Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR  
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to
            
Commission File Number: 001-13957  
  RED LION HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
Washington
 
91-1032187
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
201 W. North River Drive, Suite 100
Spokane Washington
 
99201
(Address of principal executive offices)
 
(Zip Code)
Registrant's Telephone Number, Including Area Code: (509) 459-6100  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, par value $.01 per share
New York Stock Exchange
Guarantee with Respect to 9.5% Trust Preferred Securities
(Liquidation Amount of $25 per Trust Preferred
Security) of Red Lion Hotels Corporation Capital Trust
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  o      No ý  
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o     No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ý     No   o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
o
  
Accelerated filer
 
x
 
Non-accelerated filer
 
o
 
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes   o     No   ý
The aggregate market value of the registrant's common stock as of June 30, 2014 was $108.5 million, of which 70.88% or $76.9 million was held by non-affiliates as of that date. As of February 23, 2015 , there were 19,915,343  shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2015 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days of the end of the registrant's 2014 fiscal year, are incorporated by reference herein in Part III.

Table of Contents

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



2
Table of Contents

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

In this report, "we," "us," "our," "our company," "the Company" and "RLHC" refer to Red Lion Hotels Corporation and, as the context requires, all of its subsidiaries, including Red Lion Hotels Holdings, Inc., Red Lion Hotels Franchising, Inc. and Red Lion Hotels Limited Partnership, all of which are wholly owned, and RL Venture LLC, in which it holds a 55% member interest. "Red Lion" refers to the Red Lion Brands described below. The terms "the network", "system-wide hotels" or "network of hotels" refer to our entire group of owned, leased and franchised hotels.

Item 1.
Business

Introduction

We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the management, franchising and ownership of hotels under our proprietary brands, including Hotel RL, Red Lion Hotels, Red Lion Inns & Suites and Leo Hotel Collection (the “Red Lion Brands”). The Red Lion Brands represent upscale and midscale full and select service hotels.

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

Our brands offer a unique local spin on the expected travel experience in an environment that allows customers to feel welcome and at home. Our properties strive to highlight friendly service and reflect the local flair of their markets. Our focus is to anticipate guest needs and pleasantly surprise them with our distinctive Pacific Northwest-inspired customer service. Warm and authentic, our commitment to customer service includes a focus on delivering the guest locally inspired, friendly and personalized signature moments. This is intended to position each of our hotels as an advocate to our traveling guests, creating brand relevance and loyalty, differentiating us from our competition.

In October 2014, we launched a new brand, Hotel RL. This upscale lifestyle brand is a full-service, conversion brand targeted for the top 80 U.S. urban markets that is inspired by the spirit of the Pacific Northwest and designed for consumers with a millennial mindset. Our company recently announced the first addition to Hotel RL at the Inner Harbor of Baltimore, currently under renovation and expected to open in summer 2015. We also recently announced that three of our existing hotels located in Salt Lake City, Utah, and in Olympia and Spokane, Washington will convert to the Hotel RL brand; the conversions are expected to be completed throughout 2015.

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

A summary of our properties as of December 31, 2014 is provided below:
 
 
 
Total
 
Meeting
 
 
 
Available
 
Space
 
Hotels
 
Rooms
 
(sq. ft.)
 
 
 
 
 
 
Red Lion company operated hotels
19

 
3,887

 
177,250

Red Lion franchised hotels
34

 
4,677

 
244,072

Leo Hotel Collection
2

 
3,256

 
241,000

Total
55

 
11,820

 
662,322


3
Table of Contents


Operations

We operate in three reportable segments:
The hotels segment derives revenue primarily from guest room rentals and food and beverage operations at our company operated hotels. As of December 31, 2014 , we operated 19 hotels, 14 of which are wholly-owned and five of which are leased. During 2014 our hotel segment accounted for approximately 81.5% of total revenues.
The franchise segment is engaged primarily in licensing the Red Lion Brands to franchisees. This segment generates revenue from franchise fees that are typically based on a percent of room revenues and are charged to hotel owners in exchange for the use of our brands and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. As of December 31, 2014 , we had 36 franchised hotels with 34 under the Red Lion brand and two hotels under the Leo Hotel Collection brand. During 2014 our franchise segment accounted for approximately 6.6% of total revenues.
The entertainment segment derives revenues from promotion and presentation of entertainment productions under the trade name WestCoast Entertainment, and from ticketing services under the trade name TicketsWest. The ticketing service business offers ticketing inventory management systems, call center services, and outlet/electronic channel distribution for event locations. During 2014 our entertainment segment accounted for approximately 11.8% of total revenues.
Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".
A summary of our reporting segment revenues from continuing operations is provided below (in thousands, except for percentages). For further information regarding our business segments, see Note 3 of Notes to Consolidated Financial Statements.
 
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
Hotel
 
$
118,616

 
81.5
%
 
$
120,391

 
87.6
%
 
$
131,112

 
89.9
%
Franchise
 
9,618

 
6.6
%
 
7,136

 
5.2
%
 
5,177

 
3.5
%
Entertainment
 
17,115

 
11.8
%
 
9,439

 
6.9
%
 
9,165

 
6.3
%
Other
 
77

 
0.1
%
 
341

 
0.3
%
 
442

 
0.3
%
Total Revenue
 
$
145,426

 
100.0
%
 
$
137,307

 
100.0
%
 
$
145,896

 
100.0
%
 
Revenue per available room ("RevPAR") for company operated hotels on a comparable basis from continuing operations increased 6.9% in 2014 from 2013 primarily due to both a 3.3% increase in average daily rate ("ADR") and a 220 basis point increase in occupancy. Systemwide RevPAR on a comparable basis from continuing operations increased 6.0% year-over-year primarily due to a 3.4% increase in ADR and a 150  basis point increase in occupancy. Average occupancy, ADR and RevPAR statistics for comparable hotels from continuing operations are provided below:
 
 
 
2014
 
2013
 
 
Average Occupancy
 
ADR
 
RevPAR
 
Average
Occupancy
 
ADR
 
RevPAR
Company operated hotels
 
66.6
%
 
$
91.26

 
$
60.80

 
64.4
%
 
$
88.35

 
$
56.87

Franchised hotels
 
51.4
%
 
$
82.30

 
$
42.33

 
50.9
%
 
$
79.54

 
$
40.52

Total systemwide  (1)
 
59.6
%
 
$
87.68

 
$
52.26

 
58.1
%
 
$
84.77

 
$
49.29


4
Table of Contents


Change from prior comparative periods:
 
 
2014 vs. 2013
 
 
Average Occupancy
 
ADR
 
RevPAR
Company operated hotels
 
220

bps
 
3.3
%
 
6.9
%
Franchised hotels
 
50

bps
 
3.5
%
 
4.5
%
Total systemwide  (1)
 
150

bps
 
3.4
%
 
6.0
%

(1) Includes all hotels owned, leased, under management contract and franchised, and excludes hotels classified as discontinued operations. This also excludes the two properties under the Leo Hotel Collection brand. The Missoula, Pendleton, Yakima, Kennewick, Kelso, Canyon Springs and Pocatello properties have been excluded from the owned and leased hotel statistics and included in the franchise statistics as we sold those previously owned properties during 2014 and 2013 and maintained franchise agreements on those properties.
Average occupancy, ADR and RevPAR, as defined below, are widely used in the hospitality industry and appear throughout this document as important measures in discussing our operating performance.
•
Average occupancy represents total paid rooms occupied divided by total available rooms. We use average occupancy as a measure of the utilization of capacity in our system of hotels.
•
RevPAR represents total room and related revenues divided by total available rooms. We use RevPAR as a measure of performance yield in our system of hotels.
•
ADR represents total room revenues divided by the total number of paid rooms occupied by hotel guests. We use ADR as a measure of room pricing in our system of hotels.
•
Total available rooms represents the number of rooms available multiplied by the number of days in the reported period. We use total available rooms as a measure of capacity in our system of hotels and do not adjust total available rooms for rooms temporarily out of service for remodel or other short-term periods.
•
Comparable hotels are hotels owned, leased, under management contract or franchised by us and in operation throughout each of the full periods presented, excluding hotels classified as discontinued operations.

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

Company Strategy

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

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

We believe that additional growth in our hotel network in larger metropolitan cities will come from hotel acquisitions where we contribute partial equity or participate in equity ownership opportunities in joint ventures with hotel owners and

5
Table of Contents

investors. Equity investment in hotels new to our system is an opportunity for us to redeploy capital generated from sales of hotels into improvement and expansion of our hotel network in major cities. Further growth opportunities may come from the expansion of our brand offerings. In October 2014, we launched a new upscale hotel brand, Hotel RL. This new hotel product is intended to be flexible enough to allow adaptive reuse projects, conversions and new builds while giving owners a more free-form approach to adapt the hotel to their unique markets and locations. The new flat fee structure is a true differentiator in this segment, which provides a predictable cost structure for our franchisees with the opportunity to leverage a greater proportion of their top-line growth to superior hotel performance. In December 2014, we announced the acquisition of an adaptive reuse property located at Baltimore's Inner Harbor in Maryland. Currently under renovation, the 130-room hotel is expected to open in summer 2015 as the company's first Hotel RL.

In January 2015, we announced that we had completed a comprehensive transaction to accelerate the execution of our national growth strategy. Key components included the transfer of 12 of our wholly owned hotels to RL Venture LLC, a newly created entity that was initially wholly owned by us, the sale to an unrelated third party of a 45 percent member interest in that entity, and the concurrent refinancing of all of our secured debt. Three of the hotels will be renovated and converted to the recently announced lifestyle, three-star Hotel RL brand. The remaining nine Red Lion Hotels and Red Lion Inn & Suites will also undergo comprehensive renovations. All 12 hotels will continue to be managed by RLHC's wholly owned subsidiary, Red Lion Hotels Management, Inc., under an initial five-year management contract, with three five-year extensions.

To further support the market repositioning of our Red Lion Brands and improve our financial performance, throughout 2014 and the beginning of 2015, we sold seven non-strategic hotel assets. Proceeds from the sales of these assets have provided additional capital for debt reduction and support of the growth initiatives for our hotel network.

We are also investing in sales and marketing talent and technology to improve our ability to manage the various channels which drive occupancy and average daily rate at our hotels, including transient, group and preferred corporate business. We have implemented a new guest management ecosystem, RevPak, which includes a number of industry revenue generation systems fully integrated to provide comprehensive information by integrating information on customer acquisition, customer management and customer retention. This suite of products will deliver dynamic and personalized communications and promotions tailored to individual guest travel needs and habits.

Our focus on improving e-commerce revenue generation includes ongoing updates and improvements to our RedLion.com website and improved and targeted digital marketing utilizing information generated through our RevPak reservation and distribution system.

Employees

As of December 31, 2014 , we employed 1,622 people on a full-time or part-time basis, with 1,477 directly related to hotel operations. We also had 110  employees in other operating segments, primarily within our entertainment segment, and 35  employees in our corporate office. Our total number of employees fluctuates seasonally, and we employ many part-time employees.

At December 31, 2014 , approximately 11.0% of our total workforce was covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and organized settlement of labor disputes. We believe our employee relations are satisfactory.

Available Information

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

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

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

6
Table of Contents


Item 1A.
Risk Factors

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

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

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

•
Changes in demand for transient rooms and related lodging services, including reductions in business and federal, state and local government travel that may result due to budgetary constraints, increase in the use of video conferencing services, or general economic conditions;
•
Extended periods of low occupancy demand, which may negatively impact our ability to increase rates;
•
Changes in travel patterns, extreme weather conditions and cancellation of or changes in events scheduled to occur in our markets;
•
The attractiveness of our hotels to consumers and competition from other hotels and lodging alternatives such as Airbnb;
•
The significant investment in hotel maintenance and renovation needed due to the last six to seven years of reduced capital expenditure levels;
•
The need to periodically repair and renovate the hotels in our hotel network, including the ongoing need to refresh hotels to meet current industry standards and guest expectations;
•
Insufficient available capital to us or our franchise hotel owners to fund renovations and investments needed to maintain our competitive position;
•
The quality and performance of the employees of the hotels in our network;
•
Transportation and fuel costs, the financial condition of the airline industry and the resulting impacts on travel, including possible cancellation or reduction of scheduled flights into our markets and reductions in our business with airlines crews, which regularly stay at our hotels in many markets;
•
Increases in operating costs due to inflation and other factors such as minimum wage requirements, overtime, healthcare, working conditions, work permit requirements and other labor-related costs, energy prices, insurance and property taxes, as well as increases in construction or associated renovation costs;
•
Existing and potential new regulations relating to the preparation and sale of food and beverages, liquor service and health and safety of premises;
•
Impact of war, actual or threatened terrorist attacks, heightened security measures and other national, regional or international political and geopolitical conditions;
•
Travelers' fears of exposure to contagious diseases or foodborne illness;
•
The impact of internet intermediaries and competitor pricing;
•
New supply or oversupply of hotel rooms in markets in which we operate;
•
Restrictive changes in zoning and similar land use laws and regulations, or in health, safety and environmental laws, rules and regulations;
•
Recently enacted, pending and possible future requirements to make substantial modifications to our hotels to comply with the Americans with Disabilities Act of 1990 or other governmental or regulatory requirements;
•
The financial condition of third-party property owners and franchisees, which may impact their ability to fund renovations and meet their financial obligations to us as required under management and franchise agreements;
•
Changes in guest expectations with respect to amenities at network hotels that require additional capital to meet; and
•
Improvements in technology that require capital investment by us or our franchise hotel owners in infrastructure to implement and maintain.

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

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

The lodging industry is comprised of numerous national, regional and local hotel companies and is highly competitive. Competition for occupancy is focused on three major categories of travelers: business travelers, convention and group business

7
Table of Contents

travelers and leisure travelers. All three categories are significant occupancy drivers for our hotel system and our marketing efforts are geared towards attracting their business.

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

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

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

The market price for our common stock may be volatile.

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

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

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

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

8
Table of Contents


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

Of the 55 hotels in our system at December 31, 2014, 35 are located in Oregon, Washington, Idaho and Montana. Accordingly, our results of operations and financial condition may be impacted by the economy of the Pacific Northwest, which is dependent in large part on a limited number of major industries, including agriculture, tourism, technology, timber and aerospace. These industries may be affected by:

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

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

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

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

As of December 31, 2014, we did not manage any hotels in our system that we did not own or lease. However, subsequent to December 31, 2014, we completed a joint venture transaction and a separate sale of our Bellevue property, both of which include management contracts. Additionally, in the past we have managed many hotels that were owned by third parties and operated under the Red Lion brand. Going forward we plan going forward to seek to increase the number of hotels that we manage for third parties in order to expand our hotel network. Management of non-owned hotels also allows us to take advantage of economies of scale with our infrastructure.

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

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

•
Competition with other hotel companies, many of which have more franchised and managed hotels in their systems and more resources to assist owners of new franchised and managed hotels with capital expenditures needed to satisfy brand standards;
•
Our ability to attract and retain qualified franchisees and hotel owners who want us to operate their hotels under one or more of our brands;
•
The recognition in the market and the reputation of the Red Lion Brands;
•
Access to financial resources necessary to open or rebrand hotels;
•
The ability of the owners of franchised and managed hotels to open and operate additional hotels profitably. Factors affecting the opening of new hotels, or the conversion of existing hotels to Red Lion Brands, include among others:
•
The availability of hotel management, staff and other personnel;
•
The cost and availability of suitable hotel locations;
•
The availability and cost of capital to allow hotel owners and developers to fund investments;

9
Table of Contents

•
Cost effective and timely construction of hotels (which can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions); and
•
Securing required governmental permits;
•
Our ability to continue to maintain and enhance our central reservation system to support additional franchised and managed hotels in a timely, cost-effective manner; and
•
The effectiveness and efficiency of our development organization.

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

Joint venture and other acquisition arrangements may not prove successful and could result in operating difficulties and failure to realize anticipated benefits.

In January 2015, we transferred 12 of our owned hotels to a joint venture in which we now hold a 55% interest. We may in the future acquire interests in other properties through joint venture arrangements with other entities. In addition, we may enter into other non-property investment joint ventures through other divisions such as our entertainment division or for marketing or other services. Partnerships, joint ventures and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business and create additional risks. Some of these acquisitions may be financed in whole or in part by loans under which we are jointly and severally liable for the entire loan amount along with the other joint venture partners. The terms of these joint venture arrangements may be more favorable to the other party or parties than to us. Although we will actively seek to minimize such risks before investing in partnerships, joint ventures or similar structures, investing in a property through such arrangements may subject that investment to risks not present with a wholly owned property, including, among others, the following:

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

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

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

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

As of December 31, 2014, there were 36 hotels in our system that were owned by others and operated under franchise agreements. Franchise agreements generally specify a fixed term and contain an early termination provision for the franchisee to terminate at specific intervals or for specific reasons with or without penalty by providing notice to us. There is no assurance that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms.

Subsequent to December 31, 2014, we entered into management contracts for each of the 12 hotels in our joint venture portfolio as well as our previously owned hotel in Bellevue, WA. These agreements generally specify a fixed term as well as management responsibilities defined by certain terms and conditions. Our failure to meet the obligations within these agreements

10
Table of Contents

could trigger early termination. Additionally, there is no assurance that these agreements will be renewed, or that they will not be terminated prior to the end of their respective terms for other reasons.

If owners of hotels that we manage or franchise cannot repay or refinance mortgage loans secured by their properties, our revenues and profits could decrease and our business could be harmed.

The owners of many of our managed and franchised properties have pledged their hotels as collateral for mortgage loans that they entered into when those properties were purchased or refinanced. If those owners cannot repay or refinance maturing indebtedness on favorable terms or at all, the lenders could declare a default, accelerate the related debt, and repossess the property. Such sales or repossessions could, in some cases, result in the termination of our management or franchise agreements and eliminate our anticipated income and cash flows, which could negatively affect our results of operations.

Failure of the joint venture owners to comply with debt covenants could adversely affect our financial results or condition.

In January 2015, we transferred 12 of our owned hotels to RL Venture LLC (“RL Venture”), a joint venture in which we hold a 55% equity interest. We continue to manage these hotels under a management agreement that has an initial five-year term with three five-year extensions. In connection with that transaction, the joint venture borrowed $53.8 million, which is secured by the 12 hotels. The credit agreement for this loan contains customary affirmative and negative covenants. There is no assurance that the joint venture will be able to comply with these covenants in the future. Any failure to do so could result in a demand for immediate repayment of the loan, which could result in one or more of these hotels being foreclosed upon and otherwise adversely affect our results of operation and financial condition, and limit our ability to obtain financing. For additional information, see Note 18 of Notes to Consolidated Financial Statements.

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

Many businesses, including RLHC, have been adversely affected by the state of the economy. Discretionary travel has decreased because of economic pressures, and this in turn has hurt the hospitality industry and our company. Over the last several years, high unemployment, lower family income, low corporate earnings, lower business investments and lower consumer and government spending all have reduced the demand for hotel rooms and related lodging services and put pressure on industry room rates and occupancy. Although the economy appears to be gradually improving, we still expect the operations of hotels in our network and financial results in 2015 will continue to be negatively impacted by general economic conditions, and weak hospitality occupancy and rates. These factors could also negatively impact our ability to obtain future financing and our liquidity in general. While we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital and debt service for the foreseeable future, if our cash flow or capital resources prove inadequate or we do not meet our financial debt covenants, we could potentially face liquidity problems that could have a material adverse effect on our results of operations and financial condition.

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

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

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

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

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

The expenses of owning and operating a hotel are not necessarily reduced when circumstances such as market factors and competition cause a reduction in its revenues. Accordingly, a decrease in our revenues could result in a disproportionately higher

11
Table of Contents

decrease in our earnings because our expenses are unlikely to decrease proportionately. In addition, we have recently been investing in sales and marketing, technology, franchising and personnel resources in an effort to position our company for future growth. These investments may not produce the returns we anticipate or the returns may take longer to achieve than expected.

We reported net losses from continuing operations from 2008 through 2013 and, although we had a net profit in 2014, there is no assurance that we will remain profitable in the future.

During the years 2008 through 2013, we reported net losses from continuing operations. Not only did these losses have a direct adverse effect on our financial condition, they also increased our costs of borrowing. Although we had a net profit in 2014, the long prior history of net losses could impair our ability to raise capital needed for hotel maintenance and other corporate purposes. There is no assurance that we will be able to continue to achieve profitability in the future.

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

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

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

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

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

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

If we raise capital through issuance of additional common stock, preferred stock or convertible debt, current shareholders may experience significant dilution. Moreover, there is no assurance that we could raise money through equity issuances.

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

Any unanticipated delays or expenses incurred in connection with hotel maintenance and renovation, hotel acquisitions and new project development could impact expected revenues and availability of funds, negatively affect our reputation among hotel customers, owners and franchisees and otherwise adversely impact our results of operations and financial condition, including the carrying costs of our assets.


12
Table of Contents

We may incur indebtedness in connection with capital expenditures, other corporate purposes or growth of our system of hotels.

Neither our Articles of Incorporation nor our Bylaws limit the amount of indebtedness that we may incur. Subject to limitations in our debt instruments, we may incur additional debt in the future to finance hotel renovations, repairs and replacements, for general corporate purposes or for hotel acquisitions. If our leverage increases, the resulting debt service could adversely affect our operating cash flow. Our continuing indebtedness could increase our vulnerability to general economic and lodging industry conditions, including increases in interest rates, and could impair our ability to obtain additional financing in the future and to take advantage of significant business opportunities that may arise.

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

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

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

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

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

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

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

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

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

We collect and maintain information relating to our guests for various business purposes, including credit card information and information on guest preferences that we use to enhance customer service and for marketing and promotional purposes. The collection and use of personal data are governed by privacy laws and regulations enacted in the U.S., as well as by various

13
Table of Contents

contracts under which we operate. Privacy regulation is an evolving area in which different jurisdictions may have inconsistent compliance requirements. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to service our guests and market our products, properties and services. In addition, noncompliance with applicable privacy regulations, either by us or in some circumstances by third parties engaged by us or our franchise hotel owners, could result in fines or restrictions on our use or transfer of data.

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

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

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

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

At the end of 2014 and 2013, our recorded goodwill amount was $8.5 million at the end of each year, and other intangible assets totaled $7.0 million at the end of each year. Market conditions in the future could adversely impact the fair value of one or more of our hotel, franchise and entertainment reporting units, which could result in future impairments of their goodwill, intangibles and other long-lived assets.

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

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

In accordance with the guidance for the impairment of long-lived assets, if the expected undiscounted future cash flows are less than net book value, the excess of net book value over estimated fair value of the assets is charged to current earnings. As discussed further in Note 4 of Notes to Consolidated Financial Statements, during the year ended December 31, 2013, assets, including assets that were held for sale were written down to their estimated fair value, resulting in pre-tax impairment charges of $7.8 million. During the year ended December 31, 2012, assets that were held for sale were written down to their estimated fair value, resulting in pre-tax impairment charges of $9.4 million. There were no impairment charges in 2014. Changes in our estimates and assumptions as they relate to valuation of goodwill, intangibles and other long-lived assets could affect, potentially materially, our financial condition or results of operations in the future.

Our new programs and new brands may not be successful.

We cannot assure you that our recently announced programs and brands, such as RevPak and Hotel RL, or any other new programs or brands we may launch in the future will be accepted by hotel owners, potential franchisees, or the traveling public or other customers. We also cannot be certain that we will recover the costs we incurred in developing or acquiring the brands or any new programs or brands, or that the brands or any new programs will be successful.

Certain of our shareholders, including our largest shareholder which currently owns more than 28% of our stock, and recently separately invested in our joint venture partner entity, have in the past encouraged us to sell our company. These or other shareholders may seek to impact our corporate policy and strategy, and their interests may differ from those of

14
Table of Contents

other shareholders. In addition, given the amount of stock held by our largest shareholder, we would likely need its approval in order to undertake any sale or other disposition of all or substantially all of our assets. If any of our larger shareholders or any group of shareholders decided to sell their shares, this would likely result in a significant decline in the trading price of our common stock.

As of January 21, 2015, Columbia Pacific Opportunity Fund, L.P. ("Columbia Pacific") held approximately 28% of our outstanding shares of common stock. In addition, in January 2015, Columbia Pacific Real Estate Fund II, L.P., an affiliate of Columbia Pacific, invested in the entity that we partnered with to complete our joint venture transaction. In June of 2008, Columbia Pacific filed a Schedule 13D with the SEC disclosing that it had communicated to us that it believed we would be better able to maximize shareholder value through a liquidation or sale. It has subsequently filed numerous amendments to the Schedule 13D disclosing additional communications with our company. An amendment filed by Columbia Pacific on February 28, 2012 included a copy of a letter to our board of directors encouraging us to sell our company in its entirety or in parts. A number of other significant shareholders have also expressed to us similar sentiments.

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

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

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

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

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

In 2014 we hired new chief executive, chief financial and chief marketing officers. We may in the future hire additional officers and key employees. To be properly integrated into our company, new executives and employees must spend a significant amount of time learning our business model and management system, in addition to performing their regular duties. As a result, the integration of new personnel may result in some disruption to our ongoing operations. If we fail to successfully complete this integration, our business and financial results may suffer.

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

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


15
Table of Contents

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

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

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

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

Our entertainment division, which comprised 11.8% of our revenues from continuing operations in 2014, engages in event ticketing and the presentation of various entertainment productions. Our entertainment division is vulnerable to risks associated with general regional and economic conditions, significant competition and changing consumer trends, among others. The overall economy in the markets we serve has impacted the ticketing division through lower demand for concerts, events and sporting activities. Also, we face the risk that entertainment productions will not tour the regions in which we operate or that the productions will not choose us as a presenter or promoter.

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

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

Government regulation could impact our franchise business.

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

The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our hotels and harm our financial condition.

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

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


16
Table of Contents

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

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

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

Our properties are subject to risks relating to natural disasters, terrorist activity and war, and any such event could materially adversely affect our operating results without adequate insurance coverage or preparedness.

Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, particularly in locations where our properties are located. Our properties are generally covered by comprehensive liability, public area liability, fire, boiler and machinery, extended coverage and rental loss insurance. However, certain types of catastrophic losses, such as those from earthquake, volcanic activity, flood, terrorism and environmental hazards, may exceed or not be covered by the insurance. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. Similarly, threatened or actual terrorist activity, war, epidemics, travel-related accidents, geopolitical uncertainty, international conflict and similar events that impact domestic and international travel have caused in the past, and may cause in the future, our results to differ materially from anticipated results. In addition, depending on the severity, a major incident or crisis may prevent operational continuity at hotels in our network and consequently impact the value of our brand or the reputation of our business.

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

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

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

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

We are subject to environmental regulations.

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


17
Table of Contents

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

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

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

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

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

We have reported the subsurface information for the Pasco property to the Washington State Department of Ecology (“DOE”) under its Voluntary Clean-up Program (“VCP”). The contamination does not appear to be an immediate threat to human health or the environment, and the groundwater does not appear to be threatened. In addition, the soil is capped with asphalt, which limits the exposure to humans or biota from petroleum vapors and reduces the risk of direct contact with contaminated soil. Therefore, we have requested a NFA designation from the DOE. Further, subsequent evaluation of the test results revealed a “false positive” indicating there was no indication of weathered petroleum hydrocarbon contaminants in soil. Based on this finding, we expect to receive a final NFA designation for the DOE in 2015.

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

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

We have reported the contamination identified at the Port Angeles property to the DOE under the VCP. We have requested a NFA designation from the DOE. We plan to continue to monitor the affected area and ensure that the asphalt cap is maintained.

18
Table of Contents

On January 21, 2015 the DOE denied our request for a NFA designation, until further analysis is performed. Depending on the results of further analysis we may have some requirement to perform clean-up of the affected area.

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

We face risks relating to litigation.

At any given time, we are subject to claims and actions incidental to the operation of our business. The outcome of these proceedings cannot be predicted. If a plaintiff were successful in a claim against us, we could be faced with the payment of a material sum of money and we may not be insured for such a loss. If this were to occur, it could have an adverse effect on our financial condition.

In addition, our financial condition may be adversely impacted by legal or governmental proceedings brought by or on behalf of our employees or customers. In recent years, a number of hospitality companies have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination, accessibility and similar matters. A number of these lawsuits have resulted in the payment of substantial damages by the defendants. Similar lawsuits in the future may be instituted against us and we may incur material damages and expenses which could have an adverse effect on our results of operations and financial condition.

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

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

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



19
Table of Contents

Item 1B.
Unresolved Staff Comments

None.

Item 2.
Properties

Under the Red Lion Brands as of December 31, 2014 , we owned 14 hotels, leased five , and had franchise arrangements with 36 hotels owned and operated by third parties. To support our owned, leased and franchised hotels, we provide all the services typical in our industry: marketing, sales, advertising, frequency program, revenue management, procurement, quality assurance, education and training, design and construction management. We maintain a central reservation call center with links to various travel agent global distribution systems and electronic distribution channels on the internet, including our branded website. The table below reflects our hotel properties and locations, total available rooms per hotel, as well as meeting space availability, as of December 31, 2014 .

