e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2008
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-13957
Red Lion Hotels Corporation
(Exact name of registrant as specified in its charter)
|
|
|
Washington
(State or other jurisdiction of
incorporation or organization)
|
|
91-1032187
(I.R.S. Employer
Identification No.) |
|
|
|
201 W. North River Drive, Suite 100
Spokane Washington
(Address of principal executive offices)
|
|
99201
(Zip Code) |
Registrants Telephone Number, Including Area Code: (509) 459-6100
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated
filer o | Accelerated
filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
As of November 3, 2008, there were 18,274,498 shares of the registrants common stock
outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2008 and December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except share data) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
15,974 |
|
|
$ |
15,044 |
|
Restricted cash |
|
|
3,916 |
|
|
|
4,439 |
|
Accounts receivable, net |
|
|
11,729 |
|
|
|
10,330 |
|
Inventories |
|
|
1,469 |
|
|
|
1,416 |
|
Prepaid expenses and other |
|
|
2,429 |
|
|
|
3,352 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
35,517 |
|
|
|
34,581 |
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
290,659 |
|
|
|
260,574 |
|
Goodwill |
|
|
28,042 |
|
|
|
28,042 |
|
Intangible assets, net |
|
|
11,195 |
|
|
|
11,582 |
|
Other assets, net |
|
|
6,905 |
|
|
|
9,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
372,318 |
|
|
$ |
344,509 |
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
8,245 |
|
|
$ |
4,189 |
|
Accrued payroll and related benefits |
|
|
4,459 |
|
|
|
6,166 |
|
Accrued interest payable |
|
|
296 |
|
|
|
356 |
|
Advance deposits |
|
|
850 |
|
|
|
345 |
|
Other accrued expenses |
|
|
10,580 |
|
|
|
10,419 |
|
Long-term debt, due within one year |
|
|
2,967 |
|
|
|
5,547 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
27,397 |
|
|
|
27,022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
21,000 |
|
|
|
|
|
Long-term debt, due after one year |
|
|
81,130 |
|
|
|
77,673 |
|
Deferred income |
|
|
8,649 |
|
|
|
9,169 |
|
Deferred income taxes |
|
|
17,223 |
|
|
|
17,294 |
|
Minority interest in partnerships |
|
|
29 |
|
|
|
31 |
|
Debentures due Red Lion Hotels Capital Trust |
|
|
30,825 |
|
|
|
30,825 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
186,253 |
|
|
|
162,014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Preferred
stock 5,000,000 shares authorized; $0.01 par value;
no shares issued or outstanding |
|
|
|
|
|
|
|
|
Common stock
50,000,000 shares authorized; $0.01 par value;
18,274,498 and 18,312,756 shares issued and outstanding |
|
|
183 |
|
|
|
183 |
|
Additional paid-in capital, common stock |
|
|
141,896 |
|
|
|
140,553 |
|
Retained earnings |
|
|
43,986 |
|
|
|
41,759 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
186,065 |
|
|
|
182,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
372,318 |
|
|
$ |
344,509 |
|
|
|
|
|
|
|
|
The accompanying condensed notes are an integral part of the consolidated financial statements.
3
RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three and Nine Months Ended September 30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September
30, |
|
|
September
30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except per share data) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
$ |
53,472 |
|
|
$ |
50,039 |
|
|
$ |
135,401 |
|
|
$ |
129,259 |
|
Franchise and management |
|
|
769 |
|
|
|
701 |
|
|
|
1,549 |
|
|
|
2,272 |
|
Entertainment |
|
|
1,869 |
|
|
|
3,030 |
|
|
|
6,975 |
|
|
|
9,019 |
|
Other |
|
|
776 |
|
|
|
750 |
|
|
|
2,331 |
|
|
|
2,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
56,886 |
|
|
|
54,520 |
|
|
|
146,256 |
|
|
|
142,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
|
37,375 |
|
|
|
33,546 |
|
|
|
100,827 |
|
|
|
96,311 |
|
Franchise and management |
|
|
81 |
|
|
|
190 |
|
|
|
226 |
|
|
|
586 |
|
Entertainment |
|
|
1,712 |
|
|
|
2,519 |
|
|
|
6,886 |
|
|
|
7,978 |
|
Other |
|
|
483 |
|
|
|
454 |
|
|
|
1,547 |
|
|
|
1,402 |
|
Depreciation and amortization |
|
|
4,966 |
|
|
|
4,194 |
|
|
|
13,993 |
|
|
|
12,210 |
|
Hotel facility and land lease |
|
|
1,850 |
|
|
|
1,513 |
|
|
|
5,496 |
|
|
|
4,964 |
|
Gain on asset dispositions, net |
|
|
(64 |
) |
|
|
(188 |
) |
|
|
(204 |
) |
|
|
(427 |
) |
Undistributed corporate expenses |
|
|
1,746 |
|
|
|
1,555 |
|
|
|
8,710 |
|
|
|
4,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses |
|
|
48,149 |
|
|
|
43,783 |
|
|
|
137,481 |
|
|
|
127,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
8,737 |
|
|
|
10,737 |
|
|
|
8,775 |
|
|
|
15,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2,321 |
) |
|
|
(2,320 |
) |
|
|
(6,955 |
) |
|
|
(6,871 |
) |
Minority interest in partnerships, net |
|
|
(10 |
) |
|
|
(39 |
) |
|
|
2 |
|
|
|
(40 |
) |
Other income, net |
|
|
420 |
|
|
|
379 |
|
|
|
1,331 |
|
|
|
971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
|
6,826 |
|
|
|
8,757 |
|
|
|
3,153 |
|
|
|
9,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
2,391 |
|
|
|
2,958 |
|
|
|
926 |
|
|
|
3,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
4,435 |
|
|
|
5,799 |
|
|
|
2,227 |
|
|
|
6,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations of discontinued
business units, net of income
tax benefit of $17 and $62, respectively |
|
|
|
|
|
|
(32 |
) |
|
|
|
|
|
|
(113 |
) |
Gain on disposal of discontinued business
units, net of
income tax expense of $736 and $596,
respectively |
|
|
|
|
|
|
1,338 |
|
|
|
|
|
|
|
1,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
1,306 |
|
|
|
|
|
|
|
969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,435 |
|
|
$ |
7,105 |
|
|
$ |
2,227 |
|
|
$ |
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
0.24 |
|
|
$ |
0.30 |
|
|
$ |
0.12 |
|
|
$ |
0.33 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.07 |
|
|
|
|
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.24 |
|
|
$ |
0.37 |
|
|
$ |
0.12 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
0.24 |
|
|
$ |
0.29 |
|
|
$ |
0.12 |
|
|
$ |
0.32 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.07 |
|
|
|
|
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.24 |
|
|
$ |
0.36 |
|
|
$ |
0.12 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
18,267 |
|
|
|
19,226 |
|
|
|
18,245 |
|
|
|
19,191 |
|
Weighted average shares diluted |
|
|
18,551 |
|
|
|
19,574 |
|
|
|
18,508 |
|
|
|
19,573 |
|
The accompanying condensed notes are an integral part of the consolidated financial statements.
4
RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,227 |
|
|
$ |
7,298 |
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
13,993 |
|
|
|
12,237 |
|
Gain on disposition of property, equipment and other assets, net |
|
|
(204 |
) |
|
|
(427 |
) |
Gain on disposition of discontinued operations, net |
|
|
|
|
|
|
(1,678 |
) |
Deferred income tax provision |
|
|
(71 |
) |
|
|
2,830 |
|
Minority interest in partnerships |
|
|
(2 |
) |
|
|
40 |
|
Equity in investments |
|
|
(147 |
) |
|
|
(62 |
) |
Imputed interest expense |
|
|
111 |
|
|
|
157 |
|
Stock based compensation expense |
|
|
2,104 |
|
|
|
666 |
|
Collection of doubtful accounts |
|
|
65 |
|
|
|
19 |
|
Change in current assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
|
523 |
|
|
|
(1,431 |
) |
Accounts receivable |
|
|
(1,230 |
) |
|
|
(1,238 |
) |
Inventories |
|
|
(12 |
) |
|
|
158 |
|
Prepaid expenses and other |
|
|
931 |
|
|
|
(813 |
) |
Accounts payable |
|
|
4,056 |
|
|
|
(2,082 |
) |
Accrued payroll and related benefits |
|
|
(1,707 |
) |
|
|
(1,613 |
) |
Accrued interest payable |
|
|
(60 |
) |
|
|
(98 |
) |
Other accrued expenses and advance deposits |
|
|
368 |
|
|
|
3,380 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
20,945 |
|
|
|
17,343 |
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(43,306 |
) |
|
|
(14,002 |
) |
Non-current restricted cash for sublease tenant improvements |
|
|
2,072 |
|
|
|
|
|
Proceeds from disposition of property and equipment |
|
|
5 |
|
|
|
18 |
|
Proceeds from disposition of discontinued operations |
|
|
|
|
|
|
7,918 |
|
Proceeds from short-term liquid investments |
|
|
|
|
|
|
7,635 |
|
Advances to Red Lion Hotels Capital Trust |
|
|
(27 |
) |
|
|
(17 |
) |
Other, net |
|
|
429 |
|
|
|
(284 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(40,827 |
) |
|
|
1,268 |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Borrowings on revolving credit facility |
|
|
23,000 |
|
|
|
|
|
Repayment of revolving credit facility |
|
|
(2,000 |
) |
|
|
|
|
Repayment of long-term debt |
|
|
(13,234 |
) |
|
|
(1,894 |
) |
Borrowings on long-term debt |
|
|
14,000 |
|
|
|
3,926 |
|
Common stock redeemed |
|
|
(926 |
) |
|
|
|
|
Proceeds from issuance of common stock under employee stock
purchase plan |
|
|
164 |
|
|
|
196 |
|
Proceeds from stock option exercises |
|
|
|
|
|
|
488 |
|
Distributions to operating partnership unit holders |
|
|
|
|
|
|
(1 |
) |
Additions to deferred financing costs |
|
|
(192 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
20,812 |
|
|
|
2,688 |
|
|
|
|
|
|
|
|
Net cash in discontinued operations |
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents: |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
930 |
|
|
|
21,356 |
|
Cash and cash equivalents at beginning of period |
|
|
15,044 |
|
|
|
13,262 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
15,974 |
|
|
$ |
34,618 |
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
Cash paid during periods for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
102 |
|
|
$ |
|
|
Interest on long-term debt |
|
$ |
7,227 |
|
|
$ |
7,040 |
|
Cash received during periods for: |
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
974 |
|
|
$ |
|
|
Noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Exchange of property and equipment for minority interest |
|
$ |
|
|
|
$ |
906 |
|
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 September
30, 2008, the Red Lion system of hotels contained 47 hotels located in nine states and one Canadian
province, with 8,910 rooms and 437,626 square feet of meeting space. As of that date, the Company
operated 32 hotels, of which 19 are wholly owned and 13 are leased, and franchised 15 hotels that
were owned and operated by various third-party franchisees.
