |
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Deferred income |
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6,828 |
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7,017 |
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Deferred income taxes |
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14,247 |
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14,259 |
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Minority interest in partnerships |
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242 |
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254 |
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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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165,304 |
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167,647 |
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Commitments and contingencies |
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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; $0.01 par value;
19,191,433 and 19,118,692 shares issued and outstanding |
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192 |
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191 |
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Additional paid-in capital, common stock |
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148,707 |
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147,891 |
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Retained earnings |
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33,703 |
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35,709 |
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Total stockholders equity |
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182,602 |
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183,791 |
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Total liabilities and stockholders equity |
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$ |
347,906 |
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$ |
351,438 |
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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 Months Ended March 31, 2007 and 2006
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Three months ended March 31, |
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2007 |
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2006 |
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(In thousands, except per share data) |
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Revenue: |
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Hotels |
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$ |
34,381 |
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$ |
31,028 |
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Franchise and management |
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789 |
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576 |
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Entertainment |
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3,347 |
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3,371 |
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Other |
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787 |
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773 |
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Total revenues |
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39,304 |
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35,748 |
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Operating expenses: |
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Hotels |
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29,974 |
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27,876 |
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Franchise and management |
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263 |
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222 |
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Entertainment |
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2,855 |
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2,900 |
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Other |
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483 |
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686 |
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Depreciation and amortization |
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4,020 |
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2,884 |
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Hotel facility and land lease |
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1,714 |
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1,695 |
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Gain on asset dispositions, net |
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(190 |
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(182 |
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Undistributed corporate expenses |
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1,450 |
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984 |
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Total expenses |
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40,569 |
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37,065 |
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Operating loss |
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(1,265 |
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(1,317 |
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Other income (expense): |
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Interest expense |
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(2,242 |
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(3,377 |
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Minority interest in partnerships, net |
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12 |
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106 |
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Other income, net |
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309 |
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327 |
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Loss from continuing operations before income taxes |
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(3,186 |
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(4,261 |
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Income tax benefit |
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(1,206 |
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(1,576 |
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Net loss from continuing operations |
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(1,980 |
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(2,685 |
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Discontinued operations: |
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Loss from operations of discontinued business units, net of income
tax benefits of $8 and $175, respectively |
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(14 |
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(318 |
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Net gain (loss) on disposal of discontinued business units, net of
income tax benefit (expense) of $6 and $(16) |
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(12 |
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30 |
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Loss from discontinued operations |
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(26 |
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(288 |
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Net loss |
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$ |
(2,006 |
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$ |
(2,973 |
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Loss per share: |
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Basic and Diluted |
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Loss applicable to shareholders before discontinued
operations |
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$ |
(0.10 |
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$ |
(0.20 |
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Loss from discontinued operations |
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(0.00 |
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(0.02 |
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Loss applicable to shareholders |
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$ |
(0.10 |
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$ |
(0.22 |
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Weighted average shares basic and diluted |
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19,148 |
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13,235 |
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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 Three Months Ended March 31, 2007 and 2006
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Three months ended March 31, |
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2007 |
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2006 |
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(In thousands) |
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Operating activities: |
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Net loss |
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$ |
(2,006 |
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$ |
(2,973 |
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Adjustments to reconcile net loss to net cash used in
operating activities: |
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Depreciation and amortization |
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4,028 |
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2,989 |
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Gain on disposition of property, equipment and other assets, net |
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(190 |
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(182 |
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Gain on disposition of discontinued operations, net |
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(46 |
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Deferred income tax provision |
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(12 |
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300 |
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Minority interest in partnerships |
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(12 |
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(105 |
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Equity in investments |
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9 |
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(107 |
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Imputed interest expense |
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52 |
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Compensation expense related to stock and option issuance |
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217 |
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190 |
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Provision for (collection of) doubtful accounts |
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(13 |
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182 |
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Change in current assets and liabilities: |
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Restricted cash |
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(1,296 |
) |
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(1,376 |
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Accounts receivable |
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(414 |
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31 |
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Inventories |
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30 |
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57 |
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Prepaid expenses and other |
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(726 |
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(1,523 |
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Accounts payable |
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(1,242 |
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(1,990 |
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Accrued payroll and related benefits |
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(1,705 |
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(1,579 |
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Accrued interest payable |
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(58 |
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2 |
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Other accrued expenses and advance deposits |
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1,396 |
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841 |
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Net cash used in operating activities |
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(1,942 |
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(5,289 |
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Investing activities: |
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Purchases of property and equipment |
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(5,160 |
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(10,664 |
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Proceeds from disposition of property and equipment |
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14 |
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Proceeds from disposition of discontinued operations |
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5,137 |
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Proceeds from short-term liquid investments |
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7,635 |
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11,800 |
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Advances to Red Lion Hotels Capital Trust |
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(17 |
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(17 |
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Other, net |
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(41 |
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(71 |
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Net cash provided by investing activities |
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2,417 |
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6,199 |
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Financing activities: |
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Repayment of long-term debt |
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(572 |
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(910 |
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Proceeds from issuance of common stock under employee stock
purchase plan |
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88 |
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65 |
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Proceeds from stock option exercises |
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379 |
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78 |
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Additions to deferred financing costs |
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(6 |
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Net cash used in financing activities |
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(105 |
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(773 |
) |
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Net cash in discontinued operations |
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(32 |
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48 |
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Change in cash and cash equivalents: |
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Net increase in cash and cash equivalents |
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338 |
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185 |
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Cash and cash equivalents at beginning of period |
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13,262 |
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13,533 |
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Cash and cash equivalents at end of period |
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$ |
13,600 |
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$ |
13,718 |
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Supplemental disclosure of cash flow information: |
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Cash paid during periods for: |
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Interest on long-term debt |
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$ |
2,242 |
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$ |
3,529 |
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Income taxes |
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$ |
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$ |
2,022 |
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Noncash investing and financing activities: |
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Exchange of common stock for minority interest in partnership |
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$ |
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$ |
2,273 |
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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 and upscale, full service hotels under the Red Lion brand. As of March 31,
2007, the Red Lion system of hotels contained 57 hotels located in eight states and one Canadian
province, with 10,001 rooms and 503,529 square feet of meeting space. As of that date, the Company
operated 32 hotels, of which 19 are wholly owned and 13 are leased, managed one hotel owned by a
third-party and franchised 24 hotels that were owned and operated by various third-party
franchisees.
In addition to hotel operations, the Company is also engaged in entertainment operations.
Through the entertainment division, which includes TicketsWest.com, Inc., the Company engages in
event ticket distribution and promotion and presents a variety of entertainment productions.
Historically, the Company owned certain commercial real estate properties and engaged in
traditional real estate related services, including developing, managing and acting as a broker for
sales and leases of commercial and multi-unit residential properties (collectively referred to as
the real estate management business). Together with commercial retail and office properties we
own, these operations comprised the Real Estate segment. Effective April 30, 2006, the Company
divested the real estate management business. The Company has listed one of two remaining
wholly-owned commercial real estate properties for sale. Assets held for sale and discontinued
operations are discussed further in Note 4, and any former Real Estate segment activities that are
still part of continuing operations are included within the Other segment.
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).
Up to July 22, 2005, the Company wholly owned a retail and hotel property and included it in
consolidation. At that date, the Company sold a 50% tenancy-in-common interest in the property to
a third party but continued to consolidate the property in its financial statements. Effective
July 1, 2006, the Company determined its 50% ownership interest should be reflected as an equity
method investment from the date of the sale and prior period financial statements were
reclassified. In December 2006, the Company increased its ownership in the property to 100%. From
that date forward, the property was again consolidated and has been reflected as such at both
December 31, 2006 and March 31, 2007.
The financial statements include an equity method investment in a 19.9% owned real estate
venture, as well as certain cost method investments in various entities included as other assets,
over which the Company does not exercise significant influence. In addition, the Company holds a
3% common interest in Red Lion Hotels Capital Trust (the Trust) that is considered a variable
interest entity under FIN-46(R) Consolidation of Variable Interest Entities, as revised. The
Company is not the primary beneficiary of the Trust; thus, it is treated as an equity method
investment.
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 balance sheet as of December 31, 2006 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, 2006, 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 March 31, 2007, the consolidated results of operations for the
three months ended March 31, 2007 and 2006, and the consolidated cash flows for the three months
ended March 31, 2007 and 2006. The results of operations for the periods presented may not be
indicative of those which may be expected for a full year.
6
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.
3. Property and Equipment
Property and equipment used in continuing operations is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2007 |
|
|
2006 |
|
Buildings and equipment |
|
$ |
239,321 |
|
|
$ |
226,164 |
|
Furniture and fixtures |
|
|
34,505 |
|
|
|
34,505 |
|
Landscaping and land improvements |
|
|
2,764 |
|
|
|
2,764 |
|
|
|
|
|
|
|
|
|
|
|
276,590 |
|
|
|
263,433 |
|
Less accumulated depreciation and amortization |
|
|
(88,192 |
) |
|
|
(84,450 |
) |
|
|
|
|
|
|
|
|
|
|
188,398 |
|
|
|
178,983 |
|
Land |
|
|
57,782 |
|
|
|
57,782 |
|
Construction in progress |
|
|
4,800 |
|
|
|
13,095 |
|
|
|
|
|
|
|
|
|
|
$ |
250,980 |
|
|
$ |
249,860 |
|
|
|
|
|
|
|
|
4. Assets Held For Sale and Discontinued Operations
In November 2004, the Company announced its plan to divest non-strategic assets, including
eleven of its owned hotels, certain commercial office buildings and certain other non-core
properties including condominium units and certain parcels of excess land (collectively referred to
as the divestment properties). Each of the divestment properties met the criteria to be
classified as an asset held for sale. The activities of the hotels and commercial office buildings
were considered discontinued operations under generally accepted accounting principles and have
been separately disclosed on the consolidated statement of operations, comparative for all periods
presented when they existed. Likewise, the assets and liabilities of the business units have been
segregated and separately stated on the consolidated balance sheet for all periods presented when
they existed. Depreciation of these assets, if previously appropriate, was suspended.