 
  
 
  
Total
 
Meeting
 
 
 
 
Available
 
Space
Property
 
Location
 
Rooms
 
(sq. ft.)
Company operated properties
 
 
 
 
 
 
Red Lion Hotel Eureka(1)
  
Eureka, California
  
175

  
4,890

Red Lion Hotel Redding(1)
  
Redding, California
  
192

  
6,800

Red Lion Hotel Boise Downtowner(1)
  
Boise, Idaho
  
182

  
8,600

Red Lion Templin’s Hotel on the River(1)
  
Post Falls, Idaho
  
163

  
11,000

Red Lion Hotel Bend (1)
  
Bend, Oregon
  
75

  
2,000

Red Lion Hotel Coos Bay(1)
  
Coos Bay, Oregon
  
144

  
5,000

Red Lion Hotel Salt Lake Downtown(1)
  
Salt Lake City, Utah
  
393

  
12,000

Red Lion Hotel Olympia(1)
  
Olympia, Washington
  
192

  
16,500

Red Lion Hotel Pasco(1)
  
Pasco, Washington
  
279

  
17,240

Red Lion Hotel Port Angeles(1)
  
Port Angeles, Washington
  
186

  
3,010

Red Lion Hotel Richland Hanford House(1)
  
Richland, Washington
  
149

  
9,247

Red Lion Bellevue(2)
  
Bellevue, Washington
  
181

  
5,700

Red Lion Hotel at the Park(1)
  
Spokane, Washington
  
400

  
30,000

Red Lion Hotel Wenatchee(2)
  
Wenatchee, Washington
  
149

  
7,678

Red Lion Anaheim
  
Anaheim, California
  
308

  
5,000

Red Lion Hotel Kalispell
  
Kalispell, Montana
  
170

  
10,500

Red Lion River Inn
  
Spokane, Washington
  
245

  
2,800

Red Lion Hotel Seattle Airport
  
Seattle, Washington
  
144

  
4,500

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

  
14,785

Company operated properties (19 properties)
 
 
 
3,887

  
177,250


20
Table of Contents



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

  
450

Red Lion Inn & Suites Phoenix/Tempe - ASU
 
Tempe, Arizona
 
118

 
1,300

Red Lion Inn & Suites Tucson
 
Tucson, Arizona
 
155

 
1,600

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

 
750

Red Lion Hotel Oakland International Airport
  
Oakland, California
  
189

  
4,400

Red Lion Hotel Woodlake Conference Center Sacramento
 
Sacramento, California
 
306

 
60,000

Red Lion Hotel Ontario Airport
 
Ontario, California
 
107

 
687

Red Lion Inn & Suites Perris
 
Perris, California
 
105

 
—

Red Lion Inn & Suites Denver Airport
 
Denver, Colorado
 
87

 
—

Red Lion Inn & Suites Fort Collins
 
Fort Collins, Colorado
 
63

 
—

Red Lion Hotel Lewiston
  
Lewiston, Idaho
  
183

  
12,259

Red Lion Hotel Pocatello(3)
  
Pocatello, Idaho
  
150

  
13,000

Red Lion Hotel Canyon Springs
  
Twin Falls, Idaho
  
112

  
5,085

Red Lion Inn & Suites Detroit
 
Detroit, Michigan
 
77

 
—

Red Lion Colonial Hotel
  
Helena, Montana
  
149

  
15,500

Red Lion Inn Missoula
  
Missoula, Montana
  
76

  
640

Red Lion Hotel Farmington
  
Farmington, New Mexico
  
192

  
10,000

Red Lion Hotel Gallup
  
Gallup, New Mexico
  
126

  
9,000

Red Lion Hotel Grants
  
Grants, New Mexico
  
126

  
9,000

Red Lion Hotel & Casino Elko
  
Elko, Nevada
  
222

  
3,000

Red Lion Inn & Suites McMinnville
  
McMinnville, Oregon
  
67

  
1,312

Red Lion Hotel Portland Airport
  
Portland, Oregon
  
136

  
3,000

Red Lion Hotel Salem
  
Salem, Oregon
  
148

  
10,000

Red Lion Hotel on the River — Jantzen Beach
  
Portland, Oregon
  
318

  
35,000

Red Lion Hotel Pendleton
  
Pendleton, Oregon
  
170

  
9,769

Red Lion Hotel Tacoma
  
Tacoma, Washington
  
119

  
750

Red Lion Hotel Renton
 
Renton, Washington
 
224

 
7,000

Red Lion Inn & Suites Federal Way
 
Federal Way, Washington
 
90

 
300

Red Lion Hotel & Conference Center Kelso/Longview(3)
  
Kelso, Washington
  
161

  
8,670

Red Lion Hotel Columbia Center(3)
  
Kennewick, Washington
  
162

  
9,700

Red Lion Inn & Suites Kennewick
 
Kennewick, Washington
 
61

 
300

Red Lion Inn & Suites Kent
 
Kent, Washington
 
60

 
600

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

 
—

Red Lion Hotel Yakima Center(3)
  
Yakima, Washington
  
156

  
11,000

Las Vegas Hotel and Casino - LVH(4)
 
Las Vegas, Nevada
 
2,956

 
220,000

The Riverside Hotel - Boise(4)
 
Boise, Idaho
 
300

 
21,000

Franchised properties (36 properties)
  
 
  
7,933

  
485,072

Total — All properties (55 properties)
  
 
  
11,820

  
662,322

__________ 
(1) In January 2015 we transferred these hotels to RL Venture LLC and then sold an unrelated third party a 45 percent member interest in that entity.
(2) At December 31, 2014 these hotels were listed for sale and classified as assets held for sale. We sold both hotels in early 2015 and entered into a franchise or management agreement with each purchaser.
(3) These properties were previously owned by our company, but we sold them in 2014 and entered into a franchise agreement with each purchaser.

21
Table of Contents

(4) These properties are part of the Leo Hotel Collection.

Company Operated Properties

Company operated properties are those properties which we operate and manage through ownership, lease, or management contract. We currently recognize revenues and expenses on these properties where appropriate.

Franchised Hotels

Under our franchise agreements, we receive royalties for the use of the Red Lion Brands. We also make available certain services to those hotels including reservation systems, advertising and national sales, our guest loyalty program, revenue management tools, quality inspections and brand standards, as well as administer central services programs for the benefit of all the hotels in our network.
Discontinued Operations
 
Discontinued operations includes the following: a commercial mall in Kalispell, Montana that was sold in first quarter 2013; a catering contract in Yakima, Washington that was terminated in first quarter 2013; a hotel in Medford, Oregon that was sold in third quarter 2013; and a hotel in Eugene, Oregon that ceased operations in first quarter 2014.

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

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

Item 3.
Legal Proceedings

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

Item 4.
Mine Safety Disclosures

Not applicable.

PART II

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

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

 
High
 
Low
2014
 
 
 
     Fourth Quarter (ended December 31, 2014)
$
6.38

 
$
5.26

     Third Quarter (ended September 30, 2014)
$
5.89

 
$
5.27

     Second Quarter (ended June 30, 2014)
$
6.07

 
$
5.46

     First Quarter (ended March 31, 2014)
$
6.18

 
$
5.50

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

 
$
5.10

     Third Quarter (ended September 30, 2013)
$
6.73

 
$
5.22

     Second Quarter (ended June 30, 2013)
$
7.15

 
$
5.85

     First Quarter (ended March 31, 2013)
$
9.30

 
$
5.63


22
Table of Contents

(b) The closing sale price of the common stock on the NYSE on February 23, 2015 was $6.75 . As of that date, there were approximately 118  shareholders of record of the common stock.
(c) We did not pay any cash dividends on our common stock during the last two fiscal years. The board of directors periodically reviews our dividend policy and our longer-term objectives of maximizing shareholder value. Any determination to pay cash dividends in the future will be at the discretion of our board.
(d) The following table provides information as of December 31, 2014 on plans under which equity securities may be issued to employees, directors or consultants:
 
 
  
(a)
 
(b)
 
(c)
 
 
 
Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights
 
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
 
Number of Securities
Remaining Available for
Future Issuance Under
Equity
Compensation Plans
(Excluding Securities
Reflected in Column (a))
Equity Compensation Plans Approved by Security Holders:
  
 
  
 
 
 
 
1998 Stock Incentive Plan (1)
  
3,500

  
$
7.46

 
—

 
2006 Stock Incentive Plan (2)
  
71,676

 
$
10.41

 
448,788

Equity Compensation Plans Not Approved by Security Holders
  
—

  
$
—

 
—

 
Total
  
75,176

  
$
10.27

 
448,788


__________
(1) No further grants will be made under the 1998 Stock Incentive Plan.
(2) Excludes 398,513 restricted stock units under the 2006 Stock Incentive Plan.

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


Item 6.
Selected Financial Data


23
Table of Contents

The following table sets forth our selected consolidated financial data as of and for the years ended December 31, 2014 , 2013 , 2012 , 2011 and 2010 . The selected consolidated statements of comprehensive income (loss) and balance sheet data are derived from our audited consolidated financial statements. The audited consolidated financial statements for certain of these periods are included elsewhere in this annual report. The selected consolidated financial data set forth below should be read in conjunction with, and are qualified in their entirety by, our consolidated financial statements and related notes, Management's Discussion and Analysis of Financial Condition and Results of Operations and other financial information included elsewhere in this annual report and in our prior filings with the SEC.
 
 
 
 
Year ended December 31,
 
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
(In thousands, except per share data)
Consolidated Statements of Comprehensive Income (Loss) Data
 
 
 
 
 
 
Continuing Operations:
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
$
145,426

 
$
137,307

 
$
145,896

 
$
150,443

 
$
153,905

 
Goodwill impairment
 
—

 
—

 
—

 
14,236

 
—

 
Asset impairment
 
—

 
7,785

 
9,440

 
8,417

 
—

 
Gain on asset dispositions
 
(4,006
)
 
(112
)
 
(160
)
 
(33,379
)
 
(24
)
 
Operating expenses
 
138,667

 
148,152

 
156,265

 
141,954

 
155,244

 
Operating income (loss)
 
6,759

 
(10,845
)
 
(10,369
)
 
8,489

 
1,660

 
Income (loss) from continuing operations
 
2,492

 
(15,070
)
 
(11,164
)
 
(5,295
)
 
(2,423
)
 
Earnings (loss) per share from continuing operations:
 
 
 
 
 
 
 
 
 
 
 
  Basic
 
$
0.13

 
$
(0.77
)
 
$
(0.58
)
 
$
(0.28
)
 
$
(0.13
)
 
  Diluted
 
$
0.13

 
$
(0.77
)
 
$
(0.58
)
 
$
(0.28
)
 
$
(0.13
)
Discontinued Operations:
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations of discontinued business units, net of income tax expense (benefit)
 
(187
)
 
(1,204
)
 
1,009

 
(1,557
)
 
(425
)
 
Loss on disposal and impairment of the assets of the discontinued business units, net of income tax expense (benefit)
 
$
(2
)
 
$
(773
)
 
$
(4,526
)
 
$
(296
)
 
$
(5,762
)
 
Earnings (loss) per share from discontinued operations:
 
 
 
 
 
 
 
 
 
 
 
 Basic
 
$
(0.01
)
 
$
(0.10
)
 
$
(0.18
)
 
$
(0.10
)
 
$
(0.33
)
 
 Diluted
 
$
(0.01
)
 
$
(0.10
)
 
$
(0.18
)
 
$
(0.10
)
 
$
(0.33
)
Net Income (Loss)
 
$
2,303

 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
 
$
(8,610
)
Earnings (Loss) per share
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
 
$
(0.38
)
 
$
(0.47
)
 
Diluted
 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
 
$
(0.38
)
 
$
(0.47
)
Weighted Average Shares Outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
19,785

 
19,575

 
19,327

 
19,053

 
18,485

 
Diluted
 
19,891

 
19,575

 
19,327

 
19,053

 
18,485



24
Table of Contents

 
 
 
Year ended December 31,
 
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
 
(In thousands, except per share data)
Non-GAAP Data
 
 
 
 
 
 
 
 
 
 
 
EBITDA
 
$
19,671

 
$
1,612

 
$
1,508

 
$
24,693

 
$
14,784

 
Adjusted EBITDA
 
14,875

 
11,956

 
14,275

 
15,820

 
22,531

 
Adjusted net income (loss)
 
(2,493
)
 
(6,703
)
 
(1,907
)
 
(16,121
)
 
(863
)
Consolidated Statement of Cash Flow Data
 
 
 
 
 
 
Net cash (used in) provided by operating activities
 
$
10,578

 
$
7,087

 
$
13,470

 
$
1,797

 
$
19,487

 
Net cash (used in) provided by investing activities
 
(5,600
)
 
6,441

 
12,347

 
21,611

 
(10,428
)
 
Net cash (used in) provided by financing activities
 
(12,910
)
 
(6,947
)
 
(21,321
)
 
(25,439
)
 
(8,932
)
Consolidated Balance Sheet Data
 
 
 
 
 
 
Cash
 
$
5,126

 
$
13,058

 
$
6,477

 
$
1,981

 
$
4,012

 
Assets held for sale
 
21,173

 
18,346

 
18,288

 
30,380

 
—

 
Property and equipment, net
 
160,410

 
166,356

 
195,012

 
232,589

 
272,030

 
Total assets
 
223,354

 
234,626

 
260,942

 
304,896

 
331,482

 
Total debt
 
30,200

 
43,058

 
49,178

 
70,496

 
95,152

 
Debentures due Red Lion Hotels Capital Trust
 
30,825

 
30,825

 
30,825

 
30,825

 
30,825

 
Total liabilities
 
82,517

 
97,417

 
108,034

 
139,031

 
160,717

 
Total stockholders' equity
 
140,837

 
137,209

 
152,908

 
165,865

 
170,765


EBITDA is defined as net income (loss), before interest, taxes, depreciation and amortization. We believe it is a useful financial performance measure due to the significance of our long-lived assets and level of indebtedness.
Adjusted EBITDA and Adjusted net income (loss) are additional measures of financial performance. We believe that the inclusion or exclusion of certain special items, such as gains and losses on asset dispositions and impairments, is necessary to provide the most accurate measure of core operating results and as a means to evaluate comparative results.
EBITDA, Adjusted EBITDA and Adjusted net income (loss) are commonly used measures of performance in the industry. We utilize these measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. EBITDA, Adjusted EBITDA and Adjusted net income (loss) are not intended to represent net income (loss) defined by generally accepted accounting principles in the United States ("GAAP"), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP. In addition, other companies in our industry may calculate EBITDA and in particular Adjusted EBITDA and Adjusted net income (loss) differently than we do or may not calculate them at all, limiting the usefulness of EBITDA, Adjusted EBITDA and Adjusted net income (loss) as comparative measures.


25
Table of Contents

The following is a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) attributable to RLHC for the periods presented:
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(In thousands, except per share data)
 Net income (loss)
$
2,303

 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
 
$
(8,610
)
 
Depreciation and amortization
12,762

 
13,960

 
14,968

 
17,625

 
18,902

 
Interest expense
4,575

 
5,516

 
7,553

 
8,355

 
9,012

 
Income tax (benefit) expense
31

 
(817
)
 
(6,339
)
 
5,861

 
(4,520
)
 EBITDA
19,671

 
1,612

 
1,508

 
24,693

 
14,784

 
Loss on discontinued operations (1)
189

 
1,977

 
3,327

 
1,853

 
6,187

 
Loss (gain) on asset dispositions (2)
(3,996
)
 
—

 
—

 
(33,379
)
 
—

 
Early termination fee (3)
(2,095
)
 
—

 
—

 
—

 
—

 
Lease termination costs (4)
750

 
—

 
—

 
—

 
1,560

 
Asset impairment (5)
—

 
7,785

 
9,440

 
8,417

 
—

 
Separation costs (6)
356

 
582

 
—

 
—

 
—

 
Goodwill impairment (7)
—

 
—

 
—

 
14,236

 
—

Adjusted EBITDA
$
14,875

 
$
11,956

 
$
14,275

 
$
15,820

 
$
22,531

 
 
 
 
 
 
 
 
 
 
 
(1
)
Discontinued operations includes the following: a hotel in Eugene, Oregon that ceased operations in 2014; a hotel in Medford, Oregon that was sold in 2013; a commercial mall in Kalispell, Montana that was sold in 2013; a catering contract in Yakima, Washington that was terminated in 2013; a hotel in Sacramento, California that was sold in 2012.
(2
)
During 2014, we recorded $4.0 million in gain on the sales of the Yakima, Kelso, Kennewick, Canyon Springs and Pocatello properties. In 2011, we recorded a $33.5 million gain on the sale of the Seattle Fifth Avenue Hotel. These amounts are included in the line item "Gain on asset dispositions, net" on the accompanying statements of comprehensive income (loss).
(3
)
During 2014, we recorded income from a $2.1 million early termination fee related to the Seattle Fifth Avenue Hotel terminating its franchise agreement. This amount is included in the line item "Franchise revenue" on the accompanying consolidated statements of comprehensive income (loss).
(4
)
During 2014, we amended the lease for the Red Lion Hotel Vancouver at the Quay and recorded an additional $0.8 million in amortized lease termination fees. During 2010, we recorded a $1.5 million expense related to the termination of a franchise and sublease agreement for the Red Lion Hotel Sacramento at Arden Village.
(5
)
During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. During 2012, we recorded a $9.4 million impairment charge on the Pendleton, Missoula, Denver, and Helena properties. During 2011, we recorded a $8.4 million impairment charge on the Missoula, Denver, Helena, and Vancouver properties.
(6
)
During 2014, we recorded a $0.4 million separation cost associated with the separation of the former Executive Vice President and Chief Financial Officer. During 2013, we recorded a $0.4 million separation cost associated with the retirement of the former President and Chief Executive Officer and a $0.2 million charge related to the separation of a former Executive Vice President and Chief Operating Officer. These amounts are included in the line item "General and administrative expenses" on the accompanying statements of comprehensive income (loss).
(7
)
During 2011, we recorded a $14.2 million impairment charge on goodwill in the hotel segment.

26
Table of Contents

The following is a reconciliation of Adjusted net income (loss) to net income (loss) attributable to RLHC for the periods presented:
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
 
2011
 
2010
 
 
(In thousands, except per share data)
 Net income (loss)
$
2,303

 
$
(17,047
)
 
$
(14,674
)
 
$
(7,148
)
 
$
(8,610
)
 
Loss on discontinued operations (1)
189

 
1,977

 
3,327

 
1,853

 
6,187

 
Gain on asset dispositions (2)
(3,996
)
 
—

 
—

 
(33,479
)
 
—

 
Early termination fee (3)
(2,095
)
 
—

 
—

 
—

 
—

 
Lease termination costs (4)
750

 
—

 
—

 
—

 
1,560

 
Asset impairment (5)
—

 
7,785

 
9,440

 
8,417

 
—

 
Separation costs (6)
356

 
582

 
—

 
—

 
—

 
Goodwill impairment (7)
—

 
—

 
—

 
14,236

 
—

Adjusted net income (loss)
$
(2,493
)
 
$
(6,703
)
 
$
(1,907
)
 
$
(16,121
)
 
$
(863
)
 
 
 
 
 
 
 
 
 
 
 
(1
)
Discontinued operations includes the following: a hotel in Eugene, Oregon that ceased operations in 2014; a hotel in Medford, Oregon that was sold in 2013; a commercial mall in Kalispell, Montana that was sold in 2013; a catering contract in Yakima, Washington that was terminated in 2013; a hotel in Sacramento, California that was sold in 2012.
(2
)
During 2014, we recorded $4.0 million in gain on the sales of the Yakima, Kelso, Kennewick and Canyon Springs and Pocatello properties. In 2011, we recorded a $33.5 million gain on the sale of the Seattle Fifth Avenue Hotel. These amounts are included in the line item "Gain on asset dispositions, net" on the accompanying statements of comprehensive income (loss).
(3
)
During 2014, we recorded income from a $2.1 million early termination fee related to the Seattle Fifth Avenue Hotel terminating its franchise agreement. This amount is included in the line item "Franchise revenue" on the accompanying consolidated statements of comprehensive income (loss).
(4
)
During 2014, we amended the lease for the Red Lion Hotel Vancouver at the Quay and recorded an additional $0.8 million in amortized lease termination fees. During 2010, we recorded a $1.5 million expense related to the termination of a franchise and sublease agreement for the Red Lion Hotel Sacramento at Arden Village.
(5
)
During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. During 2012, we recorded a $9.4 million impairment charge on the Pendleton, Missoula, Denver, and Helena properties. During 2011, we recorded a $8.4 million impairment charge on the Missoula, Denver, Helena, and Vancouver properties.
(6
)
During 2014, we recorded a $0.4 million separation cost associated with the separation of the former Executive Vice President and Chief Financial Officer. During 2013, we recorded a $0.4 million separation cost associated with the retirement of the former President and Chief Executive Officer and a $0.2 million charge related to the separation of a former Executive Vice President and Chief Operating Officer.
(7
)
During 2011, we recorded a $14.2 million impairment charge on goodwill in the hotel segment.

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

Introduction
We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the management, franchising and ownership of hotels under our proprietary brands, including Hotel RL, Red Lion Hotels, Red Lion Inns & Suites and Leo Hotel Collection (the “Red Lion Brands”). The Red Lion Brands represent upscale and midscale full and select service hotels.

A summary of our properties as of December 31, 2014 is provided below:
 
 
Hotels
 
Total
Available
Rooms
 
Meeting
Space
(sq. ft.)
 
 
 
 
 
 
 
Red Lion company operated hotels
 
19

 
3,887

 
177,250

Red Lion franchised hotels
 
36

 
7,933

 
485,072

Total
 
55

 
11,820

 
662,322



27
Table of Contents

We operate in three reportable segments:
The hotels segment derives revenue primarily from guest room rentals and food and beverage operations at our company operated hotels. As of December 31, 2014 , we operated 19 hotels, 14 of which were wholly owned and five of which were leased. During 2014 our hotel segment accounted for approximately 81.5% of total revenues.
The franchise segment is engaged primarily in licensing the Red Lion Brands to franchisees. This segment generates revenue from franchise fees that are typically based on a percent of room revenues and are charged to hotel owners in exchange for the use of our brands and access to our central services programs. These programs include our reservation system, guest loyalty program, national and regional sales, revenue management tools, quality inspections, advertising and brand standards. As of December 31, 2014 , we had 36 franchise hotels with 34 under the Red Lion Brands and two hotels under the Leo Hotel Collection brand. During 2014 our franchise segment accounted for approximately 6.6% of total revenues.
The entertainment segment derives revenues from promotion and presentation of entertainment productions under the trade name WestCoast Entertainment, and from ticketing services under the trade name TicketsWest. The ticketing service business offers ticketing inventory management systems, call center services, and outlet/electronic channel distribution for event locations. During 2014 our entertainment segment accounted for approximately 11.8% of total revenues.
Our remaining activities, none of which constitutes a reportable segment, have been aggregated into "other".

Results of Operations

Our reported numbers for the periods presented in this report reflect results of the Yakima, Canyon Springs, Pocatello, Kelso and Kennewick properties (all sold in 2014), the Missoula and Pendleton properties (sold in 2013), and the Denver and Helena properties (sold in 2012) for the full years prior to their sales, but only for partial years in the years in which they were sold. These properties were reported in continuing operations since we have significant continuing involvement in their operations as they now operate as franchised hotels. In order to help investors distinguish changes from results of continuing operations versus changes due to the sales of these hotel properties, we will discuss operating results from continuing operations as reported and also discuss certain operating results and data for periods included in the report on a comparable hotel basis. Comparable hotels are properties reported in continuing operations that are owned or leased by us for the entirety of the reporting periods being compared.

A summary of our consolidated statements of comprehensive income (loss) is provided below (in thousands):
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
Total revenue
 
$
145,426

 
$
137,307

 
$
145,896

Total operating expenses
 
138,667

 
148,152

 
156,265

Operating income (loss)
 
6,759

 
(10,845
)
 
(10,369
)
Other income (expense):
 
 
 
 
 
 
Interest expense
 
(4,575
)
 
(5,516
)
 
(7,553
)
Other income, net
 
339

 
474

 
229

Income (loss) from continuing operations before taxes
 
2,523

 
(15,887
)
 
(17,693
)
Income tax expense (benefit)
 
31

 
(817
)
 
(6,529
)
Income (loss) from continuing operations
 
2,492

 
(15,070
)
 
(11,164
)
Income (loss) from discontinued operations
 
(189
)
 
(1,977
)
 
(3,517
)
Net income (loss)
 
$
2,303

 
$
(17,047
)
 
$
(14,681
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
$
2,303

 
$
(17,047
)
 
$
(14,674
)
Earnings (loss) per share - basic & diluted
 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
Non-GAAP data: (1)
 
 
 
 
 
 
EBITDA
 
$
19,671

 
$
1,612

 
$
1,508

Adjusted EBITDA
 
$
14,875

 
$
11,956

 
$
14,275

Adjusted net income (loss)
 
$
(2,493
)
 
$
(6,703
)
 
$
(1,907
)
_________
 
 
 
 
 
 
(1)   See Item 6. Selected Financial Data for a reconciliation of non-GAAP measures to net income (loss) for the periods presented


28

For the year ended December 31, 2014 , we reported net income of $2.3 million or $0.12 per share. Net income includes $4.0 million in gains on the sales of the Yakima, Kelso, Kennewick, Canyon Springs and Pocatello properties. Net income also includes a $2.1 million early termination fee received related to the Seattle Fifth Avenue Hotel terminating its franchise agreement. In addition, net income includes $0.8 million in amortized lease termination fees related to the amended lease for the Red Lion Hotel Vancouver at the Quay and $0.4 million in separation costs associated with the separation of the former Executive Vice President and Chief Financial Officer.

For the year ended December 31, 2013 , our net loss was $17.0 million or $0.87 per share. The net loss includes an impairment charge of $7.8 million on the Yakima, Canyon Springs, Pocatello, Kelso and Wenatchee properties. In addition, the net loss is impacted by a $5.9 million valuation allowance recorded during the year related to our deferred tax assets. The net loss also includes $0.6 million of separation costs associated with the retirement of our former President and Chief Executive Officer and the separation of our former Executive Vice President and Chief Operating Officer.

For the year ended December 31, 2012, our net loss was $14.7 million or $0.76 per share. The net loss includes an impairment charge of $9.4 million related to the Helena, Denver Southeast, Missoula and Pendleton properties.

The above special items are reflected as Adjusted EBITDA. For the year ended December 31, 2014 , adjusted earnings before interest, taxes, depreciation and amortization ("Adjusted EBITDA") was $14.9 million , compared to $12.0 million for the year ended December 31, 2013 and $14.3 million in 2012.

Revenue

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

Revenue from Continuing Operations
 
Year Ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$ Change
% Change
 
$ Change
% Change
Hotels
118,616

 
120,391

 
131,112

 
(1,775
)
(1.5
)%
 
(10,721
)
(8.2
)%
Franchise
9,618

 
7,136

 
5,177

 
2,482

34.8
 %
 
1,959

37.8
 %
Entertainment
17,115

 
9,439

 
9,165

 
7,676

81.3
 %
 
274

3.0
 %
Other
77

 
341

 
442

 
(264
)
(77.4
)%
 
(101
)
(22.9
)%
Total Revenue
$
145,426

 
$
137,307

 
$
145,896

 
$
8,119

5.9
 %
 
$
(8,589
)
(5.9
)%

Comparable Hotel Revenue (Non-GAAP Data)

A breakdown of our comparable hotel revenues is as follows (in thousands, except for percentage changes):
 
Year Ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$ Change
% Change
 
$ Change
% Change
Hotel revenue from continuing operations
$
118,616

 
$
120,391

 
$
131,112

 
(1,775
)
(1.5
)%
 
(10,721
)
(8.2
)%
less: hotel revenue from sold and closed properties
(6,116
)
 
(14,752
)
 
(27,505
)
 
8,636

(58.5
)%
 
12,753

(46.4
)%
Comparable total hotel revenue
$
112,500

 
$
105,639

 
$
103,607

 
$
6,861

6.5
 %
 
$
2,032

2.0
 %

Comparable hotels is defined as properties that are operated by the company and excludes the results of discontinued operations and sold properties. Discontinued operations include the following: a catering contract in Yakima, Washington that was terminated in first quarter 2013; a hotel in Medford, Oregon that was sold in third quarter 2013; and a hotel in Eugene, Oregon that ceased operations in first quarter 2014. Sold properties include the following: the Kalispell property, which was sold in April 2012; the Helena property and the Sacramento property, sold in 2012; the Missoula property, which was sold in February 2013; the Pendleton property, which was sold in April 2013; the Yakima property, which was sold in April 2014; the Kelso and Kennewick properties, which were sold in May 2014; the Canyon Springs property, which was sold in June 2014; and the Pocatello property which was sold in October 2014.

We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. Comparable operating results are not intended to represent reported operating

29

results defined by generally accepted accounting principles in the United States ("GAAP"), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP.