In addition to hotel operations, the Company maintains a direct ownership interest in a retail
mall that is attached to one of its hotels and in other miscellaneous real estate investments. The
Company is also engaged in entertainment operations, which includes TicketsWest.com, Inc., and
through which the Company derives revenues from event ticket distribution and promotion and
presentation of a variety of entertainment productions.
The Company was incorporated in the state of Washington in April 1978, and operated hotels
until 1999 under various brand names including Cavanaughs Hotels. In 1999, the Company acquired
WestCoast Hotels, Inc., and rebranded its Cavanaughs hotels to the WestCoast brand changing the
Companys name to WestCoast Hospitality Corporation. In 2001, the Company acquired Red Lion
Hotels, Inc. In September 2005, after rebranding most of its WestCoast hotels to the Red Lion
brand, the Company changed its name to Red Lion Hotels Corporation. The financial statements
encompass the accounts of Red Lion Hotels Corporation and all of its consolidated subsidiaries,
including its 100% ownership of Red Lion Hotels Holdings, Inc., and Red Lion Hotels Franchising,
Inc., and its approximately 99% ownership of Red Lion Hotels Limited Partnership (RLHLP).
The financial statements include an equity method investment in the 19.9% owned corporate
office building, 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, 2007 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, 2007, previously filed with the SEC on Form 10-K.
In the opinion of management, these unaudited consolidated financial statements contain all of
the adjustments of a normal and recurring nature necessary to present fairly the consolidated
financial position of the Company at September 30, 2008, the consolidated results of operations for
the three and nine months ended September 30, 2008 and 2007, and the consolidated cash flows for
the nine months ended September 30, 2008 and 2007. The results of operations for the periods
presented may not be indicative of those which may be expected for a full year.
Management makes estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the financial statements, the reported amounts of revenues and
expenses during the reporting period and the disclosures of contingent liabilities. Actual results
could materially differ from those estimates.
6
3. Property and Equipment
Property and equipment used in continuing operations is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Buildings and equipment |
|
$ |
274,988 |
|
|
$ |
253,905 |
|
Furniture and fixtures |
|
|
39,203 |
|
|
|
37,557 |
|
Landscaping and land improvements |
|
|
5,893 |
|
|
|
5,322 |
|
|
|
|
|
|
|
|
|
|
|
320,084 |
|
|
|
296,784 |
|
Less accumulated depreciation and amortization |
|
|
(112,402 |
) |
|
|
(99,605 |
) |
|
|
|
|
|
|
|
|
|
|
207,682 |
|
|
|
197,179 |
|
Land |
|
|
66,146 |
|
|
|
58,928 |
|
Construction in progress |
|
|
16,831 |
|
|
|
4,467 |
|
|
|
|
|
|
|
|
|
|
$ |
290,659 |
|
|
$ |
260,574 |
|
|
|
|
|
|
|
|
In May 2008, the Company completed the purchase of a 478 room, full service hotel asset in the
Denver, Colorado area for $25.3 million. The Company plans to invest over $8.0 million on
renovations and enhancements at this hotel. In connection with this asset purchase, the Company is
evaluating the allocation of certain amounts to intangible assets if deemed appropriate.
4. Assets Held For Sale and Discontinued Operations
From November 2004 through December 2006, the Company divested non-strategic assets including
ten 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 have been
considered discontinued operations under generally accepted accounting principles and are
separately disclosed on the consolidated statement of operations, comparative for all periods
presented when they existed.
During the second quarter of 2007, the Company sold its one remaining hotel listed for sale
and included in discontinued operations for $3.9 in gross proceeds, located in Kalispell, Montana.
In September 2007, the Company sold its remaining commercial office complex for $13.3 million,
resulting in a gain on the sale of $2.1 million. The consideration for the sale was $4.2 million
in cash, 97,826 OP units (for further information, see Note 10), and the assumption of $7.6 million
of debt.
During the third quarter and first nine months of 2007, the Company recorded income net of
income tax expense from discontinued operations of $1.3 million and $1.0 million, respectively.
Revenues from discontinued operations during the third quarter and first nine months of 2007 were
approximately $0.2 million and $1.4 million, respectively. There were no remaining discontinued
operations as of December 31, 2007.
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 up to $100 million. The initial maturity date
for the facility is September 13, 2009, and the Company has the right to extend the maturity for
two additional one year terms which management intends to exercise. 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.
During the second quarter of 2008, the Company borrowed $23.0 million against its revolving
credit facility to purchase the Red Lion Hotel Denver Southeast discussed above in Note 3.
Outstanding borrowings under the facility accrue interest at 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 September 30, 2008, $21.0 million was outstanding
under the facility
at an interest rate of 5.2% based on a 30-day LIBOR plus 1.5%. At September 30, 2008 and
December 31, 2007, the Company was in compliance with all of its covenants.
7
In September 2008, the Company closed on a $14.0 million loan from Wells Fargo Bank
collateralized by its 181-room hotel in Bellevue, Washington. The loan provides for a five-year
term and a spread over LIBOR that was 1.75% at closing but may vary based on certain financial
ratios. The loan requires the Company to comply with certain customary covenants, which generally
mirror those under the revolving credit facility discussed in the preceding two paragraphs.
The Company used $8.2 million of the loan proceeds to pay off an existing higher-rate loan
collateralized by the same hotel, and will use the remaining loan proceeds for general corporate
purposes. In connection with this transaction, the Company paid loan fees and related costs of
approximately $0.2 million, which have been deferred and are being amortized over the term of the
loan.
6. Business Segments
As of September 30, 2008 and December 31, 2007, the Company has 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. All balances have been presented after the elimination of
inter-segment and intra-segment revenues. Selected information with respect to continuing
operations is provided below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
$ |
53,472 |
|
|
$ |
50,039 |
|
|
$ |
135,401 |
|
|
$ |
129,259 |
|
Franchise and
management |
|
|
769 |
|
|
|
701 |
|
|
|
1,549 |
|
|
|
2,272 |
|
Entertainment |
|
|
1,869 |
|
|
|
3,030 |
|
|
|
6,975 |
|
|
|
9,019 |
|
Other |
|
|
776 |
|
|
|
750 |
|
|
|
2,331 |
|
|
|
2,268 |
|
|
|
|
|
|
|
|
$ |
56,886 |
|
|
$ |
54,520 |
|
|
$ |
146,256 |
|
|
$ |
142,818 |
|
|
|
|
|
|
Operating income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels |
|
$ |
10,193 |
|
|
$ |
11,554 |
|
|
$ |
17,692 |
|
|
$ |
18,011 |
|
Franchise and
management |
|
|
536 |
|
|
|
527 |
|
|
|
911 |
|
|
|
1,343 |
|
Entertainment |
|
|
19 |
|
|
|
427 |
|
|
|
(266 |
) |
|
|
744 |
|
Other |
|
|
(2,011 |
) |
|
|
(1,771 |
) |
|
|
(9,562 |
) |
|
|
(4,814 |
) |
|
|
|
|
|
|
|
$ |
8,737 |
|
|
$ |
10,737 |
|
|
$ |
8,775 |
|
|
$ |
15,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
|
Identifiable assets: |
|
|
|
|
|
|
|
|
Hotels |
|
$ |
310,361 |
|
|
$ |
281,117 |
|
Franchise and
management |
|
|
16,710 |
|
|
|
18,260 |
|
Entertainment |
|
|
5,790 |
|
|
|
6,279 |
|
Other |
|
|
39,457 |
|
|
|
38,853 |
|
|
|
|
|
|
$ |
372,318 |
|
|
$ |
344,509 |
|
|
|
|
8
7. Earnings Per Share
The following table presents a reconciliation of the numerators and denominators used in the
basic and diluted earnings per share computations for the three and nine months ended September 30,
2008 and 2007 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Numerator basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
4,435 |
|
|
$ |
5,799 |
|
|
$ |
2,227 |
|
|
$ |
6,329 |
|
Income from discontinued operations |
|
|
|
|
|
|
1,306 |
|
|
|
|
|
|
|
969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4,435 |
|
|
|
7,105 |
|
|
|
2,227 |
|
|
|
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares basic |
|
|
18,267 |
|
|
|
19,226 |
|
|
|
18,245 |
|
|
|
19,191 |
|
Weighted average shares diluted |
|
|
18,551 |
|
|
|
19,574 |
|
|
|
18,508 |
|
|
|
19,573 |
|
|
Earnings per share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.24 |
|
|
$ |
0.30 |
|
|
$ |
0.12 |
|
|
$ |
0.33 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.07 |
|
|
|
|
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.24 |
|
|
$ |
0.37 |
|
|
$ |
0.12 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.24 |
|
|
$ |
0.29 |
|
|
$ |
0.12 |
|
|
$ |
0.32 |
|
Income from discontinued operations |
|
|
|
|
|
|
0.07 |
|
|
|
|
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
0.24 |
|
|
$ |
0.36 |
|
|
$ |
0.12 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2008, 234,658 and 227,037, respectively, of
the 1,429,794 outstanding stock options were considered dilutive. Of the 55,715 restricted stock
units outstanding during those same periods, 4,298 and 5,805 shares, respectively, were included in
the above calculation of diluted earnings per share. For the three and nine months ended September
30, 2007, 258,594 and 301,568, respectively, of the 1,306,617 outstanding stock options were
considered dilutive, as were the 44,473 and 35,175 restricted stock units outstanding during those
same periods.
At September 30, 2008 and September 30, 2007, the effect of converting the 44,837 outstanding
OP Units held by limited partners was considered dilutive and included within the above
calculations.
8. Change in Executive Officers
In February 2008, the President and Chief Executive Officer of the Company, who was also a
director of the Company, retired. In connection therewith, the Company entered into a written
retirement agreement with the executive that included separation payments and benefits of $2.2
million in value. Under the terms of the agreement, the unvested portion of the former executives
545,117 stock options and 12,990 restricted stock units immediately vested, resulting in expense of
$1.0 million during the first quarter of 2008. In addition, under the terms of the retirement
agreement, the exercise period for 414,191 of the options was extended to February 2011 or until
the earlier expiration of their original 10-year term. The remaining 130,926 stock options expired
in May 2008. The modification to the terms of the previously granted equity awards resulted in
additional stock based compensation expense of $0.4 million. In total, the Company recognized $3.7
million in expense during the first quarter of 2008 related to this retirement.