During the first quarter of 2006, the Company received gross proceeds of approximately $5.3
million upon the sale of one hotel and a portion of a second. The remaining portion of the second
hotel was sold during the third quarter of 2006. Proceeds from the sales were used primarily to
finance a company-wide hotel renovation program.
In the fourth quarter of 2006, the Company listed for sale a commercial office complex located
in Spokane, Washington, which has been considered discontinued operations and separately disclosed
on the consolidated statement of operations. In addition, the Company holds for sale one remaining
hotel in Kalispell, Montana and surplus undeveloped land. The land has been considered as held for
sale but does not meet the definition of a discontinued operation. The Company continues to
actively pursue the disposition of these assets. The net impact on consolidated earnings from the
activities of discontinued operations resulted in losses of approximately $26,000 and $0.3 million,
respectively, during the first quarters of 2007 and 2006.
7
A summary of the results of operations for the discontinued operations is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
March 31, 2006 |
|
|
Hotel |
|
|
|
|
|
|
|
|
|
Hotel |
|
|
|
|
|
|
Properties |
|
Other |
|
Combined |
|
Properties |
|
Other |
|
Combined |
|
|
|
|
|
Revenues |
|
$ |
300 |
|
|
$ |
283 |
|
|
$ |
583 |
|
|
$ |
1,428 |
|
|
$ |
258 |
|
|
$ |
1,686 |
|
Operating expenses |
|
|
(404 |
) |
|
|
(206 |
) |
|
|
(610 |
) |
|
|
(1,814 |
) |
|
|
(185 |
) |
|
|
(1,999 |
) |
Depreciation and amortization |
|
|
(1 |
) |
|
|
(7 |
) |
|
|
(8 |
) |
|
|
|
|
|
|
(104 |
) |
|
|
(104 |
) |
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39 |
) |
|
|
(37 |
) |
|
|
(76 |
) |
Interest income |
|
|
2 |
|
|
|
11 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
|
37 |
|
|
|
(29 |
) |
|
|
8 |
|
|
|
151 |
|
|
|
24 |
|
|
|
175 |
|
|
|
|
|
|
Net income (loss) from operations |
|
|
(66 |
) |
|
|
52 |
|
|
|
(14 |
) |
|
|
(274 |
) |
|
|
(44 |
) |
|
|
(318 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of
discontinued business units |
|
|
(18 |
) |
|
|
|
|
|
|
(18 |
) |
|
|
46 |
|
|
|
|
|
|
|
46 |
|
Income tax benefit (expense) |
|
|
6 |
|
|
|
|
|
|
|
6 |
|
|
|
(16 |
) |
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
Net gain (loss) on disposal of
discontinued business units |
|
|
(12 |
) |
|
|
|
|
|
|
(12 |
) |
|
|
30 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
Net income (loss) |
|
$ |
(78 |
) |
|
$ |
52 |
|
|
$ |
(26 |
) |
|
$ |
(244 |
) |
|
$ |
(44 |
) |
|
$ |
(288 |
) |
|
|
|
|
|
In the above table, the comparability of the divestment properties activity between
periods is impacted by the cessation of operations on the date of sale, as applicable.
A summary of the assets and liabilities of discontinued operations is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007 |
|
December 31, 2006 |
|
|
Hotel |
|
|
|
|
|
|
|
|
|
Hotel |
|
|
|
|
|
|
Properties |
|
Other |
|
Combined |
|
Properties |
|
Other |
|
Combined |
|
|
|
|
|
Cash and cash equivalents |
|
$ |
7 |
|
|
$ |
81 |
|
|
$ |
88 |
|
|
$ |
7 |
|
|
$ |
50 |
|
|
$ |
57 |
|
Accounts receivable, net |
|
|
19 |
|
|
|
21 |
|
|
|
40 |
|
|
|
107 |
|
|
|
35 |
|
|
|
142 |
|
Inventories |
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
5 |
|
Prepaid expenses and other |
|
|
|
|
|
|
4 |
|
|
|
4 |
|
|
|
77 |
|
|
|
7 |
|
|
|
84 |
|
Property and equipment, net |
|
|
4,080 |
|
|
|
10,134 |
|
|
|
14,214 |
|
|
|
4,080 |
|
|
|
9,837 |
|
|
|
13,917 |
|
Other assets, net |
|
|
60 |
|
|
|
245 |
|
|
|
305 |
|
|
|
87 |
|
|
|
247 |
|
|
|
334 |
|
|
|
|
|
|
Assets of discontinued operations |
|
$ |
4,171 |
|
|
$ |
10,485 |
|
|
$ |
14,656 |
|
|
$ |
4,363 |
|
|
$ |
10,176 |
|
|
$ |
14,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
20 |
|
|
$ |
69 |
|
|
$ |
89 |
|
|
$ |
72 |
|
|
$ |
10 |
|
|
$ |
82 |
|
Accrued payroll and related benefits |
|
|
17 |
|
|
|
|
|
|
|
17 |
|
|
|
20 |
|
|
|
|
|
|
|
20 |
|
Accrued interest payable |
|
|
|
|
|
|
21 |
|
|
|
21 |
|
|
|
|
|
|
|
21 |
|
|
|
21 |
|
Other accrued expenses |
|
|
119 |
|
|
|
28 |
|
|
|
147 |
|
|
|
99 |
|
|
|
16 |
|
|
|
115 |
|
Long-term debt |
|
|
|
|
|
|
3,874 |
|
|
|
3,874 |
|
|
|
|
|
|
|
3,874 |
|
|
|
3,874 |
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
156 |
|
|
$ |
3,992 |
|
|
$ |
4,148 |
|
|
$ |
191 |
|
|
$ |
3,921 |
|
|
$ |
4,112 |
|
|
|
|
|
|
5. Notes Payable to Bank
In September 2006, the Company entered into a revolving credit facility for up to $50 million
with a syndication of banks led by Calyon New York Branch. Subject to certain conditions,
including the provision of additional collateral acceptable to the lenders, the size of the
facility may be increased at the Companys request to up to $100 million. The initial maturity
date for the facility is September 13, 2009, but the Company has the right to extend the maturity
for two additional one year terms. Borrowings under the facility may be used to finance
acquisitions or capital expenditures, for working capital and for other general corporate purposes.
The obligations under the facility are collateralized by a company owned hotel, including a deed
of trust and security agreement covering all of its assets, as well as by unsecured guaranties of
the Company and certain of its other subsidiaries. In connection with this transaction, the
Company paid loan fees and related costs of approximately $0.9 million, which have been deferred
and are being amortized over the initial term of the facility.
Outstanding borrowings under the facility accrue interest as Eurodollar loans with rates
ranging from 150 to 225 basis points over LIBOR, with an option for base rate loans based upon the
federal funds rate or prime rate. The credit facility requires the Company to comply with certain
customary affirmative and negative covenants, the most restrictive of which are financial covenants
dealing with leverage, interest coverage and debt service coverage. At March 31, 2007, no amounts
were outstanding and the Company was in compliance with all of its covenants.
8
6. Business Segments
As of March 31, 2007 and December 31, 2006, the Company had three operating segments hotels,
franchise and management and entertainment. The other segment consists primarily of
miscellaneous revenues and expenses, cash and cash equivalents, certain receivables and certain
property and equipment which are not specifically associated with an operating segment. Management
reviews and evaluates the operating segments exclusive of interest expense; therefore, it has not
been allocated to the segments.
The Company has historically owned certain commercial properties and has also engaged in
traditional real estate related services, including developing, managing and acting as a broker for
sales and leases of commercial and multi-unit residential properties (collectively referred to as
the real estate management business). Together, these operations comprised the real estate
segment. Effective April 30, 2006, the Company divested the real estate management business. In
addition, consistent with company strategy of divesting non-core assets, during the fourth quarter
of 2006 the Company listed one of its two remaining wholly-owned commercial real estate properties
for sale and classified its results of operations within discontinued operations for all periods
presented. Further, the remaining operations of that segment have been reclassified to Other for
2006 and for all comparative periods, where appropriate.