2014 Compared to 2013

During 2014 , revenue from the hotel segment decreased $1.8 million or 1.5% from 2013 . The primary reason for the decline is the sale of properties in 2014. On a comparable basis, revenue from the hotel segment increased $6.9 million or 6.5% in 2014 compared to 2013 . This comparable increase was primarily driven by a 230 basis points increase in occupancy compared to 2013, primarily driven by increases in permanent and group room nights. ADR increased 3.3% compared to 2013, primarily driven by higher rates in the transient segment.

Revenue from our franchise segment increased $2.5 million to $9.6 million in 2014 compared to 2013 . This was primarily due to the early termination fee for the Seattle Fifth Avenue franchise location of $2.1 million.

Revenue in the entertainment segment increased $7.7 million to $17.1 million in 2014 . This was primarily due to triple the number of Broadway show dates in 2014 as compared to 2013.

2013 Compared to 2012

Revenues in 2013 from the hotel segment decreased $10.7 million or 8.2% from 2012. The primary reason for the decline is the sale of properties in 2013. On a comparable basis, revenue from the hotel segment increased $2.0 million or 2.09% in 2013 compared to 2012. This comparable increase was primarily driven by a 3.9% increase in ADR. The increase in rate was primarily driven by an increase in the transient market segment. Our largest source of growth came from non-qualified retail, our highest rated customer segment. Focused growth in that segment along with management of the occupancy contribution from opaque online travel agency ("OTA") channels were a big part of our ADR increase strategy during 2013.

Revenue from our franchise segment increased $2.0 million to $7.1 million in 2013 compared to 2012. The addition of new franchised properties and contractual rate increases for existing franchisees drove this increase.

Revenue in the entertainment segment increased $0.3 million to $9.4 million in 2013 compared to 2012. The 2013 segment revenue was positively impacted by stronger ticket demand for events in the markets that our ticketing business serves.

Operating Expenses

Operating expenses generally include direct operating expenses for each of the operating segments, depreciation and amortization, hotel facility and land lease expense, gain or loss on asset dispositions and general and administrative expenses.

Operating Expenses from Continuing Operations

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

30

 
Year ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$ Change
% Change
 
$ Change
% Change
Hotels
$
94,241

 
$
97,831

 
$
107,247

 
$
(3,590
)
(3.7
)%
 
$
(9,416
)
(8.8
)%
Franchise
7,004

 
6,555

 
4,758

 
449

6.8
 %
 
1,797

37.8
 %
Entertainment
14,785

 
9,189

 
9,020

 
5,596

60.9
 %
 
169

1.9
 %
Other
318

 
535

 
827

 
(217
)
(40.6
)%
 
(292
)
(35.3
)%
Depreciation and amortization
12,762

 
13,960

 
14,968

 
(1,198
)
(8.6
)%
 
(1,008
)
(6.7
)%
Hotel facility and land lease
5,210

 
4,464

 
4,143

 
746

16.7
 %
 
321

7.7
 %
Asset impairment
—

 
7,785

 
9,440

 
(7,785
)
(100.0
)%
 
(1,655
)
(17.5
)%
Loss (gain) on asset dispositions, net
(4,006
)
 
(112
)
 
(160
)
 
(3,894
)
3,476.8
 %
 
48

(30.0
)%
General and administrative expenses
8,353

 
7,945

 
6,022

 
408

5.1
 %
 
1,923

31.9
 %
Total operating expenses
$
138,667

 
$
148,152

 
$
156,265

 
$
(9,485
)
(6.4
)%
 
$
(8,113
)
(5.2
)%

Comparable Hotel Expense (Non-GAAP Data)

A breakdown of our comparable hotel expenses is as follows (in thousands, except for percentage changes):
 
Year ended December 31,
 
2014 vs. 2013
 
2013 vs. 2012
 
2014
 
2013
 
2012
 
$ Change
% Change
 
$ Change
% Change
Hotel operating expenses from continuing operations
$
94,241

 
$
97,831

 
$107,247
 
(3,590
)
(3.7
)%
 
(9,416
)
(8.8
)%
less: hotel operating expenses from sold and closed properties
(5,714
)
 
(12,571
)
 
(24,367
)
 
6,857

(54.5
)%
 
11,796

(48.4
)%
Comparable hotel operating expenses
$
88,527

 
$
85,260

 
$
82,880

 
3,267

3.8
 %
 
2,380

2.9
 %

Comparable hotels is defined as properties that are operated by the company and excludes the results of discontinued operations and sold properties. Discontinued operations include the following: a catering contract in Yakima, Washington that was terminated in first quarter 2013; a hotel in Medford, Oregon that was sold in third quarter 2013; and a hotel in Eugene, Oregon that ceased operations in first quarter 2014. Sold properties include the following: the Kalispell property, which was sold in April 2012; the Helena property and the Sacramento property, sold in 2012; the Missoula property, which was sold in February 2013; the Pendleton property, which was sold in April 2013; the Yakima property, which was sold in April 2014; the Kelso and Kennewick properties, which were sold in May 2014; the Canyon Springs property, which was sold in June 2014; and the Pocatello property was sold in October 2014.

We utilize these comparable measures because management finds them a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, ongoing operations. We believe they are a complement to reported operating results. Comparable operating results are not intended to represent reported operating results defined by generally accepted accounting principles in the United States ("GAAP"), and such information should not be considered as an alternative to reported information or any other measure of performance prescribed by GAAP.

2014 Compared to 2013

Direct hotel expenses as reported were $94.2 million in 2014 compared to $97.8 million in 2013 . The primary reason for the decline is the sale of properties in 2014. On a comparable basis, direct hotel expenses were $88.5 million in 2014 compared to $85.3 million in 2013 , representing a 3.8% increase. The increase was driven primarily by increased payroll and occupancy related costs, partially offset by lower costs due to changes in our loyalty program. On a comparable basis, the hotel segment had a direct margin of 21.3 % in 2014 compared to 19.3 % in 2013 . The improvement in margin was primarily driven by the increase in ADR.
   
Direct expenses for the franchise segment in 2014 increased by $0.4 million compared to 2013 , primarily driven by increased franchise development costs.

Direct expenses for the entertainment segment in 2014 increased $5.6 million as compared to 2013 . The increase is due to the volume of shows.


31

Depreciation and amortization expenses decreased $1.2 million in 2014 compared to 2013 . The primary reason for the decline is the sale of properties in 2014; we do not depreciate our assets held for sale.

Hotel facility and land lease costs decreased $0.7 million to $5.2 million in 2014 compared to 2013 . During 2014, we amended the lease for the Red Lion Hotel Vancouver at the Quay and recorded an additional $0.8 million in amortized lease termination fees.

During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. We had no such impairments in 2014.

During 2014, we recorded $4.0 million in gain on the sales of the Yakima, Kelso, Kennewick and Canyon Spring and Pocatello properties. We had no such gains in 2013.

General and administrative expenses increased by $0.4 million in 2014 compared to 2013 . The increase is primarily due to the accrual of a corporate bonus in 2014. There was no such accrual in 2013.

2013 Compared to 2012

Direct hotel expenses as reported were $97.8 million in 2013 compared to $107.2 million in 2012. The primary reason for the decline is the sale of properties in 2013. On a comparable basis, direct hotel expenses were $85.3 million in 2013 compared to $ 82.9 million in 2012, representing a 2.9% increase. The year over year increase was primarily due to increased marketing expense to improve ADR as well as one-time labor cost adjustments that benefited 2012. On a comparable basis, the hotel segment had a direct margin of 19.3% in 2013 compared to 20.0% in 2012.
   
Direct expenses for the franchise segment in 2013 increased by $1.8 million compared to 2012, primarily driven by increased marketing costs.

Direct expenses for the entertainment segment in 2013 increased $0.2 million as compared to 2012. The variance is driven
by the change in the year over year timing and mix of shows.

Depreciation and amortization expenses decreased $1.0 million in 2013 compared to 2012. The primary reason for the decline is the sale of properties in 2013; we do not depreciate our assets held for sale.

Hotel facility and land lease costs increased $0.3 million to $4.5 million in 2013 compared to 2012 primarily resulting from the sale of the Kalispell Mall property. Concurrent with the sale, we entered into an operating lease agreement with the buyer of the commercial mall under which we continue to operate the attached Red Lion Hotel Kalispell.

During 2013, we recorded a $7.8 million impairment charge on the Yakima, Canyon Springs, Pocatello, Kelso, and Wenatchee properties. During 2012, we recorded a $9.4 impairment charge on our Helena, Denver Southeast, Missoula and Pendleton properties.

General and administrative expenses increased by $1.9 million in 2013 compared to 2012. We incurred additional corporate expenses during 2013 primarily due to CEO transition costs, and increased board of director costs and legal expense.

Interest Expense

Interest expense for the year ended December 31, 2014 decreased $1.0 million to $4.6 million . The decline is attributable to a decline in the principal amount of debt outstanding in 2014. Our average pre-tax interest rate on debt during 2014 was 6.9% compared to 6.3% in 2013 .

Interest expense for the year ended December 31, 2013 decreased $2.0 million to $5.5 million compared to $7.6 million recorded in 2012 . The decline is primarily attributable to a decline in the principal amount of debt outstanding in 2013 . Our average pre-tax interest rate on debt during 2013 was 6.3% compared to 7.5% in 2012.

Income Taxes

Our effective income tax rate with respect to income from continuing operations for 2014 was 1.2% as compared to (5.1)% and (36.9)%  for 2013 and 2012 , respectively. The variances in our rate are due primarily to recording a valuation allowance of $5.9 million against the Company's net deferred tax assets in 2013. Other items giving rise to a difference between our statutory U.S. federal tax rate of 34% and our effective rate include state taxes and incentive tax credits allowed under federal law.


32

We make estimates and judgments in determining income tax expense or benefit for financial statement purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which typically arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, and in the determination of tax credits and other items that impact our income tax expense or benefit.

In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income (loss).

Based on our current assessment of future taxable income, a valuation allowance is required to reduce our deferred tax assets to an amount that is more likely than not to be realized. We relied on the reversal of certain deferred tax liabilities for realization of a portion of our deferred tax assets and recorded a valuation allowance on the remaining balance at December 31, 2014.

Discontinued Operations

During the first quarter of 2014, we ceased the operation of the Red Lion Hotel Eugene in Eugene, Oregon ("Eugene property") when we assigned our lease to a third party. During the first quarter of 2013, we terminated a catering contract in Yakima, Washington. During the second quarter of 2013, we closed on the sale of the Kalispell Center Mall property in Kalispell, Montana ("Kalispell Mall property") for $11.6 million. During the third quarter of 2013 we sold the Red Lion Hotel Medford in Medford, Oregon ("Medford property") for $2.8 million.

Accordingly, the results of these operations have been classified as discontinued operations in our consolidated statements of comprehensive income (loss) for all periods presented. For additional information, see Note 6 of Notes to Consolidated Financial Statements.

During 2013, as a result of the anticipated closure of the Eugene property, long-lived assets with a carrying value of $1.5 million were written down to their estimated fair value of $0.5 million less disposal costs of $0.1 million resulting in a pre-tax impairment charge in discontinued operations of $1.1 million .

Liquidity and Capital Resources
During the third quarter of 2013, we entered into an agreement with Wells Fargo Bank, National Association ("Wells Fargo") to expand our existing credit facility. The balance of the term loan under the credit facility at the time of the expansion was $0.5 million and there was no outstanding balance on the revolving line of credit. The term loan was increased to a total of $45.0 million , with $38.2 million used to refinance nine fixed-rate notes collateralized by individual properties ("CMBS debt") that were maturing in July 2013.
The original terms of the expanded facility are as follows:
•
Principal payments of $750,000 are required on the term loan on the last day of each calendar quarter or the first business day thereafter. If a property securing the facility is sold we will be required to make an additional principal payment on the term loan equal to the greater of (i)  50% of the net proceeds from the sale or (ii)  50% of the appraised market value of the property sold. If any such additional principal payment exceeds $1 million , the remaining principal balance amortization will be modified to reflect the additional payment.
•
The term loan matures on June 30, 2018.
•
A $10 million revolving line of credit is available under the facility until June 30, 2015.
•
Interest under the term loan and revolving line of credit will initially be payable at our option (i) at a fluctuating rate 75 basis points above a base rate in effect from time to time, or (ii) at a rate 325 basis points above LIBOR (under one, three or six month terms). Beginning in 2015, the spread on the LIBOR will decline if our senior leverage ratio is less than 3.00 . We have entered into a swap to hedge 40% of our interest rate exposure under the term loan. See Note 9 for further discussion.
•
Our obligations under the facility are (i) guaranteed by our subsidiaries Red Lion Hotels Limited Partnership, Red Lion Hotels Franchising, Inc., Red Lion Hotels Management, Inc. and Red Lion Hotels Holdings, Inc., (ii) secured by our accounts receivable and inventory, and (iii) further collateralized by 19 of our hotel properties located in Bellevue, Spokane, Olympia, Port Angeles, Richland, Pasco and Wenatchee, Washington; in Post Falls and Boise, Idaho; in Bend and Coos Bay, Oregon; in Eureka and Redding, California; and in Salt Lake City, Utah.


33

The revolving line of credit, which is subject to certain financial covenants, allows us to fund operating needs and may be limited based on a formula relating to the trailing twelve-month consolidated net income of the hotel properties collateralizing the facility. The revolving line of credit was not subject to limitation based on this calculation at December 31, 2014. At December 31, 2014 , $7.0 million on the revolving line of credit was available as we had $3.0 million in letters of credit. As of December 31, 2014, we were in compliance with applicable debt covenants.

Subsequent to December 31, 2014, as part of a joint venture transaction, we repaid the outstanding balance of our secured debt with Wells Fargo and the joint venture obtained a new $53.8 million mortgage loan from Capital Source, a division of Pacific Western Bank. We also sold our Bellevue and Wenatchee properties. The revolving line of credit and interest rate swap were terminated as part of these transactions. See Note 18 of Notes to Consolidated Financial Statements.

In addition to the initial advance of $53.8 million under the new mortgage loan, the loan provides for further advances of $26.0 million over a two-year period to cover expenses incurred in improving the joint venture’s properties. The loan has a four-year term with a one-year extension option, and interest under the advanced portions of the loan will be calculated at LIBOR plus 4.75%. Interest only payments are due monthly commencing February 2015. Monthly principal payments are required beginning in January 2017 and are based on a 25 year amortization period based on the then current outstanding principal amount. The joint venture must obtain an interest rate cap at standard market terms and, in the event of any prepayment, must pay the lender a penalty tied to its cumulative receipt of $6 million in minimum interest. The loan is non-recourse except that the investors in the joint venture, including the company, signed guarantees regarding, amongst other things, the completion of certain improvements to the joint venture properties, environmental covenants, losses incurred by the lender and any event of bankruptcy involving the joint venture or its owners. The loan agreement contains customary reporting and operating covenants applicable to the joint venture, including requirements for lender approval of annual operating and capital budgets, under certain conditions.

As of the date of filing this Form 10-K, we were in compliance with our debt covenants under the Capital Source loan agreement. We also continue to generate positive cash flow from operations and to have adequate liquidity to fund our ongoing operating activities; however there can be no assurance that we will be able to repay or refinance our debts when they mature or invest in our hotels to remain competitive at our current rates.

We are committed to keeping our properties well maintained and attractive to our customers in order to maintain our competitiveness within the industry and keep our hotels properly positioned in their markets. This requires ongoing access to capital for replacement of outdated furnishings as well as for facility repair, modernization and renovation. Over the last five to six years, our levels of capital expenditures for these purposes have been lower than normal due to the general economic conditions impacting our industry. As a result, we believe it will be necessary to invest capital in our hotels at higher levels than in recent years to support the room rates that we have historically charged.

We may seek to raise additional funds through public or private financings, strategic relationships, sales of assets or other arrangements. We cannot assure that such funds, if needed, will be available on terms attractive to us, or at all. If we sell additional assets, these sales may result in future impairments or losses on the final sale. Finally, any additional equity financings may be dilutive to shareholders and debt financing, if available, may involve covenants that place substantial restrictions on our business.

At December 31, 2014 total outstanding debt was $61.0 million , net of discount. Included in that amount is $30.8 million of debentures due to Red Lion Hotels Capital Trust. Our average pre-tax interest rate on debt was 6.9% at December 31, 2014 , of which $47.0 million is at a fixed rate loan with an average rate of 7.9% and $14.0 million is at an average variable rate of 4.2% .

Operating Activities

Net cash provided by operating activities in 2014 totaled $10.6 million , a $3.5 million increase from net cash provided by operating activities of $7.1 million during 2013 and a $2.9 million decrease from $13.5 million net cash provided in 2012 . The primary drivers of the 2014 increase from 2013 are improvements in operating income, the release of previously restricted cash and favorable timing of payroll accruals.

Investing Activities

Net cash used in investing activities totaled $5.6 million during 2014 compared to net cash provided by investing activities of $6.4 million during 2013 and net cash provided by investing activities of $12.3 million in 2012 . The primary driver of the decrease in 2014 was the $16.1 million net cash paid to purchase an adaptive reuse property located at Baltimore’s Inner Harbor, partially offset by lower levels of capital expenditures on our existing properties throughout the year.


34

Financing Activities

Net cash used in financing activities was $12.9 million during 2014 , compared to $6.9 million in 2013 and $21.3 million in 2012 . Financing activities in 2014 included the required principal payments on the Wells Fargo credit facility in connection with the sales of five hotels in 2014. Financing activities during 2013 included the increase of the term loan under of our credit facility to $45 million, a portion of which was used to repay $38.2 million of debt.

Contractual Obligations

The following table summarizes our significant contractual obligations, including principal and estimated interest on debt, as of December 31, 2014 (in thousands):
 
 
Total
 
Less than
1 year
 
1-3 years
 
4-5 years
 
After
5 years
Debt, excluding debentures (1)
 
$
34,531

 
$
3,526

 
$
6,766

 
$
24,239

 
$
—

Operating and capital leases
 
20,926

 
7,110

 
3,680

 
2,116

 
8,020

Service agreements
 
550

 
275

 
275

 
—

 
—

Debentures due Red Lion Hotels Capital Trust (1)
 
116,235

 
2,928

 
5,857

 
5,857

 
101,593

Total contractual obligations (2)
 
$
172,242

 
$
13,839

 
$
16,578

 
$
32,212

 
$
109,613

__________
(1)
Including estimated interest payments and commitment fees over the life of the debt agreement.
(2)
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.

We have leasehold interests at five hotel properties as well as our corporate headquarters located in Spokane, Washington. These leases require us to pay fixed monthly rent and have expiration dates of 2016 and beyond which are reflected in the table above. The table below summarizes the terms of the leases, including extension periods at our option, for our hotel properties as of December 31, 2014 :

Property
 
Expiration date of lease
 
Extension periods
Red Lion River Inn
 
October 2018
 
Three renewal terms of five years each
Red Lion Hotel Seattle Airport
 
December 2024
 
One renewal term of five years
Red Lion Hotel Vancouver (at the Quay) (1)
 
December 2015
 
None
Red Lion Anaheim
 
April 2016
 
18 renewal terms of five years each
Red Lion Hotel Kalispell
 
April 2028
 
Three renewal terms of five years each
__________
(1) In September 2014, we amended the lease for Red Lion Hotel Vancouver (at the Quay) to revise the lease term to December 31, 2015. In addition, we have the right to terminate the lease after December 31, 2014 with a payment of $3.0 million. If we have not previously terminated the lease, the lease will expire on December 31, 2015 with a required payment of $3.0 million.

Off-Balance Sheet Arrangements

As of December 31, 2014 , 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.

Other Matters

Franchise Update

At December 31, 2014 , our network of hotels included 36 hotels under franchise agreements, representing a total of 7,933 rooms and 485,072 square feet of meeting space.

Asset Sale Update

35


At December 31, 2014, we had the following properties listed for sale:

•
Red Lion Hotel Wenatchee
•
Red Lion Hotel Bellevue
On January 22, 2015, we sold the Wenatchee property for $4.1 million and concurrently entered into a franchise agreement with the new owner.
On February 18, 2015, we sold the Bellevue property for $35.4 million and concurrently entered into a management agreement with the new owner.

Seasonality

Our business is subject to seasonal fluctuations, with more revenues and profits realized from May through October than during the rest of the year. During 2014 , revenues during the second and third quarters approximated 28.5% and 29.0% , respectively, of total revenues for the year, compared to revenues of 22.4% and 20.1% 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 presented.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with Generally Accepted Accounting Principles ("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 management's most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements; however, we have also identified our most critical accounting policies and estimates below. Management has discussed the development and selection of our critical accounting policies and estimates with the audit committee of our board of directors, and the audit committee has reviewed the disclosures presented below.

Revenue Recognition and Receivables

Revenue is generally recognized as services are provided. When payments from customers are received before 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 and management fees from hotels under management contract. Revenues are recognized when services have been performed, generally at the time of the hotel stay or guests visit to the restaurant and at the time the management services are provided.
•
Franchise  - Fees received in connection with the franchise and marketing of our brand names. Franchise revenues are recognized as earned in accordance with the contractual terms of the franchise agreements.
•
Entertainment  - Online ticketing services, ticketing inventory management systems, promotion of Broadway-style shows and other special events. Where we act as an agent and receive a net fee or commission, revenue is recognized in the period the services are performed. When we are the promoter of an event and are at-risk for the production, revenues and expenses are recorded in the period of the event performance.

We review the ability to collect individual accounts receivable on a routine basis. We record an allowance for doubtful accounts based on specifically identified amounts that we believe to be uncollectible. A receivable is written off against the allowance for doubtful accounts if collection attempts fail.

36


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 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 as an asset impairment.

We review the recoverability of our long-lived assets 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.

To determine estimated fair value, we use Level 3 inputs for our discounted cash flow analyses. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. Level 3 inputs used include growth rate, property-level pro forma financial information and remaining lives of the assets. Management bases these assumptions on historical data and experience and future operational expectations. For certain assets, we use recent asset appraisals or valuations performed by third-parties, which we deemed to be Level 3 inputs, to support our estimate of fair value.

Intangible Assets

We assess goodwill and other intangibles for potential impairments annually, generally in October, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. 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.
 

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

New and Future Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-08,
"Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in ASU 2014-08 change the criteria for reporting a discontinued operation and require new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Only disposals representing a strategic shift in operations should be presented as discontinued operations. This accounting standard update is effective for annual filings beginning on or after December 15, 2014. Early adoption is permitted. The impact of the adoption of ASU 2014-08 on our company's results of operations, financial position, cash flows and disclosures will be based on our company’s future disposal activity.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers". ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. We are in the process of evaluating this guidance and our method of adoption.

Management has assessed the potential impact of other recently issued, but not yet effective, accounting standards and
determined that the provisions are either not applicable to our company, or are not anticipated to have a material impact on our
consolidated financial statements.


37

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from outstanding debt. As of December 31, 2014 , our outstanding debt, including current maturities and excluding unamortized origination fees, was $61.4 million .

At December 31, 2014 , $30.8 million of our outstanding debt was subject to currently fixed interest rates and was not exposed to market risk from rate changes. In addition, $16.2 million of the $30.5 million outstanding on the variable rate Wells Fargo term loan was subject to an interest rate swap, which effectively fixed its interest rate at 4.88%. The remaining $14.3 million outstanding under the term loan remained subject to variable rates, which were 3.4% at the end of 2014. The limit on the Wells Fargo revolving line of credit was $10 million, a portion of which supported outstanding letters of credit. The revolving line of credit, which was subject to certain financial covenants, allowed us to fund operating needs and could be limited based on a formula relating to the trailing twelve-month consolidated net income of the hotel properties collateralizing the facility. As of December 31, 2014 , $7.0 million on the revolving line of credit was available as we had $3.0 million in letters of credit at that date.

Under the credit facility with Wells Fargo, interest under the term loan and revolving line of credit was initially payable at our option (i) at a fluctuating rate 75 basis points above a base rate in effect from time to time, or (ii) at a rate 325 basis points above LIBOR (under one, three or six month terms). Beginning in 2015, the spread on the LIBOR would have declined if our senior leverage ratio was less than 3.00. The facility terms required us to hedge at least 40% of our interest rate exposure under the term loan.

We do not enter into derivative transactions for trading purposes, but rather to hedge our exposure to interest rate fluctuations. We manage the floating rate debt using interest rate swaps in order to reduce our exposure to the impact of changing interest rates and future cash outflows for interest.

In June 2013, we entered into an $18.0 million notional amount swap agreement that exchanges a variable interest rate based upon LIBOR for a 4.88% fixed rate of interest over the term of the agreement. The maturity date of the swap was June 29, 2018. From inception through the second quarter of 2014, our interest rate swap was designated as a cash flow hedge. The gains and losses in the fair value of the swap were recorded in stockholders’ equity as a component of accumulated other comprehensive income (loss) ("AOCI") on the consolidated balance sheets. As a result of the additional principal payments made concurrent with the sales of our properties, we no longer qualified for hedge accounting and we de-designated the interest rate swap as a cash flow hedge. Beginning in the third quarter of 2014, the gains and losses in the fair value of the swap were recorded as interest expense on the consolidated statements of comprehensive income (loss) and the AOCI balance was amortized and expensed as interest expense over the remaining life of the interest rate swap.

Subsequent to December 31, 2014, as part of a joint venture transaction, we repaid the outstanding balance of our secured debt with Wells Fargo and the joint venture obtained a new $53.8 million mortgage loan from Capital Source, a division of Pacific Western Bank. We also sold our Bellevue and Wenatchee properties. The revolving line of credit and interest rate swap were terminated as part of these transactions.

In addition to the initial advance of $53.8 million under the new mortgage loan, the loan provides for further advances of $26.0 million over a two-year period to cover expenses incurred in improving the joint venture’s properties. The loan has a four-year term with a one-year extension option, and interest under the advanced portions of the loan will be calculated at LIBOR plus 4.75%. Interest only payments are due monthly commencing February 2015. Monthly principal payments are required beginning in January 2017 and are based on a 25 year amortization period based on the then current outstanding principal amount. The joint venture must obtain an interest rate cap at standard market terms and, in the event of any prepayment, must pay the lender a penalty tied to its cumulative receipt of $6 million in minimum interest. The loan is non-recourse except that the investors in the joint venture, including the company, signed guarantees regarding, amongst other things, the completion of certain improvements to the joint venture properties, environmental covenants, losses incurred by the lender and any event of bankruptcy involving the joint venture or its owners. The loan agreement contains customary reporting and operating covenants applicable to the joint venture, including requirements for lender approval of annual operating and capital budgets, under certain conditions.

Outside of these changes, we do not foresee any other changes of significance in our exposure to fluctuations in interest rates, although we will continue to manage our exposure to this risk by monitoring available financing alternatives.

The below table summarizes our debt obligations at December 31, 2014 on our consolidated balance sheet (in thousands):

38
Table of Contents

 
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
Fair Value
Debt, excluding debentures
 
$
2,261

 
$
2,261

 
$
2,261

 
$
23,745

 


 
$
—

 
$
30,528

 
$
30,683

Average interest rate
 
 
 
 
 
 
 
 
 
 
 
 
 
4.2
%
 
 
Debentures due Red Lion
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Hotels Capital Trust
 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
30,825

 
$
30,825

 
$
31,639

Average interest rate
 
 
 
 
 
 
 
 
 
 
 
 
 
9.5
%
 
 

Item 8.
Financial Statements and Supplementary Data
See Item 15 of this annual report for certain information with respect to the financial statements filed as a part hereof, including financial statements filed pursuant to the requirements of this Item 8.
The following table sets forth supplementary financial data (in thousands except per share amounts) for each quarter for the years ended December 31, 2014 and 2013 , derived from our unaudited financial statements. The data set forth below should be read in conjunction with and is qualified in its entirety by reference to our consolidated financial statements.