Also in February 2008, the board of directors granted 5,769 restricted shares of common stock
and 52,734 options to purchase common stock in connection with the appointment of the Companys new
President, Chief Executive Officer and director. Under the terms of the award, the options and
units issued will vest 25% each year for four years . Both equity awards were based on a grant
date price of $7.80. On the grant date, the options had a fair value of $2.53 per share, based on
the Black-Scholes options pricing model using the following assumptions:
|
|
|
|
|
Dividend yield |
|
|
0 |
% |
Expected volatility |
|
|
34.6 |
% |
Forfeiture rate |
|
|
0 |
% |
Risk free interest rate |
|
|
3.62 |
% |
Expected options lives |
|
4 years |
9
9. Stock Based Compensation
The 2006 Stock Incentive Plan authorizes the grant or issuance of various option and other
awards including restricted stock grants and other stock-based compensation. The plan was approved
by the shareholders of the Company and allows awards of 1.0 million shares, subject to adjustments
for stock splits, stock dividends and similar events. During the first nine months of 2008, the
board of directors granted 334,212 options to purchase common stock
and 36,125 unvested restricted stock
units to executive officers and other key employees, all of which will vest 25% each year for four
years with no stock price acceleration provision. In addition, non-executive directors of the
Company were granted an aggregate of 17,160 shares of common stock with a fair value of $0.2
million as part of the existing directors compensation arrangement. As of September 30, 2008,
there were 386,220 shares of common stock available for issuance pursuant to future stock option
grants or other awards under the 2006 plan.
For the options issued in 2008, the weighted average assumptions below were used:
|
|
|
|
|
Weighted-average fair value of options granted |
|
$ |
8.52 |
|
Dividend yield |
|
|
0 |
% |
Expected volatility |
|
|
34.25 |
% |
Forfeiture rate |
|
|
4.3 |
% |
Risk free interest rates |
|
|
4.12 |
% |
Expected option lives |
|
4 years |
In the third quarter and first nine months of 2008, the Company recognized approximately $0.2
million and $1.7 million, respectively, in compensation expense related to options, compared to
$0.2 million and $0.5 million, respectively, during the same periods in 2007. The 2008 nine month
period includes expense recorded in February upon the retirement of the Companys former President
and Chief Executive Officer, as discussed above in Note 8. At September 30, 2008, the fair value
of outstanding options was approximately $1.9 million. As outstanding unvested options vest, the
Company expects to recognize approximately $1.6 million in additional compensation expense before
the impact of income taxes over a weighted average period of 32 months, including $0.1 million
during the remainder of 2008. A summary of stock option activity during the first nine months of
2008, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Number |
|
|
Exercise |
|
|
|
of Shares |
|
|
Price |
|
Balance, December 31, 2007 |
|
|
1,276,534 |
|
|
$ |
7.98 |
|
Options granted |
|
|
334,212 |
|
|
$ |
8.52 |
|
Options forfeited |
|
|
(180,952 |
) |
|
$ |
12.79 |
|
|
|
|
|
|
|
|
Balance, September 30, 2008 |
|
|
1,429,794 |
|
|
$ |
7.49 |
|
|
|
|
|
|
|
|
Exercisable, September 30, 2008 |
|
|
722,057 |
|
|
$ |
6.50 |
|
|
|
|
|
|
|
|
Additional information regarding stock options outstanding and exercisable as of September 30,
2008, 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
|
|
|
653,801 |
|
|
|
3.94 |
|
|
2011-2014
|
|
$ |
5.30 |
|
|
$ |
1,777 |
|
|
|
507,551 |
|
|
$ |
5.36 |
|
|
$ |
1,350 |
|
7.05 7.80
|
|
|
270,878 |
|
|
|
5.69 |
|
|
2009-2018
|
|
|
7.52 |
|
|
|
136 |
|
|
|
114,500 |
|
|
|
7.47 |
|
|
|
64 |
|
8.31 8.80
|
|
|
288,842 |
|
|
|
8.83 |
|
|
2010-2018
|
|
|
8.71 |
|
|
|
|
|
|
|
27,008 |
|
|
|
8.31 |
|
|
|
|
10.88-10.94
|
|
|
24,956 |
|
|
|
2.07 |
|
|
2009-2016
|
|
|
10.93 |
|
|
|
|
|
|
|
21,970 |
|
|
|
10.93 |
|
|
|
|
12.21-15.00
|
|
|
191,317 |
|
|
|
8.21 |
|
|
2008-2017
|
|
|
12.66 |
|
|
|
|
|
|
|
51,028 |
|
|
|
12.81 |
|
|
|
|
|
|
|
|
|
|
|
|
1,429,794 |
|
|
|
5.80 |
|
|
2008-2018
|
|
$ |
7.49 |
|
|
$ |
1,913 |
|
|
|
722,057 |
|
|
$ |
6.50 |
|
|
$ |
1,414 |
|
|
|
|
|
|
|
|
|
(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 third quarter of 2008, or September 30, 2008, based upon the Companys closing stock price of $8.02. |
10
During May 2008, 2,750 shares of common stock were issued upon vesting of outstanding
restricted stock units. In accordance with the terms of the 2006 plan, the Company authorized a
net settlement of distributable shares to employees after consideration of individual employees
tax withholding obligations, at the election of each employee. In June 2008, the Company
repurchased 423 shares for approximately $9.47 per share to cover the tax withholding obligations.
As of September 30, 2008 and September 30, 2007, there were 55,715 and 44,473 unvested restricted
stock units outstanding, respectively. Since grant, approximately 1% of total restricted stock
units granted have been forfeited. In the first nine months of 2008 and 2007, the Company
recognized approximately $0.2 million and $0.1 million, respectively, in compensation expense
related to restricted stock units. The 2008 expense includes $0.1 million recorded upon the
retirement of the Companys former President and Chief Executive Officer. As the restricted stock
units vest, the Company expects to recognize approximately $0.4 million in additional compensation
expense over a weighted average period of 38 months.
In 1998, the Company adopted an employee stock purchase plan (the 1998 ESPP) to assist its
employees in acquiring a stock ownership interest in the Company at a discount. Under the ESPP,
300,000 shares of common stock are authorized for purchase, of which 64,993 shares remained
available at the time the ESPP terminated on December 31, 2007, in accordance with its terms. The
64,993 shares included 8,515 shares issued in January 2008, for which the Company had previously
recognized approximately $0.1 million in compensation expense for the discount.
Due to the expiration of the 1998 ESPP and upon shareholder ratification at the annual
shareholder meeting in May 2008, the Company adopted a new employee stock purchase plan (the 2008
ESPP). The terms of the 2008 ESPP remained essentially the same as its predecessor, with 300,000
shares of common stock authorized for purchase by eligible employees at a discount through payroll
deductions. No employee may purchase more than $25,000 worth of shares in any calendar year. As
allowed under the 2008 ESPP, a participant may elect to withdraw from the plan, effective for the
purchase period in progress at the time of the election with all accumulated payroll deductions
returned to the participant at the time of the withdrawal. The common stock will be offered during
twenty consecutive six-month periods, with the purchase periods beginning on the first day and
ending on the last day of each subsequent six-month period. The first period began on January 1,
2008 and ended on June 30, 2008, and 13,750 shares were issued out of the plan in July 2008.
10. Stockholders Equity
Share Repurchases
In September 2007, the Company announced a common stock repurchase program for up to $10.0
million. Any stock repurchases were to be made through open market purchases, block purchases or
privately negotiated transactions. The timing and actual number of share repurchases were
dependent on several factors including price, corporate and regulatory requirements and other
conditions. As of December 31, 2007, the Company had repurchased 924,200 shares at a cost of $9.1
million. During January 2008, the Company repurchased an additional 93,000 shares for an aggregate
cost of $0.9 million, completing the program.
|
|
|
|
|
|
|
|
|
|
|
Number |
|
Weighted Average |
Period |
|
of Shares |
|
Repurchase Price |
1/1/08-1/31/08
|
|
|
93,000 |
|
|
$ |
9.58 |
|
Operating Partnership Units
As discussed in Note 1, the Company is a general partner of RLHLP and holds an approximately
99% interest in that entity. Partners who hold operating partnership units (OP Units) have the
right to put those OP Units to RLHLP, in which event either (a) RLHLP must redeem the units for
cash, or (b) the Company, as general partner, may elect to acquire the OP Units for cash or in
exchange for a like number of shares of its common stock. In September 2007 and as partial
consideration for the sale of the commercial office complex discussed in Note 4 above, the Company
accepted 97,826 OP Units held by limited partners at a value of $9.27 per share, based upon the
trading price of the common stock five days before the sale. Since this transaction, there have
been no other acquisitions by the Company of OP Units held by limited partners and at September 30,
2008 and December 31, 2007, 44,837 OP Units were held by limited partners.
11. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 establishes a framework for measuring fair value in accordance with 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 assets and liabilities in financial
statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued proposed FSP FAS 157-2, which delayed the effective date of SFAS No. 157 for all
nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). FSP FAS 157-2 partially defers the
effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim
periods within those fiscal years for items within the scope of the FSP. Effective January 1,
2008, the Company adopted SFAS No. 157 except as it applies to those nonfinancial assets and
nonfinancial liabilities as noted in FSP FAS 157-2.
11
The Company does not use derivative instruments, nor does it hold or issue financial
instruments for the purpose of trading. The Companys financial instruments currently consist of
cash and cash equivalents, restricted cash, accounts receivable, cash included in other assets,
current liabilities and debt obligations. The carrying amounts for cash and cash equivalents,
current investments, accounts receivable, current liabilities and variable rate long-term debt are
reasonable estimates of their fair values. Therefore, the Company experienced no impact on the
carrying value of any financial asset or liability recognized at adoption and does not expect the
adoption of this standard to have a material effect on its 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.
While SFAS No. 159 became effective on January 1, 2008, the Company did not elect the fair value
measurement option for any of its financial assets or liabilities.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141R) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of Accounting Research Bulletin No. 51 (SFAS No. 160) SFAS No. 141R will change how
business acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. SFAS No. 160 will change the accounting and reporting
for minority interests, which will be recharacterized as noncontrolling interests and classified as
a component of equity. SFAS No. 141R and SFAS No. 160 are effective for annual periods beginning
after December 15, 2008, and early adoption is not permitted. The Company is currently evaluating
the impact the adoption of SFAS No. 141R and SFAS No. 160 could have on the consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161), an amendment of FASB No. 133. The new statement will improve
the transparency about where derivative instruments are located in financial statements, how
derivative instruments and related hedge items are currently accounted for under Statement 133, and
how these instruments ultimately affect an entitys financial position, performance, and cash flow.