The franchise and management segment had intra-segment revenues with the hotels segment for
management fees which were eliminated in the consolidated financial statements. Likewise, the
entertainment segment had inter-segment revenues which were eliminated in the consolidated
financial statements. Management reviews and evaluates the operations of all of its segments
including the inter-segment and intra-segment revenues. All balances have been presented after the
elimination of inter-segment and intra-segment revenues. Selected information with respect to
continuing operations is as provided below. For similar information with regard to discontinued
operations, see Note 4.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
March 31, |
|
|
2007 |
|
2006 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
Hotels |
|
$ |
34,381 |
|
|
$ |
31,028 |
|
Franchise and management |
|
|
789 |
|
|
|
576 |
|
Entertainment |
|
|
3,347 |
|
|
|
3,371 |
|
Other |
|
|
787 |
|
|
|
773 |
|
|
|
|
|
|
$ |
39,304 |
|
|
$ |
35,748 |
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
Hotels |
|
$ |
(547 |
) |
|
$ |
(810 |
) |
Franchise and management |
|
|
334 |
|
|
|
117 |
|
Entertainment |
|
|
386 |
|
|
|
330 |
|
Other |
|
|
(1,438 |
) |
|
|
(954 |
) |
|
|
|
|
|
$ |
(1,265 |
) |
|
$ |
(1,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2007 |
|
2006 |
|
|
|
Identifiable assets: |
|
|
|
|
|
|
|
|
Hotels |
|
$ |
256,866 |
|
|
$ |
256,838 |
|
Franchise and management |
|
|
31,016 |
|
|
|
31,879 |
|
Entertainment |
|
|
5,170 |
|
|
|
5,259 |
|
Other |
|
|
40,198 |
|
|
|
42,923 |
|
|
|
|
|
|
$ |
333,250 |
|
|
$ |
336,899 |
|
|
|
|
9
7. Loss Per Share
The following table presents a reconciliation of the numerators and denominators
used in the basic and diluted loss per share computations for the three months ended March 31, 2007
and 2006 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2007 |
|
|
2006 |
|
Numerator basic and diluted: |
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
$ |
(1,980 |
) |
|
$ |
(2,685 |
) |
Loss on discontinued operations |
|
|
(26 |
) |
|
|
(288 |
) |
|
|
|
|
|
|
|
Net loss |
|
|
(2,006 |
) |
|
|
(2,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Weighted average shares basic and diluted |
|
|
19,148 |
|
|
|
13,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss applicable to shareholders before discontinued operations |
|
$ |
(0.10 |
) |
|
$ |
(0.20 |
) |
Loss on discontinued operations |
|
|
|
|
|
|
(0.02 |
) |
|
|
|
|
|
|
|
Loss applicable to shareholders |
|
$ |
(0.10 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
|
|
|
(a) |
|
At March 31, 2007 and March 31, 2006, the effect of converting OP Units would be anti-dilutive
and the units are therefore excluded from the above calculation. |
|
(b) |
|
At March 31, 2007 and March 31, 2006, 1,184,883 and 1,217,610 options to purchase common shares
and unvested restricted stock units, respectively, were outstanding. The effect of the shares that
would be issued upon exercise of these options and units would be anti-dilutive and is therefore
excluded from the above calculations. |
|
(c) |
|
All convertible debt instruments outstanding at March 31, 2006, were considered anti-dilutive. |
8. Stock Based Compensation
The 1998 Stock Incentive Plan and the 2006 Stock Incentive Plan (the Plans) authorize the
grant or issuance of various option or other awards including restricted stock grants and other
stock-based compensation. The plans were approved by the shareholders of the Company. The 2006
plan allows awards up to a maximum number of 1.0 million shares, subject to adjustments for stock
splits, stock dividends and similar events. The 1998 plan allowed for a maximum number of 1.4
million shares, although as a condition to the approval of the 2006 plan, the Company will no
longer grant or issue awards under this plan. The compensation committee of the board of directors
administers the 2006 plan and establishes to whom awards may be granted, and the type and terms and
conditions, including the exercise period, of those awards that may be granted. As of March 31,
2007, there were 808,218 shares of common stock available for issuance pursuant to future stock
option grants or other awards under the 2006 plan.
The Company also maintains an employee stock purchase plan (the ESPP) to assist its
employees in acquiring a stock ownership interest in the Company. Under the ESPP, 300,000 shares
of common stock have been authorized for purchase, of which 83,602 remain available in accordance
with its terms. The ESPP permits eligible employees to purchase common stock at a discount through
payroll deductions, and no employee may purchase more than $25,000 worth in any calendar year.
During the first quarter of 2007, 9,299 shares were issued out of the plan and the Company
recognized approximately $25,000 in compensation expense for the discount.
The Company calculates stock based compensation under the provisions of SFAS No. 123(R),
including options and other awards issued under the Plans and shares under the ESPP. Stock options
issued are valued based upon the Black-Scholes option-pricing model and the Company recognizes this
value as an expense over the periods in which the options vest. Use of the Black-Scholes
option-pricing model requires that the Company make certain assumptions, including expected
volatility, forfeiture rate, risk-free interest rate, expected dividend yield and expected life of
the options, based on historical experience. Volatility is based on historical information with
terms consistent with the expected life of the option. The risk free interest rate is based on the
quoted treasury yield curve at the time of grant, with terms consistent with the expected life of
the option.
All options granted prior to 2003 were designated as nonqualified options, with an exercise
price equal to or in excess of fair market value on the date of grant, and for a term of ten years.
For substantially all options granted, fifty percent of each recipients options will vest on the
fourth anniversary of the date of grant and the remaining 50% will vest on the fifth anniversary of
the date of grant. For options issued prior to 2004, the vesting schedule will change if,
beginning one year after the option grant date, the stock price of the common stock reaches the
following target levels (measured as a percentage increase over the exercise price) for 60
consecutive trading days:
10
|
|
|
|
|
|
|
Percent of |
Stock |
|
Options |
Price |
|
Shares |
Increase |
|
Vested |
25% |
|
|
25 |
% |
50% |
|
|
50 |
% |
75% |
|
|
75 |
% |
100% |
|
|
100 |
% |
For options issued in 2004 and 2005, the vesting schedule will change if, between the two
year anniversary and the four year anniversary of the option grant date, the stock price of the
common stock reaches the below target levels (measured as a percentage increase over the exercise
price) for 60 consecutive trading days. During the first quarter of 2007, 25% of the shares issued
in 2004, or 114,726 options, vested and became eligible for exercise in accordance with these
provisions.
|
|
|
|
|
|
|
Percent of |
Stock |
|
Options |
Price |
|
Shares |
Increase |
|
Vested |
100% |
|
|
25 |
% |
200% |
|
|
50 |
% |
Options issued in 2006 vest 25% each year for four years with no stock price acceleration
provision.
In each of the first quarters of 2007 and 2006, the Company recognized approximately $0.2
million in compensation expense for previously granted options. The Company also recognized tax
benefits related to the exercise of stock options of $0.1 million during the first quarter of 2007.
At March 31, 2007, the fair value of options vested was approximately $1.1 million. As options
vest, the Company expects to recognize approximately $1.6 million in additional compensation
expense before the impact of income taxes, including $0.5 million during the remainder of 2007, and
is expected to be recognized over a weighted average period of 35 months. A summary of stock
option activity at March 31, 2007, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
|
of Shares |
|
|
Price |
|
Balance, December 31, 2006 |
|
|
1,256,874 |
|
|
$ |
7.14 |
|
Options granted |
|
|
|
|
|
$ |
|
|
Options exercised |
|
|
(63,442 |
) |
|
$ |
5.99 |
|
Options forfeited |
|
|
(34,352 |
) |
|
$ |
5.69 |
|
|
|
|
|
|
|
|
Balance, March 31, 2007 |
|
|
1,159,080 |
|
|
$ |
7.25 |
|
|
|
|
|
|
|
|
Exercisable, March 31, 2007 |
|
|
444,103 |
|
|
$ |
7.00 |
|
|
|
|
|
|
|
|
During the first three months of 2007 and 2006, the total intrinsic value received by the
grantees upon exercise of the 63,442 and 13,031 stock options was $0.4 million and $0.1 million,
respectively. From those exercises, the Company issued new shares of common stock and received
approximately $0.4 million and $0.1 million, respectively, in gross proceeds.
11
Additional information regarding stock options outstanding and exercisable as of March 31,
2007, 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 |
|
|
691,159 |
|
|
|
6.94 |
|
|
|
2011-2014 |
|
|
$ |
5.32 |
|
|
$ |
4,922 |
|
|
|
334,687 |
|
|
$ |
5.52 |
|
|
$ |
2,316 |
|
7.46 - 8.31 |
|
|
232,508 |
|
|
|
7.58 |
|
|
|
2009-2015 |
|
|
|
7.56 |
|
|
|
1,134 |
|
|
|
41,108 |
|
|
|
8.03 |
|
|
|
181 |
|
10.88-10.94 |
|
|
28,612 |
|
|
|
3.34 |
|
|
|
2009-2016 |
|
|
|
10.93 |
|
|
|
43 |
|
|
|
22,638 |
|
|
|
10.94 |
|
|
|
34 |
|
12.21-15.00 |
|
|
206,801 |
|
|
|
7.78 |
|
|
|
2008-2016 |
|
|
|
12.83 |
|
|
|
37 |
|
|
|
45,670 |
|
|
|
15.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,159,080 |
|
|
|
7.13 |
|
|
|
2008-2016 |
|
|
$ |
7.25 |
|
|
$ |
6,136 |
|
|
|
444,103 |
|
|
$ |
7.00 |
|
|
$ |
2,531 |
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value is before applicable income taxes and represents the amount
option recipients would have received if all options had been available to be exercised on the last
trading day of the first quarter of 2007, or March 30, 2007, based upon the Companys closing stock
price of $12.44. |
In November 2006 and November 2004, the Company granted 18,389 and 18,535 restricted shares of
common stock, respectively, to members of senior management as compensation. The Company did not
grant restricted shares of common stock to members of senior management in 2005. While all of the
shares are considered granted, they are not considered issued or outstanding until vested. The
2006 award vests 25% on each anniversary of the grant date. The 2004 award vested 20%, or 3,707
shares, upon grant and vests an additional 20% at each subsequent anniversary date. The shares
awarded had a fair value of $0.2 million and $0.1 million on grant date, respectively, based on
grant date prices of $12.21 for the November 2006 awards and $5.04 for the November 2004 awards.