 
 
Year ended December 31, 2014 (unaudited)
 
 
First
 
Second
 
Third
 
Fourth
 
 
 
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Total
 
 
 
 
 
 
 
 
 
 
 
Hotel revenue
25,925

 
31,399

 
36,758

 
24,534

 
118,616

 
Franchise revenue
1,525

 
4,453

 
2,066

 
1,574

 
9,618

 
Entertainment revenue
5,105

 
5,538

 
3,306

 
3,166

 
17,115

 
Other revenue
33

 
18

 
14

 
12

 
77

 
Total revenues
$
32,588

 
$
41,408

 
$
42,144

 
$
29,286

 
$
145,426

 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss) from continuing operations
$
(2,175
)
 
$
6,253

 
$
6,096

 
$
(3,415
)
 
$
6,759

 
 
 
 
 
 
 
 
 
 
 
 
Gain on asset disposition
(75
)
 
(3,403
)
 
40

 
(568
)
 
(4,006
)
 
Income (loss) from continuing operations
(3,330
)
 
5,139

 
5,101

 
(4,418
)
 
2,492

 
Income (loss) from discontinued operations
(188
)
 
(1
)
 
—

 
—

 
(189
)
 
Net income (loss)
$
(3,518
)
 
$
5,138

 
$
5,101

 
$
(4,418
)
 
$
2,303

 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - basic and diluted
$
(0.18
)
 
$
0.26

 
$
0.26

 
$
(0.22
)
 
$
0.12




39
Table of Contents

 
 
Year ended December 31, 2013 (unaudited)
 
 
First
 
Second
 
Third
 
Fourth
 
 
 
 
Quarter
 
Quarter
 
Quarter
 
Quarter
 
Total
 
 
 
 
 
 
 
 
 
 
 
Hotel revenue
25,033

 
31,741

 
37,729

 
25,888

 
120,391

 
Franchise revenue
1,264

 
1,943

 
2,368

 
1,561

 
7,136

 
Entertainment revenue
3,373

 
1,778

 
1,623

 
2,665

 
9,439

 
Other revenue
85

 
86

 
84

 
86

 
341

 
Total revenues
$
29,755

 
$
35,548

 
$
41,804

 
$
30,200

 
$
137,307

 
 
 
 
 
 
 
 
 
 
 
 
Operating income (loss) from continuing operations
$
(3,731
)
 
$
(71
)
 
$
3,989

 
$
(11,032
)
 
$
(10,845
)
 
 
 
 
 
 
 
 
 
 
 
 
Asset impairment
—

 
—

 
—

 
7,785

 
7,785

 
Gain on asset disposition
(92
)
 
(28
)
 
100

 
(92
)
 
(112
)
 
Income (loss) from continuing operations
(3,174
)
 
(703
)
 
1,737

 
(12,930
)
 
(15,070
)
 
Income (loss) from discontinued operations
64

 
(503
)
 
(510
)
 
(1,028
)
 
(1,977
)
 
Net income (loss)
$
(3,110
)
 
$
(1,206
)
 
$
1,227

 
$
(13,958
)
 
$
(17,047
)
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share - basic and diluted
$
(0.16
)
 
$
(0.06
)
 
$
0.06

 
$
(0.71
)
 
$
(0.87
)
 

40
Table of Contents

Financial Statements
The 2014 Consolidated Financial Statements of Red Lion Hotels Corporation are
presented on pages 43 to 66 of this annual report.

41
Table of Contents



Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Red Lion Hotels Corporation
Spokane, Washington
We have audited the accompanying consolidated balance sheets of Red Lion Hotels Corporation (the “Company”) as of December 31, 2014 and 2013 and the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Red Lion Hotels Corporation at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014 , in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Red Lion Hotels Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 26, 2015 expressed an unqualified opinion thereon.


/s/ BDO USA, LLP
Spokane, WA
February 26, 2015


42

RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 2014 and December 31, 2013
 
 
 
2014
 
2013
 
 
(In thousands, except share data)
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
5,126

 
$
13,058

Restricted cash
 
225

 
—

Accounts receivable, net
 
6,752

 
6,283

Notes receivable
 
2,944

 
672

Inventories
 
1,013

 
1,386

Prepaid expenses and other
 
3,671

 
3,266

Deferred income taxes
 
—

 
1,034

Assets held for sale
 
21,173

 
18,346

Total current assets
 
40,904

 
44,045

Property and equipment, net
 
160,410

 
166,356

Goodwill
 
8,512

 
8,512

Intangible assets
 
7,012

 
6,992

Notes receivable - long term
 
2,340

 
4,423

Other assets, net
 
4,176

 
4,298

Total assets
 
$
223,354

 
$
234,626

LIABILITIES
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
2,952

 
$
4,763

Accrued payroll and related benefits
 
4,567

 
2,786

Other accrued entertainment expenses
 
5,625

 
4,418

Other accrued expenses
 
2,547

 
4,271

Deferred income taxes
 
2,778

 
—

Long-term debt, due within one year
 
—

 
3,000

Total current liabilities
 
18,469

 
19,238

Long-term debt, net of discount
 
30,200

 
40,058

Deferred income
 
2,988

 
3,455

Deferred income taxes
 
35

 
3,841

Debentures due Red Lion Hotels Capital Trust
 
30,825

 
30,825

Total liabilities
 
82,517

 
97,417

 
 
 
 
 
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; 19,846,508 and 19,687,232 shares issued and outstanding
 
198

 
197

Additional paid-in capital, common stock
 
153,671

 
152,303

Accumulated other comprehensive loss, net of tax
 
(203
)
 
(159
)
Retained earnings (accumulated deficit)
 
(12,829
)
 
(15,132
)
Total stockholders' equity
 
140,837

 
137,209

Total liabilities and stockholders' equity
 
$
223,354

 
$
234,626

The accompanying notes are an integral part of the consolidated financial statements.

43
Table of Contents

RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31, 2014 , 2013 , and 2012
 
 
 
2014
 
2013
 
2012
 
 
(In thousands, except per share data)
Revenue:
 
 
 
 
 
 
Hotels
 
$
118,616

 
$
120,391

 
$
131,112

Franchise
 
9,618

 
7,136

 
5,177

Entertainment
 
17,115

 
9,439

 
9,165

Other
 
77

 
341

 
442

Total revenues
 
145,426

 
137,307

 
145,896

Operating expenses:
 
 
 
 
 
 
Hotels
 
94,241

 
97,831

 
107,247

Franchise
 
7,004

 
6,555

 
4,758

Entertainment
 
14,785

 
9,189

 
9,020

Other
 
318

 
535

 
827

Depreciation and amortization
 
12,762

 
13,960

 
14,968

Hotel facility and land lease
 
5,210

 
4,464

 
4,143

Asset impairment
 
—

 
7,785

 
9,440

Gain on asset dispositions, net
 
(4,006
)
 
(112
)
 
(160
)
General and administrative expenses
 
8,353

 
7,945

 
6,022

Total operating expenses
 
138,667

 
148,152

 
156,265

Operating income (loss)
 
6,759

 
(10,845
)
 
(10,369
)
Other income (expense):
 
 
 
 
 
 
Interest expense
 
(4,575
)
 
(5,516
)
 
(7,553
)
Other income, net
 
339

 
474

 
229

Income (loss) from continuing operations before taxes
 
2,523

 
(15,887
)
 
(17,693
)
Income tax (benefit) expense
 
31

 
(817
)
 
(6,529
)
Income (loss) from continuing operations
 
2,492

 
(15,070
)
 
(11,164
)
Discontinued operations:
 
 
 
 
 
 
Income (loss) from discontinued business units, net of income tax (benefit) expense of $0, $66 and $573, respectively
 
(187
)
 
(1,204
)
 
1,009

Loss on disposal of the assets of the discontinued business units, net of income tax (benefit) expense of $0, $0 and $(2,566), respectively
 
(2
)
 
(773
)
 
(4,526
)
Income (loss) from discontinued operations
 
(189
)
 
(1,977
)
 
(3,517
)
Net income (loss)
 
2,303

 
(17,047
)
 
(14,681
)
Less net income (loss) attributable to noncontrolling interest
 
—

 
—

 
(7
)
Net income (loss) attributable to Red Lion Hotels Corporation
 
2,303

 
(17,047
)
 
(14,674
)
Comprehensive income (loss)
 
 
 
 
 
 
        Unrealized gains (losses) on cash flow hedge, net of tax
 
(44
)
 
(159
)
 
—

Comprehensive income (loss)
 
$
2,259

 
$
(17,206
)
 
$
(14,674
)
Earnings (loss) per share
 
 
 
 
 
 
Basic and diluted:
 
 
 
 
 
 
   Net income (loss) from continuing operations
 
$
0.13

 
$
(0.77
)
 
$
(0.58
)
   Net income (loss) from discontinued operations
 
$
(0.01
)
 
$
(0.10
)
 
$
(0.18
)
   Net income (loss) attributable to Red Lion Hotels Corporation
 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
Weighted average shares - basic
 
19,785

 
19,575

 
19,327

Weighted average shares - diluted
 
19,891

 
19,575

 
19,327


The accompanying notes are an integral part of the consolidated financial statements.

44
Table of Contents


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2014 , 2013 , and 2012


 
 
 
Red Lion Hotels Corporation Stockholders' Equity
 
 
 
 
 
 
 
Common Stock
 
 
 
 
 
Equity Attributable to Non-controlling Interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional
Paid-in Capital
 
Retained
Earnings (Accumulated Deficit)
 
Accumulated Other Comprehensive Income (Loss)
 
 
Total
Equity
 
 
 
(In thousands, except share data)
Balances, December 31, 2011
 
19,172,670

 
$
192

 
$
149,027

 
$
16,589

 
$
—

 
$
57

 
$
165,865

 
Net income (loss)
—

 
—

 
—

 
(14,674
)
 
—

 
(7
)
 
(14,681
)
 
Common stock exchanged for non-controlling interest in partnership
44,837

 
—

 
50

 
—

 
—

 
(50
)
 
—

 
Stock issued under employee stock purchase plan
17,304

 
—

 
102

 
—

 
—

 
—

 
102

 
Stock issued under option plan
 
61,492

 
1

 
348

 
—

 
—

 
—

 
349

 
Stock based compensation
 
155,546

 
2

 
1,253

 
—

 
—

 
—

 
1,255

 
Excess tax benefit from stock-based compensation
 
—

 
—

 
18

 
—

 
—

 
—

 
18

Balances, December 31, 2012
 
19,451,849

 
195

 
150,798

 
1,915

 
—

 
—

 
152,908

 
Net income (loss)
 
—

 
—

 
—

 
(17,047
)
 
—

 
—

 
(17,047
)
 
Stock issued under employee stock purchase plan
13,765

 
—

 
82

 
—

 
—

 
—

 
82

 
Stock issued under option plan
2,000

 
—

 
11

 
—

 
—

 
—

 
11

 
Stock based compensation
219,618

 
2

 
1,514

 
—

 
—

 
—

 
1,516

 
Excess shortfall from stock-based compensation
—

 
—

 
(102
)
 
—

 
—

 
—

 
(102
)
 
Loss on valuation of swap contract, net of tax
—

 
—

 
—

 
—

 
(159
)
 
—

 
(159
)
Balances, December 31, 2013
19,687,232

 
197

 
152,303

 
(15,132
)
 
(159
)
 
—

 
137,209

 
Net income (loss)
 
—

 
—

 
—

 
2,303

 
—

 
—

 
2,303

 
Stock issued under employee stock purchase plan
14,427

 
—

 
69

 
—

 
—

 
—

 
69

 
Stock based compensation
144,849

 
1

 
1,299

 
—

 
—

 
—

 
1,300

 
Loss on valuation of swap contract, net of tax
—

 
—

 
—

 
—

 
(72
)
 
—

 
(72
)
 
Amortization of accumulated loss of swap contract
 
—

 
—

 
—

 
—

 
28

 
—

 
28

Balances, December 31, 2014
19,846,508

 
$
198

 
$
153,671

 
$
(12,829
)
 
$
(203
)
 
$
—

 
$
140,837


The accompanying notes are an integral part of the consolidated financial statements.

45
Table of Contents

RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2014 , 2013 , and 2012
 
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Operating activities:
 
 
 
 
 
 
Net income (loss)
 
$
2,303

 
$
(17,047
)
 
$
(14,681
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
Depreciation and amortization
 
12,886

 
14,247

 
15,815

(Gain) loss on disposition of property, equipment and other assets, net
 
(4,006
)
 
660

 
80

Asset impairment
 
—

 
8,858

 
16,294

Deferred income taxes
 
6

 
(764
)
 
(8,314
)
Equity in investments
 
36

 
53

 
1

Stock based compensation expense
 
1,300

 
1,819

 
1,344

Provision for doubtful accounts
 
170

 
110

 
423

Change in current assets and liabilities:
 
 
 
 
 
 
Restricted cash
 
(225
)
 
2,417

 
941

Accounts receivable
 
(635
)
 
(711
)
 
1,000

Notes receivable
 
(153
)
 
—

 
(109
)
Inventories
 
198

 
(152
)
 
(61
)
Prepaid expenses and other
 
(890
)
 
(230
)
 
(675
)
Accounts payable
 
(1,811
)
 
(1,261
)
 
1,039

Accrued other
 
1,399

 
(912
)
 
373

Net cash (used in) provided by operating activities
 
10,578

 
7,087

 
13,470

Investing activities:
 
 
 
 
 

Purchases of property and equipment
 
(24,891
)
 
(13,193
)
 
(8,442
)
Proceeds from disposition of property and equipment
 
17,316

 
16,025

 
20,819

Collection of notes receivable related to property sales
 
1,914

 
3,706

 
—

Advances to Red Lion Hotels Capital Trust
 
(27
)
 
(27
)
 
(27
)
Other, net
 
88

 
(70
)
 
(3
)
Net cash (used in) provided by investing activities
 
(5,600
)
 
6,441

 
12,347
















46
Table of Contents


RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
For the Years Ended December 31, 2014 , 2013 , and 2012

 
 
2014
 
2013
 
2012
 
 
(In thousands)
Financing activities:
 
 
 
 
 
 
Borrowings on credit facility
 
—

 
—

 
2,122

Borrowings on long-term debt
 
—

 
44,500

 
—

Repayment of credit facility
 
—

 
(11,300
)
 
(2,966
)
Repayment of long-term debt
 
(12,973
)
 
(38,878
)
 
(20,474
)
Proceeds (payments) of stock compensation, net
 
69

 
(312
)
 
255

Additions to deferred financing costs
 
(6
)
 
(957
)
 
(258
)
Net cash (used in) provided by financing activities
 
(12,910
)
 
(6,947
)
 
(21,321
)
 
 
 
 
 
 
 
Change in cash and cash equivalents:
 
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
(7,932
)
 
6,581

 
4,496

Cash and cash equivalents at beginning of year
 
13,058

 
6,477

 
1,981

Cash and cash equivalents at end of year
 
$
5,126

 
$
13,058

 
$
6,477

 
 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
 
Cash paid during years for:
 
 
 
 
 
 
Income taxes
 
$
44

 
$
46

 
$
149

Interest on debt
 
$
4,514

 
$
5,629

 
$
7,000

Cash received during years for:
 
 
 
 
 
 
        Income taxes
 
$
18

 
$
384

 
$
44

Non-cash investing and financing activities:
 
 
 
 
 
 
Reclassification of property and other assets to assets held for sale
 
$
17,702

 
$
18,890

 
$
4,277

               Reclassification of long term note receivable to short term
 
$
2,311

 
$
—

 
$
—

Exchange of note receivable for real property
 
$
1,950

 
$
1,720

 
$
6,000

Exchange of common stock for noncontrolling interest in partnership
 
$
—

 
$
—

 
$
50

Conversion of restricted cash to accounts receivable
 
$
—

 
$
—

 
$
75

Conversion of note receivable to fixed assets
 
$
—

 
$
—

 
$
210

              Conversion of accounts receivable to note receivable
 
$
—

 
$
67

 
$
277

              Reclassification of property to other assets
 
$
117

 
$
—

 
$
—

Bonuses to employees paid in stock
 
$
—

 
$
—

 
$
125


The accompanying notes are an integral part of the consolidated financial statements.

47
Table of Contents

RED LION HOTELS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.
Organization

Red Lion Hotels Corporation ("RLHC", "we", "our", "us" or the "company") is a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, management and franchising of hotels under our proprietary brands, including Hotel RL, Red Lion Hotels, Red Lion Inns & Suites and Leo Hotel Collection (the "Red Lion Brands"). The Red Lion Brands represent upscale and midscale full and select service hotels. As of December 31, 2014 , the Red Lion network of hotels was comprised of 55 hotels located in ten states and one Canadian province. The Red Lion Hotels and Red Lion Inn & Suites network was comprised of 53 hotels with 8,564 rooms and 421,322 square feet of meeting space, of which we operated 19 hotels ( 14 are wholly owned and five are leased) and 34 are franchised. The Leo Hotel Collection was comprised of two hotels with 3,256 rooms and 241,000 square feet of meeting space.

We are also engaged in entertainment operations, which derive revenues from promotion and presentation of entertainment productions and ticketing services under the operations of WestCoast Entertainment and TicketsWest. The ticketing service offers online ticket sales, ticketing inventory management systems, call center services, and outlet/electronic distributions for event locations.

We were incorporated in the state of Washington in April 1978, and until 2005 operated hotels under various brand names including Cavanaughs Hotels and WestCoast Hospitality Corporation. The financial statements encompass the accounts of Red Lion Hotels Corporation and all of its consolidated subsidiaries, including Red Lion Hotels Holdings, Inc., Red Lion Hotels Franchising, Inc., and Red Lion Hotels Limited Partnership ("RLHLP").

During a portion of the first quarter of 2012, RLHC owned 99.7% of RLHLP. The remaining 0.3% is reflected in our first quarter 2012 financial statements as non-controlling interest. In February 2012, we elected to issue 44,837 shares of our common stock in exchange for a like number of operating partnership units that then certain limited partners had put to RLHLP. RLHLP remained in existence as a limited partnership because there were 70,842.51 operating partnership units held by North River Drive Company, a wholly owned subsidiary of RLHC. In December 2012, North River Drive Company was merged into RLHC and no longer exists. However, RLHLP remains as a limited partnership for state law (but not federal tax) purposes because Red Lion Hotels Corporation and its wholly owned subsidiary, Bellevue Inn LLC, are its two partners.

The financial statements also include an equity method investment in a 19.9% owned real estate venture, as well as certain cost method investments in various entities included as other assets, over which we do not exercise significant influence. In addition, we hold a 3% common interest in Red Lion Hotels Capital Trust (the "Trust") that is considered a variable interest entity. We are not the primary beneficiary of the Trust; thus, it is treated as an equity method investment.

2.
Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements have been prepared by RLHC 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"), and include all accounts and wholly and majority-owned subsidiaries' accounts. All significant inter-company and inter-segment transactions and accounts have been eliminated upon consolidation.

 
Cash and Cash Equivalents

All highly liquid investments purchased with an original maturity of three months or less are considered to be cash equivalents. At times, cash balances at banks and other financial institutions may be in excess of federal insurance limits.

Restricted Cash

In accordance with our various borrowing arrangements, at December 31, 2014 cash of approximately 0.2 million was held for collateralizing a letter of credit for an equity method investment.

48


Allowance for Doubtful Accounts

The ability to collect individual accounts receivable is reviewed on a routine basis. An allowance for doubtful accounts is recorded based on specifically identified amounts believed to be uncollectible. If actual collection experience changes, revisions to the allowance may be required and if all attempts to collect a receivable fail, it is recorded against the allowance. The estimate of the allowance for doubtful accounts is impacted by, among other things, national and regional economic conditions.

The following schedule summarizes the activity in the allowance account for trade accounts receivable for the past three years for continuing operations:
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
 
 
(In thousands)
Allowance for doubtful accounts, continuing operations
 
 
Balance, beginning of year
$
132

 
$
98

 
$
387

 
Additions to allowance
244

 
95

 
137

 
Write-offs, net of recoveries
(73
)
 
(61
)
 
(426
)
 
Balance, end of year
$
303

 
$
132

 
$
98


Inventories

Inventories consist primarily of food and beverage products held for sale at the company-operated restaurants and guest supplies. Inventories are valued at the lower of cost, determined on a first-in, first-out basis, or net realizable value.

Property and Equipment

Property and equipment are stated at cost. The cost of improvements that extend the life of property and equipment is capitalized. Repairs and maintenance charges are expensed as incurred.

Depreciation is provided using the straight-line method over the estimated useful life of each asset, which ranges as follows:
 
 
Buildings
25 to 39 years
Equipment
2 to 15 years
Furniture and fixtures
5 to 15 years
Landscaping and improvements
15 years
 

Valuation of Long-Lived Assets

We test long-lived asset groups for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We also perform a test for recoverability when management has committed to a plan to sell or otherwise dispose of an asset group and the plan is expected to be completed within a year. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.

We base our calculations of the estimated fair value of an asset group on the income approach or the market approach. The assumptions and methodology utilized for the income approach are the same as those described in the "Valuation of Goodwill" caption. For the market approach, we use analyses based primarily on market comparables, recent appraisals and assumptions about market capitalization rates, growth rates, and inflation.

For information on impairment losses recorded in 2014 , 2013 and 2012 associated with long-lived assets, see Note 4.

49


Valuation of Goodwill and Indefinite Lived Intangible Assets

We assess goodwill and other intangibles for potential impairments annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. For purposes of goodwill impairment testing, we have determined that the individual segments where goodwill is recorded constitute reporting units as defined in the literature.

We first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The qualitative factors include economic environment, business climate, market capitalization, operating performance, competition, and other factors. If quantitative analyses are required, in the first step of evaluating goodwill for impairment we compare the estimated fair value of the reporting unit with its carrying value. If the estimated fair value of the reporting unit exceeds its carrying amount, no further analysis is needed.

If the estimated fair value of the reporting unit is less than its carrying amount, we proceed to the second step of the test to calculate the implied fair value of the reporting unit's goodwill in order to determine whether any impairment is required. We calculate the implied fair value of the reporting unit's goodwill by allocating the estimated fair value of the reporting unit to all of the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination. If the carrying value of the reporting unit's goodwill exceeds the implied fair value of the goodwill, we recognize an impairment loss for that excess amount. In allocating the estimated fair value of the reporting unit to all of the assets and liabilities of the reporting unit, we use industry and market data, recent appraisals and knowledge of the industry and past experiences.

We base our calculations of the estimated fair value of a reporting unit on a combined income and market approach. For the income approach, we use a discounted cash flow model that includes the following assumptions: projections of revenues and expenses and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. We base these assumptions on historical data and experience, third-party appraisals, industry projections, micro and macro general economic condition projections, and our own expectations. For the market approach, we use analyses based primarily on market comparables and assumptions about market capitalization rates, growth rates, and inflation. See Note 7 .

The impairment test for indefinite lived intangible assets consists of either a qualitative assessment or a comparison of the fair value of the intangible asset with its carrying amount. An impairment loss, if any, is recognized for the amount by which the carrying value exceeds the fair value of the asset. Fair value is typically estimated using a discounted cash flow analysis.

Assets Held for Sale

We consider a property to be an asset held for sale when all of the following criteria are met:
•
management commits to a plan to sell the property;
•
it is unlikely that the disposal plan will be significantly modified or discontinued;
•
the property is available for immediate sale in its present condition;
•
actions required to complete the sale of the property have been initiated;
•
sale of the property is probable, we expect the completed sale will occur within one year; and
•
the property is actively being marketed for sale at a price that is reasonable given its current market value.

Upon designation as an asset held for sale, we record the carrying value of each property at the lower of its carrying value or its estimated fair value, less estimated costs to sell, and cease depreciation.

For information on the assets classified as held for sale, see Note 5 .

Notes Receivable

We carry notes receivable at their estimated collection amount and they are classified as either current or noncurrent depending on the expected collection date. Interest income on notes receivable is recognized using the interest method.


50

During 2014, we sold the Red Lion Hotel Pocatello ("Pocatello property") and the Red Lion Hotel & Conference Center Kelso/Longview ("Kelso property") and received a $1.8 million secured promissory note and a $0.2 million secured promissory note, respectively.

During 2013, we sold a property, the Red Lion Hotel Pendleton ("Pendleton property") and received a $1.7 million secured promissory note.

During 2012, we sold two properties, the Red Lion Hotel Sacramento at Arden Village ("Sacramento property") and the Red Lion Hotel Denver Southeast in Aurora, Colorado ("Denver Southeast property") and received a $2.7 million secured promissory note and a $4.0 million secured promissory note, respectively.

Other Assets

Other assets primarily include deferred loan costs, equity method and cost method investments discussed in Note 1 . Equity method investments are carried at cost, adjusted for our proportionate share of earnings and any investment disbursements. Cost method investments are carried at their original purchase price. Deferred loan costs are amortized using the effective interest method over the term of the related loan agreement.

Fair Value Measurements

Applicable accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:
•
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
•
Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
•
Level 3 includes unobservable inputs that reflect assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

Deferred Income

In 2003, we sold a hotel to an unrelated party in a sale-operating leaseback transaction. The pre-tax gain on the transaction of approximately $7.0 million was deferred and is being amortized into income over the period of the lease term, which expires in November 2018 and is renewable for three , five -year terms at our option. During 2014 , 2013 and 2012 , we recognized income of approximately $0.5 million each year for the amortization of the deferred gain. The remaining balance at December 31, 2014 , was $1.8 million .

Income Taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning, and results of recent operations. At December 31, 2014, a valuation allowance has been recorded to reduce our deferred tax assets to an amount that is more likely than not to be realized. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

We record uncertain tax positions in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and

51

(2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. See Note 14.

Revenue Recognition

Revenue is generally recognized as services are provided. When payments from customers are received before services have been performed, the amount received is recorded as deferred revenue until the service has been completed. We recognize revenue from the following sources:
•
Hotels  - Room rental and food and beverage sales from owned and leased hotels and management fees from hotels under management contract. Revenues are recognized when services have been performed, generally at the time of the hotel stay or guests visit to the restaurant and at the time the management services are provided.
•
Franchise  - Fees received in connection with the franchise and marketing of our brand names. Franchise revenues are recognized as earned in accordance with the contractual terms of the franchise agreements.
•
Entertainment  - Online ticketing services, ticketing inventory management systems, promotion of Broadway-style shows and other special events. Where we act as an agent and receive a net fee or commission, revenue is recognized 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.

Advertising and Promotion

Costs associated with advertising and promotional efforts are generally expensed as incurred. During the years ended December 31, 2014 , 2013 and 2012 , we incurred approximately $3.4 million , $3.9 million and $3.1 million , respectively, in advertising expense from continuing operations.

Basic and Diluted Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income (loss) by the weighted-average number of shares outstanding during the period. Diluted earnings (loss) per share gives effect to all dilutive potential shares that are outstanding during the period and include outstanding stock options and other outstanding employee equity grants, as well as the effect of noncontrolling interest related to the previously outstanding operating partnership units of RLHLP, by increasing the weighted-average number of shares outstanding by their effect. When we report a net loss during the period, basic and diluted earnings (loss) per share are the same. See Note 13 .

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates.

Reclassifications

Certain amounts disclosed in prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported income/losses, cash flows, total assets, or stockholders' equity as previously reported.
Recent Accounting Pronouncements

In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-08,
"Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in ASU 2014-08 change the criteria for reporting a discontinued operation and require new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. Only disposals representing a strategic shift in operations should be presented as discontinued operations. This accounting standard update is effective for annual filings beginning on or after December 15, 2014. Early adoption is permitted. The impact of the adoption of ASU 2014-08 on our company's results of operations, financial position, cash flows and disclosures will be based on our company’s future disposal activity.


52

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers". ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 may be applied using either a full retrospective or a modified retrospective approach and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is not permitted. We are in the process of evaluating this guidance and our method of adoption.

Management has assessed the potential impact of other recently issued, but not yet effective, accounting standards and determined that the provisions are either not applicable to our company, or are not anticipated to have a material impact on our consolidated financial statements.

3.
Business Segments

We have three operating segments: hotels, franchise and entertainment. The "other" segment consists of miscellaneous revenues and expenses, cash and cash equivalents, certain receivables, certain property and equipment and general and administrative expenses, which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense and income taxes; therefore, it has not been allocated to the segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues and expenses.

Selected information with respect to continuing operations is provided below (in thousands):
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
Revenues:
 
 
 
 
 
 
Hotels
 
$
118,616

 
$
120,391

 
$
131,112

Franchise
 
9,618

 
7,136

 
5,177

Entertainment
 
17,115

 
9,439

 
9,165

Other
 
77

 
341

 
442

 
 
$
145,426

 
$
137,307

 
$
145,896

Operating income (loss):
 
 
 
 
 
 
Hotels
 
$
11,807

 
$
(2,211
)
 
$
(2,785
)
Franchise
 
2,565

 
531

 
374

Entertainment
 
1,981

 
(109
)
 
(244
)
Other
 
(9,594
)
 
(9,056
)
 
(7,714
)
 
 
$
6,759

 
$
(10,845
)
 
$
(10,369
)
Capital expenditures:
 
 
 
 
 
 
Hotels
 
$
24,255

 
$
11,882

 
$
7,690

Franchise
 
20

 
320

 
6

Entertainment
 
241

 
10

 
171

Other
 
375

 
280

 
785

 
 
$
24,891

 
$
12,492

 
$
8,652

Depreciation and amortization:
 
 
 
 
 
 
Hotels
 
$
11,394

 
$
12,643

 
$
13,229

Franchise
 
49

 
49

 
45

Entertainment
 
350

 
359

 
389

Other
 
969

 
909

 
1,305

 
 
$
12,762

 
$
13,960

 
$
14,968



53

 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
Identifiable assets:
 
 
 
 
 
 
Hotels
 
$
190,332

 
$
192,225

 
$
212,418

Franchise
 
9,807

 
9,348

 
8,994

Entertainment
 
6,161

 
6,759

 
5,976

Other  (1)
 
17,054

 
26,294

 
33,554

 
 
$
223,354

 
$
234,626

 
$
260,942

(1) Includes the identifiable assets of assets classified as held for sale.