It requires that entities disclose the fair value of derivative instruments and their gains and
losses, disclose features that are credit risk related, and cross reference footnotes to enable
financial statement end users to locate significant derivative instrument information more easily.
SFAS No. 161 is effective for all financial statements that are issued for fiscal years and interim
periods after November 15, 2008, although entities are encouraged to adopt its requirements early.
The Company does not currently engage in hedging activities and does not currently have derivative
instruments recorded within its consolidated financial statements. Thus, the Company does not
expect the adoption of SFAS No. 161 will have any effect on its consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162), which identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP to improve the quality of
standards and the standard-setting process, including improving the conceptual framework, codifying
existing accounting literature, transitioning to a single standard-setter regime, and converging
FASB and standards of the International Accounting Standards Board. SFAS No. 162 is effective 60
days following the SECs approval of the PCAOB amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles.
12
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 this document, as well as our annual report filed on Form 10-K for the
year ended December 31, 2007, 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, 2007, previously filed
with the SEC on Form 10-K.
Introduction
We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily
engaged in the ownership, operation and franchising of midscale and upscale, full service hotels
under our proprietary Red Lion Brand. Established over 30 years ago, the Red Lion brand is
nationally recognized and particularly well known in the western United States, where most of our
hotels are located. The Red Lion brand is typically associated with three and four-star
full-service hotels.
As of September 30, 2008, our hotel system contained 47 hotels located in nine states and one
Canadian province, with 8,910 rooms and 437,626 square feet of meeting space as provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
Meeting |
|
|
|
|
|
|
Available |
|
Space |
|
|
Hotels |
|
Rooms |
|
(sq. ft.) |
Red Lion Owned and Leased Hotels |
|
|
31 |
|
|
|
5,935 |
|
|
|
304,684 |
|
Other Leased Hotel (1) |
|
|
1 |
|
|
|
310 |
|
|
|
5,000 |
|
Red Lion Franchise Hotels |
|
|
15 |
|
|
|
2,665 |
|
|
|
127,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
47 |
|
|
|
8,910 |
|
|
|
437,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Red Lion Hotels |
|
|
46 |
|
|
|
8,600 |
|
|
|
432,626 |
|
|
|
|
(1) |
|
Represents a hotel acquired in the fourth quarter of 2007 that is being repositioned as a Red Lion,
although until that time has been flagged as an independent property and other leased hotel. |
Red Lion is about Staying Comfortable and our product and service culture is successful in
both large urban and smaller markets. Our hotels strive to reflect the character of the unique
local markets in which they are operated, while maintaining a consistent Stay Comfortable
experience. We believe our adherence to consistent customer service standards and brand
touch-points make 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. Under customary terms of a management agreement,
revenue is recorded from management fees charged to the owners of the hotels, typically
based on a percentage of the hotels gross revenues plus an incentive fee based on
operating performance. We have not managed any hotels for third parties since January
2008, when the last hotel managed by us elected not to renew the management agreement. |
|
|
|
|
The entertainment segment derives revenue primarily from ticketing services and
promotion and presentation of entertainment productions. |
13
Our remaining activities, none of which constitutes a reportable segment, have been aggregated
into Other. In September 2007, and as discussed further in Note 4 of Notes to Condensed
Consolidated Financial Statements, we sold the remaining commercial office building held for sale
that had been included within discontinued operations. There were no remaining discontinued
operations as of December 31, 2007.
Executive Summary
Our mission is to create the most memorable guest experience possible, through personalized,
exuberant service, allowing us to be a leader in our markets. We believe that leveraging the
uniqueness of our physical assets and interacting with our guests in the warm, genuine way that Red
Lion has historically been know for will drive growth and increase shareholder value. To achieve
these goals, we have focused and will continue to focus our resources monetary, capital and
human in four primary areas:
Infrastructure We have improved the foundation of our company by focusing on our core
competencies and by investing in the infrastructure we use to manage the distribution of our
inventory through online and traditional reservation channels. Centrally sourced reservations
(i.e. voice, redlion.com, travel agent and third-party on-line travel agencies) have remained
consistent during the first nine months of 2008 compared to 2007, accounting for 45% of system
revenues in 2008 compared to 46% in 2007. The revenue we delivered from our branded website,
redlion.com, increased 4.3% during the first nine months of 2008 compared to the first nine
months of 2007.
In October 2008, we completed the installation of MICROS Opera Property Management
Systems throughout our portfolio of owned hotels. This upgraded system is designed to provide
us with a single database for managing, analyzing and reporting our customer activity and
greatly enhances both our customer service levels and ability to e-market using sophisticated
customer relations management tools and tactics.
Physical Assets We have completed major room and public space renovations at all of
our owned and leased hotels, which have strengthened the performance of our hotel system
quarter-after-quarter since 2005, when renovations began. We remain committed to ongoing
capital improvements including $15 million during the fourth quarter of 2008 in order to
build on our previous investments and continue to strengthen the Red Lion brand by improving
our hotel quality to enhance our guests experience.
Average occupancy, average daily rate and revenue per available room statistics provided
below includes all owned, leased and franchised hotels on a comparable basis. Similar to
others in our industry and in light of the difficult economic conditions that have impacted
our business, particularly during September, during the third quarter of 2008 we saw a drop of
1% in RevPAR at our owned and leased properties compared to the third quarter of 2007.
Occupancy was down 2.1 points although rate increased by 1.8%, as provided in the table below.
Year-to-date RevPAR for the first nine months of 2008 is positive to the comparable 2007
period, with reported growth of 1.5%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended September 30, |
|
For the nine months ended September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
|
|
Average(1) |
|
|
|
|
|
|
|
|
|
Average(1) |
|
|
|
|
|
|
|
|
|
Average(1) |
|
|
|
|
|
|
|
|
|
Average(1) |
|
|
|
|
|
|
Occupancy |
|
ADR(2) |
|
RevPAR(3) |
|
Occupancy |
|
ADR(2) |
|
RevPAR(3) |
|
Occupancy |
|
ADR(2) |
|
RevPAR(3) |
|
Occupancy |
|
ADR(2) |
|
RevPAR(3) |
Owned and Leased Hotels |
|
|
74.2 |
% |
|
$ |
97.11 |
|
|
$ |
72.08 |
|
|
|
76.3 |
% |
|
$ |
95.43 |
|
|
$ |
72.79 |
|
|
|
65.2 |
% |
|
$ |
91.57 |
|
|
$ |
59.69 |
|
|
|
65.4 |
% |
|
$ |
89.84 |
|
|
$ |
58.79 |
|
Franchised Hotels |
|
|
70.1 |
% |
|
$ |
81.72 |
|
|
$ |
57.26 |
|
|
|
72.4 |
% |
|
$ |
77.56 |
|
|
$ |
56.12 |
|
|
|
60.6 |
% |
|
$ |
78.22 |
|
|
$ |
47.43 |
|
|
|
64.8 |
% |
|
$ |
74.81 |
|
|
$ |
48.50 |
|
|
|
|
|
|
|
|
|
|
Total Red Lion Hotels |
|
|
72.9 |
% |
|
$ |
92.37 |
|
|
$ |
67.33 |
|
|
|
75.1 |
% |
|
$ |
90.06 |
|
|
$ |
67.60 |
|
|
|
63.8 |
% |
|
$ |
87.75 |
|
|
$ |
55.99 |
|
|
|
65.3 |
% |
|
$ |
85.39 |
|
|
$ |
55.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change from prior
comparative period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned and Leased Hotels |
|
|
(2.1 |
) |
|
|
1.8 |
% |
|
|
-1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
1.9 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Franchised Hotels |
|
|
(2.3 |
) |
|
|
5.4 |
% |
|
|
2.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.2 |
) |
|
|
4.6 |
% |
|
|
-2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Red Lion Hotels |
|
|
(2.2 |
) |
|
|
2.6 |
% |
|
|
-0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
2.8 |
% |
|
|
0.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Average occupancy
represents total
paid rooms divided
by total available
rooms. Total
available rooms
represents the
number of rooms
available
multiplied by the
number of days in
the reported period
and includes rooms
taken out of
service for
renovation. |
|
(2) |
|
Average daily rate (ADR) represents total room revenues divided by the total number of paid rooms occupied by hotel guests. |
|
(3) |
|
Revenue per available room (RevPAR) represents total room and related revenues divided by total available rooms. |
During the third quarter of 2008, our franchise properties saw a 2.0% improvement in RevPAR
compared to the 2007 period as properties began to come back on line from renovation. ADR
increased 5.4%, although occupancy decreased 2.3 points. Results for our
franchise properties were also impacted positively from hotels that have left the system for
insufficient progress in completing the required property improvements.
14
The Red Lion Way We want our guests to feel our commitment to their memorable experience
through our associates. In order to live up to our mission statement, management believes strongly
in associate retention and development and is committed to competitive compensation and benefit
packages and advancement opportunities. We are investing in a strong future by developing
throughout all levels of our organization leaders who understand that a culture of associate
satisfaction and excellent service is an integral component of our long-term growth strategy. Our
goal is to be known in our industry for leadership excellence and being a great company to work for
in each of our markets. As a result of our efforts, we continue to experience a reduction in
associate turnover.
Growth Preparing for growth means improving our liquidity and capital resources and
increasing the depth of financial resources available to us. In May 2008, we completed the
acquisition of a 478-room, full service hotel in the Denver, Colorado area. The two-tower hotel
property also includes 25,000 square feet of meeting space and an onsite two-story parking garage.
The purchase price was $25.3 million and we plan to invest over $8.0 million on renovations to
enhance the hotel. Combined with our existing 297-room franchised property in Denver, this creates
a strong Red Lion presence in this strategic hub market.
We intend to continue to add properties in large, western U.S. urban markets, complemented by
franchising leading properties in smaller, secondary cities, and progressively move east,
leveraging the momentum of our growth in the western states. This may include selectively making
joint venture investments or acquiring hotels located in major metropolitan cities. We will
evaluate investment opportunities in highly visible markets based upon a number of factors
including price, strategic fit, potential profitability and geographic distribution. In addition
to our Anaheim, California acquisition in October 2007 and the recently acquired Red Lion Hotel
Denver Southeast, the greater San Francisco, Los Angeles, Phoenix, and Dallas areas are examples of
hub markets we are targeting for expansion. We believe that recent economic conditions and the
state of the capital markets may create a favorable environment for strategic buyers.