As of March 31, 2007 and March 31, 2006, there were 25,803 and 11,121 unvested shares
outstanding, respectively. No shares have been forfeited since grant. In each of the first
quarters of 2007 and 2006, the Company recognized approximately $19,000 and $5,000, respectively,
in compensation expense. As the restricted shares vest, the Company expects to recognize
approximately $0.2 million in additional compensation expense over a weighted average period of 41
months.
9. Recent Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes by establishing minimum standards for the recognition and
measurement of tax positions taken or expected to be taken in a tax return. Under the requirements
of FIN 48, a company must review all of its uncertain tax positions and make a determination as to
whether its position is more-likely-than-not to be sustained upon examination by regulatory
authorities. If a position meets the more-likely-than-not criterion, then the related tax benefit
is measured based on the cumulative probability analysis of the amount that is more-likely-than-not
to be realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of the provisions of FIN 48 did not have a material impact on the
Companys financial condition or results of operations.
In June 2006, the Emerging Issues Task Force (EITF) issued EITF No. 06-2, Accounting for
Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for
Compensated Absences. Under EITF No. 06-2, the compensation cost associated with a sabbatical or
other similar benefit arrangement should be accrued over the requisite service period if an
employees right to such absence (a) requires the completion of a minimum service period and (b) in
which the benefit does not increase with additional years of service pursuant to paragraph 6(b) of
SFAS No. 43 for arrangements in which the individual continues to be a compensated employee and is
not required to perform duties for the entity during the absence. EITF No. 06-2 was effective for
the Company on January 1, 2007, and the adoption of the provisions of EITF No. 06-2 did not
materially impact the Companys financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157
does not require any new fair value measurements itself. However, this statement applies under
other accounting pronouncements that require or permit fair value measurements and may therefore
change current practice if an alternative measure of fair value has been used. SFAS No. 157
applies an exchange price notion for fair value consistent with previously preferred practice, with
a focus on exit price and market-based measurements as compared to entry price and entity-specific
measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal
years. Earlier application is encouraged and the new measurement criteria are generally to be
applied prospectively. The Company is currently evaluating the impact SFAS No. 157 will have on
its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159).
SFAS No. 159 permits entities to choose to measure many financial
12
instruments and certain other
items at fair value, the objective of which is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions. This
statement is expected to expand the use of fair value measurement, which is consistent with FASBs
long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is
effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on or before November
15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 Fair Value
Measurements. The Company is currently evaluating the impact SFAS No. 159 will have on its
consolidated financial statements.
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,
2006, 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, managed 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, 2006, 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, development and franchising of midscale and upscale, full
service hotels. The Red Lion brand is nationally recognized and particularly well known in the
western United States where most of our hotels are located. The Red Lion brand is typically
associated with three and four-star full-service hotels. As of March 31, 2007, our hotel system
contained 57 hotels located in eight states and one Canadian province, with 10,001 rooms and
503,529 square feet of meeting space as provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Meeting |
|
|
|
|
|
|
Available |
|
Space |
|
|
Hotels |
|
Rooms |
|
(sq. ft.) |
|
|
|
Owned Hotels (1) |
|
|
19 |
|
|
|
3,864 |
|
|
|
213,472 |
|
Leased Hotels
(2) |
|
|
13 |
|
|
|
2,184 |
|
|
|
99,856 |
|
Franchised Hotels |
|
|
24 |
|
|
|
3,699 |
|
|
|
154,201 |
|
Managed Hotels |
|
|
1 |
|
|
|
254 |
|
|
|
36,000 |
|
|
|
|
Total |
|
|
57 |
|
|
|
10,001 |
|
|
|
503,529 |
|
|
|
|
|
|
|
(1) |
|
Statistics include one hotel identified as a discontinued business unit, with
218 rooms and 14,000 square feet of meeting space. |
|
(2) |
|
Leased hotels are those properties which we operate and manage and have
ownership of some or all of the equipment and personal property on site, however,
the hotel facility and the underlying land is occupied under an operating lease
from a third party. Our lease expiration dates range from
2020 to 2033 and have renewal provisions attached for each hotel. |
Established over 30 years ago, the Red Lion brand is well recognized, particularly in the
western United States, and is typically associated with three and four-star full-service hotels by
our customers. Red Lion is about Staying Comfortable and our product and service culture works
in both large urban and smaller markets. The character of our hotels strives to reflect its
individual local market while maintaining consistent brand standards, which we feel makes our
hotels an attractive choice for customers within the markets we currently operate. We believe our
adherence to consistent customer service standards and brand touch-points makes guests feel at home
no matter where they are.
We operate in three reportable segments:
|
|
|
The hotels segment derives revenue primarily from guest room rentals and food and
beverage operations at our owned and leased hotels. |
|
|
|
|
The franchise and management segment is engaged primarily in licensing the Red Lion
brand to franchisees and managing hotels for third-party owners. This segment generates
revenue from franchise fees that are typically based on a percent of room revenues and
are charged to hotel owners in exchange for the use of our brand and access to our
central services programs. These programs include the reservation system, guest loyalty
program, national and regional sales, revenue management tools, quality inspections,
advertising and brand standards. It also reflects revenue from management fees charged
to the owners of |
14
|
|
|
our managed hotels, typically based on a percentage of the hotels gross revenues plus an
incentive fee based on operating performance. |
|
|
|
|
The entertainment segment derives revenue primarily from ticketing services and
promotion and presentation of entertainment productions. |
We have historically owned certain commercial real estate properties. We also have engaged in
traditional real estate related services, including developing, managing and acting as a broker for
sales and leases of commercial and multi-unit residential properties (collectively referred to as
the real estate management business). Together, these operations comprised our real estate
segment. Effective April 30, 2006, we divested the real estate management business. In addition,
consistent with our strategy of divesting non-core assets, during the fourth quarter of 2006, we
listed one of our two remaining wholly-owned commercial real estate properties for sale and have
classified its results of operations within discontinued operations for all periods presented.
Further, the remaining operations of that segment have been reclassified to Other for 2006 and
for all comparative periods, where appropriate. For additional information, see Note 4 of Notes to
Consolidated Financial Statements.
Executive Summary
Our goal is to create the most memorable guest experience possible, allowing us to be the
leader in our markets through personalized, exuberant service. To achieve that goal, we have and
will continue to focus our resources monetary, capital and human in three primary areas:
|
|
|
Infrastructure Improving the foundation of the corporation including
focusing on our core competencies, improving our liquidity and capital
resources, improving the infrastructure used to manage reservations and
support our hotel system and increasing our depth of resources. |
|
|
|
|
Physical Assets Improving our product, including the physical assets
presented to our guests and the feel of our guest experience. |
|
|
|
|
Growth Preparing for growth, especially in the franchise arena, means
creating consistent upscale brand standards throughout our hotel system,
enhancing the service delivery presented to our customers and developing and
connecting with our associates in an effort to better meet the expectations of
our guests. |
In 2005, we completed the implementation of our Stay Comfortable initiative and began major
room renovations in several hotels including new floor and wall coverings, tiled bathroom floors,
granite vanities and other bathroom upgrades, enhanced guest room features including new plush
pillow top mattresses and upgraded linen and pillow packages, large work desks and ergonomic chairs
and amenities such as complimentary wireless internet access. By the end of 2006, we began work on
common areas such as lobbies and restaurants and as of March 31, 2007, we have substantially
completed all hotel renovations we announced at the end of 2004.
Guest reaction to our renovations has been positive, as evidenced by the 13.9% increase in
RevPAR and 10.3% increase in ADR at our owned and leased properties during the first quarter of
2007 over the comparable period. A summary of the performance of our hotel system, including all
hotels owned, leased, managed and franchised for each of the periods presented, is provided below.
We continue to believe the lodging industry as a whole will continue to see increases in ADR and
RevPAR in 2007 and beyond. While RevPAR, ADR and occupancy remained relatively flat at our
franchised hotels during the comparable periods, we believe that results have been impacted by
hotel renovations similar to what we experienced at our owned and leased properties up through the
second quarter of 2006. Franchised hotels are required to complete renovations to our enhanced Red
Lion brand standards by the end of 2007.