4.
Property and Equipment

Property and equipment used in continuing operations is summarized as follows (in thousands):
 
 
December 31,
 
 
2014
 
2013
Buildings and equipment
 
$
182,273

 
$
188,331

Furniture and fixtures
 
31,910

 
32,685

Landscaping and land improvements
 
6,943

 
6,459

 
 
221,126

 
227,475

Less accumulated depreciation and amortization
 
(117,968
)
 
(117,343
)
 
 
103,158

 
110,132

Land
 
39,087

 
48,886

Construction in progress
 
18,165

 
7,338

Property and equipment, net
 
$
160,410

 
$
166,356


The table above excludes the property and equipment balances of assets held for sale. See Note 5 for further discussion.

Impairments on property and equipment are summarized below:
 
 
Impairment Recorded
 
 
 
 
 
Year Ended December 31,
Continuing
Discontinued
Year
 
 
2014
2013
2012
Operations
Operations
Sold
 
 
(in millions)
 
 
 
Red Lion Hotel Wenatchee
 
$—
$1.0
$—
x
 
2015
Red Lion Hotel Canyon Springs
 
—
2.6
—
x
 
2014
Red Lion Hotel Yakima Center
 
—
0.7
—
x
 
2014
Red Lion Hotel & Conference Center Kelso/Longview
 
—
1.5
—
x
 
2014
Red Lion Hotel Pocatello
 
—
2.0
—
x
 
2014
Red Lion Hotel Eugene
 
—
1.1
—
 
x
2014
Red Lion Hotel Medford
 
—
—
0.8
 
x
2013
Kalispell Center Mall
 
—
—
2.2
 
x
2013
Red Lion Hotel Pendleton
 
—
—
2.3
x
 
2013
Red Lion Hotel Missoula
 
—
—
0.9
x
 
2013
Red Lion Hotel Denver Southeast
 
—
—
3.9
x
 
2012
Red Lion Colonial Hotel
 
—
—
2.3
x
 
2012
Red Lion Hotel Sacramento at Arden Village
 
—
—
3.9
 
x
2012


54

5. Assets Held for Sale

The following properties were classified as assets held for sale as of December 31, 2014: the Red Lion Hotel Bellevue in Bellevue, Washington ("Bellevue property") and the Red Lion Hotel Wenatchee in Wenatchee, Washington ("Wenatchee property"). The Bellevue property and the Wenatchee property were sold in 2015. See Note 18 for more information.

The following properties were classified as assets held for sale as of December 31, 2013: the Red Lion Hotel Canyon Springs in Twin Falls, Idaho ("Canyon Springs property"), the Red Lion Hotel Columbia Center in Kennewick, Washington ("Kennewick property"), the Red Lion Hotel Yakima Center in Yakima Washington ("Yakima property"), the Red Lion Hotel & Conference Center Kelso/Longview ("Kelso property"), the Red Lion Hotel Pocatello ("Pocatello property"), and the Red Lion Hotel Wenatchee ("Wenatchee property"). These properties were classified as assets held for sale in the fourth quarter of 2013. The Canyon Springs, Kennewick, Yakima, Kelso, and Pocatello properties were sold in 2014.

The property and equipment of these properties that are classified as assets held for sale on the consolidated balance sheets (beginning in the year classified as held for sale) as of December 31, 2014 and 2013 are detailed in the table below (in thousands):
 
2014
 
2013
Buildings and equipment
$
16,339

 
$
25,367

Furniture and fixtures
345

 
1,138

Landscaping and land improvements
1,948

 
7,337

 
18,632

 
33,842

Less accumulated depreciation
(8,537
)
 
(25,207
)
 
10,095

 
8,635

Land
11,066

 
9,478

Construction in progress
12

 
233

Assets held for sale
$
21,173

 
$
18,346


6.
Discontinued Operations

During 2014, we ceased the operation of the Red Lion Hotel Eugene in Eugene, Oregon ("Eugene property") when we assigned our leased to a third party. Accordingly, all operations of this property have been classified as discontinued operations for all periods presented.

During 2013, we terminated a catering contract in Yakima, Washington. Accordingly, all operations under this contract have been classified as discontinued operations for all periods presented. Certain property and equipment related to these operations were considered abandoned and a pre-tax loss on disposition of assets of $0.1 million has been recognized in discontinued operations.

During 2013, we closed on the sales of the Kalispell Center Mall property in Kalispell, Montana ("Kalispell Mall property"), the Red Lion Hotel Medford in Medford, Oregon ("Medford property") and the Red Lion Hotel Sacramento at Arden Village ("Sacramento property"). We no longer have continuing involvement in these properties; therefore the operations of these properties have been classified as discontinued operations for all periods presented.

55

The following table summarizes the results of discontinued operations for the periods indicated (in thousands):
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
Revenues
 
$
133

 
$
5,778

 
$
10,048

Operating expenses
 
(290
)
 
(5,233
)
 
(7,497
)
Hotel facility and land lease
 
(30
)
 
(423
)
 
(717
)
Depreciation and amortization
 
—

 
(187
)
 
(847
)
Interest Expense
 
—

 
—

 
595

Loss on asset dispositions
 
—

 
(1,073
)
 
—

Income tax (expense) benefit
 
—

 
(66
)
 
(573
)
Loss from operations of discontinued business units
 
(187
)
 
(1,204
)
 
1,009

Loss on disposal or impairment of the assets of discontinued business units
 
(2
)
 
(773
)
 
(7,092
)
Income tax benefit
 
—

 
—

 
2,566

Loss on impairment of the assets of the discontinued business units
 
(2
)
 
(773
)
 
(4,526
)
Loss from discontinued operations
 
$
(189
)
 
$
(1,977
)
 
$
(3,517
)

Changes to discontinued operations in 2014

The following properties were classified as discontinued operations in the consolidated statements of comprehensive income (loss) for the year ended December 31, 2013 when they were initially listed for sale. They were subsequently reclassified into continuing operations due to a determination that there will be significant continuing involvement through a franchise agreement.

•
In April 2014, we closed on the sale of the Yakima property for $3.7 million .
•
In May 2014, we closed on the sale of the Kennewick property for $5.9 million .
•
In May 2014, we closed on the sale of the Kelso property for $4.8 million . $4.6 million was paid in cash and the remainder was paid via a secured promissory note due in January 2016.
•
In June 2014, we closed on the sale of the Canyon Springs property for $2.5 million .
•
In October 2014, we closed on the sale of the Pocatello property for $3.0 million . $2.2 million was paid in cash and the remainder was paid via a secured promissory note that requires minimum monthly payments and is due in full in October 2018.
•
In January 2015, we closed on the sale of the Wenatchee property for $4.1 million . See Note 18 for further discussion.

7.
Goodwill and Intangibles

Goodwill represents the excess of the estimated fair value of the net assets acquired during business combinations over the net tangible and identifiable intangible assets acquired. Goodwill was recorded in prior years in connection with the acquisitions of franchises and entertainment businesses.

The Red Lion brand name is an identifiable, indefinite lived-intangible asset that represents the separable legal right to a trade name and associated trademarks acquired in a business combination we entered into in 2001.

We assess goodwill and the brand name for potential impairments annually as of October 1, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the assets. We did not impair any goodwill during the year ended December 31, 2014 or December 31, 2013 .


56

The following table summarizes the balances of goodwill and other intangible assets (in thousands):
 
 
December 31,
 
 
2014
 
2013
Goodwill
$
8,512

 
$
8,512

 
 
 
 
 
Intangible assets
 
 
 
 
Brand name
$
6,878

 
$
6,878

 
Trademarks
134

 
114

Total intangible assets
$
7,012

 
$
6,992

     
Goodwill and other intangible assets attributable to each of our business segments at December 31, 2014 and 2013 were as follows (in thousands):  
 
December 31,
 
2014
 
2013
 
 
 
Intangible
 
 
 
Intangible
 
Goodwill
 
Assets
 
Goodwill
 
Assets
Hotels
$
—

 
$
4,659

 
$
—

 
$
4,639

Franchise
5,351

 
2,347

 
5,351

 
2,347

Entertainment
3,161

 
6

 
3,161

 
6

Total
$
8,512

 
$
7,012

 
$
8,512

 
$
6,992



8.
Credit Facility and Long-Term Debt
During the third quarter of 2013, we entered into an agreement with Wells Fargo Bank, National Association ("Wells Fargo") to expand our existing credit facility. The balance of the term loan under the credit facility at the time of the expansion was $0.5 million and there was no outstanding balance on the revolving line of credit. The term loan was increased to a total of $45.0 million , with $38.2 million used to refinance nine fixed-rate notes collateralized by individual properties ("CMBS debt") that were maturing in July 2013.
The original terms of the expanded facility are as follows:
•
Principal payments of $750,000 are required on the term loan on the last day of each calendar quarter or the first business day thereafter. If a property securing the facility is sold we will be required to make an additional principal payment on the term loan equal to the greater of (i)  50% of the net proceeds from the sale or (ii)  50% of the appraised market value of the property sold. If any such additional principal payment exceeds $1 million , the remaining principal balance amortization will be modified to reflect the additional payment.
•
The term loan matures on June 30, 2018.
•
A $10 million revolving line of credit is available under the facility until June 30, 2015.
•
Interest under the term loan and revolving line of credit will initially be payable at our option (i) at a fluctuating rate 75 basis points above a base rate in effect from time to time, or (ii) at a rate 325 basis points above LIBOR (under one, three or six month terms). Beginning in 2015, the spread on the LIBOR will decline if our senior leverage ratio is less than 3.00 . We have entered into a swap to hedge 40% of our interest rate exposure under the term loan. See Note 9 for further discussion.
•
Our obligations under the facility are (i) guaranteed by our subsidiaries Red Lion Hotels Limited Partnership, Red Lion Hotels Franchising, Inc., Red Lion Hotels Management, Inc. and Red Lion Hotels Holdings, Inc., (ii) secured by our accounts receivable and inventory, and (iii) further collateralized by 19 of our hotel properties located in Bellevue, Spokane, Olympia, Port Angeles, Richland, Pasco and Wenatchee, Washington; in Post Falls and Boise, Idaho; in Bend and Coos Bay, Oregon; in Eureka and Redding, California; and in Salt Lake City, Utah.


57

The facility required us to comply with customary affirmative and negative covenants, as well as financial covenants relating to leverage, debt service, and loan coverage ratios. It also included customary events of default. We were in compliance with these covenants at December 31, 2014 .

At December 31, 2014 outstanding debt was $61.0 million . The debt balance includes the $30.5 million outstanding on the term loan with Wells Fargo and unamortized origination fees on the debt of $0.3 million . In addition to this term loan, we also had a revolving line of credit with Wells Fargo for up to $10 million , a portion of which supported outstanding letters of credit. At December 31, 2014 , $7.0 million on the revolving line of credit was available as we had $3.0 million in letters of credit as of that date. Also included in the total debt amount is $30.8 million of debentures due to Red Lion Hotels Capital Trust that matures in 2044. See Note 10 for further discussion.

As discussed in Note 6, during 2014, we completed the sales of the Yakima, Kelso, Kennewick, Canyon
Springs and Pocatello properties, which were pledged as collateral for our credit facility. As required under the terms of the loan, we made principal payments totaling $10.4 million from the proceeds of the sales. As of December 31, 2014, principal payments of $591,689 were required on the term loan on the last day of each calendar quarter or the first business day thereafter.

As discussed in Note 18, subsequent to year-end, we completed the sales of the Bellevue and Wenatchee properties. We also, as part of a joint venture transaction, repaid the outstanding balance of our secured debt with Wells Fargo and the joint venture obtained a new $53.8 million mortgage loan from Capital Source, a division of Pacific Western Bank. The revolving line of credit was terminated as part of these transactions.

Contractual maturities for the term loan and revolving line of credit outstanding at December 31, 2014 , for the remaining term, are summarized by year as follows (in thousands):
Year Ending December 31,
 
Amount
2015
 
$
2,261

2016
 
2,261

2017
 
2,261

2018
 
23,744

 
 
$
30,527



58

9.
Derivative Financial Instruments

We do not enter into derivative transactions for trading purposes, but rather to hedge our exposure to interest rate fluctuations. We manage our floating rate debt using interest rate swaps in order to reduce our exposure to the impact of changing interest rates and future cash outflows for interest.

As required under the Wells Fargo credit facility, we entered into an interest rate swap with Wells Fargo to hedge the first 40% of our interest rate exposure. The swap had an original notional amount of $18.0 million and a fixed rate of 4.88% . Our contractual quarterly payments reduced the outstanding notional amount to $16.2 million as of December 31, 2014. The swap was settled on the same day as the required monthly interest payments on the term loan and expired on June 29, 2018.

From inception through the second quarter of 2014, our interest rate swap was designated as a cash flow hedge. The gains and losses in the fair value of the swap were recorded in stockholders’ equity as a component of accumulated other comprehensive income (loss) ("AOCI") on the consolidated balance sheets. As a result of the additional principal payments made concurrent with the sales of our properties, we no longer qualified for hedge accounting and we de-designated the interest rate swap as a cash flow hedge. Beginning in the third quarter of 2014, the gains and losses in the fair value of the swap were recorded as interest expense on the consolidated statements of comprehensive income (loss) and the AOCI balance was amortized and expensed as interest expense over the remaining life of the interest rate swap.

We measure the value of the interest rate swap utilizing an income approach valuation technique, converting future amounts of cash flows to a single present value in order to obtain a transfer exit price within the bid and ask spread that is most representative of the fair value of our derivative instruments. This option-pricing technique utilizes a one-month LIBOR forward yield curve, obtained from an independent external service.

At December 31, 2014 , the valuation of the interest rate swap resulted in the recognition of a swap liability totaling $0.2 million , which is included in other accrued expenses on the balance sheet.

10.
Debentures of Red Lion Hotels Capital Trust

Together with the Trust, we completed a public offering of $46.0 million of trust preferred securities in 2004. The securities are listed on the New York Stock Exchange and entitle holders to cumulative cash distributions at a 9.5% annual rate with maturity in February 2044. The cost of the offering totaled $2.3 million , which the Trust paid through an advance by us. The advance to the Trust is included with other noncurrent assets on our consolidated balance sheets.

We borrowed all of the proceeds from the offering, including our original 3% trust common investment of $1.4 million , on the same day through 9.5%  debentures that are included as a long-term liability on our consolidated balance sheets. The debentures mature in 2044 and their payment terms mirror the distribution terms of the trust securities. The debenture agreement required the mandatory redemption of 35% of the then-outstanding trust securities at 105% of issued value if we completed an offering of common shares with gross proceeds of greater than $50 million . In accordance therewith and in connection with a common stock offering in May 2006, we repaid approximately $16.6 million of the debentures due the Trust. The Trust then redeemed 35% of the outstanding trust preferred securities and trust common securities at a price of $26.25 per share, a 5% premium over the issued value of the securities. Of the $16.6 million , approximately $0.5 million was received back by us for our trust common securities and was reflected as a reduction of our investment in the Trust. At December 31, 2014 and 2013 , debentures due the Trust totaled $30.8 million .

11.
Commitments and Contingencies

At any given time we are subject to claims and actions incidental to the operations of our business. Based on information currently available, we do not expect that any sums we may receive or have to pay in connection with any legal proceeding would have a materially adverse effect on our consolidated financial position or net cash flow.

Due to our equity method investment in a 19.9% owned real estate venture, we are considered a guarantor of the mortgage for the building associated with that investment. We would be obligated to pay a portion of this mortgage in the event the real estate venture were unable to meet its principal or interest payment obligations. As of December 31, 2014, the maximum amount payable under this guarantee was approximately $1.9 million , which represents 19.9% of the outstanding mortgage balance. At December 31, 2014, it was not probable that we would be required to pay any of this amount; thus we have not accrued a liability for any portion of this obligation in our December 31, 2014 financial statements.

12.
Stockholders' Equity

59


We are authorized to issue 50 million shares of common stock, par value $0.01 per share, and five million shares of preferred stock, par value $0.01 per share. As of December 31, 2014 , there were 19,846,508  shares of common stock issued and outstanding and no shares of preferred stock issued and outstanding. The board of directors has the authority, without action by the shareholders, to designate and issue preferred stock in one or more series and to designate the rights, preferences and privileges of each series, which may be greater than the rights of the common stock.

Each holder of common stock is entitled to one vote for each share held on all matters to be voted upon by the shareholders with no cumulative voting rights. Holders of common stock are entitled to receive ratably the dividends, if any, that are declared from time to time by the board of directors out of funds legally available for that purpose. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate in the future.

Stock Incentive Plans

As approved by our shareholders, the 1998 Stock Incentive Plan and the 2006 Stock Incentive Plan, as amended, authorize the grant or issuance of various option or other awards including restricted stock grants and other stock-based compensation. The 2006 plan allows awards covering up to two million shares (subject to adjustments for stock splits, stock dividends and similar events). The 1998 plan allows awards covering up to 1.4 million shares, although as a condition to the approval of the 2006 plan, we no longer grant or issue awards under the 1998 plan. The compensation committee of the board of directors administers the 2006 plan and establishes to whom awards are granted and the type and terms and conditions, including the exercise period, of the awards. As of December 31, 2014 , there were 448,788  shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2006 plan.

Stock based compensation expense reflects the fair value of stock based awards measured at grant date, including an estimated forfeiture rate, and is recognized over the relevant service period. Stock-based compensation expense related to these awards during 2014 , 2013 and 2012 for employees was approximately $0.9 million , $1.3 million and $0.8 million , respectively.

Stock-based compensation expense includes $0.3 million of expense recorded upon the separation of our former Executive Vice President and Chief Financial Officer in 2014 and $0.5 million of expense recorded upon the retirement of our former President and Chief Executive Officer in 2013.

In addition to the awards mentioned above, during the years ended December 31, 2014 , 2013 and 2012 , there were 85,442 , 77,360 and 58,705 shares of common stock, respectively, issued in aggregate to non-management directors as compensation for service. During the years ended December 31, 2014 , 2013 and 2012 , we recognized compensation expense of approximately $0.5 million , $0.6 million and $0.5 million , respectively, upon issuance.

Stock Options

Stock options issued are valued based upon the Black-Scholes option pricing model and we recognize this value as an expense over the periods in which the options vest. Use of the Black-Scholes option-pricing model requires that we make certain assumptions, including expected volatility, forfeiture rate, risk-free interest rate, expected dividend yield and expected life of the options, based on historical experience. Volatility is based on historical information with terms consistent with the expected life of the option. The risk free interest rate is based on the quoted daily treasury yield curve rate at the time of grant, with terms consistent with the expected life of the option. No stock options were granted in 2014, 2013 or 2012.

60


A summary of stock option activity for the year ended December 31, 2014 , is as follows:
 
 
Number
of Shares
 
Weighted
Average
Exercise
Price
Balance, January 1, 2014
 
167,607

 
$
9.41

Options granted
 
—

 
$
—

Options exercised
 
—

 
$
—

Options forfeited
 
(92,431
)
 
$
8.87

Balance, December 31, 2014
 
75,176

 
$
10.27

Exercisable, December 31, 2014
 
75,176

 
$
10.27


Additional information regarding stock options outstanding and exercisable as of December 31, 2014 , is presented below.
 
Exercise
Price
 
Number
Outstanding
 
Weighted
Average
Remaining
Contractual
Life (Years)
 
Expiration
Date
 
Exercise
Price
 
Aggregate
Intrinsic
Value (1)
 
Number
Exercisable
 
Exercise
Price
 
Aggregate
Intrinsic
Value (1)
7.46
 
3,500

 
0.86

 
2015
 
$
7.46

 
$
—

 
3,500

 
$
7.46

 
$
—

8.74
 
40,836

 
3.39

 
2018
 
8.74

 
—

 
40,836

 
8.74

 
—

12.21
 
15,195

 
1.89

 
2016
 
12.21

 
—

 
15,195

 
12.21

 
—

13.00
 
15,645

 
2.38

 
2017
 
13.00

 
—

 
15,645

 
13.00

 
—

 
 
75,176

 
2.76

 
2015-2018
 
$
10.27

 
$
—

 
75,176

 
$
10.27

 
$
—

____________
(1)
The aggregate intrinsic value is before applicable income taxes and represents the amount option recipients would have received if all options had been exercised on the last trading day of 2014 , based upon our closing stock price of $6.34 .

Restricted Stock Units, Shares Issued as Compensation

During 2014 , 2013 and 2012 , we granted 319,168 , 218,356 and 169,036 unvested restricted stock units, respectively, to executive officers and other key employees, the majority of which vest 25% each year for four years on each anniversary of the grant date. While all of the shares are considered granted, they are not considered issued or outstanding until vested. As of December 31, 2014 , 2013 and 2012 there were 398,513 , 303,749 and 323,561 unvested restricted stock units outstanding, respectively. Since we began issuing restricted stock units, approximately 22.1% of total restricted stock units granted have been forfeited.

A summary of restricted stock unit activity for the year ended December 31, 2014 , is as follows:
 
 
Number
of Shares
 
Weighted
Average
Grant Date
Fair Value
Balance, January 1, 2014
 
303,749

 
$
7.32

Granted
 
319,168

 
$
5.63

Vested
 
(117,758
)
 
$
7.18

Forfeited
 
(106,646
)
 
$
7.01

Balance, December 31, 2014
 
398,513

 
$
6.09


  117,758  shares of common stock were issued to employees in 2014 as their restricted stock units vested. Under the terms of the 2006 plan and upon issuance, we authorized a net settlement of distributable shares to employees after consideration of individual employees' tax withholding obligations, at the election of each employee.


61

During 2014 , 2013 and 2012 , we recognized approximately $0.9 million , $1.2 million and $0.8 million , respectively, in compensation expense related to these grants, and expect to record an additional $1.6 million in compensation expense over the remaining weighted average vesting periods of approximately 26 months.

Employee Stock Purchase Plan

In 2008, we adopted a new employee stock purchase plan ("ESPP") upon expiration of our previous plan. Under the ESPP, 300,000  shares of common stock are authorized for purchase by eligible employees at a discount through payroll deductions. No employee may purchase more than $25,000 worth of shares, or more than 10,000 total shares, in any calendar year. As allowed under the ESPP, a participant may elect to withdraw from the plan, effective for the purchase period in progress at the time of the election with all accumulated payroll deductions returned to the participant at the time of withdrawal. During 2014 , 2013 and 2012 , there were 14,427 , 13,765 and 17,304 shares, respectively, issued, and approximately $18,000 , $17,000 and $16,000 was recorded in compensation expense related to the discount associated with the plan in each year, respectively.

13.     Earnings (Loss) Per Share

The following table presents a reconciliation of the numerators and denominators used in the basic and diluted net income (loss) per share computations for the years ended December 31, 2014 , 2013 and 2012 (in thousands, except per share amounts):
 
 
Year ended December 31,
 
 
2014
 
2013
 
2012
Numerator - basic and diluted:
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
2,492

 
$
(15,070
)
 
$
(11,164
)
Less net income or loss attributable to noncontrolling interest
 
—

 
—

 
(7
)
Income (loss) from discontinued operations
 
(189
)
 
(1,977
)
 
(3,517
)
Net income (loss)
 
$
2,303

 
$
(17,047
)
 
$
(14,674
)
Denominator:
 
 
 
 
 
 
Weighted average shares - basic
 
19,785

 
19,575

 
19,327

Weighted average shares - diluted
 
19,891

 
19,575

 
19,327

Earnings (loss) per share:
 
 
 
 
 
 
Basic and Diluted
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
0.13

 
$
(0.77
)
 
$
(0.58
)
Income (loss) from discontinued operations
 
$
(0.01
)
 
$
(0.10
)
 
$
(0.18
)
Net income (loss)
 
$
0.12

 
$
(0.87
)
 
$
(0.76
)
At December 31, 2014 , 75,176 options to purchase common shares were considered antidilutive.
At December 31, 2013 and 2012 all of the 167,607 and 172,814 options to purchase common shares and all of the 303,749 and 323,561 restricted stock units outstanding as of that date were considered antidilutive in the period.

14. Income Taxes

Major components of the income tax expense (benefit) from continuing operations for the years ended December 31, 2014 , 2013 and 2012 , are as follows (in thousands):
 
 
December 31,
 
 
2014
 
2013
 
2012
Current:
 
 
 
 
 
 
  Federal (benefit) expense
$
—

 
$
(17
)
 
$
(153
)
 
  State (benefit) expense
25

 
32

 
6

Deferred (benefit) expense
6

 
(766
)
 
(8,376
)
 
 
 
 
 
 
 
Income tax (benefit) expense
31

 
(751
)
 
(8,523
)
Less: tax benefit of discontinued operations
—

 
(66
)
 
1,994

Income tax (benefit) expense from continuing operations
$
31

 
$
(817
)
 
$
(6,529
)

62


The differences between income taxes expected at the U.S. federal statutory income tax rate of 34 percent and the reported income tax (benefit) expense are summarized as follows (in thousands, except percentages):
 
December 31,
 
2014
 
2013
 
2012
 
Amount
%
 
Amount
%
 
Amount
%
(Benefit) provision at federal statutory rate
$
858

34.0
 %
 
$
(6,051
)
-34.0
 %
 
$
(7,887
)
-34.0
 %
State tax (benefit) expense
23

0.9
 %
 
(365
)
-2.0
 %
 
(774
)
-3.3
 %
Effect of tax credits
(173
)
-6.9
 %
 
(433
)
-2.4
 %
 
(336
)
-1.4
 %
Other
286

11.3
 %
 
205

1.1
 %
 
474

2.0
 %
Valuation allowance
(963
)
-38.2
 %
 
5,893

33.1
 %
 
—

—
 %
Income tax (benefit) expense
31

1.2
 %
 
(751
)
-4.2
 %
 
(8,523
)
-58.1
 %
Effect of discontinued operations
—

—
 %
 
(66
)
—
 %
 
1,994

—
 %
Income tax (benefit) expense from continuing operations
$
31

1.2
 %
 
$
(817
)
-5.1
 %
 
$
(6,529
)
-36.9
 %
Significant components of the net deferred tax assets and liabilities at December 31, 2014 and 2013 , are as follows (in thousands):
 
December 31,
 
2014
 
2013
 
Assets
Liabilities
 
Assets
Liabilities
Property and equipment
$
—

$
11,889

 
$
—

$
11,680

Brand name
—

2,485

 
—

2,502

Other intangible assets
—

208

 
—

211

Gain on sale leaseback
1,079

—

 
1,257

—

Tax credit carryforwards
4,484

—

 
4,299

—

Federal and state net operating losses
10,250

—

 
10,746

—

Other
872

—

 
1,177

—

Valuation allowance
(4,916
)
—

 
(5,893
)
—

Total
$
11,769

$
14,582

 
$
11,586

$
14,393


At December 31, 2014 and 2013 , we had federal gross operating loss carryforwards of approximately $27.3 million and $28.6 million , respectively; state gross operating loss carryforwards of approximately $20.5 million and $21.8 million , respectively; and federal and state tax credit carryforwards of approximately $4.5 million and $4.3 million , respectively. The federal net operating loss carryforwards will expire beginning in 2033 , and the state net operating loss carryforwards will expire beginning in 2017 ; the tax credit carryforwards will begin to expire in 2024 .

We assess the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the existing deferred tax assets. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2014. Such objective evidence limits the ability to consider other subjective evidence such as our projections for future growth.

On the basis of this evaluation, as of December 31, 2014, a valuation allowance of $4.9 million has been recorded to reduce deferred tax assets to an amount that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth. Should we determine we will be able to realize our deferred tax assets, the tax benefits relating to any reversal of the valuation allowance will be accounted for as a reduction of income tax expense.

We recognize the financial statement effect of a tax position when it is more likely than not to be sustained on the basis of its technical merits. We have no material uncertain tax positions at December 31, 2014 and 2013 , and do not anticipate a significant change in any unrecognized tax benefits over the next twelve months. Accordingly, we have not provided for any unrecognized

63

tax benefits or related interest and penalties. We account for penalties and interest related to unrecognized tax benefits as a component of income tax expense. With limited exception, we are no longer subject to U.S. federal, state and local income tax examinations by taxing authorities for years prior to 2008.

15.    Operating Lease Commitments
    
Total future minimum payments due under all current term operating leases at December 31, 2014 , are as indicated below (in thousands):
Year Ended December 31,
 
 
2015
 
$
7,072

2016
 
2,199

2017
 
1,481

2018
 
1,366

2019
 
750

Thereafter
 
8,020

Total
 
$
20,888


Total rent expense from continuing operations, under leases for the years ended December 31, 2014 , 2013 and 2012 was $5.2 million , $4.5 million , and $4.1 million , respectively, shown as hotel facility and land lease expense on our consolidated statements of comprehensive income (loss).