Significant events during the current year thus far include:
|
|
|
The acquisition of a 478-room hotel in the Denver, Colorado area as discussed above; |
|
|
|
|
Change in management leadership following the retirement of our former President and
Chief Executive Officer; |
|
|
|
|
10-year anniversary as a public company and trading on the New York Stock Exchange; |
|
|
|
|
Rebranding of our customer loyalty program to the Red Lion R&R (Rewards and
Recognition) Club; |
|
|
|
|
Commencement of the complete renovation of our Anaheim property; |
|
|
|
|
Completion of the implementation of new ticketing application software at all
TicketsWest locations; and |
|
|
|
|
Refinance of the 181-room hotel in Bellevue, Washington for $14.0 million. |
Financially, we believe we have a strong balance sheet and financial position. At September
30, 2008, in addition to $16.0 million in cash, we had unused capacity of $29.0 million under our
$50.0 million revolving credit facility. This credit facility can be increased by an additional
$50 million to a maximum of $100 million, subject to satisfaction of various conditions. In
September we closed on a $14.0 million loan from Wells Fargo Bank collateralized by our 181-room
hotel in Bellevue, Washington, $8.2 million of which was used to pay off existing higher-rate
debt. The loan provides for a five-year term and a spread over LIBOR that was 1.75% at closing but
may vary based on certain financial ratios.
Our operating results are subject to conditions affecting the lodging industry, including any
impact from the downturn of the airline industry and high fuel prices. While we experienced
positive RevPAR and operating margin growth in the first and second quarters, we saw a significant
slowdown in demand during the third quarter of 2008, primarily commencing in September after the
Labor Day weekend. For the first time in several years, we reported lower RevPAR from our owned
and leased hotels quarter-over-quarter. In particular, our transient business has decreased
year-over-year and we expect that trend to continue throughout the remainder of 2008 and likely
into 2009. We have undertaken a review of activities in an effort to implement cost cutting
measures and maintain or improve our margins. We are aggressively managing our mix of business and
have launched several marketing programs in an effort to boost revenues and maintain or increase
our market share.
Our strategy will continue to be to improve profit margins through cost controls while
maintaining the Red Lion culture so that our guests continue to Stay Comfortable. In this
uncertain economy and into the future, we believe that we are positioned to achieve our long-term
strategic goals. However, we believe the current economic period and its effect on our industry
have created an uncertain operating environment for the remainder of 2008 and into 2009. There can
be no assurance our results of operations will be similar to our results reported thus far during
the first nine months of 2008 if changes in travel patterns continue or general conditions of the
economy do not improve.
Results of Operations
During the third quarter of 2008, we reported net income of $4.4 million (or $0.24 per share)
compared to $7.1 million (or $0.37 per share) during the third quarter of 2007. For the first nine
months of 2008, we reported net income of $2.2 million (or $0.12 per share) compared to net income
of $7.3 million (or $0.38 per share) during the first nine months of 2007. Year-to-date results
through September
2008 have been impacted negatively by a $3.7 million charge recorded during the first quarter
of 2008 for separation costs associated with the retirement of our former President and Chief
Executive Officer in February 2008. In addition, third quarter 2007 results included income from
discontinued operations of $1.3 million, further adding to the difference in net income during the
comparable quarterly and nine-month periods.
15
During the second quarter of 2007, we sold the last hotel included in discontinued operations
for gross proceeds of $3.9 million. In September 2007, we sold our remaining commercial office
complex included in discontinued operations for $13.3 million, for a gain on the sale of $2.1
million. The net impact on consolidated earnings from the activities of discontinued operations
during the third quarter and first nine months of 2007 was income of approximately $1.3 million and
$1.0 million, respectively. There were no remaining discontinued operations as of December 31,
2007. A summary of our consolidated statement of operations is as provided below (in thousands,
except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Total revenue |
|
$ |
56,886 |
|
|
$ |
54,520 |
|
|
$ |
146,256 |
|
|
$ |
142,818 |
|
Operating expenses |
|
|
48,149 |
|
|
|
43,783 |
|
|
|
137,481 |
|
|
|
127,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
8,737 |
|
|
|
10,737 |
|
|
|
8,775 |
|
|
|
15,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2,321 |
) |
|
|
(2,320 |
) |
|
|
(6,955 |
) |
|
|
(6,871 |
) |
Minority interest in partnerships, net |
|
|
(10 |
) |
|
|
(39 |
) |
|
|
2 |
|
|
|
(40 |
) |
Other income, net |
|
|
420 |
|
|
|
379 |
|
|
|
1,331 |
|
|
|
971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes |
|
|
6,826 |
|
|
|
8,757 |
|
|
|
3,153 |
|
|
|
9,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
2,391 |
|
|
|
2,958 |
|
|
|
926 |
|
|
|
3,015 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
4,435 |
|
|
|
5,799 |
|
|
|
2,227 |
|
|
|
6,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
1,306 |
|
|
|
|
|
|
|
969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,435 |
|
|
$ |
7,105 |
|
|
$ |
2,227 |
|
|
$ |
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic |
|
$ |
0.24 |
|
|
$ |
0.37 |
|
|
$ |
0.12 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted |
|
$ |
0.24 |
|
|
$ |
0.36 |
|
|
$ |
0.12 |
|
|
$ |
0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA |
|
$ |
14,113 |
|
|
$ |
17,401 |
|
|
$ |
24,101 |
|
|
$ |
30,113 |
|
EBITDA from continuing operations |
|
$ |
14,113 |
|
|
$ |
15,271 |
|
|
$ |
24,101 |
|
|
$ |
28,425 |
|
Operating expenses increased by $4.4 million quarter-over-quarter, due primarily to an 11.4%
increase in hotel segment expenses and from the impact of increased depreciation expense of $0.8
million. During the nine-month comparable period, operating expenses increased $9.9 million also
due to increased hotels segment expenses and increased depreciation expense, as well as the $3.7
million charge incurred in the first quarter of 2008 discussed above. The following table details
the impact of that $3.7 million charge on net income, earnings per share and EBITDA for the first
nine months of 2008 (in thousands, except per share data):
|
|
|
|
|
Separation costs |
|
$ |
(3,654 |
) |
Income tax benefit |
|
|
1,297 |
|
|
|
|
|
Impact of separation costs on net income |
|
$ |
(2,357 |
) |
|
|
|
|
|
|
|
|
|
Separation costs |
|
$ |
(0.20 |
) |
Income tax benefit |
|
|
0.07 |
|
|
|
|
|
Impact of separation costs on earnings per share |
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
Impact of separation costs on EBITDA |
|
$ |
(3,654 |
) |
|
|
|
|
EBITDA represents net income before interest expense, income tax 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 as defined by
generally accepted accounting principles in the United States (GAAP), and such information should
not be considered as an alternative to net income, cash flows from operations or any other measure
of performance prescribed by GAAP.
16
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 determined in accordance with
GAAP as an indicator of performance or as an alternative to cash flows from operating activities as
an indicator of liquidity.
The following is a reconciliation of EBITDA and EBITDA from continuing operations to net
income for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
EBITDA |
|
$ |
14,113 |
|
|
$ |
17,401 |
|
|
$ |
24,101 |
|
|
$ |
30,113 |
|
Income tax expense |
|
|
(2,391 |
) |
|
|
(3,676 |
) |
|
|
(926 |
) |
|
|
(3,548 |
) |
Interest expense |
|
|
(2,321 |
) |
|
|
(2,417 |
) |
|
|
(6,955 |
) |
|
|
(7,030 |
) |
Depreciation and amortization |
|
|
(4,966 |
) |
|
|
(4,203 |
) |
|
|
(13,993 |
) |
|
|
(12,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,435 |
|
|
$ |
7,105 |
|
|
$ |
2,227 |
|
|
$ |
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA from continuing operations |
|
$ |
14,113 |
|
|
$ |
15,271 |
|
|
$ |
24,101 |
|
|
$ |
28,425 |
|
Income tax expense |
|
|
(2,391 |
) |
|
|
(2,958 |
) |
|
|
(926 |
) |
|
|
(3,015 |
) |
Interest expense |
|
|
(2,321 |
) |
|
|
(2,320 |
) |
|
|
(6,955 |
) |
|
|
(6,871 |
) |
Depreciation and amortization |
|
|
(4,966 |
) |
|
|
(4,194 |
) |
|
|
(13,993 |
) |
|
|
(12,210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
|
4,435 |
|
|
|
5,799 |
|
|
|
2,227 |
|
|
|
6,329 |
|
Income from discontinued operations |
|
|
|
|
|
|
1,306 |
|
|
|
|
|
|
|
969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,435 |
|
|
$ |
7,105 |
|
|
$ |
2,227 |
|
|
$ |
7,298 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
A breakdown of our revenues from continuing operations for the three and nine months ended
September 30, 2008 and 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, |
|
|
Nine months ended September 30, |
|
Revenues From Continuing Operations |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Hotels: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Room revenue |
|
$ |
39,280 |
|
|
$ |
36,851 |
|
|
$ |
95,399 |
|
|
$ |
90,744 |
|
Food and beverage revenue |
|
|
12,643 |
|
|
|
12,007 |
|
|
|
36,459 |
|
|
|
35,675 |
|
Other department revenue |
|
|
1,549 |
|
|
|
1,181 |
|
|
|
3,543 |
|
|
|
2,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hotels segment revenue |
|
|
53,472 |
|
|
|
50,039 |
|
|
|
135,401 |
|
|
|
129,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise and management revenue |
|
|
769 |
|
|
|
701 |
|
|
|
1,549 |
|
|
|
2,272 |
|
Entertainment revenue |
|
|
1,869 |
|
|
|
3,030 |
|
|
|
6,975 |
|
|
|
9,019 |
|
Other revenue |
|
|
776 |
|
|
|
750 |
|
|
|
2,331 |
|
|
|
2,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
56,886 |
|
|
$ |
54,520 |
|
|
$ |
146,256 |
|
|
$ |
142,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Three Months Ended September 30, 2008 and 2007
During the third quarter of 2008, revenue from the hotel segment increased $3.4 million, or
6.9%, compared to the third quarter of 2007, primarily due to the addition of the Denver property,
which we acquired in May 2008, and from the Anaheim property, which we acquired in October 2007.