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, |
|
|
2007 |
|
2006 |
|
|
Average
(2) |
|
|
|
|
|
|
|
|
|
Average
(2) |
|
|
|
|
|
|
Occupancy |
|
ADR
(3) |
|
RevPAR
(4) |
|
Occupancy |
|
ADR
(3) |
|
RevPAR
(4) |
|
|
|
|
|
Red Lion Hotels: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and Leased Hotels |
|
|
53.0 |
% |
|
$ |
81.45 |
|
|
$ |
43.18 |
|
|
|
51.3 |
% |
|
$ |
73.84 |
|
|
$ |
37.90 |
|
Franchised Hotels |
|
|
56.6 |
% |
|
$ |
79.52 |
|
|
$ |
45.00 |
|
|
|
57.4 |
% |
|
$ |
78.54 |
|
|
$ |
45.07 |
|
|
|
|
|
|
Total Red Lion Hotels |
|
|
54.2 |
% |
|
$ |
80.77 |
|
|
$ |
43.80 |
|
|
|
53.4 |
% |
|
$ |
75.56 |
|
|
$ |
40.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System-wide (1) |
|
|
53.6 |
% |
|
$ |
82.12 |
|
|
$ |
44.05 |
|
|
|
52.7 |
% |
|
$ |
76.85 |
|
|
$ |
40.54 |
|
|
|
|
|
|
Change from prior comparative period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Red Lion Hotels: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and Leased Hotels |
|
|
1.7 |
|
|
|
10.3 |
% |
|
|
13.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Franchised Hotels |
|
|
(0.8 |
) |
|
|
1.2 |
% |
|
|
-0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Red Lion Hotels |
|
|
0.8 |
|
|
|
6.9 |
% |
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System-wide (1) |
|
|
0.9 |
|
|
|
6.9 |
% |
|
|
8.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
System-wide includes all hotels owned, leased, managed and franchised, presented on a
comparable basis for hotel statistics. This includes one managed property and one hotel
held as discontinued, neither utilizing the Red Lion brand. |
|
(2) |
|
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. |
|
(3) |
|
Average daily rate (ADR) represents total room revenues divided by the total number of
paid rooms occupied by hotel guests. |
|
(4) |
|
Revenue per available room (RevPAR) represents total room and related revenues divided by
total available rooms. |
Through 2005, our strategy was to increase occupancy through strategic marketing and
investment in our properties, and then to increase rates as demand increased for our rooms. For
six consecutive quarters through June 2005, we increased occupancy. We built on this demand by
increasing ADR during the second half of 2005 in the majority of our markets. In 2006 as we
completed our room renovation program, we experienced strong growth in our hotels segment and saw
improvement in its underlying fundamentals. Overall, RevPAR grew by 8.0% from 2005 and we began to
see our ability to increase room rates accelerate, driving a 12.3% increase in ADR between the
third quarter of 2005 and the third quarter of 2006 and an 11.7% increase between the fourth
quarter of 2005 and the fourth quarter of 2006. We believe occupancy has increased positively due
to all rooms at our owned and leased properties being available during the first quarter of 2007
versus not available due to renovations in 2006, offset by our continuing shift of customer base.
The net impact of these business strategies has been a gain in total occupied rooms of 1.7
percentage points.
With the completion of our extensive room renovations in 2006, we saw an increase of 10.8% in
hotel revenues during the first quarter of 2007. Revenues during the first quarter of 2007
compared to the first quarter of 2006 have been directly impacted by our strategy to target a
higher-paying customer base by concentrating our focus on more corporate business and group stays,
instead of lower rate promotional and permanent contract business. Occupancy has been affected by
this shift in customer base as well as from the impact of rooms not available due to the
renovations through much of 2006.
Our brand strengthening initiatives, marketing efforts and technological upgrades have
achieved and are continuing to achieve desired results. Throughout 2005 and 2006, we completed
installation of the new MICROS Opera Property Management System (Opera) in 16 of our Red Lion
hotels, and plan to complete the implementation at our remaining hotels. Opera shares a single
database with our central reservations system allowing for better yield management. Combined with
our redesigned website, Opera further enhances our ability to manage reservations generated through
all electronic channels and helps position us to efficiently and economically take advantage of
electronic travel bookings.
Travelers continue to book more reservations through electronic distribution systems like our
own branded website and third-party on-line travel agents (OTAs, or also referred to as
alternative distribution systems or ADS). Our central reservations and distribution management
technology allows us to manage the yield on these OTA channels on a real-time, hotel-by-hotel
basis. Our focus on driving customers to our branded website has made it the fastest growing
source of online reservations, allowing us to further maximize our yield on those types of
bookings. We have merchant model agreements with leading OTA providers, which typically entitle
the provider to keep a fixed percentage of the price paid by the customer for each room booked
allowing us to maximize the yield of a typically lower rated market segment. Our success in
managing these rates reflects our management of these distribution channels and our merchant model
agreements.
Our strategy includes a growth goal of expansion to 100 markets, primarily by expanding the
number of hotels franchised under the Red Lion brand, including joint ventures and direct
acquisition in hub markets. We expect to add properties in large, western U.S. urban markets,
16
complemented by leading properties in smaller, secondary cities, and progressively move east,
leveraging the momentum of our growth in the western states. Financially we have a strong balance
sheet to advance these objectives. In 2006, we completed a public offering for gross proceeds of
$64.3 million and significantly reduced our long-term debt. We have a revolving credit facility
for up to $50 million available to us, with no amount outstanding at March 31, 2007. Our credit
facility can be increased to $100 million subject to satisfaction of various conditions.
The success of our accomplishments has elevated the Red Lion brand and laid the foundation for
our goals of continued growth at our existing operations and expansion into new markets through a
combination of new franchises, joint ventures and hotel acquisitions. We believe the Red Lion
brand and our financial position are as strong as at any other time in our history and position us
well to achieve our strategic goals.
Results of Operations
For the three months ended March 31, 2007, total revenue increased $3.6 million over the first
quarter of 2006 primarily due to increased revenues generated from our hotels segment. Our net
loss from continuing operations during the first quarter of 2007 improved over the comparative
period, a direct result of the increased revenues discussed above. This was offset by increased
depreciation and amortization expense from the completed hotel renovations and increased corporate
expenses. During the first quarters of 2007 and 2006, we reported net losses of approximately $2.0
million (or $0.10 per share) and $3.0 million (or $0.22 per share). A summary of our consolidated
statement of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Total revenue |
|
$ |
39,304 |
|
|
$ |
35,748 |
|
Operating expenses |
|
|
40,569 |
|
|
|
37,065 |
|
|
|
|
|
|
|
|
Operating loss |
|
|
(1,265 |
) |
|
|
(1,317 |
) |
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2,242 |
) |
|
|
(3,377 |
) |
Minority interest in partnerships, net |
|
|
12 |
|
|
|
106 |
|
Other income, net |
|
|
309 |
|
|
|
327 |
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes |
|
|
(3,186 |
) |
|
|
(4,261 |
) |
|
|
|
|
|
|
|
|
|
Income tax benefit |
|
|
(1,206 |
) |
|
|
(1,576 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
(1,980 |
) |
|
|
(2,685 |
) |
|
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
|
(26 |
) |
|
|
(288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,006 |
) |
|
$ |
(2,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share |
|
$ |
(0.10 |
) |
|
$ |
(0.22 |
) |
|
|
|
|
|
|
|
Direct margins improved in every segment, including 266 basis points from our hotels in
the first quarter of 2007 from the same period in 2006, as provided in the below table, due to
improvements in RevPAR, ADR and occupancy discussed above. During the first quarter of 2007, we
reported a 54% improvement in EBITDA from continuing operations comparing against the same quarter
a year ago.
17
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
2007 |
|
2006 |
|
|
(in thousands) |
Hotels revenue (1) |
|
$ |
34,381 |
|
|
$ |
31,028 |
|
|
|
|
|
|
|
|
|
|
Direct margin (2) |
|
$ |
4,407 |
|
|
$ |
3,152 |
|
Direct margin % |
|
|
12.8 |
% |
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
|
Franchise and management revenue |
|
$ |
789 |
|
|
$ |
576 |
|
|
|
|
|
|
|
|
|
|
Direct margin (2) |
|
$ |
526 |
|
|
$ |
354 |
|
Direct margin % |
|
|
66.7 |
% |
|
|
61.5 |
% |
|
|
|
|
|
|
|
|
|
Entertainment revenue |
|
$ |
3,347 |
|
|
$ |
3,371 |
|
|
|
|
|
|
|
|
|
|
Direct margin (2) |
|
$ |
492 |
|
|
$ |
471 |
|
Direct margin % |
|
|
14.7 |
% |
|
|
14.0 |
% |
|
|
|
|
|
|
|
|
|
Other revenue |
|
$ |
787 |
|
|
$ |
773 |
|
|
|
|
|
|
|
|
|
|
Direct margin (2) |
|
$ |
304 |
|
|
$ |
87 |
|
Direct margin % |
|
|
38.6 |
% |
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
3,034 |
|
|
$ |
1,736 |
|
EBITDA from continuing operations |
|
$ |
3,076 |
|
|
$ |
2,000 |
|
|
|
|
(1) |
|
Continuing operations only |
|
(2) |
|
Revenues less direct operating expenses. |
EBITDA represents net income (or loss) before interest expense, income tax benefit
(expense) and depreciation and amortization. We utilize EBITDA as a financial measure because
management believes that investors find it to be a useful tool to perform more meaningful
comparisons of past, present and future operating results and as a means to evaluate the results of
core on-going operations. We believe it is a complement to net income and other financial
performance measures. EBITDA from continuing operations is calculated in the same manner, but
excludes the operating activities of business units identified as discontinued. EBITDA is not
intended to represent net income (loss) as defined by generally accepted accounting principles in
the United States, and such information should not be considered as an alternative to net income
(loss), cash flows from operations or any other measure of performance prescribed by generally
accepted accounting principles in the United States (GAAP).