We have leasehold interests at five hotel properties as well as our corporate headquarters located in Spokane, Washington. These leases require us to pay fixed monthly rent and have expiration dates of 2016 and beyond. The table below summarizes the terms of the leases, including extension periods at our option, for our hotel properties as of December 31, 2014 :
Property
 
Expiration date of lease
 
Extension periods
Red Lion River Inn
 
October 2018
 
Three renewal terms of five years each
Red Lion Hotel Seattle Airport
 
December 2024
 
One renewal term of five years
Red Lion Hotel Vancouver (at the Quay) (1)
 
December 2015
 
None
Red Lion Anaheim
 
April 2016
 
18 renewal terms of five years each
Red Lion Hotel Kalispell
 
April 2028
 
Three renewal terms of five years each
__________
(1) In September 2014, we amended the lease for Red Lion Hotel Vancouver (at the Quay) to revise the lease term to December 31, 2015. In addition, we have the right to terminate the lease after December 31, 2014 with a payment of $3.0 million . If we have not previously terminated the lease, the lease will expire on December 31, 2015 with a required payment of $3.0 million .


16. Related-Party Transactions

We conducted various business transactions in which the counterparty was considered a related party due to the relationships between us and the counterparty's officers, directors and/or equity owners. The nature of the transactions was limited to performing certain management and administrative functions for the related entities, commissions for real estate sales and leased office space. The total aggregate value of these transactions in 2014 , 2013 and 2012 was $0.0 million , $0.1 million and $0.5 million , respectively.


17.
Fair Value of Financial Instruments

Estimated fair values of financial instruments (in thousands) are shown in the table below. The carrying amounts for cash and cash equivalents, accounts receivable, notes receivable and current liabilities are reasonable estimates of their fair values. We estimate the fair value of our long-term debt, excluding leases, using expected future payments discounted at risk-adjusted rates, both of which are Level 3 inputs. The debentures are valued at the closing price on December 31, 2014 , of the underlying trust preferred securities on the New York Stock Exchange, which was a directly observable Level 1 input. The fair values provided below are not necessarily indicative of the amounts we or the debt holders could realize in a current market exchange. In addition,

64

potential income tax ramifications related to the realization of gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration.
 
 
December 31, 2014
 
December 31, 2013
 
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Financial assets:
 
 
 
 
 
 
 
 
Cash and cash equivalents and restricted cash (1)
 
$
5,351

 
$
5,351

 
$
13,058

 
$
13,058

Accounts receivable (1)
 
$
6,752

 
$
6,752

 
$
6,283

 
$
6,283

Notes receivable
 
$
5,284

 
$
5,284

 
$
5,095

 
$
5,095

Financial liabilities:
 
 
 
 
 
 
 
 
Current liabilities, excluding debt (1)
 
$
18,469

 
$
18,469

 
$
16,238

 
$
16,238

Total debt
 
$
30,200

 
$
30,683

 
$
43,058

 
$
44,311

Debentures
 
$
30,825

 
$
31,639

 
$
30,825

 
$
32,058

__________
(1)
Includes the cash, accounts receivable, and current liabilities of discontinued operations held for sale.

18.
Subsequent Events
In January 2015, we transferred 12 of our wholly owned hotels into RL Venture LLC a newly created entity that was initially wholly owned by us. Subsequently, we sold a 45 percent member interest in RL Venture LLC to Shelbourne Falcon RLHC Hotel Investors LLC ("Shelbourne"). We concurrently repaid the outstanding balance of our secured debt with Wells Fargo Bank. The joint venture also obtained a new mortgage loan from Capital Source, a division of Pacific Western Bank, secured by the 12 properties. Shelbourne is an entity led by Shelbourne Capital LLC and includes several other institutional real estate investors, including Columbia Pacific Real Estate Fund II, LP, an affiliate of the company's largest shareholder Columbia Pacific Opportunity Fund, LP. All 12 hotels will continue to be managed by RLHC's wholly owned subsidiary, Red Lion Hotels Management, Inc., under an initial five -year management contract, with three five -year extensions. These hotels will continue to be consolidated as the joint venture is considered a variable interest entity and we are the primary beneficiary. In connection with Shelbourne's investment in the joint venture, RLHC issued to Shelbourne warrants to acquire 442,533 shares of common stock at $6.78 per share.
The new mortgage loan has a base principal amount of $53.8 million and an additional $26.0 million over a two -year period to cover expenses related to improvements to the properties owned by the joint venture. The loan has a four -year term with a one -year extension option, and interest under the advanced portions of the loan will be calculated at LIBOR plus 4.75% . Interest only payments are due monthly commencing February 2015. Monthly principal payments are required beginning in January 2017 and are based on a 25 year amortization period based on the then current outstanding principal amount. The joint venture is required to buy an interest rate cap at standard market terms and in the event of any prepayment, are required to pay the lender a penalty tied to their cumulative receipt of $6 million in minimum interest. The loan is non-recourse except that several investors in the joint venture, including the company, are required to sign guarantees regarding, amongst other things, the completion of certain improvements to the joint venture properties, environmental covenants, losses incurred by the lender and any event of bankruptcy involving the joint venture or its owners. The loan agreement contains customary reporting and operating covenants applicable to the joint venture, including requirements for lender approval of annual operating and capital budgets, under certain conditions.

On January 22, 2015, we sold the Wenatchee property for $4.1 million and concurrently entered into a franchise agreement with the new owner. See Note 5 for more information.
On February 18, 2015, we sold the Bellevue property for $35.4 million and concurrently entered into a management agreement with the new owner. See Note 5 for more information.

65

Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.

Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2014 , we carried out an evaluation, under the supervision and with the participation of our management, including the 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.
Management's Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over our financial reporting, which is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
Because of its inherent limitations, any system of internal controls over financial reporting, no matter how well designed, may not prevent or detect misstatements due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Also, because of changes in conditions, internal control effectiveness may vary over time.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2014 , using criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and concluded that we have maintained effective internal control over financial reporting as of December 31, 2014 , based on these criteria.
Our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2014 , has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in its report which is included herein.
There have been no changes in our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during our fourth fiscal quarter of 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

66
Table of Contents

 
Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Red Lion Hotels Corporation
Spokane, Washington
We have audited Red Lion Hotels Corporation’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Red Lion Hotels Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, “Management’s Annual Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Red Lion Hotels Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria .
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Red Lion Hotels Corporation as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 and our report dated February 26, 2015 expressed an unqualified opinion thereon.


/s/ BDO USA, LLP
Spokane, WA
February 26, 2015






67
Table of Contents

Item 9B.
Other Information

None.

PART III

Item  10.
Directors and Executive Officers and Corporate Governance

Executive Officers of the Registrant
Name
 
Age
 
Position
Gregory T. Mount
 
 
54

 
 
President and Chief Executive Officer
James A. Bell
 
 
47

 
 
Executive Vice President, Chief Financial Officer
Harry G. Sladich
 
 
53

 
 
Executive Vice President, Hotel Operations and Sales
William J. Linehan
 
 
49

 
 
Executive Vice President, Chief Marketing Officer
Thomas L. McKeirnan
 
 
46

 
 
Executive Vice President, General Counsel and Secretary
Jack G. Lucas
 
 
62

 
 
Vice President and President, TicketsWest

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

James A. Bell.   Mr. Bell was appointed Executive Vice President, Chief Financial Officer effective October 29, 2014. Mr. Bell joined RLHC from Coldwater Creek, Inc., where he was most recently President and Interim Chief Executive Officer, and also served as Executive Vice President, Chief Operating Officer and Chief Financial Officer from January 2012 to June 2014, Senior Vice President Chief Financial Officer from March 2010 to January 2012 and Vice President of Finance from September 2009 to March 2010. From 2007 to 2009 Mr. Bell served as Senior Vice President Finance and Planning for Harry & David Holdings, Inc., and from 2002 to 2007, he was Senior Director of Finance and Controller for international clothing retailer The Gap, Inc. Prior to working at The Gap, Inc., Mr. Bell was Vice President in the technology investment banking group at Piper Jaffray, Inc. From May 1989 to June 1998, Mr. Bell served as a U.S. Navy officer and Naval Flight Officer.

Harry G. Sladich.    Mr. Sladich has served as Executive Vice President, Hotel Operations and Sales since February 2014. He previously had served as Executive Vice President of Sales, Marketing & Distribution since joining our company in March 2010.  A 35-year veteran of the hospitality industry, Mr. Sladich served as President and CEO of the Spokane Regional Convention and Visitors Bureau from 2005 to 2010, where he played a key role in building and selling the Washington State image.  Earlier in his career, Mr. Sladich was Vice President of Sales and Marketing for Sterling Hospitality, hotel developers and operators of several franchises including Holiday Inn Express, Hampton Inn and Quality Inn.  Before working for Sterling Hospitality, he was General Manager of Hotel Lusso, an upscale boutique hotel in Spokane, and was Vice President of National Sales for Guestmark International (GMI), a national hotel marketing company based in Boston.  Mr. Sladich has also worked for Sheraton Hotels in both hotel operations and food and beverage. Mr. Sladich serves on two prominent national industry boards, including the U.S. Travel Association and Destination & Travel Foundation Board of Trustees.  In addition, former Washington State Governor Christine Gregoire appointed Mr. Sladich to the board of Washington Filmworks, which manages the state incentive programs for films produced in Washington, and to the Washington State Convention Center Board of Directors.  He has also served on the board for the Western Association of Convention & Visitors Bureaus (WACVB) and the Boys & Girls Clubs of Spokane County.
 
William J. Linehan. Mr. Linehan joined our company as Executive Vice President, Chief Marketing Officer in February 2014. From 2009 until he joined us, he served as Chief Marketing Officer of Richfield Hospitality, Inc., a hotel management company based in Denver, Colorado. From 2006 to 2008, he served as Vice President, Global Marketing of InterContinental Hotels Group. From 2002 to 2006, Mr. Linehan was the Global Vice President of Marketing, Brand Alignment and Partnership at Starwood Hotels & Resorts Worldwide, Inc. Prior to joining Starwood, he had since 1987 held various hotel management positions.

68
Table of Contents


Thomas L. McKeirnan.     Mr. McKeirnan has been Executive Vice President, General Counsel and Secretary since February 2013. He served as Senior Vice President, General Counsel and Secretary from February 2005 through January 2013. He has been with our company since July 2003. Prior to joining us, Mr. McKeirnan was a partner at the Spokane, Washington law firm of Paine Hamblen Coffin Brooke & Miller LLP from January 2002 until July 2003 and an associate attorney at the same firm from 1999 to 2001. Mr. McKeirnan was an associate attorney with the Seattle, Washington law firm of Riddell Williams P.S. from 1995 until 1999. Mr. McKeirnan's private legal practice focused on corporate, transactional, real estate and securities law, with an emphasis on the hospitality industry. While in private practice, Mr. McKeirnan represented us as outside counsel on various strategic and transactional matters and also represented WestCoast Hotels, Inc. prior to our acquisition of that company. Mr. McKeirnan serves as a director and Chairman of the Nominating and Corporate Governance Committee of the Board of Directors of St. Augustine Gold & Copper Ltd. He also serves on the Executive Committee of the Board of Trustees of Gonzaga Preparatory School.

Jack G. Lucas.     Mr. Lucas serves as Vice President of RLHC and President of TicketsWest. He is in charge of overseeing all of the various departments within our entertainment division. He has been President of TicketsWest since February 2006 and Vice President of RLHC since August 1998. Mr. Lucas has approximately 29 years of experience in the entertainment industry, and has been employed by us since 1987. Mr. Lucas previously spent 13 years on the management staff of the City of Spokane Entertainment Facilities, which included a 2,700-seat performing arts center, 30,000-seat stadium, 8,500-seat coliseum, and convention center. Mr. Lucas was awarded the 2004 International Ticketing Professional of the Year award from the International Ticketing Association. In 2013, Mr. Lucas earned the prestigious International Ticketing Association INTIX Patricia Spira Lifetime Achievement Award.

The remainder of the information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2015 Annual Meeting of Shareholders under the captions “Proposal 1: Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance.” This proxy statement will be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2014 pursuant to Regulation 14A under the Securities Exchange Act of 1934.

We make available free of charge on our website (www.redlion.com) the charters of all of the standing committees of our board of directors (including those of the audit, nominating and corporate governance and compensation committees), the code of business conduct and ethics for our directors, officers and employees, and our corporate governance guidelines. We will furnish copies of these documents to any shareholder upon written request sent to our General Counsel, 201 W. North River Drive, Suite 100, Spokane, Washington 99201-2293.



Item 11.
Executive Compensation

The information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2015 Annual Meeting of Shareholders under the captions “Compensation Discussion and Analysis,” “Executive Compensation” and “Director Compensation.”

Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

A portion of the information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2015 Annual Meeting of Shareholders under the caption “Security Ownership of Certain Beneficial Owners and Management.”

See Item 5 of this Annual Report on Form 10-K for information regarding our equity compensation plans.

Item  13.
Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2015 Annual Meeting of Shareholders under the captions “Certain Relationships and Related Transactions,” and “Corporate Governance - Director Independence.”

Item 14.
Principal Accounting Fees and Services


69
Table of Contents

The information required by this item will be contained in, and is incorporated by reference from, the definitive proxy statement for our 2015 Annual Meeting of Shareholders under the caption “Principal Accounting Fees and Services.”


70
Table of Contents

PART IV

Item 15.
Exhibits

List of documents filed as part of this report:
1. Index to Red Lion Hotels Corporation financial statements:
 
 
 
Page  
 
 
 
 
a.
Consolidated Balance Sheets
 
 
 
b.
Consolidated Statements of Comprehensive Income (Loss)
 
 
 
c.
Consolidated Statements of Changes in Stockholders' Equity
 
 
 
d.
Consolidated Statements of Cash Flows
 
 
 
e.
Notes to Consolidated Financial Statements
2. Index to financial statement schedules:
All schedules for which provisions are made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable or the information is contained in the Financial Statements and therefore has been omitted.
3. Index to exhibits:

71
Table of Contents

 
Exhibit Number
Description
 
 
3.1
Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.2 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on May 25, 2011)
 
 
3.2
Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on August 12, 2013)
 
 
4.1
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 in the Form S‑3/A (Commission File No. 333-133287) filed on May 15, 2006)
 
 
4.2
Certificate of Trust of Red Lion Hotels Capital Trust (incorporated by reference to Exhibit 4.2 in the Form S‑1 (Commission File No. 333‑110214) filed on November 4, 2003)
 
 
4.3
Declaration of Trust of Red Lion Hotels Capital Trust (incorporated by reference to Exhibit 4.3 in the Form S‑1 (Commission File No. 333‑110214) filed on November 4, 2003)
 
 
4.4
Amended and Restated Declaration of Trust of Red Lion Hotels Capital Trust (incorporated by reference to Exhibit 4.1 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on March 19, 2004)
 
 
4.5
Indenture for 9.5% Junior Subordinated Debentures Due February 24, 2044 (incorporated by reference to Exhibit 4.2 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on March 19, 2004)
 
 
4.6
Form of Certificate for 9.5% Trust Preferred Securities (Liquidation Amount of $25 per Trust Preferred Security) of Red Lion Hotels Capital Trust (incorporated by reference to Exhibit 4.3 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on March 19, 2004)
 
 
4.7
Form of 9.5% Junior Subordinated Debenture Due February 24, 2044 (incorporated by reference to Exhibit 4.4 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on March 19, 2004)
 
 
4.8
Trust Preferred Securities Guarantee Agreement dated February 24, 2004 (incorporated by reference to Exhibit 4.5 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on March 19, 2004)
 
 
4.9
Trust Common Securities Guarantee Agreement dated February 24, 2004 (incorporated by reference to Exhibit 4.6 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on March 19, 2004)
 
 
 
Executive Compensation Plans and Agreements
 
 
10.1
1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on May 15, 2001)
 
 
10.2
Form of Notice of Grant of Stock Options and Option Agreement for the 1998 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on November 15, 2005)
 
 
10.3
2006 Stock Incentive Plan (incorporated by reference to Appendix C to the Schedule 14A (Commission File No. 001‑13957) filed on April 20, 2006)
 
 
10.4
First Amendment to 2006 Stock Incentive Plan (incorporated by reference to Appendix A to the Schedule 14A (Commission File No. 001‑13957) filed on April 22, 2009)
 
 
10.5
Form of Restricted Stock Unit Agreement -- Notice of Grant for the 2006 Stock Incentive Plan (incorporated by reference to Exhibit 10 in the Current Report on Form 8-K (Commission File No. 001‑13957) filed on November 22, 2006)
 
 
10.6
Form of Notice of Grant of Stock Options and Option Agreement for the 2006 Stock Incentive Plan (incorporated by reference to Exhibit 20.1 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 14, 2006)


72
Table of Contents

Exhibit Number
Description
 
 
10.7
2008 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Schedule 14A (Commission File No. 001‑13957) filed on April 22, 2008)
 
 
10.8
First Amendment to 2008 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.8 in the Annual Report on Form 10‑K (Commission File No. 001‑13957) filed on March 11, 2010)
 
 
10.9
Executive Officer’s Incentive Pay Plan Effective January 1, 2014 (incorporated by reference to Exhibit 10.10 in the Annual Report on Form 10‑K (Commission File No. 001‑13957) filed on March 5, 2014)
 
 
10.10 **
Employment offer letter of Gregory T. Mount, as amended and restated on February 27, 2015
 
 
10.11 **
Employment offer letter of James A. Bell, as amended and restated on February 27, 2015
 
 
10.12 **
Employment offer letter of William J. Linehan, as amended and restated on February 27, 2015
 
 
10.13 **
Executive Employment Agreement between the Registrant and Thomas L. McKeirnan, as amended and restated on February 27, 2015
 
 
10.14 **
Employment offer letter of Harry G. Sladich, as amended and restated on February 27, 2015
 
 
10.15
Employment offer letter of Julie Shiflett, as amended and restated on May 21, 2013 (incorporated by reference to Exhibit 10.4 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 9, 2013)
 
 
10.16
Retention Agreement dated June 24, 2014 between the Registrant and Julie Shiflett (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 8, 2014)
 
 
 
Other Material Contracts
 
 
10.17
Second Amended and Restated Credit Agreement dated as of June 20, 2013 between the Registrant and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.1 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 9, 2013)
 
 
10.18
Term Note dated June 20, 2013 for $45,000,000 payable by the Registrant to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.2 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 9, 2013)
 
 
10.19
Revolving Line of Credit Note dated June 20, 2013 for $10,000,000 payable by the Registrant to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.3 in the Quarterly Report on Form 10‑Q (Commission File No. 001‑13957) filed on August 9, 2013)
 
 
 
** Exhibits filed with this report
 
 
 
 
 
 
 
 
 
 
 
 


73
Table of Contents

Exhibit Number
Description
 
 
 
 
 
 
21 **
List of Subsidiaries of Red Lion Hotels Corporation
 
 
23 **
Consent of BDO USA, LLP
 
 
24
Powers of Attorney (included on signature page)
 
 
31.1 **
Certification of principal executive officer pursuant to Exchange Act Rule 13a-14(a)
 
 
31.2 **
Certification of principal financial officer pursuant to Exchange Act Rule 13a-14(a)
 
 
32.1 **
Certification of principal executive officer pursuant to Exchange Act Rule 13a-14(b)
 
 
32.2 **
Certification of principal financial officer pursuant to Exchange Act Rule 13a-14(b)
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
 

** Exhibits filed with this report
 
 
 



74
Table of Contents

SIGNATURES

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

RED LION HOTELS CORPORATION
Registrant

By /s/ GREGORY T. MOUNT
Gregory T. Mount
President and Chief Executive Officer

Date: February 26, 2015

POWERS OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints Gregory T. Mount and James A. Bell and each of them severally, such person's true and lawful attorneys-in-fact and agents, with full power to act without the other and with full power of substitution and resubstitution, to execute in the name and on behalf of such person, individually and in each capacity stated below, any and all amendments to this report, and any and all other instruments necessary or incidental in connection herewith, and to file the same with the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

75
Table of Contents

Signature
 
Title
 
Date
 
 
 
 
 
 
 
 
 
/s/ GREGORY T. MOUNT
 
President and Chief Executive Officer
(Principal Executive Officer)
 
February 26, 2015
 
 
Gregory T. Mount
 
 
 
 
 
 
 
 
 
 
 
 
/s/ JAMES A. BELL
 
Executive Vice President, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
 
February 26, 2015
 
 
James A. Bell
 
 
 
 
 
 
 
 
 
 
 
 
/s/ MELVIN L. KEATING
 
Chairman of the Board of Directors
 
February 26, 2015
 
 
Melvin L. Keating
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ JAMES P. EVANS
 
Director
 
February 26, 2015
 
 
James P. Evans
 
 
 
 
 
 
 
 
 
 
 
 
/s/ RYLAND P. DAVIS
 
Director
 
February 26, 2015
 
 
Ryland P. Davis
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ RAYMOND R. BRANDSTROM
 
Director
 
February 26, 2015
 
 
Raymond R. Brandstrom
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ DAVID J. JOHNSON
 
Director
 
February 26, 2015
 
 
David J. Johnson
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ MICHAEL VERNON
 
Director
 
February 26, 2015
 
 
Michael Vernon
 
 
 
 
 
 
 
 
 
 
 
 
 
/s/ ROBERT G. WOLFE
 
Director
 
February 26, 2015
 
 
Robert G. Wolfe
 
 
 
 


76





February 27, 2015
Gregory T. Mount
RE: Red Lion Hotels Corporation President & CEO Offer Letter
Dear Greg:
This letter amends and restates your original offer letter dated January 9, 2014, effective as of the date set forth above.
On behalf of Red Lion Hotels Corporation (the “Company”), we are delighted to offer you the position of President and Chief Executive Officer. In your new position, you will report to the Board of Directors of the Company (the “Board”).
Your appointment as an executive officer of the Company is subject to formal appointment by the Board. After appointment, and so long as you are an executive officer of the Company, the details of your hire, your compensation and of any of your acquisitions and dispositions of stock of Red Lion would be subject to Securities Exchange Commission reporting rules.
The following outlines the employment package for your position.
START DATE: January 27, 2014.
POSITION: President and Chief Executive Officer. Your responsibilities will be those outlined in your job description, as may be modified, and as may be assigned to you from time to time by the Board.
COMPENSATION: Your position is classified as a salaried exempt position, which means it is exempt from state and federal overtime laws. You will be paid a bi-weekly base salary of $16,666.65, which is equivalent to $433,333.00 per year, subject to normal withholdings and payroll taxes. You will not be entitled to any additional compensation in the event you are appointed to serve as a director of the Company or as an officer or director of any of the Company’s direct or indirect subsidiaries or affiliates.
BONUS: In addition to your base salary, you are eligible to earn a bonus if you are actively employed throughout the applicable bonus period, and if you meet the other requirements outlined in the Variable Pay Plan (“VPP”), as may be amended from time to time. Bonus targets and goals for achievement of bonuses by executive officers are set by the Compensation Committee of the Board. Your annual bonus at target will be 50% of your base salary.
EQUITY GRANT: You will receive an annual grant of equity under the Company’s 2006 Stock Incentive Plan (or such successor plan as may be then in effect) valued at 50% of your annual base salary. Such equity grants have in recent years been in the form of restricted stock units (“RSUs”) and are typically granted to senior executives of the Company in May. To take into account the time from your Start Date to May, 2014, you will receive an initial RSU issuance valued at 65% of your base salary (based on the closing price of the Company’s stock on your Start Date) which will vest 25% on each of the next four anniversaries of your Start Date.

4825-9288-5794.03
34402.00043

INITIAL BONUS: You will receive a starting bonus of $40,000.00 in cash, to be paid with your first paycheck, subject to normal withholdings and payroll taxes. In the event you voluntarily terminate your employment with the Company prior to the first anniversary of your Start Date, you will be required to reimburse the Company $40,000.00 and you authorize the Company to deduct the entire amount from your final paycheck or from any other funds the Company then owes to you or is holding on your behalf.  Should the amount exceed your final paycheck, you agree to promptly reimburse the Company any remaining balance at that time. You will also receive a grant of RSUs valued at $60,000 based on the closing price of the Company’s stock on your Start Date that will vest in its entirety on the first anniversary of your Start Date.
RELOCATION COSTS:
The Company shall reimburse or pay for your following relocation expenses:
1.
Present home marketing and closing costs
2.
Packing/unpacking and movement of ordinary household goods through a full service carrier mutually agreed by you and the Company, to include two cars and up to $3,000 for specialty goods (such as a wine collection, fragile items, etc.).
3.
Temporary housing in Spokane, WA for up to 90 days
4.
Two trips to Spokane, WA for you and your family to review housing and school alternatives
5.
Closing costs for purchase of new home in Spokane, WA within twelve (12) months of your Start Date
6.
A relocation allowance of $5,000 to cover ancillary expenses, grossed up by 35% to the extent such expenses are not tax-deductible moving expenses to the Executive
If you are terminated for Cause (defined below) or leave the Company voluntarily within two years of your Start Date, you will be required to reimburse the Company a pro-rated amount for the balance of the relocation expenses and you authorize the Company to deduct this remaining balance from your final paycheck.  Should the balance exceed your final paycheck, you will be expected to reimburse the remaining balance.
BENEFITS: You will be eligible to participate in all standard employee benefit programs on the same terms and conditions as any Company Vice President, as they may be modified from time to time, including:

4825-9288-5794.03
34402.00043     2

•
Medical and Dental insurance eligible the first of the month following your Start Date
•
Employee Assistance Program (EAP)
•
Long Term Disability insurance coverage starting the first of the month following your Start Date
•
Flexible Spending Account - Section 125 Medical Reimbursement and Dependent Care accounts eligible within 30 days of your Start Date for the following 1 st  of the month effective date
•
AFLAC - Voluntary Cancer Protection, Short Term Disability, Personal Recovery and Accident / Injury Protection Plans available following Start Date and also during open enrollment periods
•
Paid vacation. You will be eligible for 4 weeks paid vacation each year of your employment. Within your first year of employment, this allowed vacation time does not apply to the Company Vacation Policy. As such, in your first year of service, these approved but unearned vacation hours will not be entered into our payroll system until requested and taken. Should your employment with the Company end before you have earned vacation hours under our normal vacation policy, this approved but unearned vacation will not be paid out at separation nor will it be subject to any rollover consideration. Following your one year anniversary your vacation hours will be subject to the Company vacation policy, as detailed in the Company benefits handbook.
•
Paid sick leave
•
A special paid Year-End Break (four paid days off) to be taken each calendar year between the Monday before Christmas and January 31
•
Eight (8) paid holidays each year and one (1) personal day
•
Participation in the Company 401(k) Retirement Savings Plan with a discretionary match made after the end of each calendar year.
•
Direct Deposit
•
Option to purchase shares of Company stock at a 15% discount through payroll deduction under Red Lion’s Employee Stock Purchase Plan
•
Voluntary Term Life and AD&D Insurance coverage eligible the first of the month following your Start Date
•
Continuing education reimbursement
•
Discounted hotel accommodations for you and your family in the Red Lion network
A benefit book will be provided to you upon the commencement of your employment, describing the Company’s benefits and eligibility requirements in detail. You will also receive a copy of the Company’s Associate Handbook with information regarding the Company’s policies and procedures.
SEVERANCE BENEFITS:
UPON TERMINATION WITHOUT CAUSE: If the Company terminates your employment without Cause (defined below) prior to the second anniversary of your Start Date, the Company will, (i) pay you a lump sum payment equal to one-half (1/2) your base annual salary for the then current fiscal year. If the Company terminates your employment without Cause after the second anniversary of your Start Date, the Company will pay you a lump sum payment equal to your base annual salary for the then current fiscal year.
UPON CHANGE OF CONTROL AND CONSTRUCTIVE TERMINATION: If, during the term of your employment with the Company, there is a Change of Control (defined below) and there is a Constructive Termination (defined below) of your employment without Cause within twelve (12) months after such Change of Control, you will, in lieu of severance under the preceding paragraph, be entitled to a lump sum payment equal to the sum of (a) one hundred fifty percent (150%) of your base annual salary for the then current fiscal year, plus (b) an amount equal to (i) one hundred fifty percent (150%) of your target annual bonus under the VPP for the then current fiscal year, multiplied by (ii) a fraction, the numerator of which is 365 plus the number of days elapsed in the then current fiscal year at the time of the termination and the denominator of which is 365. In addition, (A) the Company shall accelerate vesting on any portion of any equity grant previously made to you under the Company’s 2006 Stock Incentive Plan, or any successor