These properties positively impacted revenue by a total of $4.6 million for the quarter. Neither
of these properties were in our system during the comparable period in 2007. Since the second
quarter of 2008, revenues from the Anaheim property have been impacted by the hotels extensive
renovations that have commenced and will continue through the end of 2008. The Red Lion Sacramento
contributed $0.4 million to revenues in the third quarter of 2007 prior to its transition from a
leased hotel to a franchise in July 2007. On a comparable hotel basis, hotels revenue was $48.9
million for the third quarter of 2008 compared to $49.6 for the same period in 2007, a decrease of
$0.7 million or 1.4%.
For comparable hotels, occupancy decreased 2.1 points quarter-over-quarter, although ADR
increased 1.8% to bring RevPAR down 1.0% during the third quarter of 2008 compared against the
third quarter of 2007. Across our system of owned and leased hotels, we saw decreases in both
transient and group room nights during the third quarter of 2008 as compared to the same period in
2007. These decreases were partially offset by increases in revenues from redlion.com, third-party
online travel agent bookings and travel agency promotions. In addition, earlier in 2008 we began
to build a strong base foundation of stable, permanent business in several of our hotels, the
majority derived from airline crews and other guests delivering a fixed minimum number of rooms per
night. Food and beverage revenue increased 5.3%, also due to the addition of Denver and Anaheim.
Revenue from the franchise and management segment increased 9.7% due to termination fees of
$0.3 million recorded for two franchised properties that left the system on September 30, 2008,
partially offset by lower royalty fees received in the third quarter of 2008 compared to the third
quarter of 2007 resulting from having fewer hotels in our system quarter-on-quarter. Revenues from
the entertainment segment decreased 38.3% from the prior year period primarily as a result of our
production of Disneys The Lion King in Honolulu, Hawaii that commenced a 12-week run in September
2007, with no comparable shows in the third quarter of 2008.
Nine Months Ended September 30, 2008 and 2007
In the first nine months of 2008, revenue from the hotel segment increased $6.1 million, or
4.8%, compared to the first nine months of 2007. Affecting comparability of the variance are
revenues included from the Red Lion Sacramento recorded in the first nine months of 2007, offset by
revenues from Anaheim and from the Red Lion Denver Southeast that were not in our system of hotels
during the first nine months of 2007. On a comparable hotel basis, hotels revenue was $126.6
million for the first nine months of 2008 compared to $124.6 million for the same period in 2007,
an increase of $2.0 million or 1.6%. Hotel revenues during 2008 have also been positively affected
by an increase in group revenue, as well as from increases in permanent, travel agency promotions,
redlion.com and third-party online travel agent bookings year-over-year. However, hotel revenue
has been impacted by a general decrease in transient revenues compared to the first nine months of
2007. On a comparable basis, ADR increased 1.9% across all hotel business segments with
essentially flat occupancy. RevPAR for the first nine months of 2008 increased 1.5% compared to
the first nine months of 2007.
Revenue from the franchise and management segment decreased $0.7 million, or 31.8%, compared
to the first nine months of 2007. In the first nine months of 2007, we received approximately $0.5
million in new franchise commitment fees, as well as termination fees related to hotels that left
our system and from a franchise application fee received from a new owner of an existing hotel in
our system. During the first nine months of 2008, we recorded $0.3 million in franchise
termination fees, although we recorded less royalty fees throughout the year as a result of having
fewer hotels in our system. Entertainment revenues decreased $2.0 million, or 22.7%, primarily due
to differences in number, type and attendance levels of shows presented during the first nine
months of 2008 compared to 2007. A profitable 12-week run of our production of Disneys The Lion
King began in Honolulu, Hawaii in September 2007, although most of the profits occurred in the
fourth quarter.
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 three and nine months ended September 30, 2008, increased $4.4 million and
$9.9 million, respectively, over the same periods in 2007 as provided below:
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
Operating Expenses From Continuing Operations |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Hotels |
|
$ |
37,375 |
|
|
$ |
33,546 |
|
|
$ |
100,827 |
|
|
$ |
96,311 |
|
Franchise and management |
|
|
81 |
|
|
|
190 |
|
|
|
226 |
|
|
|
586 |
|
Entertainment |
|
|
1,712 |
|
|
|
2,519 |
|
|
|
6,886 |
|
|
|
7,978 |
|
Other |
|
|
483 |
|
|
|
454 |
|
|
|
1,547 |
|
|
|
1,402 |
|
Depreciation and amortization |
|
|
4,966 |
|
|
|
4,194 |
|
|
|
13,993 |
|
|
|
12,210 |
|
Hotel facility and land lease |
|
|
1,850 |
|
|
|
1,513 |
|
|
|
5,496 |
|
|
|
4,964 |
|
Gain on asset dispositions, net |
|
|
(64 |
) |
|
|
(188 |
) |
|
|
(204 |
) |
|
|
(427 |
) |
Undistributed corporate expenses |
|
|
1,746 |
|
|
|
1,555 |
|
|
|
8,710 |
|
|
|
4,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
$ |
48,149 |
|
|
$ |
43,783 |
|
|
$ |
137,481 |
|
|
$ |
127,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels revenue -owned (1) |
|
$ |
38,426 |
|
|
$ |
35,106 |
|
|
$ |
95,127 |
|
|
$ |
89,031 |
|
Direct margin (2) |
|
$ |
12,304 |
|
|
$ |
12,209 |
|
|
$ |
26,433 |
|
|
$ |
25,044 |
|
Direct margin % |
|
|
32.0 |
% |
|
|
34.8 |
% |
|
|
27.8 |
% |
|
|
28.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels revenue- leased (1) |
|
$ |
15,046 |
|
|
$ |
14,933 |
|
|
$ |
40,274 |
|
|
$ |
40,228 |
|
Direct margin (2) |
|
$ |
3,793 |
|
|
$ |
4,284 |
|
|
$ |
8,141 |
|
|
$ |
7,904 |
|
Direct margin % |
|
|
25.2 |
% |
|
|
28.7 |
% |
|
|
20.2 |
% |
|
|
19.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise and management revenue |
|
$ |
769 |
|
|
$ |
701 |
|
|
$ |
1,549 |
|
|
$ |
2,272 |
|
Direct margin (2) |
|
$ |
688 |
|
|
$ |
511 |
|
|
$ |
1,323 |
|
|
$ |
1,686 |
|
Direct margin % |
|
|
89.5 |
% |
|
|
72.9 |
% |
|
|
85.4 |
% |
|
|
74.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment revenue |
|
$ |
1,869 |
|
|
$ |
3,030 |
|
|
$ |
6,975 |
|
|
$ |
9,019 |
|
Direct margin (2) |
|
$ |
157 |
|
|
$ |
511 |
|
|
$ |
89 |
|
|
$ |
1,041 |
|
Direct margin % |
|
|
8.4 |
% |
|
|
16.9 |
% |
|
|
1.3 |
% |
|
|
11.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
$ |
776 |
|
|
$ |
750 |
|
|
$ |
2,331 |
|
|
$ |
2,268 |
|
Direct margin (2) |
|
$ |
293 |
|
|
$ |
296 |
|
|
$ |
784 |
|
|
$ |
866 |
|
Direct margin % |
|
|
37.8 |
% |
|
|
39.5 |
% |
|
|
33.6 |
% |
|
|
38.2 |
% |
|
|
|
(1) |
|
Continuing operations only |
|
(2) |
|
Revenues less direct operating expenses. |
Three Months Ended September 30, 2008 and 2007
Direct hotel expenses increased 11.4% compared to the third quarter of 2007, compared with a
hotel segment revenue increase of 6.9% during the third quarter of 2008. Room related expenses
was the driver for the increased expenditures with an increase of $1.1 million, or 11.3%,
attributed to the additional rooms in our system from Denver and Anaheim in the third quarter of
2008 compared to the same period in 2007. In addition, food and beverage costs increased $0.6
million in the quarter over the prior year. Overall, the segment had a direct profit of $16.1
million compared to $16.5 million during the third quarter of 2007, for a direct operating margin
decrease of 290 basis points quarter-over-quarter.
Direct costs for the franchise and management segment decreased $0.1 million, or 57.4%, and
entertainment direct costs decreased 32.0% from the comparable prior year period primarily from
fewer shows and less associated show expense during the third quarter of 2008 compared to the third
quarter in 2007.
Undistributed corporate expenses include general and administrative charges such as corporate
payroll, legal expenses, charitable contributions, director and officers insurance, bank service
charges and outside accountants and various other consultants expense. We consider these expenses
to be undistributed because the costs are not directly related to our business segments and
therefore are not further distributed. However, costs that can be identified with a particular
segment are distributed, such as accounting, human resources and information technology, and are
included in direct expenses. During the third quarter of 2008, we reported an increase of 12.3% in
undistributed corporate expenses primarily related to increased legal and outside services from the
strategic alternative review discussed below in Item 1A. Risk Factors.
19
Nine Months Ended September 30, 2008 and 2007
Direct hotel expenses during the first nine months of 2008 increased $4.5 million, or 4.7%
over the first nine months of 2007, compared with a hotel segment revenue increase of 4.8%. Room
related expenses was the driver for the increased expenditures, in addition to an increase in food
and beverage costs year-over-year. Overall, the segment had a direct profit of $34.6 million
compared to $32.9 million during the first nine months of 2007, a 4.9% improvement; although direct
operating margin remained flat during both periods at 25.5%.
Direct costs for the franchise and management segment were lower by $0.4 million during the
comparable periods, and entertainment costs decreased $1.1 million, or 13.7%, compared to a revenue
decrease of $2.0 million. The nine month period in 2008 was negatively impacted by fewer shows
presented than in 2007.
Undistributed corporate expenses during the first nine months of 2008 included the $3.7
million charge for separation costs discussed above, which was the most substantial contributor to
the negative $4.2 million variance year-on-year. In addition, the variance was also attributable
to increased equity compensation expense and increased outside consulting services.
Income Taxes
During the third quarter and first nine months of 2008, we reported income tax expense of $2.4
million and $0.9 million, respectively, compared to $3.0 million during both the third quarter of
2007 and the first nine months of 2007. 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.