We use EBITDA to measure the financial performance of our owned and leased hotels because we
believe interest, taxes and depreciation and amortization bear little or no relationship to our
operating performance. By excluding interest expense, EBITDA measures our financial performance
irrespective of our capital structure or how we finance our properties and operations. We generally
pay federal and state income taxes on a consolidated basis, taking into account how the applicable
taxing laws apply to us in the aggregate. By excluding taxes on income, we believe EBITDA provides
a basis for measuring the financial performance of our operations excluding factors that our hotels
cannot control. By excluding depreciation and amortization expense, which can vary from hotel to
hotel based on historical cost and other factors unrelated to the hotels financial performance,
EBITDA measures the financial performance of our hotels without regard to their historical cost.
For all of these reasons, we believe that EBITDA provides us and investors with information that is
relevant and useful in evaluating our business. We believe that the presentation of EBITDA from
continuing operations is useful for the same reasons, in addition to using it for comparative
purposes for our intended operations going forward.
However, because EBITDA excludes depreciation and amortization, it does not measure the
capital we require to maintain or preserve our fixed assets. In addition, because EBITDA does not
reflect interest expense, it does not take into account the total amount of interest we pay on
outstanding debt nor does it show trends in interest costs due to changes in our borrowings or
changes in interest rates. EBITDA from continuing operations excludes the activities of operations
we have determined to be discontinued and does not reflect the totality of operations as
experienced for the periods presented. EBITDA, as defined by us, may not be comparable to EBITDA
as reported by other companies that do not define EBITDA exactly as we define the term. Because we
use EBITDA to evaluate our financial performance, we reconcile it to net income, which is the most
comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not
represent cash generated from operating activities determined in accordance with GAAP, and should
not be considered as an alternative to operating income or net income (loss) determined in
accordance with GAAP as an indicator of performance or as an alternative to cash flows from
operating activities as an indicator of liquidity.
The following is a reconciliation of EBITDA and EBITDA from continuing operations to net loss
for the periods presented (in thousands):
18
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
EBITDA |
|
$ |
3,034 |
|
|
$ |
1,736 |
|
Income tax benefit (expense) |
|
|
1,220 |
|
|
|
1,734 |
|
Interest expense |
|
|
(2,231 |
) |
|
|
(3,455 |
) |
Depreciation and amortization |
|
|
(4,029 |
) |
|
|
(2,988 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,006 |
) |
|
$ |
(2,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA from continuing operations |
|
$ |
3,076 |
|
|
$ |
2,000 |
|
Income tax benefit |
|
|
1,206 |
|
|
|
1,576 |
|
Interest expense |
|
|
(2,242 |
) |
|
|
(3,377 |
) |
Depreciation and amortization |
|
|
(4,020 |
) |
|
|
(2,884 |
) |
|
|
|
|
|
|
|
Net loss from continuing operations |
|
|
(1,980 |
) |
|
|
(2,685 |
) |
Loss from discontinued operations |
|
|
(26 |
) |
|
|
(288 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,006 |
) |
|
$ |
(2,973 |
) |
|
|
|
|
|
|
|
Revenue
A breakdown of our revenues from continuing operations for the first three months of 2007 and
2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
Revenues From Continuing Operations |
|
|
|
|
|
|
|
|
Hotels: |
|
|
|
|
|
|
|
|
Room revenue |
|
$ |
22,655 |
|
|
$ |
19,748 |
|
Food and beverage revenue |
|
|
10,962 |
|
|
|
10,380 |
|
Other department revenue |
|
|
764 |
|
|
|
900 |
|
|
|
|
|
|
|
|
Total hotels segment revenue |
|
|
34,381 |
|
|
|
31,028 |
|
|
|
|
|
|
|
|
Franchise and management revenue |
|
|
789 |
|
|
|
576 |
|
Entertainment revenue |
|
|
3,347 |
|
|
|
3,371 |
|
Other revenue |
|
|
787 |
|
|
|
773 |
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
39,304 |
|
|
$ |
35,748 |
|
|
|
|
|
|
|
|
During the first quarter of 2007, revenue from the hotels segment increased $3.4 million,
or 10.8%, compared to the first quarter of 2006, primarily due to an increase of $2.9 million in
rooms department revenue driven by rate increases as discussed above. Current year revenues are
also higher than the previous quarter as 2006 results were impacted by rooms being displaced from
their associated renovations. Food and beverage revenue increased 5.6% during the first quarter of
2007 from the same period in 2006, primarily due to a 6.2% increase in banquet-related revenues.
Our planned public area renovations, such as lobbies, restaurants, exteriors and banquet rooms, are
substantially complete and we anticipate an increased demand for banquets and other group business
that we expect to result in further gains in revenues from our food and beverage services.
Revenue from the franchise and management segment increased primarily due to a termination fee
of $142,000 relating to a hotel currently operating under the Red Lion brand that will leave the
system in May 2007, as well as from a franchise application fee received by a new owner of an
existing hotel within our system during the first quarter of 2007.
Revenues in the entertainment and other segments were relatively unchanged quarter-on-quarter,
with entertainment revenues of $3.3 million during the first quarter of 2007 compared to $3.4
million in the 2006 period and other revenues of $0.8 million during both periods.
Operating Expenses
Operating expenses include direct operating expenses for each of the operating segments, hotel
facility and land lease expense, depreciation and amortization, gain or loss on asset dispositions
and undistributed corporate expenses. In the aggregate, operating expenses from continuing
operations during the first three months of 2007 increased $3.5 million over 2006 as provided
below:
19
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Operating Expenses From Continuing Operations |
|
|
|
|
|
|
|
|
Hotels |
|
$ |
29,974 |
|
|
$ |
27,876 |
|
Franchise and management |
|
|
263 |
|
|
|
222 |
|
Entertainment |
|
|
2,855 |
|
|
|
2,900 |
|
Other |
|
|
483 |
|
|
|
686 |
|
Depreciation and amortization |
|
|
4,020 |
|
|
|
2,884 |
|
Hotel facility and land lease |
|
|
1,714 |
|
|
|
1,695 |
|
Gain on asset dispositions, net |
|
|
(190 |
) |
|
|
(182 |
) |
Undistributed corporate expenses |
|
|
1,450 |
|
|
|
984 |
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
40,569 |
|
|
$ |
37,065 |
|
|
|
|
|
|
|
|
Direct hotel expenses increased 7.5% from the first quarter of 2006, compared with a
hotel segment revenue increase of 10.8%. Room related expenses increased $0.7 million, or 10.4%,
and food and beverage costs increased $0.4 million, or 4.1%, on revenue increases of 14.7% and
5.6%, respectively. Hotel segment costs were also affected by increased sales related costs,
including marketing charges and compensation related to revenue performance, increased utility
costs and payroll related costs directly related to the hotels. Overall, the segment had a direct
profit of $4.4 million during the first quarter in 2007, compared to $3.2 million in the first
quarter of 2006, for a direct margin improvement of 266 basis points. Hotel direct margin was
12.8% in 2007 compared to 10.2% in 2006.
Direct costs for the franchise and management segment remained approximately the same during
the first three months of 2007 compared to the 2006 period, although segment profit increased due
to the increase in revenues discussed above. Entertainment costs also remained similar to the prior
comparative quarter, as did its segment profit. Other segment expenses decreased by $0.2 million
for a segment profit of $0.3 million compared to $0.1 million during the first quarter of 2006,
primarily due to the sale of the real estate management business during the second quarter of 2006.
During the first quarter of 2006, the real estate segment reported a direct profit of $0.4
million.
Depreciation and amortization increased 39.4% during the first quarter of 2007 compared to
2006, related directly to our hotel room renovations substantially completed at the end of 2006.
Undistributed corporate expenses were $0.5 million higher during 2007 compared to 2006
primarily attributable to increased SOX related expenditures over the prior period, including
increased audit, legal and outside consultant fees, and increased compensation levels, including
SFAS 123(R) option and ESPP expenses. Undistributed corporate expenses include general and
administrative charges such as corporate payroll, legal expenses, charitable contributions,
director and officers insurance, bank service charges and outside accountants and various other
consultants expense. We consider these expenses to be undistributed because the costs are not
directly related to our business segments and therefore are not further distributed. However,
costs that can be identified to a particular segment are distributed, such as accounting, human
resources and information technology, and are included in direct expenses.
Interest Expense
Interest expense for the three months ended March 31, 2007, decreased 33.6% to $2.2 million,
compared to $3.4 million recorded during the comparable period in 2006, as a result of the
repayment of almost $60 million in debt in 2006. Our average pre-tax interest rate on debt during
2007 was 7.7% compared to 7.9% during the 2006 period.
Income Taxes
Income tax benefit on continuing operations recognized during 2007 decreased $0.4 million to
$1.2 million compared to $1.6 million in the first quarter of 2006, due to the reduced loss before
income tax benefits. The experienced rate on pre-tax net income differed from the statutory
combined federal and state tax rates primarily due to the utilization of certain incentive tax
credits allowed under federal law.
Discontinued Operations
At March 31, 2007, we had remaining for sale within discontinued operations a commercial
complex located in Spokane, Washington, and one hotel located in Kalispell, Montana. During the
first quarter of 2007, we recorded a loss from discontinued operations of approximately $26,000,
compared to a loss of $0.3 million during the first quarter of 2006. The three months ended March
31, 2006, include the activities of two hotels sold during that quarter and three others that were
sold later in the year. Aggregate proceeds from the sale of the two hotels totaled $5.3 million,
resulting in a gain of approximately $30,000 net of income tax expense.