4825-9288-5794.03
34402.00043     3

plan, that would otherwise have vested after the date of the termination of your employment; and (B) all Company imposed restrictions under any restricted stock, restricted stock unit or other similar equity-based awards granted to you by the Company shall be terminated upon the termination of your employment, and the Company shall issue all common stock that underlies such awards but has not yet been issued; provided that (i) if the terms of any such award require you to pay monetary consideration for such stock, the stock underlying such award shall be issued only if you pay such consideration, and (ii) if any restrictions under any such award are performance-based, such restrictions shall terminate and the stock underlying such award shall be issued only if and to the extent expressly provided in the agreement evidencing the award.
As used herein, the term “Cause” means: (i) your willful and intentional failure or refusal to perform or observe any of your material duties, responsibilities or obligations, if such breach is not cured within 30 days after notice thereof to you by the Company, which notice shall state that such conduct shall, without cure, constitute Cause; (ii) any willful and intentional act by you involving fraud, theft, embezzlement or dishonesty affecting the Company; or (iii) your conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved.
“Constructive Termination” shall be deemed to occur if the Company terminates your employment without Cause, or if you voluntarily elect to terminate your employment within thirty (30) days after any of the following events occurring without your consent: (i) there is a significant reduction in your overall scope of duties, authorities and responsibilities (it being understood that a new position within a larger combined company is not a constructive termination if it is in the same area of operations and involves similar scope of management responsibility notwithstanding that you may not retain as senior a position overall within the larger combined company as your prior position within the Company); (ii) you are required to relocate your place of employment, other than a relocation within 40 miles of Spokane, Washington; or (iii) there is a reduction of more than 20% of your base salary or target bonus (other than any such reduction consistent with a general reduction of pay across the Company’s or its successor’s executive staff as a group, as an economic or strategic measure due to poor financial performance by the Company).
As used herein, the term “Change of Control” means the occurrence of any one of the following events: any merger or consolidation involving the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), adoption of a plan for liquidation of the Company or for sale of all or substantially all of the assets of the Company or other similar transaction or series of transactions involving the Company, or the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934).
The severance amounts hereunder shall, subject to COMPLIANCE WITH SECTION 409A below, be paid to you as soon as practicable following the occurrence of the event that entitles you to such payments.
COMPLIANCE WITH SECTION 409A
Notwithstanding any other provision of this letter to the contrary, the provision, time and manner of payment or distribution of all compensation and benefits provided by this letter (“Section 409A Deferred Compensation”) that constitute nonqualified deferred compensation subject to and not exempted from the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), shall be subject to, limited by and construed in accordance with the requirements of such section and all regulations and other guidance promulgated by the Secretary of the Treasury pursuant to such section (such section, regulations and other guidance being referred to herein as “Section 409A”), including the following:

4825-9288-5794.03
34402.00043     4

(a)     Separation from Service . Payments and benefits constituting Section 409A Deferred Compensation otherwise payable or provided pursuant to this letter upon your Constructive Termination shall be paid or provided only at the time of a termination of your employment that constitutes a Separation from Service. For the purposes of this letter, a “Separation from Service” is a separation from service within the meaning of Treasury Regulation Section 1.409A-1(h).
(b)     Six-Month Delay Applicable to Specified Employees . If, at the time of your Separation from Service, you are a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then any payments and benefits constituting Section 409A Deferred Compensation to be paid or provided pursuant to this letter upon your Separation from Service shall be paid or provided commencing on the later of (i) the first business day after the date that is six months after the date of such Separation from Service or, if earlier, the date of your death (in either case, the “Delayed Payment Date”), or (ii) the date or dates on which such Section 409A Deferred Compensation would otherwise be paid or provided in accordance with this letter without regard to this paragraph. All such payments and benefits that would, but for this paragraph, become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment Date.
(c)     Installments . Your right to receive any amounts payable hereunder in two or more installments shall be treated as a right to receive a series of separate payments and, accordingly, each such installment payment shall at all times be considered a separate and distinct payment for purposes of Section 409A.
(d)     Notice Upon Constructive Termination . If you voluntarily elect to terminate your employment under circumstances that would otherwise constitute a Constructive Termination under this letter, a Constructive Termination shall not be deemed to have occurred unless (i) you have given the Company written notice that a specified event has occurred giving you the right to voluntarily terminate your employment and have that be treated as a Constructive Termination, (ii) the Company fails to cure such event within a period of thirty (30) days after the receipt of such notice, and (iii) you voluntarily terminate your employment within thirty (30) days following the end of that period.
PROOF OF ELIGIBILITY TO WORK IN U.S.: Our offer is contingent upon your submission of satisfactory proof of your identity and your legal authorization to work in the United States. If you fail to submit this proof, federal law prohibits us from hiring you.
LOYALTY, NONDISCLOSURE OF CONFIDENTIAL INFORMATION: By accepting this offer, you agree that you will act at all times in the best interest of the Company. You also agree that, except as required for performance of your work, you will not use, disclose or publish any Confidential Information of the Company either during or after your employment, or remove any such information from the Company’s premises. Confidential Information includes, but is not limited to, lists of actual and prospective customers and clients, financial and personnel-related information, projections, operating procedures, budgets, reports, business or marketing plans, compilations of data created by the Company or by third parties for the benefit of the Company.
NONCOMPETITION AND NONSOLICITATION: You agree that during your employment with the Company and for any period that is equivalent to a period for which you are being paid severance after termination, you will not, directly or indirectly, engage or participate or make any financial investments in (other than ownership of up to 5% of the aggregate of any class of securities of any corporation if such securities are listed on a national stock exchange or under section 12(g) of the Securities Exchange Act of 1934) or become employed by, or act as an agent or principal of, or render advisory or other management services to or for, any Competing Business. As used herein the term “Competing Business” means any business which includes hotel ownership, hotel management, hotel services or hotel franchising that competes directly or indirectly with the Company.

4825-9288-5794.03
34402.00043     5

You also agree that during your employment at the Company and during any period that is equivalent to a period for which you are being paid severance after termination, you will not solicit, raid, entice or induce any person that then is or at any time during the twelve-month period prior to the end of your employment was an employee of the Company (other than a person whose employment with the Company has been terminated by the Company), to become employed by any person, firm or corporation.
COMPLAINT RESOLUTION: By accepting this offer with the Company, you also agree to continue to familiarize yourself with its policies, including its policies on equal opportunity and anti-harassment, and to promptly report to the appropriate the Company supervisors or officers any matters which require their attention.
KEY EMPLOYEE STATUS: You are regarded as a key employee under certain federal regulations governing family and medical leave. This status will require that you work closely with us in planning if you develop a need for family or medical leave.
NATURE OF EMPLOYMENT: As explained to you on the application for employment you submitted, the Company is an at-will employer. This means that your employment is not for a set amount of time; either you or the Company may terminate employment at any time, with or without cause.
DRUG SCREEN AND BACKGROUND CHECK: The Company has a vital interest in maintaining safe, healthful and efficient working conditions for its employees. With this in mind, employment at the Company is contingent on your satisfactory completion of a drug screen and background check.
ENTIRE AGREEMENT: This letter contains all of the terms of your employment with the Company, and supersedes any prior understandings or agreements, whether oral or in writing.
The Company reserves the right, subject to limitations and provisions of applicable law and regulations, to change, interpret, withdraw, or add to any of its policies, benefits, or terms and conditions of employment at its sole discretion, and without prior notice or consideration to any associate. The Company’s policies, benefits or terms and conditions of employment do not create a contract or make any promises of specific treatment.
Greg, we are pleased and proud to be adding your talents to a management team that is dedicated to making a difference in the communities we serve, creating fulfilling jobs and environments conducive to success, and providing the foundation for ongoing success of the Company.
Sincerely,
_/s/ Mel Keating ______________
Mel Keating
Chairman of the Board of Directors
Red Lion Hotels Corporation
Accepted as of the date first set forth above
_/s/ Gregory T. Mount _____________
Gregory T. Mount

4825-9288-5794.03
34402.00043     6



February 27, 2015
James A. Bell
2605 S. Arthur Street
Spokane, WA 99203
RE:
Red Lion Hotels Corporation Executive Vice President, Chief Financial Officer Offer Letter
Dear Jim:
This letter amends and restates your original offer letter dated October 9, 2014, effective as of the date set forth above.
On behalf of Red Lion Hotels Corporation (the “Company”), we are delighted to offer you the position of Executive Vice President, Chief Financial Officer. In your new position, you will report to the President & CEO of the Company.
Your appointment as an executive officer of the Company is subject to formal appointment by the Company’s Board of Directors (the “Board”). After appointment, and so long as you are an executive officer of the Company, the details of your hire, your compensation and any of your acquisitions and dispositions of stock of Red Lion would be subject to Securities Exchange Commission reporting rules.
The following outlines the employment package for your position.
START DATE: October 29, 2014.
POSITION: Executive Vice President, Chief Financial Officer. Your responsibilities will be those outlined in your job description, as may be modified, and as may be assigned to you from time to time by the President & CEO.
COMPENSATION: Your position is classified as a salaried exempt position, which means it is exempt from state and federal overtime laws. You will be paid a bi-weekly base salary of $11,656.81, which is equivalent to $303,077.00 per year, subject to normal withholdings and payroll taxes. You will not be entitled to any additional compensation in the event you are appointed to serve as a director of the Company or as an officer or director of any of the Company’s direct or indirect subsidiaries or affiliates.
BONUS: In addition to your base salary, you are eligible to earn a bonus if you are actively employed throughout the applicable bonus period, and if you meet the other requirements outlined in the Variable Pay Plan (“VPP”), as may be amended from time to time. Bonus targets and goals for achievement of bonuses by executive officers are set by the Compensation Committee of the Board. Your annual bonus at target will be 40% of your base salary. In your first year of participation in the VPP (from your Start Date through December 31, 2014), any bonus earned will be calculated based on your full salary and not pro-rated to reflect a partial year of employment or eligibility.
EQUITY GRANT: At the sole discretion of the Compensation Committee of the Company’s Board, you will receive an annual grant of equity under the Company’s 2006 Stock Incentive Plan (the “Plan”), or such successor plan as may be then in effect. Such equity grants have in recent years been in an amount equal to 40% of the Company’s Executive Vice Presidents’ base salary and have been in the form of restricted stock units (“RSUs”).

4834-2997-7634.03
34402.00043

Notwithstanding the terms of any document to the contrary, in the event that (i) a Change in Control (as defined in the Plan) occurs, and (ii) any equity grant previously made to you under the Plan or under any successor plan fails to become a Continuing Award (as defined in the Plan), then such equity award will vest 100% and all Company imposed restrictions on any restricted stock and restricted stock unit awards issued to you shall be terminated upon the consummation of such Change in Control.
INITIAL BONUS: You will receive a starting bonus of $25,000.00 in cash, to be paid on the first payroll following your Start Date, subject to normal withholdings and payroll taxes. In the event you voluntarily terminate your employment with the Company prior to the first anniversary of your Start Date, you will be required to reimburse the Company $25,000.00 and you authorize the Company to deduct the entire amount from your final paycheck or from any other funds the Company then owes to you or is holding on your behalf.  Should the amount exceed your final paycheck, you agree to promptly reimburse the Company any remaining balance at that time.
Additionally, you will receive a starting bonus of $25,000 in cash to be paid on the first payroll following July 1, 2015, subject to normal withholdings and payroll taxes. In the event you voluntarily terminate your employment with the Company prior to the second anniversary of your Start Date, you will be required to reimburse the Company $25,000.00 and you authorize the Company to deduct the entire amount from your final paycheck or from any other funds the Company then owes to you or is holding on your behalf. Should the amount exceed your final paycheck, you agree to promptly reimburse the Company any remaining balance at that time.
You will also receive a grant of 21,000 RSUs on your Start Date. This grant will vest annually in equal tranches of 25% each beginning in May 2015 (May 2015, May 2016, May 2017 and May 2018). You will also receive a separate grant of 10,000 RSUs on your Start Date that will vest in its entirety on the second year anniversary of your Start Date.
BENEFITS: You will be eligible to participate in the employee benefits programs that are available to any newly hired Company VP as well as other benefits that are subsequently added for VPs for which you are qualified as a named executive officer of the Company, as they may be modified from time to time, including:

4834-2997-7634.03
34402.00043     2

•
Medical and Dental insurance (eligible to enroll effective the first of the month following your Start Date);
•
;
•
Long Term Disability insurance coverage starting the first of the month following your Start Date (company paid);
•
Flexible Spending Account - Section 125 Medical Reimbursement and Dependent Care accounts eligible within 30 days of your Start Date for the following 1 st  of the month effective date;
•
AFLAC - Voluntary Cancer Protection, Short Term Disability, Personal Recovery and Accident / Injury Protection Plans available following your Start Date and also during open enrollment periods (employee paid);
•
Paid vacation. You will be eligible for 4 weeks paid vacation each year of your employment. Within your first year of employment, this allowed vacation time does not apply to the Company Vacation Policy. As such, in your first year of service, these approved but unearned vacation hours will not be entered into our payroll system until requested and taken. Should your employment with the Company end before you have earned vacation hours under our normal vacation policy, this approved but unearned vacation will not be paid out at separation nor will it be subject to any rollover consideration. Following your one year anniversary your vacation hours will be subject to the Company vacation policy, as detailed in the Company benefits handbook.
•
Paid sick leave, which accrues at approximately 8 hours per month to a maximum of 240 hours;
•
;
•
;
•
;
•
;
•
;
•
Voluntary Term Life and AD&D Insurance coverage eligible the first of the month following your Start Date (employee paid);
•
Continuing education reimbursement; and
•
Discounted hotel accommodations for you and your family in the Red Lion network.
A benefit book will be provided to you upon the commencement of your employment, describing the Company’s benefits and eligibility requirements in detail. You will also receive a copy of the Company’s Associate Handbook with information regarding the Company’s policies and procedures.
SEVERANCE BENEFITS:
UPON TERMINATION WITHOUT CAUSE: If the Company terminates your employment without Cause (defined below), the Company will pay you a lump sum payment equal to one-half (1/2) your base annual salary for the then current fiscal year.
UPON CHANGE OF CONTROL AND CONSTRUCTIVE TERMINATION: If, during the term of your employment with the Company, there is a Change of Control (defined below) and there is a Constructive Termination (defined below) of your employment without Cause within twelve (12) months after such Change of Control, you will, in lieu of severance under the preceding paragraph, be entitled to a lump sum payment equal to the sum of (a) your base annual salary for the then current fiscal year, plus (b) an amount equal to (i) your target annual bonus under the VPP for the then current fiscal year, multiplied by (ii) a fraction, the numerator of which is 365 plus the number of days elapsed in the then current fiscal year at the time of the termination and the denominator of which is 365. In addition, (A) the Company shall accelerate vesting on any portion of any equity grant previously made to you under the Company’s 2006 Stock Incentive Plan, or any successor plan, that would otherwise have vested after the date of the termination of your employment; and (B) all Company imposed restrictions under any restricted stock, restricted stock unit or other similar equity-based awards granted to you by the Company shall be terminated upon the termination of your

4834-2997-7634.03
34402.00043     3

employment, and the Company shall issue all common stock that underlies such awards but has not yet been issued; provided that (i) if the terms of any such award require you to pay monetary consideration for such stock, the stock underlying such award shall be issued only if you pay such consideration, and (ii) if any restrictions under any such award are performance-based, such restrictions shall terminate and the stock underlying such award shall be issued only if and to the extent expressly provided in the agreement evidencing the award.
As used herein, the term “Cause” means: (i) your willful and intentional failure or refusal to perform or observe any of your material duties, responsibilities or obligations, if such breach is not cured within 30 days after notice thereof to you by the Company, which notice shall state that such conduct shall, without cure, constitute Cause; (ii) any willful and intentional act by you involving fraud, theft, embezzlement or dishonesty affecting the Company; or (iii) your conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved.
“Constructive Termination” shall be deemed to occur if the Company terminates your employment without Cause, or if you voluntarily elect to terminate your employment within thirty (30) days after any of the following events occurring without your consent: (i) there is a significant reduction in your title or in the overall scope of your duties, authorities and responsibilities (it being understood that a new position within a larger combined company is not a constructive termination if it is in the same area of operations and involves similar scope of management responsibility notwithstanding that you may not retain as senior a position overall within the larger combined company as your prior position within the Company); or (ii) there is a reduction of more than 20% of your base salary or target bonus (other than any such reduction consistent with a general reduction of pay across the Company’s or its successor’s executive staff as a group, as an economic or strategic measure due to poor financial performance by the Company); or (iii) the Company has relocated the corporate headquarters more than thirty miles away from its current location at W 201 North River Drive, Spokane, WA 99201.
As used herein, the term “Change of Control” means the occurrence of any one of the following events: any merger or consolidation involving the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), adoption of a plan for liquidation of the Company or for sale of all or substantially all of the assets of the Company or other similar transaction or series of transactions involving the Company, or the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934).
The severance amounts hereunder shall, subject to COMPLIANCE WITH SECTION 409A below, be paid to you as soon as practicable following the occurrence of the event that entitles you to such payments.
COMPLIANCE WITH SECTION 409A
Notwithstanding any other provision of this letter to the contrary, the provision, time and manner of payment or distribution of all compensation and benefits provided by this letter (“Section 409A Deferred Compensation”) that constitute nonqualified deferred compensation subject to and not exempted from the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), shall be subject to, limited by and construed in accordance with the requirements of such section and all regulations and other guidance promulgated by the Secretary of the Treasury pursuant to such section (such section, regulations and other guidance being referred to herein as “Section 409A”), including the following:
(a)     Separation from Service . Payments and benefits constituting Section 409A Deferred Compensation otherwise payable or provided pursuant to this letter upon your Constructive Termination shall be paid or provided only at the

4834-2997-7634.03
34402.00043     4

time of a termination of your employment that constitutes a Separation from Service. For the purposes of this letter, a “Separation from Service” is a separation from service within the meaning of Treasury Regulation Section 1.409A-1(h).
(b)     Six-Month Delay Applicable to Specified Employees . If, at the time of your Separation from Service, you are a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then any payments and benefits constituting Section 409A Deferred Compensation to be paid or provided pursuant to this letter upon your Separation from Service shall be paid or provided commencing on the later of (i) the first business day after the date that is six months after the date of such Separation from Service or, if earlier, the date of your death (in either case, the “Delayed Payment Date”), or (ii) the date or dates on which such Section 409A Deferred Compensation would otherwise be paid or provided in accordance with this letter without regard to this paragraph. All such payments and benefits that would, but for this paragraph, become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment Date.
(c)     Installments . Your right to receive any amounts payable hereunder in two or more installments shall be treated as a right to receive a series of separate payments and, accordingly, each such installment payment shall at all times be considered a separate and distinct payment for purposes of Section 409A.
(d)     Notice Upon Constructive Termination . If you voluntarily elect to terminate your employment under circumstances that would otherwise constitute a Constructive Termination under this letter, a Constructive Termination shall not be deemed to have occurred unless (i) you have given the Company written notice that a specified event has occurred giving you the right to voluntarily terminate your employment and have that be treated as a Constructive Termination, (ii) the Company fails to cure such event within a period of thirty (30) days after the receipt of such notice, and (iii) you voluntarily terminate your employment within thirty (30) days following the end of that period.
PROOF OF ELIGIBILITY TO WORK IN U.S.: Our offer is contingent upon your submission of satisfactory proof of your identity and your legal authorization to work in the United States. If you fail to submit this proof within the required timeframe, federal law prohibits us from hiring you.
LOYALTY, NONDISCLOSURE OF CONFIDENTIAL INFORMATION: By accepting this offer, you agree that you will act at all times in the best interest of the Company. You also agree that, except as required for performance of your work, you will not use, disclose or publish any Confidential Information of the Company either during or after your employment, or remove any such information from the Company’s premises. Confidential Information includes, but is not limited to, lists of actual and prospective customers and clients, financial and personnel-related information, projections, operating procedures, budgets, reports, business or marketing plans, compilations of data created by the Company or by third parties for the benefit of the Company.
NONCOMPETITION AND NONSOLICITATION: You agree that during your employment with the Company and for any period that is equivalent to a period for which you are being paid severance after termination, you will not, directly or indirectly, engage or participate or make any financial investments in (other than ownership of up to 5% of the aggregate of any class of securities of any corporation if such securities are listed on a national stock exchange or under section 12(g) of the Securities Exchange Act of 1934) or become employed by, or act as an agent or principal of, or render advisory or other management services to or for, any Competing Business. As used herein the term “Competing Business” means any business which includes hotel ownership, hotel management, hotel services or hotel franchising that competes directly or indirectly with the Company.

4834-2997-7634.03
34402.00043     5

You also agree that during your employment at the Company and during any period that is equivalent to a period for which you are being paid severance after termination, you will not solicit, raid, entice or induce any person that then is or at any time during the twelve-month period prior to the end of your employment was an employee of the Company (other than a person whose employment with the Company has been terminated by the Company), to become employed by any person, firm or corporation.
COMPLAINT RESOLUTION: By accepting this offer with the Company, you also agree to continue to familiarize yourself with its policies, including its policies on equal opportunity and anti-harassment, and to promptly report to the appropriate Company supervisors or officers any matters which require their attention.
KEY EMPLOYEE STATUS: You are regarded as a key employee under certain federal regulations governing family and medical leave. This status will require that you work closely with us in planning if you develop a need for family or medical leave.
NATURE OF EMPLOYMENT: As explained to you on the application for employment you submitted, the Company is an at-will employer. This means that your employment is not for a set amount of time; either you or the Company may terminate employment at any time, with or without cause.
BACKGROUND CHECK: The Company has a vital interest in maintaining safe, healthful and efficient working conditions for its employees. With this in mind, employment at the Company is contingent on your satisfactory completion of a background and credit check.
ENTIRE AGREEMENT: This letter contains all of the terms of your employment with the Company, and supersedes any prior understandings or agreements, whether oral or in writing.
The Company reserves the right, subject to limitations and provisions of applicable law and regulations, to change, interpret, withdraw, or add to any of its policies, benefits, or terms and conditions of employment at its sole discretion, and without prior notice or consideration to any associate. The Company’s policies, benefits or terms and conditions of employment do not create a contract or make any promises of specific treatment.
Jim, we are pleased and proud to be adding your talents to a management team that is dedicated to making a difference in the communities we serve, creating fulfilling jobs and environments conducive to success, and providing the foundation for ongoing success of the Company.
Sincerely,
_/s/ Gregory T. Mount __________
Gregory T. Mount
President & Chief Executive Officer
Red Lion Hotels Corporation
Accepted as of the date first set forth above
_/s/ James A. Bell _____________
James A. Bell


4834-2997-7634.03
34402.00043     6



February 27, 2015
William J. Linehan
RE:
Red Lion Hotels Corporation Executive Vice President, Chief Marketing Officer Offer Letter
Dear Bill:
This letter amends and restates your original offer letter dated February 10, 2014, effective as of the date set forth above.
On behalf of Red Lion Hotels Corporation (the “Company”), we are delighted to offer you the position of Executive Vice President, Chief Marketing Officer. In your new position, you will report to the President & CEO of the Company.
Your appointment as an executive officer of the Company is subject to formal appointment by the Company’s Board of Directors (the “Board”). After appointment, and so long as you are an executive officer of the Company, the details of your hire, your compensation and of any of your acquisitions and dispositions of stock of Red Lion would be subject to Securities Exchange Commission reporting rules.
The following outlines the employment package for your position.
START DATE: March 17, 2014.
POSITION: Executive Vice President, Chief Marketing Officer. Your responsibilities will be those outlined in your job description, as may be modified, and as may be assigned to you from time to time by the President & CEO.
COMPENSATION: Your position is classified as a salaried exempt position, which means it is exempt from state and federal overtime laws. You will be paid a bi-weekly base salary of $11,211.54, which is equivalent to $291,500.00 per year, subject to normal withholdings and payroll taxes. You will not be entitled to any additional compensation in the event you are appointed to serve as a director of the Company or as an officer or director of any of the Company’s direct or indirect subsidiaries or affiliates.
BONUS: In addition to your base salary, you are eligible to earn a bonus if you are actively employed throughout the applicable bonus period, and if you meet the other requirements outlined in the Variable Pay Plan (“VPP”), as may be amended from time to time. Bonus targets and goals for achievement of bonuses by executive officers are set by the Compensation Committee of the Board. Your annual bonus at target will be 40% of your base salary.
EQUITY GRANT: At the sole discretion of the Compensation Committee of the Company’s Board, you will receive an annual grant of equity under the Company’s 2006 Stock Incentive Plan (or such successor plan as may be then in effect). Such equity grants have in recent years been in an amount equal to 40% of the Company’s Executive Vice Presidents’ base salary and have been in the form of restricted stock units (“RSUs”).
INITIAL BONUS: You will receive a starting bonus of $10,000.00 in cash, to be paid on April 22, 2014, subject to normal withholdings and payroll taxes. In the event you voluntarily terminate your employment with the Company prior to the first anniversary of your Start Date, you will be required to reimburse the Company $10,000.00 and you authorize the Company to deduct the entire amount from your final paycheck or from any other funds the Company

4846-2292-8930.03
34402.00043

then owes to you or is holding on your behalf.  Should the amount exceed your final paycheck, you agree to promptly reimburse the Company any remaining balance at that time. You will also receive a grant of RSUs valued at $30,000.00 based on the closing price of the Company’s stock on your date of Start Date that will vest in its entirety on the first anniversary of your Start Date.
RELOCATION: You shall not be required to relocate from your present residence as a condition of your employment. You will, however, be expected as part of your duties to spend up to two weeks per month at the corporate office in Spokane on average excluding holidays and to such places as may be directed from time to time by the Company. The Company will reimburse your reasonable travel expenses in accordance with its travel reimbursement policies as such policies may change from time to time.
BENEFITS: You will be eligible to participate in all standard employee benefit programs on the same terms and conditions as any Company Vice President, as they may be modified from time to time, including:
•
Medical and Dental insurance eligible the first of the month following your Start Date
•
Employee Assistance Program (EAP)
•
Long Term Disability insurance coverage starting the first of the month following your Start Date
•
Flexible Spending Account - Section 125 Medical Reimbursement and Dependent Care accounts eligible within 30 days of your Start Date for the following 1 st  of the month effective date
•
AFLAC - Voluntary Cancer Protection, Short Term Disability, Personal Recovery and Accident / Injury Protection Plans available following Start Date and also during open enrollment periods
•
Paid vacation. You will be eligible for 4 weeks paid vacation each year of your employment. Within your first year of employment, this allowed vacation time does not apply to the Company Vacation Policy. As such, in your first year of service, these approved but unearned vacation hours will not be entered into our payroll system until requested and taken. Should your employment with the Company end before you have earned vacation hours under our normal vacation policy, this approved but unearned vacation will not be paid out at separation nor will it be subject to any rollover consideration. Following your one year anniversary your vacation hours will be subject to the Company vacation policy, as detailed in the Company benefits handbook.
•
Paid sick leave
•
A special paid Year-End Break (four paid days off) to be taken each calendar year between the Monday before Christmas and January 31
•
Eight (8) paid holidays each year and one (1) personal day
•
Participation in the Company 401(k) Retirement Savings Plan with a discretionary match made after the end of each calendar year.
•
Direct Deposit
•
Option to purchase shares of Company stock at a 15% discount through payroll deduction under Red Lion’s Employee Stock Purchase Plan
•
Voluntary Term Life and AD&D Insurance coverage eligible the first of the month following your Start Date
•
Continuing education reimbursement
•
Discounted hotel accommodations for you and your family in the Red Lion network
A benefit book will be provided to you upon the commencement of your employment, describing the Company’s benefits and eligibility requirements in detail. You will also receive a copy of the Company’s Associate Handbook with information regarding the Company’s policies and procedures.
SEVERANCE BENEFITS:

4846-2292-8930.03
34402.00043     2

UPON TERMINATION WITHOUT CAUSE: If the Company terminates your employment without Cause (defined below), the Company will pay you a lump sum payment equal to one-half (1/2) your base annual salary for the then current fiscal year.
UPON CHANGE OF CONTROL AND CONSTRUCTIVE TERMINATION: If, during the term of your employment with the Company, there is a Change of Control (defined below) and there is a Constructive Termination (defined below) of your employment without Cause within twelve (12) months after such Change of Control, you will, in lieu of severance under the preceding paragraph, be entitled to a lump sum payment equal to the sum of (a) your base annual salary for the then current fiscal year, plus (b) an amount equal to (i) your target annual bonus under the VPP for the then current fiscal year, multiplied by (ii) a fraction, the numerator of which is 365 plus the number of days elapsed in the then current fiscal year at the time of the termination and the denominator of which is 365. In addition, (A) the Company shall accelerate vesting on any portion of any equity grant previously made to you under the Company’s 2006 Stock Incentive Plan, or any successor plan, that would otherwise have vested after the date of the termination of your employment; and (B) all Company imposed restrictions under any restricted stock, restricted stock unit or other similar equity-based awards granted to you by the Company shall be terminated upon the termination of your employment, and the Company shall issue all common stock that underlies such awards but has not yet been issued; provided that (i) if the terms of any such award require you to pay monetary consideration for such stock, the stock underlying such award shall be issued only if you pay such consideration, and (ii) if any restrictions under any such award are performance-based, such restrictions shall terminate and the stock underlying such award shall be issued only if and to the extent expressly provided in the agreement evidencing the award.
As used herein, the term “Cause” means: (i) your willful and intentional failure or refusal to perform or observe any of your material duties, responsibilities or obligations, if such breach is not cured within 30 days after notice thereof to you by the Company, which notice shall state that such conduct shall, without cure, constitute Cause; (ii) any willful and intentional act by you involving fraud, theft, embezzlement or dishonesty affecting the Company; or (iii) your conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved.
“Constructive Termination” shall be deemed to occur if the Company terminates your employment without Cause, or if you voluntarily elect to terminate your employment within thirty (30) days after any of the following events occurring without your consent: (i) there is a significant reduction in your overall scope of duties, authorities and responsibilities (it being understood that a new position within a larger combined company is not a constructive termination if it is in the same area of operations and involves similar scope of management responsibility notwithstanding that you may not retain as senior a position overall within the larger combined company as your prior position within the Company);; or (ii) there is a reduction of more than 20% of your base salary or target bonus (other than any such reduction consistent with a general reduction of pay across the Company’s or its successor’s executive staff as a group, as an economic or strategic measure due to poor financial performance by the Company).
As used herein, the term “Change of Control” means the occurrence of any one of the following events: any merger or consolidation involving the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), adoption of a plan for liquidation of the Company or for sale of all or substantially all of the assets of the Company or other similar transaction or series of transactions involving the Company, or the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934).