Liquidity and Capital Resources
We believe we have a strong financial position with adequate cash flows, and that we have both
low leverage and strong credit ratios that will allow us to access capital. Our short-term
liquidity needs over the next twelve months will be met by funds generated from operating
activities and by existing cash and cash equivalents of $16.0 million at September 30, 2008. To
finance the May 2008 acquisition of the Red Lion Denver Hotel Southeast for $25.3 million, we
utilized $23.0 million of our $50 million credit facility. At September 30, 2008, the outstanding
balance was $21.0 million. We also have the ability to increase this facility to $100 million,
subject to satisfaction of various conditions. We also refinanced a 181-room hotel in Bellevue,
Washington in September 2008 at terms more favorable than the higher-rate debt paid off. We
believe that recent economic conditions and the state of the capital markets may create a favorable
environment for strategic buyers.
A comparative summary of our balance sheets at September 30, 2008 and December 31, 2007 is
provided below:
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
|
2008 |
|
2007 |
Consolidated balance sheet data (in thousands): |
|
|
|
|
|
|
|
|
Cash and cash equivalent |
|
$ |
15,974 |
|
|
$ |
15,044 |
|
Restricted cash (1) |
|
$ |
3,916 |
|
|
$ |
4,439 |
|
Working capital (2) |
|
$ |
8,120 |
|
|
$ |
7,559 |
|
Property and equipment, net |
|
$ |
290,659 |
|
|
$ |
260,574 |
|
Total assets |
|
$ |
372,318 |
|
|
$ |
344,509 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
105,097 |
|
|
$ |
83,220 |
|
Debentures due Red Lion Hotels Capital Trust |
|
$ |
30,825 |
|
|
$ |
30,825 |
|
Total liabilities |
|
$ |
186,253 |
|
|
$ |
162,014 |
|
Total stockholders equity |
|
$ |
186,065 |
|
|
$ |
182,495 |
|
|
|
|
(1) |
|
Restricted under securitized borrowing arrangements for future payments of principal,
interest, furniture, fixtures and equipment, repairs, insurance premiums and real and personal
property taxes. |
|
(2) |
|
Represents current assets less current liabilities. |
During the remaining three months of 2008, we expect cash expenditures to primarily include
the funding of operating activities, interest payments on our outstanding indebtedness and
additional capital expenditures of approximately $15.0 million to primarily fund renovation costs
for three of our hotels in Anaheim and Denver. We expect to meet our long-term liquidity
requirements for the paying of future property acquisitions and other investments and continued
hotel and other various capital improvements through net cash provided by operations, long-term
secured and unsecured indebtedness, including any unused portion of our $50 million credit
facility, and joint ventures.
20
Operating Activities
Net cash provided by operations increased $3.6 million to $20.9 million during the first nine
months of 2008 compared to the 2007 period. Non-cash income statement expenses, including
depreciation and amortization, provision for deferred tax and stock based compensation, increased
15.0% during the current year period, and working capital changes, including restricted cash,
receivables, accruals, payables and inventories, were also favorable resulting in increased cash
flow of $6.6 million during the first nine months of 2008. The changes in accounts payable during
the first nine months of 2008 are a reflection of the increase in hotel renovation activity
occurring at three of our hotels in Anaheim and Denver. During the first nine months of
2008, restricted cash held in escrow for future payments of insurance, property taxes, repairs and
other items as required by debt agreements decreased $0.5 million compared to an increase of $1.4
million reflected during the first nine months of 2007.
Investing Activities
Net cash used in investing activities totaled $40.8 million during the first nine months of
2008, primarily for the acquisition of the Red Lion Hotel Denver Southeast for $25.3 million in May
2008 and renovation expenditures at several locations. Other additions during 2008 to property and
equipment increased 28.4% from the first nine months of 2007 to $18.0 million. We utilized $2.1
million of restricted cash included in other assets during 2008 to fulfill our commitment to
reimburse up to $3.0 million in tenant improvements at the Red Lion Hotel Sacramento in connection
with its July 2007 sublease. During the first quarter of 2008, we also received approximately $0.5
million for a workers compensation premium reimbursement and from the payoff of a long-term
receivable.
During the 2007 period, net cash provided by investing activities totaled $1.3 million.
During the first quarter of 2007, we liquidated all variable rate demand notes recorded at December
31, 2006, totaling $7.6 million. In the second and third quarters of 2007, we sold the remaining
assets held in discontinued operations for proceeds of $7.9 million
Financing Activities
Net financing activities provided cash of approximately $20.8 million during the first nine
months of 2008 compared to $2.7 million provided during the 2007 period, primarily from the
borrowing of $23.0 million under our $50 million credit facility to finance the acquisition of the
Red Lion Hotel Denver Southeast. In addition, we closed on a $14.0 million loan in September 2008
collateralized by a 181-room hotel in Bellevue, Washington, $8.2 million of which was used to pay
off existing higher-rate debt. In addition to this payoff, $5.0 million of scheduled principal
payments on long-term debt were made during the first nine months of 2008, compared to $1.9 million
during the first nine months of 2007. During the current period, we also have repaid $2.0 million
of the $23.0 million drawn on our credit facility in May 2008. In June 2007, we borrowed $3.9
million that was later assumed by the buyers of the commercial office complex sold in September
2007. Net financing activities during the 2007 period benefited from the exercise by employees of
81,418 stock options resulting in proceeds to the company of $0.5 million. No options were
exercised during the first nine months of 2008.
In September 2007, we announced a common stock repurchase program for up to $10 million
through open market purchases, block purchases or privately negotiated transactions, subject to
certain conditions. Through the fourth quarter of 2007, we had repurchased 924,200 shares at a
cost of $9.1 million. During January 2008, we completed our share repurchase program with the
purchase of an additional 93,000 shares at an aggregate cost of $0.9 million.
At September 30, 2008, we had total debt obligations of $135.9 million, of which $81.8 million
was securitized debt collateralized by individual hotels with fixed interest rates ranging from
5.5% to 8.1%. Included within outstanding debt are debentures due to the Red Lion Hotels Capital
Trust of $30.8 million, which are uncollateralized and bear interest at a fixed rate of 9.5%.
Contractual Obligations
The following table summarizes our significant contractual obligations as of September 30,
2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
4-5 years |
|
|
5 years |
|
Long-term debt (1) |
|
$ |
131,679 |
|
|
$ |
9,833 |
|
|
$ |
57,843 |
|
|
$ |
64,003 |
|
|
$ |
|
|
Operating leases (2) |
|
|
66,255 |
|
|
|
7,738 |
|
|
|
14,757 |
|
|
|
10,722 |
|
|
|
33,038 |
|
Service agreements |
|
|
1,100 |
|
|
|
275 |
|
|
|
550 |
|
|
|
275 |
|
|
|
|
|
Debentures due Red Lion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels Capital Trust (1) |
|
|
134,538 |
|
|
|
2,928 |
|
|
|
5,857 |
|
|
|
5,857 |
|
|
|
119,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations (3) |
|
$ |
333,572 |
|
|
$ |
20,774 |
|
|
$ |
79,007 |
|
|
$ |
80,857 |
|
|
$ |
152,934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Including estimated interest payments and commitment fees over the life of the debt agreement. |
|
(2) |
|
Operating lease amounts are net of estimated sublease income of $11.3 million annually. |
|
(3) |
|
With regard to purchase obligations, we are not party to any material agreements to purchase goods or services that are enforceable
or legally binding as to fixed or minimum quantities to be purchased or stated price terms. |
21
In 2001, we assumed a master lease agreement for 17 hotel properties, including 12 which were
part of the Red Lion acquisition. Subsequently, we entered into an agreement with Doubletree DTWC
Corporation whereby Doubletree DTWC Corporation is subleasing five of these hotel properties from
Red Lion. The master lease agreement requires minimum monthly payments of $1.3 million plus
contingent rents based on gross receipts from the 17 hotels, of which approximately $0.8 million
per month is paid by a sub-lease tenant. The lease agreement expires in December 2020, although we
have the option to extend the term on a hotel-by-hotel basis for additional five-year terms.
In July 2007, we entered into an agreement to sublease the Red Lion Hotel Sacramento to a
third party with an initial lease term expiring in 2020. In connection with the sublease
agreement, we received deferred lease income of $3.0 million, which will be amortized over the life
of the sublease agreement. The sublease agreement provides for annual rent payments of $1.4
million, which we have netted against lease amounts payable by us in computing the operating lease
amounts shown in the above table. As part of the agreement, we have committed to reimburse the
tenant for up to $3.0 million in tenant improvements. As of the date of this filing, all of this
$3.0 million had been spent.
In October 2007, we completed an acquisition of a 100-year (including extension periods)
leasehold interest in a hotel in Anaheim, California for $8.3 million, including costs of
acquisition. As required under the terms of the leasehold agreement, we will pay $1.8 million per
year in lease payments through April 2011, the amounts of which have been reflected in the above
table. At our option, we are entitled to extend the lease for up to 19 additional terms of five
years each, with increases in lease payments tied directly to the Consumer Price Index. Beyond the
monthly payments through April 2011, we have not included any additional potential future lease
commitment related to the Anaheim property in the table above.
Off-balance Sheet Arrangements
As of September 30, 2008, we had no off-balance sheet arrangements, as defined by SEC
regulations, which have or are reasonably likely to have a current or future effect on our
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to investors.
Other Matters
Franchise and Management Contracts
At September 30, 2008, our system of hotels included 15 hotels under franchise agreements,
representing a total of 2,665 rooms and 127,942 square feet of meeting space. During the first
quarter of 2008, the franchised property Red Lion Hotel Baton Rouge (132 rooms) joined the system,
although one hotel under a management contract (254 rooms) did not renew its agreement and left our
system of hotels. In April 2008, franchise agreements with three hotels expired and were not
renewed, representing a total of 301 rooms. In addition, we have terminated franchise agreements
with four other properties, including three during the third quarter of 2008 for insufficient
progress in completing the required property improvements. Those hotels were the former Red Lion
Hotel Modesto (186 rooms), the Red Lion Hotel Hillsboro (123 rooms) and the Red Lion Hotel Klamath
Falls (108 rooms).
All franchised hotels were required to meet Red Lion upscale brand standards by the end of
2007. The majority of hotels met the standards by the end of 2007, while some are still in the
process of completing renovations. We believe all but two of our current franchisees are either in
full compliance with the Companys enhanced brand standards or making sufficient progress to be in
full compliance in the near term. We are monitoring their work and will terminate additional
hotels for non compliance if satisfactory progress does not continue.
Seasonality
Our business is subject to seasonal fluctuations, and more revenues and profits are realized
from May through October than during the rest of the year. During 2007, revenues during the second
and third quarters approximated 26.2% and 29.2%, respectively, of total revenues for the year,
compared to revenues of 21.0% and 23.6% of total revenues during the first and fourth quarters,
respectively.