20
Liquidity and Capital Resources
Our financial position is as strong as it has ever been and we are positioned well for our
growth plans. Our hotel renovations have increased our ADR and revenues during the first quarter
of 2007, resulting in improved cash flows over the first quarter of 2006 by $3.3 million. A
comparative summary of our balance sheets at March 31, 2007 and December 31, 2006 is provided
below:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2007 |
|
2006 |
Consolidated balance sheet data (in thousands): |
|
|
|
|
|
|
|
|
Working capital (1) |
|
$ |
7,623 |
|
|
$ |
10,217 |
|
Assets of discontinued operations |
|
$ |
14,656 |
|
|
$ |
14,539 |
|
Other assets held for sale |
|
$ |
715 |
|
|
$ |
715 |
|
Property and equipment, net |
|
$ |
250,980 |
|
|
$ |
249,860 |
|
Total assets |
|
$ |
347,906 |
|
|
$ |
351,438 |
|
|
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
4,148 |
|
|
$ |
4,112 |
|
Total long-term debt |
|
$ |
84,752 |
|
|
$ |
85,272 |
|
Debentures due Red Lion Hotels Capital Trust |
|
$ |
30,825 |
|
|
$ |
30,825 |
|
Total liabilities |
|
$ |
165,304 |
|
|
$ |
167,647 |
|
Total stockholders equity |
|
$ |
182,602 |
|
|
$ |
183,791 |
|
|
|
|
(1) |
|
Represents current assets less current liabilities, excluding assets and
liabilities of discontinued operations and assets held for sale. |
Our short-term liquidity needs during 2007 include funds for operating activities,
interest payments on our outstanding indebtedness and capital expenditures, which we expect to
generally meet through net cash provided by operations and from our existing cash and cash
equivalents of $13.6 million at March 31, 2007. We may also draw upon our $50 million credit
facility. At March 31, 2007, we had an additional $4.1 million of restricted cash available under
securitized borrowing arrangements for future payment of furniture, fixtures and equipment,
repairs, insurance premiums and real and personal property taxes. We expect to meet our long-term
liquidity requirements for the funding of property acquisitions, renovations and other
non-recurring capital improvements through net cash provided by operations, long-term secured and
unsecured indebtedness, including our new credit facility, and joint ventures.
By the end of the first quarter of 2007, we were substantially finished with our major
renovation initiative for our owned and leased hotels that began in 2005. The capital investment
program represented one of the most significant facility improvement programs in company history,
and we remain committed to ongoing capital improvements in order to continue to enhance the Red
Lion brand by improving our hotel quality to enhance our guests experiences. We believe that by
continuing to improve upon the quality of our existing product in areas where customers quality
expectations are growing, we position our hotels to take advantage of the growth potential in our
existing markets and make the Red Lion brand more attractive for franchise opportunities. During
the first quarters of 2007 and 2006, we spent a total of $5.2 million and $10.7 million,
respectively, on capital improvements. During the remainder of 2007, we anticipate spending an
aggregate of $12.5 million to complete our hotel renovations and fund routine capital expenditures
and additional improvements.
Operating Activities
Net cash used in operations decreased 63.3% during the first quarter of 2007 compared to the
2006 period, totaling $1.9 million compared to $5.3 million in 2006. Non-cash income statement
expenses including depreciation and amortization, provision for deferred tax and stock based
compensation, totaled $4.1 million during the first three months of 2007 compared to $3.2 million
in 2006, increasing cash flow from operations by $0.9 million quarter-on-quarter. Working capital
changes, including restricted cash, receivables, accruals, payables and inventories, required less
cash during the 2007 period ($4.0 million) than in 2006 ($5.5 million). At March 31, 2007,
restricted cash held in escrow for future payments of insurance, property taxes, repairs and other
items as required by debt agreements, increased by $1.3 million from December 31, 2006, which we
expect to receive during the second quarter of 2007.
Investing Activities
Net cash provided by investing activities totaled $2.4 million during the first three months
of 2007, compared to cash provided in the 2006 period of $6.2 million. Cash additions to property
and equipment decreased 51.6% in 2007 from 2006, although offset by net cash proceeds of $5.1
million received primarily from the sale of two hotels during 2006. Also affecting the decrease
was the liquidation of variable rate demand notes during the first quarter of 2007, which as of
December 31, 2006, totaled $7.6 million. Total proceeds received during the first quarter of 2006
from these short-term investments totaled $11.8 million.
21
Financing Activities
Net financing activities provided cash of approximately $0.1 million during the first three
months of 2007 compared to $0.8 million used during the 2006 period. During the first quarter of
2006, $0.9 million was repaid in scheduled principal long-term debt payments compared to $0.6
million paid during 2007. Net financing activities during the 2007 period benefited from the
exercise by employees of stock options resulting in proceeds to the company of $0.4 million.
At March 31, 2007, we had total debt obligations of $119.5 million, of which $64.4 million was
securitized debt collateralized by individual hotels with fixed interest rates ranging from 6.7% to
8.1%. Included within outstanding debt are debentures due the Red Lion Hotels Capital Trust of
$30.8 million, which are uncollateralized and due the trust at a fixed rate of 9.5%.
Of the $64.4 million in securitized debt, three pools of cross securitized debt exist: (i) one
consisting of five properties with total borrowings of $21.3 million; (ii) a second consisting of
two properties with total borrowings of $19.2 million; and (iii) a third consisting of four
properties with total borrowings of $23.9 million. Each pool of securitized debt and the other
collateralized hotel borrowings include defeasance provisions for early repayment.
Contractual Obligations
The following table summarizes our significant contractual obligations as of March 31, 2007,
including contractual obligations of business units identified as discontinued on our consolidated
balance sheet (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Long-term debt(1) |
|
$ |
129,304 |
|
|
$ |
8,628 |
|
|
$ |
20,507 |
|
|
$ |
37,943 |
|
|
$ |
62,226 |
|
Operating leases(2) |
|
|
82,650 |
|
|
|
6,646 |
|
|
|
12,294 |
|
|
|
12,220 |
|
|
|
51,490 |
|
Debentures due Red Lion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels Capital Trust
(1) |
|
|
156,012 |
|
|
|
2,928 |
|
|
|
5,857 |
|
|
|
5,857 |
|
|
|
141,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations(3) |
|
$ |
367,966 |
|
|
$ |
18,202 |
|
|
$ |
38,658 |
|
|
$ |
56,020 |
|
|
$ |
255,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 $9.9 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. |
Off-balance Sheet Arrangements
As of March 31, 2007, we had no off-balance sheet arrangements, as defined by SEC regulations,
that have or are reasonably likely to have a current or future effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources
that is material to investors.
Other Matters
Franchise and Management Contracts
At March 31, 2007, our system of hotels included one hotel under a management contract and 24
hotels under franchise agreements. During 2006, we added a franchise property in Baton Rouge,
Louisiana, that is expected to open in mid-2007 after a multi-million dollar renovation. In
January 2007, we executed a new franchise agreement with a new owner of the Red Lion Hotel Elko,
Nevada. As part of the agreement, the hotel will undergo renovations to comply with our enhanced
Red Lion brand standards. During the second quarter of 2007, a franchised hotel in San Diego,
California, will cease being a member of the Red Lion system.
Acquisitions
There were no hotels acquired or other material operating acquisitions during the first
quarter of 2007.
Seasonality
Our business is subject to seasonal fluctuations. Significant portions of our revenues and
profits are realized from May through October. During 2006, revenues during the second and third
quarters approximated 25.7% and 30.2%, respectively, of total revenues for the year, compared to
revenues of 21.0% and 23.2% of total revenues during the first and fourth quarters.
22
Inflation
The effect of inflation, as measured by fluctuations in the U.S. Consumer Price Index, has not
had a material impact on our revenues or net income during the periods under review.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial statements, and (ii)
the reported amounts of revenues and expenses during the reporting periods. Actual results could
differ materially from those estimates. We consider a critical accounting policy to be one that is
both important to the portrayal of our financial condition and results of operations and requires
managements most subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain. Our significant accounting policies are
described in Note 2 of Notes to Consolidated Financial Statements included in our annual report on
Form 10-K for the year ended December 31, 2006. However, we have identified our most critical
accounting policies and estimates below. Management has discussed the development and selection of
our critical accounting policies and estimates with the audit committee of our board of directors,
and the audit committee has reviewed the disclosures presented below.
Revenue Recognition and Receivables
Revenue is generally recognized as services are provided. When we receive payment from
customers before our services have been performed, the amount received is recorded as deferred
revenue until the service has been completed. We recognize revenue from the following sources:
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Hotels Room rental and food and beverage sales from owned and leased hotels. Revenues
are recognized when our services have been performed, generally at the time of the hotel
stay or guests visit to the restaurant. This treatment is consistent with others within
our industry. Our revenues are significantly impacted by global, national and regional
economic conditions affecting the travel and hospitality industry, as well as the relative
market share of our hotels compared with our competitors. |
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Franchise and Management Fees received in connection with the franchise of our brand
names and management fees we earn from managing third-party owned hotels. Franchise and
management revenues are recognized as earned in accordance with the contractual terms of
the franchise or management agreements. |
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Entertainment Computerized event ticketing services and promotion of Broadway style
shows and other special events. Where we act as an agent and receive a net fee or
commission, it is recognized as revenue in the period the services are performed. When we
are the promoter of an event and are at-risk for the production, revenues and expenses are
recorded in the period of the event performance. |
We review the ability to collect individual accounts receivable on a routine basis. We record
an allowance for doubtful accounts based on specifically identified amounts that we believe to be
uncollectible and amounts that are past due beyond a certain date. The receivable is written off
against the allowance for doubtful accounts if collection attempts fail. Our estimate of the
allowance for doubtful accounts is impacted by, among other things, national and regional economic
conditions.
Long-lived Assets
Property and equipment is stated at cost less accumulated depreciation. The assessment of
long-lived assets for possible impairment requires us to make judgments regarding estimated future
cash flows from the respective properties, which is dependent upon internal forecasts, estimation
of the long-term rate of growth for our business, the useful life over which our cash flows will
occur, the determination of real estate and prevailing market values, asset appraisals and, if
available and appropriate, current estimated net sales proceeds from pending offers or net sales
proceeds from previous, comparable transactions. If the expected undiscounted future cash flows
are less than the net book value of the assets, the excess of the net book value over the estimated
fair value is charged to current earnings.
We review the recoverability of our long-lived assets annually or more frequently as events or
circumstances indicate that the carrying amount of an asset may not be recoverable. Changes to our
plans, including a decision to sell, dispose of or change the intended use of an asset, could have
a material impact on the carrying value of the asset.
Assets Held For Sale
We account for assets held for sale in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144 Accounting for the Impairment or Disposal of Long-lived Assets.
Assets held for sale are recorded at the lower of their historical carrying value or market value.
Revenues earned and recorded expenses associated with the operations of the properties held for
sale prior to the sale date are recorded in discontinued operations, unless we anticipate
continuing involvement after the sale. Depreciation is suspended when the asset is determined to
be held for sale.
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The real estate market, including the market for our hotels, is affected by many factors
beyond our control and our ability to sell an asset in response to changing economic, financial or
investment conditions is limited. Once we have made the decision to sell one or more of our
assets, we may be unable to do so or, even if we are successful, it may take us longer than
anticipated to find willing purchasers or the sale may be on less favorable terms. If an asset is
ultimately not sold within the guidelines of SFAS No. 144, depreciation would be recaptured for the
period the asset was classified as held for sale. In addition, if an asset held for sale is not
ultimately sold, our review of its carrying value may result in a possible impairment based on its
estimated fair market value.
Intangible Assets
Our intangible assets include brands and goodwill which we account for in accordance with SFAS
No. 142 Goodwill and Other Intangible Assets. We do not amortize our brands and goodwill.
Instead, we test for impairment annually or more frequently as events or circumstances indicate the
carrying amount of an asset may not be recoverable. Our goodwill and other intangible asset
impairment test requires judgment, including the identification of reporting units, assignment of
assets and liabilities to reporting units, assignment of goodwill to reporting units, and
determination of the fair value of each reporting unit, subject to the same general assumptions
discussed above for long-lived assets. At March 31, 2007 and December 31, 2006, our recorded
goodwill and other intangible assets not subject to amortization remained unchanged at $28.0
million. While we have not recognized an impairment loss since we originally recorded goodwill,
changes in our estimates and assumptions could affect, potentially materially, our financial
condition or results of operations in the future.
Our other intangible assets include management, marketing and lease contracts, the value of
which is amortized on a straight-line basis over the weighted average life of the agreements and
totaled $12.0 million and $12.1 million, respectively, at March 31, 2007 and December 31, 2006. The
assessment of these contracts requires us to make certain judgments, including estimated future
cash flow from the applicable properties.
New Accounting Pronouncements
In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes by establishing minimum standards for the recognition and
measurement of tax positions taken or expected to be taken in a tax return. Under the requirements
of FIN 48, a company must review all of its uncertain tax positions and make a determination as to
whether its position is more-likely-than-not to be sustained upon examination by regulatory
authorities. If a position meets the more-likely-than-not criterion, then the related tax benefit
is measured based on the cumulative probability analysis of the amount that is more-likely-than-not
to be realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The adoption of the provisions of FIN 48 did not have a material impact on the
Companys financial condition or results of operations.
In June 2006, the Emerging Issues Task Force (EITF) issued EITF No. 06-2, Accounting for
Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for
Compensated Absences. Under EITF No. 06-2, the compensation cost associated with a sabbatical or
other similar benefit arrangement should be accrued over the requisite service period if an
employees right to such absence (a) requires the completion of a minimum service period and (b) in
which the benefit does not increase with additional years of service pursuant to paragraph 6(b) of
SFAS No. 43 for arrangements in which the individual continues to be a compensated employee and is
not required to perform duties for the entity during the absence. EITF No. 06-2 was effective for
us on January 1, 2007, and the adoption of the provisions of EITF No. 06-2 did not materially
impact our financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157
does not require any new fair value measurements itself. However, this statement applies under
other accounting pronouncements that require or permit fair value measurements and may therefore
change current practice if an alternative measure of fair value has been used. SFAS No. 157
applies an exchange price notion for fair value consistent with previously preferred practice, with
a focus on exit price and market-based measurements as compared to entry price and entity-specific
measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. Earlier application is
encouraged and the new measurement criteria are generally to be applied prospectively. The Company
is currently evaluating the impact SFAS No. 157 will have on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS No. 159).
SFAS No. 159 permits entities to choose to measure many financial instruments and certain other
items at fair value, the objective of which is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by measuring related assets
and liabilities differently without having to apply complex hedge accounting provisions. This
statement is expected to expand the use of fair value measurement, which is consistent with FASBs
long-term measurement objectives for accounting for financial instruments. SFAS No. 159 is
effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on or before November
15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157 Fair Value
Measurements. The Company is currently evaluating the impact SFAS No. 159 will have on our
consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We believe there has been no material change to our market risk since the end of our last
fiscal year. Historically we have been exposed to market risk from changes in interest rates and
we may be again in the future. However, at March 31, 2007, all of our outstanding debt was subject
to currently fixed interest rates. We have managed our exposure to these risks by monitoring
available financing alternatives. We do not foresee any significant changes in our exposure to
fluctuations in interest rates or in how such exposure is managed in the future.
The below table summarizes our debt obligations at March 31, 2007, including those held as a
component of liabilities of discontinued operations, on our consolidated balance sheet (in
thousands). During the first quarter of 2007, recurring scheduled principal payments of $0.5
million were made that were included as debt obligations at December 31, 2006.
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2007 |
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2008 |
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2009 |
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2010 |
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2011 |
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Thereafter |
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Total |
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Fair Value |
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Long-term debt |
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Fixed rate |
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$ |
1,739 |
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$ |
5,403 |
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$ |
2,669 |
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$ |
2,860 |
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$ |
24,993 |
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$ |
50,962 |
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$ |
88,626 |
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$ |
88,106 |
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Average interest rate |
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7.73 |
% |
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Debentures due Red Lion |
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Hotels Capital Trust |
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$ |
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$ |
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$ |
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$ |
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$ |
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$ |
30,825 |
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$ |
30,825 |
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$ |
32,320 |
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Average interest rate |
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9.50 |
% |
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Item 4. Controls and Procedures
As of March 31, 2007, we carried out an evaluation under the supervision and with the
participation of our management, including the Chief Executive Officer (CEO) and our 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.
During the first quarter of 2007, we migrated our fixed asset accounting from a legacy system
to Microsoft Dynamics Great Plains (GP), which calculates our depreciation expense. While
utilizing more functionality within GP and further streamlining our accounting system, the
migration of fixed assets did not materially change our overall system of internal controls over
financial reporting.
There were no other changes in internal control over financial reporting, as defined in
Exchange Act Rules 13a-15(f), during the first three months of 2007 that have materially affected,
or are reasonably likely to materially affect, our internal controls over financial reporting.
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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. 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 factors discussed in Part I, Item 1A. Risk Factors in our annual report on Form 10-K for the
year ended December 31, 2006, 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. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits
Index to Exhibits
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Exhibit |
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Number |
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Description |
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10.1
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Executive Employment Agreement dated April 12, 2007, between the Registrant and Arthur M. Coffey |
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10.2
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Executive Employment Agreement dated April 12, 2007, between the Registrant and Anupam Narayan |
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10.3
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Executive Employment Agreement dated April 12, 2007, between the Registrant and John M. Taffin |
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10.4
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Executive Employment Agreement dated April 12, 2007, between the Registrant and Thomas McKeirnan |
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31.1
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Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
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31.2
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Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
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32.1
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Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14(b) |
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32.2
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Certification of Chief Financial Officer pursuant to Exchange Act Rule 13(a)-14(b) |
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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.
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Red Lion Hotels Corporation
Registrant
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Signature |
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Title |
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By:
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/s/ Anupam Narayan
Anupam Narayan
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Executive Vice President, Chief Investment
Officer and Chief Financial Officer
(Principal Financial Officer)
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May 9, 2007 |
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By:
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/s/ Anthony F. Dombrowik
Anthony F. Dombrowik
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Senior Vice President, Corporate Controller
(Principal Accounting Officer)
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May 9, 2007 |
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