Inflation
The effect of inflation, as measured by fluctuations in the U.S. Consumer Price Index, has not
had a material impact on our consolidated financial statements 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, 2007. 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.
22
Revenue Recognition and Receivables
Revenue is generally recognized as services are provided. When we receive payment from
customers before our services have been performed, the amount received is recorded as deferred
revenue until the service has been completed. We recognize revenue from the following sources:
|
|
|
Hotels Room rental and food and beverage sales from owned and leased hotels. Revenues
are recognized when our services have been performed, generally at the time of the hotel
stay or guests visit to the restaurant. This treatment is consistent with others within
our industry. Our revenues are significantly impacted by global, national and regional
economic conditions affecting the travel and hospitality industry, as well as the relative
market share of our hotels compared with our competitors. |
|
|
|
|
Franchise and Management Fees received in connection with the franchise of our brand
names and management fees we have earned from managing third-party owned hotels. Franchise
and management revenues are recognized as earned in accordance with the contractual terms
of our existing franchise or management agreements. |
|
|
|
|
Entertainment Computerized event ticketing services and promotion of Broadway style
shows and other special events. Where we act as an agent and receive a net fee or
commission, it is recognized as revenue in the period the services are performed. When we
are the promoter of an event and are at-risk for the production, revenues and expenses are
recorded in the period of the event performance. |
|
|
|
|
Other Primarily from rental income received from our direct ownership interest in a
retail mall in Kalispell, Montana that is attached to our Red Lion hotel. |
We review the ability to collect individual accounts receivable on a routine basis. We record
an allowance for doubtful accounts based on specifically identified amounts that we believe to be
uncollectible and amounts that are past due beyond a certain date. The receivable is written off
against the allowance for doubtful accounts if collection attempts fail. Our estimate of the
allowance for doubtful accounts is impacted by, among other things, national and regional economic
conditions.
Long-lived Assets
Property and equipment is stated at cost less accumulated depreciation. The assessment of
long-lived assets for possible impairment requires us to make judgments regarding estimated future
cash flows from the respective properties, which is dependent upon internal forecasts, estimation
of the long-term rate of growth for our business, the useful life over which our cash flows will
occur, the determination of real estate and prevailing market values, asset appraisals and, if
available and appropriate, current estimated net sales proceeds from pending offers or net sales
proceeds from previous, comparable transactions. If the expected undiscounted future cash flows are
less than the net book value of the assets, the excess of the net book value over the estimated
fair value is charged to current earnings.
We review the recoverability of our long-lived assets annually or more frequently as events or
circumstances indicate that the carrying amount of an asset may not be recoverable. Changes to our
plans, including a decision to sell, dispose of or change the intended use of an asset, could have
a material impact on the carrying value of the asset.
Intangible Assets
Our intangible assets include brands and goodwill which we account for in accordance with SFAS
No. 142 Goodwill and Other Intangible Assets. We do not amortize our brands and goodwill.
Instead, we test for impairment annually or more frequently as events or circumstances indicate the
carrying amount of an asset may not be recoverable. Our annual measurement date for impairment is
October 1. 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 September
30, 2008 and December 31, 2007, 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.
Per SFAS No. 142, if certain circumstances occur, such as a significant adverse change in
legal factors, a change in the business climate or other significant changes were to occur at any
time during the year outside of the annual impairment date, we are required to evaluate whether a
triggering event would indicate our goodwill has been impaired. Due to current market
conditions, we evaluated whether a triggering event had occurred that would cause us to conclude
that goodwill had been impaired. Through review of other hospitality companies and other financial
analysis, we determined that at the end of the third quarter of 2008, no such events occurred that
would trigger an impairment analysis per SFAS No. 142. However, if circumstances change, all or a
portion of the recorded goodwill would need to be written off in a future period or periods, which
could have an adverse effect on our results of operations.
Our other intangible assets include management, marketing and lease contracts, the value of
which is amortized on a straight-line basis over the weighted average life of the agreements and
totaled $11.2 million and $11.6 million, respectively, at September, 2008 and December 31, 2007.
The assessment of these contracts requires us to make certain judgments, including estimated future
cash flow from the applicable properties.
23
New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157).
SFAS No. 157 establishes a framework for measuring fair value in accordance with 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 assets and liabilities in financial
statements issued for fiscal years beginning after November 15, 2007. In February 2008, the FASB
issued proposed FSP FAS 157-2, which delayed the effective date of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually). FSP FAS 157-2
partially defers the effective date of SFAS No. 157 to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years for items within the scope of the FSP.
Effective January 1, 2008, we adopted SFAS No. 157 except as it applies to those nonfinancial
assets and nonfinancial liabilities as noted in FSP FAS 157-2.
We do not use derivative instruments, nor do we hold or issue financial instruments for the
purpose of trading. Our financial instruments currently consist of cash and cash equivalents,
restricted cash, accounts receivable, cash included in other assets, current liabilities and debt
obligations. The carrying amounts for cash and cash equivalents, current investments, accounts
receivable, current liabilities and variable rate long-term debt are reasonable estimates of their
fair values. Therefore, we experienced no impact on the carrying value of any asset or liability
recognized at adoption and do not expect the adoption of this standard to have a material effect on
our 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.
While SFAS No. 159 became effective on January 1, 2008, we did not elect the fair value measurement
option for any of our financial assets or liabilities.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS
No. 141(R)) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an
amendment of Accounting Research Bulletin No. 51 (SFAS No. 160). SFAS No. 141(R) will change
how business acquisitions are accounted for and will impact financial statements both on the
acquisition date and in subsequent periods. SFAS No. 160 will change the accounting and reporting
for minority interests, which will be recharacterized as noncontrolling interests and classified as
a component of equity. SFAS No. 141(R) and SFAS No. 160 are effective for annual periods beginning
after December 15, 2008, and early adoption is not permitted. We are currently evaluating the
impact that the adoption of SFAS No. 141(R) and SFAS No. 160 could have on our consolidated
financial statements.
In March 2008, the FASB issues SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities (SFAS No. 161), an amendment of FASB No. 133. SFAS No. 161 will improve the
transparency about where derivative instruments are located in financial
statements, how derivative instruments and related hedge items are currently accounted for
under Statement 133, and how these instruments ultimately affect an entitys financial position,
performance, and cash flow. It requires that entities disclose the fair value of derivative
instruments and their gains and losses, disclose features that are credit risk related, and
cross reference footnotes to enable financial statement end users to locate significant derivative
instrument information more easily. SFAS No. 161 is effective for all financial statements that are
issued for fiscal years and interim periods after November 15, 2008 but entities are encouraged to
adopt its requirements early. We do not currently engage in hedging activities and do not currently
have derivative instruments recorded within our consolidated financial statements. Thus, we do not
expect the adoption of SFAS No. 161 to have any effect on our consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting
Principles (SFAS No. 162), which identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP to improve the quality of
standards and the standard-setting process, including improving the conceptual framework, codifying
existing accounting literature, transitioning to a single standard-setter regime, and converging
FASB and standards of the International Accounting Standards Board. SFAS No. 162 is effective 60
days following the SECs approval of the PCAOB amendments to AU Section 411, The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles.
24
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. At September 30, 2008, $100.9 million of our outstanding debt was subject to
currently fixed interest rates and until recently, we had not been exposed to market risk from
changes in interest rates. In May 2008, we borrowed $23.0 million on our revolving credit facility
that accrues interest at rates that range from 150 to 225 basis points over LIBOR, with an option
for a base rate loan based upon the federal fund rate or prime rate. In September 2008, we closed
on a $14.0 million loan, that provides for a five-year term and a spread over LIBOR that was 1.75%
at closing but may vary based on certain financial ratios.
We manage our exposure to interest rate risk by monitoring available financing alternatives,
although 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 September 30, 2008 on our consolidated balance sheet (in thousands). During the
first nine months of 2008, recurring scheduled principal payments of $13.2 million were made that
were included as debt obligations at December 31, 2007, as well as an additional $2.0 million on
the $23.0 million borrowed in May 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
Thereafter |
|
Total |
|
Fair Value |
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
$ |
731 |
|
|
$ |
3,005 |
|
|
$ |
3,170 |
|
|
$ |
46,272 |
|
|
$ |
1,974 |
|
|
$ |
49,945 |
|
|
$ |
105,097 |
|
|
$ |
94,857 |
|
Average interest
rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.21 |
% |
|
|
|
|
Debentures due Red Lion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels Capital Trust |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
30,825 |
|
|
$ |
30,825 |
|
|
$ |
26,938 |
|
Average interest
rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9.50 |
% |
|
|
|
|
Item 4. Controls and Procedures
As of September 30, 2008, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that
our disclosure controls and procedures were effective to ensure that material information required
to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within time periods specified in Securities
and Exchange Commission rules and forms.
There were no changes in internal control over financial reporting, as defined in Exchange Act
Rules 13a-15(f), during the third quarter of 2008 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
25
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 risks described below, and 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, 2007, 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.
The recent unsolicited proposal from Columbia Pacific Opportunity Fund LP may create uncertainty
that may adversely affect our business.
On June 27, 2008, we received an unsolicited, non-binding and conditional preliminary
indication of interest proposal from Columbia Pacific Opportunity Fund LP (Columbia Pacific) to
acquire all of our outstanding shares of common stock. Our board of directors, consistent with its
fiduciary duties and in consultation with its financial and legal advisors, carefully evaluated
this indication of interest. The board of directors retained an outside investment
banking firm to assist it in evaluating strategic options for maximizing our shareholder value and
we entered into several confidentiality agreements with third parties, including Columbia Pacific, in connection with that effort.
In October 2008, we announced that we had concluded the strategic options review process, that we
had received no definitive proposals from any third parties, and that Columbia Pacific had withdrawn its previous indication of interest. We believe that a significant factor in
this outcome was the recent downturn in the U.S. and global economies and credit markets.
The fact that we engaged in a publicly-announced review of strategic options and the fact
that such review did not result in a transaction may create uncertainty regarding
our companys future that may adversely affect our business, including but not
limited to our ability to attract new franchisees to the Red Lion brand and our ability to
retain and attract employees.
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
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
31.2
|
|
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
32.1
|
|
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14(b) |
32.2
|
|
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13(a)-14(b) |
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Red Lion Hotels Corporation
Registrant
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
|
By:
|
|
/s/ Anupam Narayan
Anupam Narayan
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
November 6, 2008 |
|
|
|
|
|
|
|
By:
|
|
/s/ Anthony F. Dombrowik
Anthony F. Dombrowik
|
|
Senior Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
November 6, 2008 |
27