4846-2292-8930.03
34402.00043     3

The severance amounts hereunder shall, subject to COMPLIANCE WITH SECTION 409A below, be paid to you as soon as practicable following the occurrence of the event that entitles you to such payments.
COMPLIANCE WITH SECTION 409A
Notwithstanding any other provision of this letter to the contrary, the provision, time and manner of payment or distribution of all compensation and benefits provided by this letter (“Section 409A Deferred Compensation”) that constitute nonqualified deferred compensation subject to and not exempted from the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), shall be subject to, limited by and construed in accordance with the requirements of such section and all regulations and other guidance promulgated by the Secretary of the Treasury pursuant to such section (such section, regulations and other guidance being referred to herein as “Section 409A”), including the following:
(a)     Separation from Service . Payments and benefits constituting Section 409A Deferred Compensation otherwise payable or provided pursuant to this letter upon your Constructive Termination shall be paid or provided only at the time of a termination of your employment that constitutes a Separation from Service. For the purposes of this letter, a “Separation from Service” is a separation from service within the meaning of Treasury Regulation Section 1.409A-1(h).
(b)     Six-Month Delay Applicable to Specified Employees . If, at the time of your Separation from Service, you are a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then any payments and benefits constituting Section 409A Deferred Compensation to be paid or provided pursuant to this letter upon your Separation from Service shall be paid or provided commencing on the later of (i) the first business day after the date that is six months after the date of such Separation from Service or, if earlier, the date of your death (in either case, the “Delayed Payment Date”), or (ii) the date or dates on which such Section 409A Deferred Compensation would otherwise be paid or provided in accordance with this letter without regard to this paragraph. All such payments and benefits that would, but for this paragraph, become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment Date.
(c)     Installments . Your right to receive any amounts payable hereunder in two or more installments shall be treated as a right to receive a series of separate payments and, accordingly, each such installment payment shall at all times be considered a separate and distinct payment for purposes of Section 409A.
(d)     Notice Upon Constructive Termination . If you voluntarily elect to terminate your employment under circumstances that would otherwise constitute a Constructive Termination under this letter, a Constructive Termination shall not be deemed to have occurred unless (i) you have given the Company written notice that a specified event has occurred giving you the right to voluntarily terminate your employment and have that be treated as a Constructive Termination, (ii) the Company fails to cure such event within a period of thirty (30) days after the receipt of such notice, and (iii) you voluntarily terminate your employment within thirty (30) days following the end of that period.
PROOF OF ELIGIBILITY TO WORK IN U.S.: Our offer is contingent upon your submission of satisfactory proof of your identity and your legal authorization to work in the United States. If you fail to submit this proof, federal law prohibits us from hiring you.
LOYALTY, NONDISCLOSURE OF CONFIDENTIAL INFORMATION: By accepting this offer, you agree that you will act at all times in the best interest of the Company. You also agree that, except as required for performance of your work, you will not use, disclose or publish any Confidential Information of the Company either during or after your

4846-2292-8930.03
34402.00043     4

employment, or remove any such information from the Company’s premises. Confidential Information includes, but is not limited to, lists of actual and prospective customers and clients, financial and personnel-related information, projections, operating procedures, budgets, reports, business or marketing plans, compilations of data created by the Company or by third parties for the benefit of the Company.
NONCOMPETITION AND NONSOLICITATION: You agree that during your employment with the Company and for any period that is equivalent to a period for which you are being paid severance after termination, you will not, directly or indirectly, engage or participate or make any financial investments in (other than ownership of up to 5% of the aggregate of any class of securities of any corporation if such securities are listed on a national stock exchange or under section 12(g) of the Securities Exchange Act of 1934) or become employed by, or act as an agent or principal of, or render advisory or other management services to or for, any Competing Business. As used herein the term “Competing Business” means any business which includes hotel ownership, hotel management, hotel services or hotel franchising that competes directly or indirectly with the Company.
You also agree that during your employment at the Company and during any period that is equivalent to a period for which you are being paid severance after termination, you will not solicit, raid, entice or induce any person that then is or at any time during the twelve-month period prior to the end of your employment was an employee of the Company (other than a person whose employment with the Company has been terminated by the Company), to become employed by any person, firm or corporation.
COMPLAINT RESOLUTION: By accepting this offer with the Company, you also agree to continue to familiarize yourself with its policies, including its policies on equal opportunity and anti-harassment, and to promptly report to the appropriate the Company supervisors or officers any matters which require their attention.
KEY EMPLOYEE STATUS: You are regarded as a key employee under certain federal regulations governing family and medical leave. This status will require that you work closely with us in planning if you develop a need for family or medical leave.
NATURE OF EMPLOYMENT: As explained to you on the application for employment you submitted, the Company is an at-will employer. This means that your employment is not for a set amount of time; either you or the Company may terminate employment at any time, with or without cause.
DRUG SCREEN AND BACKGROUND CHECK: The Company has a vital interest in maintaining safe, healthful and efficient working conditions for its employees. With this in mind, employment at the Company is contingent on your satisfactory completion of a drug screen and background check.
ENTIRE AGREEMENT: This letter contains all of the terms of your employment with the Company, and supersedes any prior understandings or agreements, whether oral or in writing.
The Company reserves the right, subject to limitations and provisions of applicable law and regulations, to change, interpret, withdraw, or add to any of its policies, benefits, or terms and conditions of employment at its sole discretion, and without prior notice or consideration to any associate. The Company’s policies, benefits or terms and conditions of employment do not create a contract or make any promises of specific treatment.
Bill, we are pleased and proud to be adding your talents to a management team that is dedicated to making a difference in the communities we serve, creating fulfilling jobs and environments conducive to success, and providing the foundation for ongoing success of the Company.

4846-2292-8930.03
34402.00043     5

Sincerely,
_/s/ Gregory T. Mount _____________
Gregory T. Mount
President & Chief Executive Officer
Red Lion Hotels Corporation
Accepted as of the date first set forth above
_/s/ William J Linehan _____________
William J. Linehan

4846-2292-8930.03
34402.00043     6




EXECUTIVE EMPLOYMENT AGREEMENT


This EXECUTIVE EMPLOYMENT AGREEMENT is dated effective as of February 27, 2015 (“Effective Date”) by and between Red Lion Hotels Corporation, a Washington corporation (the “Company”), and Thomas L. McKeirnan (the “Executive”), and is intended to replace and supersede that certain Executive Employment Agreement between the Company and the Executive dated April 22, 2008.
The Company desires to employ the Executive in the capacity of Senior Vice President, General Counsel, and the Executive desires to be so employed, on the terms and subject to the conditions set forth in this agreement (the “Agreement”).
Now, therefore, in consideration of the mutual covenants set forth herein and other good and valuable consideration, the parties hereto hereby agree as follows:
1.    Employment; Term.

The Company employs the Executive, and the Executive agrees to be employed by the Company, upon the terms and subject to the conditions set forth herein, for a term commencing on the Effective Date and terminating on December 31, 2015 unless terminated earlier in accordance with Section 5 of this Agreement; provided, that, subject to earlier termination in accordance with Section 5 of this Agreement, such term shall automatically be extended from time to time for additional periods of one calendar year from the date on which it would otherwise expire unless the Executive, on one hand, or the Company, on the other, gives notice to the other party not less than 120 days prior to such date that he or it elects to permit the term of this Agreement to expire without extension on such date. The initial term of this Agreement as the same may be extended in accordance with the terms of this Agreement is hereinafter referred to as the “Term”.
2.    Positions; Conduct.

(a)    During the Term, the Executive will hold the title and office of, and serve in the position of, Executive Vice President, General Counsel of the Company. The Executive shall report to the Chief Executive Officer of the Company and shall perform such specific duties and services (including service as an officer, director or equivalent position of any direct or indirect subsidiary without additional compensation) as the Company shall reasonably request consistent with the Executive’s position.

(b)    During the Term, the Executive agrees to devote his full business time and attention to the business and affairs of the Company and to faithfully and diligently perform, to the best of his ability, all of his duties and responsibilities hereunder. Nothing in this Agreement shall preclude the Executive from devoting reasonable time and attention to the following (the “Exempted Activities”): (i) serving as an officer, director, trustee or member of any organization, (ii) engaging in charitable and community activities and (iii) managing his personal investments and affairs. In no event shall the Exempted Activities involve any material conflict of interest with the interests of the Company or, individually or collectively, interfere materially with the performance by the Executive of his duties and responsibilities under this Agreement.

(c)    The Executive’s office and place of rendering his services under this Agreement shall be in the principal executive offices of the Company. During the Term, the Company shall provide the Executive with executive office space, and administrative and secretarial assistance and other support services consistent with his positions and with his duties and responsibilities hereunder.

Thomas L. McKeirnan Executive Employment Agreement Page 1


3.    Board of Directors; Committees.

It is understood that the right to elect directors of the Company is by law vested in the stockholders and directors of the Company, and it is mutually contemplated that service on the board of directors of the Company (the “Board”) or any of the Company’s subsidiaries, or on any committee of the Board or the board of directors of any of the Company’s subsidiaries, is not a condition of this Agreement.
4.    Salary; Additional Compensation; Perquisites and Benefits.

(a)    During the Term, the Company will pay the Executive a base salary at an annual rate of not less than $265,974 per annum, subject to annual review by the Compensation Committee of the Board (the “Committee”) and, in the discretion of the Committee, to increase from time to time. Once increased, such base salary may not be decreased. Such salary shall be paid in periodic installments in accordance with the Company’s standard practice, but not less frequently than semi-monthly.

(b)    During the Term, Executive shall participate in the Company’s Executive Officers Variable Pay Plan and any successor or replacement bonus plans as may be adopted by the Committee from time to time for senior executives of the Company (the “VPP”). If Executive achieves the target performance goals determined under the VPP by the Committee for any calendar year, he shall be entitled to a bonus for that year equal to at least 30% of his base salary for that year (with any partial year pro rated).

(c)    The Board or the Committee in its sole discretion may award any additional or other amounts of cash, restricted stock or options or other equity based awards in respect of any whole or partial year during the Term.

(d)    The Company will reimburse the Executive, in accordance with its standard policies from time to time in effect, for all out-of-pocket business expenses as may be incurred by the Executive in the performance of his duties under this Agreement.

(e)    The Executive shall be entitled to vacation time to be credited and taken in accordance with the Company’s policy from time to time in effect for senior executives, which in any event shall not be less than a total of four weeks per calendar year.

(f)    The Company shall indemnify the Executive to the fullest extent permitted under the law of the State of Washington.

5.    Termination

(a)    The Term will terminate automatically upon the Executive’s death and, in the case of a determination of the Executive’s Disability, will terminate upon notice by the Company or the Executive to the other. As used herein the term “Disability” means the Executive’s inability to perform his duties and responsibilities under this Agreement for a period of more than 120 consecutive days, or for more than 180 days, whether or not consecutive, during any 365-day period, due to physical or mental incapacity or impairment. A determination of Disability will be made by a physician satisfactory to both the Executive and the Company; provided that if they cannot agree as to a physician, then each shall select a physician and these two together shall select a third physician whose determination of Disability shall be binding on the Executive and the Company. Should the Executive become incapacitated, his employment shall continue and all base salary and other compensation due the Executive hereunder shall continue to be paid through the date upon which the Executive’s employment is terminated for Disability in accordance with this section.


Thomas L. McKeirnan Executive Employment Agreement Page 2


(b)    The Term may be terminated by the Company upon notice to the Executive with or without “Cause” as defined herein.

(c)    The Term shall terminate automatically and without any further notice or action upon the Executive’s resignation or retirement from the Company, with or without Good Reason (as defined below), or if the Term is not extended pursuant to the proviso to Section 1 as a result of the Executive or the Company giving notice thereunder that it elects to permit the Term to expire without extension.
6.    Severance.

(a)    If the Term terminates for any reason, the Company will pay to the Executive an aggregate amount equal to the Executive’s accrued and unpaid base salary through the date of such termination, additional salary payments in lieu of the Executive’s accrued and unused vacation time, unreimbursed business expenses, unreimbursed medical, dental and other employee benefit expenses in accordance with the applicable plans, and any and all other benefits available to the Executive or Executive’s estate under then-existing Company benefit plans or policies, including if applicable death or Disability benefits, provided for (the “Standard Termination Payments”). Except as expressly provided below, payment of the Standard Termination Payments shall be the Company’s only obligation to Executive, and the Company shall incur no further liability, in connection with such termination.
(b)    If the Term is terminated upon the Executive’s death or Disability, the Company will pay to the Executive’s estate or the Executive, as the case may be (i) the Standard Termination Payments, (ii) a lump sum payment, if applicable, equal to the Executive’s earned but unpaid bonus under the VPP for the prior fiscal year, and (iii) a lump sum payment equal to the Executive’s target bonus under the VPP for the fiscal year in which the death or Disability occurs prorated for the portion of the year elapsed at the time of the termination. Such payments shall be the Company’s only obligations to Executive in such a case. The Company shall incur no further liability for such a termination.
(c)    If the Company terminates the Executive’s employment under this Agreement without Cause other than by reason of his death or Disability and such termination does not occur within twelve (12) months following a Change of Control (as defined below), or if the Term is not extended pursuant to the proviso to Section 1 as a result of the Company giving notice thereunder that it elects to permit the Term to expire without extension, or if the Executive terminates his employment hereunder within six months of any event constituting Good Reason and such termination does not occur within twelve (12) months following a Change of Control, the Company will (i) pay the Executive the Standard Termination Payments, (ii) pay the Executive a lump sum payment equal to the Executive’s earned but unpaid bonus under the VPP for the prior fiscal year, (iii) pay the Executive a lump sum payment equal to the Executive’s target bonus under the VPP for the fiscal year in which the termination occurs prorated for the portion of the year elapsed at the time of the termination, (iv) pay the Executive a lump sum payment equal to the Executive’s total cash compensation for the previous fiscal year, and (v) continue in effect the Executive’s benefits with respect to life, health and insurance plans or their equivalent for one year. Such payments and the obligations set forth below in Section 6(e) shall be the Company’s only obligations to Executive in such a case. The Company shall incur no further liability for such a termination.
(d)    If the Company terminates the Executive’s employment under this Agreement without Cause within twelve (12) months following a Change of Control (as defined below), or if the Executive terminates his employment hereunder within twelve (12) months following a Change of Control and within six (6) months following any event constituting Good Reason, the Company will (i) pay the Executive the Standard Termination Payments, (ii) pay the Executive a lump sum payment equal to the Executive’s earned but unpaid bonus under the VPP for the prior fiscal year, (iii) pay the Executive a lump sum payment equal to (A) the Executive’s target bonus under the VPP for the fiscal year in which the termination occurs, multiplied by (B) a fraction, the numerator of which is 365 plus the number of days elapsed in that fiscal year at the time of the termination and the denominator of which is 365, (iv) pay the Executive a lump sum payment equal to the Executive’s base annual salary for the fiscal year in which the

Thomas L. McKeirnan Executive Employment Agreement Page 3


termination occurs, and (v) continue in effect the Executive’s benefits with respect to life, health and insurance plans or their equivalent for one year. Such payments and the obligations set forth below in Section 6(e) shall be the Company’s only obligations to Executive in such a case. The Company shall incur no further liability for such a termination.
(e)    If the Company terminates the Executive’s employment under this Agreement without Cause other than by reason of his Disability, or if the Term is not extended pursuant to the proviso to Section 1 as a result of the Company giving notice thereunder that it elects to permit the Term to expire without extension, or if there is a Change of Control, or if the Executive terminates his employment hereunder within six months of any event constituting Good Reason, then (i) the Company shall accelerate vesting on any portion of any equity grant previously made to the Executive under the Company’s 2006 Stock Incentive Plan, or any successor plan, that would otherwise have vested after the date of the termination of the Executive’s employment; and (ii) all Company imposed restrictions under any restricted stock, restricted stock unit or other similar equity-based awards granted to the Executive by the Company shall be terminated upon the termination of the Executive’s employment, and the Company shall issue all common stock that underlies such awards but has not yet been issued; provided that (A) if the terms of any such award require the Executive to pay monetary consideration for such stock, the stock underlying such award shall be issued only if the Executive pays such consideration, and (B) if any restrictions under any such award are performance-based, such restrictions shall terminate and the stock underlying such award shall be issued only if and to the extent expressly provided in the agreement evidencing the award.
(f)    As used herein, the term “Cause” means: (i) the Executive’s willful and intentional failure or refusal to perform or observe any of his material duties, responsibilities or obligations set forth in this Agreement, if such breach is not cured within 30 days after notice thereof to the Executive by the Company, which notice shall state that such conduct shall, without cure, constitute Cause and makes specific reference to this Section 6(f); (ii) any willful and intentional act of the Executive involving fraud, theft, embezzlement or dishonesty affecting the Company; or (iii) the Executive’s conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved.
(g)    As used herein, the term “Good Reason” means the occurrence of any of the following, without the prior written consent of the Executive: (i) assignment to the Executive of duties materially inconsistent with the Executive’s position and responsibilities described in Section 2(a) hereof,; (ii) the removal of the Executive from the position described in Section 2(a); (iii) any material breach of this Agreement by the Company which is continuing; or (iv) a Change of Control; provided that a Change of Control shall only constitute Good Reason if, within 12 months after such Change of Control: (a) the Company changes its headquarters office location to a location more than 40 miles from the city limits of Spokane, Washington, (b) the Company changes Executive’s job title, or (c) Executive experiences a significant diminution in his duties or responsibilities or compensation compared to prior to the Change of Control, other than in connection with the termination of the Executive’s employment by the Company for Cause, by the Executive without Good Reason, or as a result of the Executive’s death or Disability. Notwithstanding anything to the contrary in this Section 6(g), the Executive shall not be deemed to have Good Reason unless the Executive gives the Company written notice that the specified conduct or event has occurred giving rise to Executive having Good Reason, and the Company fails to cure such conduct or event within thirty (30) days after the receipt of such notice.
(h)    As used herein, the term “Change of Control” means the occurrence of any one of the following events: any merger or consolidation involving the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), adoption of a plan for liquidation of the Company or for sale of all or substantially all of the assets of the Company or other similar transaction or series of transactions involving the Company, or the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934).
(i)    The amounts required to be paid and the benefits required to be made available to the Executive under this Section 6 are absolute. Under no circumstances shall the Executive, upon the termination of his

Thomas L. McKeirnan Executive Employment Agreement Page 4


employment hereunder, be required to seek alternative employment and, in the event that the Executive does secure other employment, no compensation or other benefits received in respect of such employment shall be set-off or in any other way limit or reduce the obligations of the Company under this Section 6.
(j)    The amounts required to be paid to the Executive under this Section 6, together with any Gross-Up Payment required to be paid to the Executive under Section 10(b), shall, subject to Section 11 below, be paid to the Executive as soon as practicable following the occurrence of the event that entitles the Executive to such payments.
7.    Confidential Information.

(a)    The Executive acknowledges that the Company and its Affiliates (as defined below) own and have developed and compiled, and will in the future own, develop and compile certain Confidential Information and that during the course of his rendering services to the Company Confidential Information has and will be disclosed to the Executive by the Company and its Affiliates. The Executive hereby agrees that, during the Term (except as required to conduct the business of the Company) and thereafter, he will not in any way use or disclose, furnish or make accessible to anyone, directly or indirectly, any Confidential Information of the Company or its Affiliates. As used herein, an “Affiliate” of a person or other entity means a person or other entity that directly or indirectly controls, is controlled by or is under common control with the person or other entity specified (including without limitation any investment entity managed by the person or other entity specified or a person or entity that directly or indirectly controls, is controlled by or under common control with the person or other entity specified).
(b)    As used herein, the term “Confidential Information” means any trade secrets, confidential or proprietary information, or other knowledge, know-how, information, documents or materials, owned, developed or possessed by the Company or one of its Affiliates pertaining to its businesses the confidentiality of which such company takes reasonable measures to protect, including, but not limited to, trade secrets, techniques, know-how (including designs, plans, procedures, processes and research records), software, computer programs, innovations, discoveries, improvements, research, developments, test results, reports, specifications, data, formats, marketing data and business plans and strategies, business opportunities, guest lists, vendor terms, agreements and other forms of documents, expansion plans, budgets, projections, and salary, staffing and employment information. Notwithstanding the foregoing, Confidential Information shall not in any event include information which (i) was generally known or generally available to the public prior to its disclosure to the Executive, (ii) becomes generally known or generally available to the public subsequent to its disclosure to the Executive through no wrongful act of the Executive, (iii) is or becomes available to the Executive from sources other than the Company or its Affiliates which sources are not known to the Executive to be under any duty of confidentiality with respect thereto or (iv) the Executive is required to disclose by applicable law or regulation or by order of any court or federal, state or local regulatory or administrative body (provided that the Executive provides the Company with prior notice of the contemplated disclosure and reasonably cooperates with the Company, at the Company’s sole expense, in seeking a protective order or other appropriate protection of such information).
8.    Restrictive Covenants.

(a)    The Executive agrees that during his employment hereunder and for a period of twelve months thereafter the Executive will not, directly or indirectly, engage or participate or make any financial investments in (other than ownership of up to 5% of the aggregate of any class of securities of any corporation if such securities are listed on a national stock exchange or registered under section 12(g) of the Securities Exchange Act of 1934) or become employed by, or act as an agent or principal of, or render advisory or other management services to or for, any Competing Business. As used herein the term “Competing Business” means any business which includes hotel ownership, hotel management, hotel

Thomas L. McKeirnan Executive Employment Agreement Page 5


services or hotel franchising and has a headquarters in Washington, Oregon, Idaho, Montana, Utah or Northern California, defined as the area from San Jose, California north to California’s border with Oregon.

(b)    The Executive agrees that during his employment hereunder and for a period of twenty-four months thereafter he will not solicit, raid, entice or induce any person that then is or at any time during the twelve-month period prior to the end of the Term was an employee of the Company or any of its Affiliates (other than a person whose employment with the Company or such Affiliate has been terminated by the Company or such Affiliate), to become employed by any person, firm or corporation.
9.    Specific Performance.

(a)    The Executive acknowledges that the services to be rendered by him hereunder are of a special, unique, extraordinary and personal character and that the Company would sustain irreparable harm in the event of a violation by the Executive of Section 7 or 8 hereof. Therefore, in addition to any other remedies available, the Company shall be entitled to specific enforcement and/or an injunction from any court of competent jurisdiction restraining the Executive from committing or continuing any such violation of this Agreement without proving actual damages or posting a bond or other security. Nothing herein shall be construed as prohibiting the Company from pursuing any other remedies available to it for such breach or threatened breach, including the recovery of damages.
(b)    If any of the restrictions on activities of the Executive contained in Sections 7 or 8 shall for any reason be held by a court of competent jurisdiction to be excessively broad as to duration, geographical scope or activity of subject, such restrictions shall be construed so as thereafter to be limited or reduced to be enforceable to the maximum extent compatible with the applicable law as it shall then appear; it being understood that by the execution of this Agreement the parties hereto regard such restrictions as reasonable and compatible with their respective rights.

(c)    Notwithstanding anything in this Agreement to the contrary, in the event that the Company fails to make any payment of any amounts or provide any of the benefits to the Executive when due as called for under Section 6 of this Agreement and such failure shall continue for twenty (20) days after notice thereof from the Executive, all restrictions on the activities of the Executive under Sections 7 and 8 shall be immediately and permanently terminated.
10.    Withholding; Additional Payments.

(a)    The parties agree that all payments to be made to the Executive by the Company pursuant to the Agreement shall be subject to all applicable withholding obligations.
(b)    The parties intend that the severance payments and other compensation provided for herein are reasonable compensation for Executive’s services to the Company and shall not constitute “excess parachute payments” within the meaning of Section 280G(b)(1) of the Internal Revenue Code of 1986, as amended (the “Code”). In the event the parties determine that the severance benefits or any other benefits or payments to which Executive is entitled pursuant to this Agreement or otherwise (collectively, the “Total Benefits”), will be subject to the excise tax imposed pursuant to Section 4999 of the Code (“Excise Tax”), the Company shall pay to Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by Executive, after deduction of any Excise Tax on the Total Benefits and any federal, state and local income taxes, Excise Tax, and FICA and Medicare withholding taxes upon the payment provided for by this Section, will be equal to the Total Benefits.

For purposes of this Section, Executive will be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Excise Tax is (or would be) payable and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive’s residence on the date of termination of Executive’s employment with the Company, net of the reduction in

Thomas L. McKeirnan Executive Employment Agreement Page 6


federal income taxes that could be obtained from deduction of such state and local taxes (calculated by assuming that any reduction under Section 68 of the Code in the amount of itemized deductions allowable to Executive applies first to reduce the amount of such state and local income taxes that would otherwise be deductible by Executive).

In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Executive’s employment, Executive shall repay to the Company, at the time the amount of such reduction in Excise Tax is fully determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax, federal, state and local income taxes and FICA and Medicare withholding taxes imposed on the Gross-Up Payment being repaid by Executive to the extent that such repayment results in a reduction in Excise Tax, FICA and Medicare withholding taxes and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Executive’s employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional Gross-Up Payment to Executive in respect of such excess (plus any interest, penalties or additions payable by Executive with respect to such excess) at the time that the amount of such excess is finally determined.

The parties’ obligations under this Section shall survive termination of this Agreement.
11.    Compliance with Section 409A
Notwithstanding any other provision of this Agreement to the contrary, the provision, time and manner of payment or distribution of all compensation and benefits provided by this Agreement (“Section 409A Deferred Compensation”) that constitute nonqualified deferred compensation subject to and not exempted from the requirements of Section 409A of the Code shall be subject to, limited by and construed in accordance with the requirements of such section and all regulations and other guidance promulgated by the Secretary of the Treasury pursuant to such section (such section, regulations and other guidance being referred to herein as “Section 409A”), including the following:
(a)     Separation from Service . Payments and benefits constituting Section 409A Deferred Compensation otherwise payable or provided pursuant to Section 6 upon the Executive’s termination of employment shall be paid or provided only at the time of a termination of the Executive’s employment that constitutes a Separation from Service. For the purposes of this Agreement, a “Separation from Service” is a separation from service within the meaning of Treasury Regulation Section 1.409A-1(h).
(b)     Six-Month Delay Applicable to Specified Employees . If, at the time of a Separation from Service of the Executive, the Executive is a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then any payments and benefits constituting Section 409A Deferred Compensation to be paid or provided pursuant to Section 6 upon the Separation from Service of the Executive shall be paid or provided commencing on the later of (i) the first business day after the date that is six months after the date of such Separation from Service or, if earlier, the date of death of the Executive (in either case, the “Delayed Payment Date”), or (ii) the date or dates on which such Section 409A Deferred Compensation would otherwise be paid or provided in accordance with Section 6. All such payments and benefits that would, but for this Section 11(b), become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment Date.
(c)     Installments . Executive’s right to receive any amounts payable hereunder in two or more installments shall be treated as a right to receive a series of separate payments and, accordingly, each such installment payment shall at all times be considered a separate and distinct payment for purposes of Section 409A.
12.    Notices .

Thomas L. McKeirnan Executive Employment Agreement Page 7


All notices required or permitted hereunder shall be in writing and shall be deemed given and received when delivered personally, four days after being mailed if sent by registered or certified mail, postage pre-paid, or by one day after delivery if sent by air courier (for next-day delivery) with evidence of receipt thereof or by facsimile with receipt confirmed by the addressee. Such notices shall be addressed respectively:
If to the Executive , to:
Thomas L. McKeirnan
235 E 9 th  
Spokane, WA 99202

If to the Company , to:
Red Lion Hotels Corporation
201 W. North River Drive
Spokane, WA 99201
Attn: Chief Executive Officer

or to any other address of which such party may have given notice to the other parties in the manner specified above.
13.    Miscellaneous.

(a)    This Agreement is a personal contract calling for the provision of unique services by the Executive, and the Executive’s rights and obligations hereunder may not be sold, transferred, assigned, pledged or hypothecated by the Executive. The rights and obligations of the Company hereunder will be binding upon and run in favor of its successors and assigns.

(b)    This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Washington.

(c)    Any controversy arising out of or relating to this Agreement or any breach hereof shall be settled by arbitration in Spokane, Washington by a single neutral arbitrator who shall be a retired federal or state court judge in accordance with the Commercial Arbitration Rules of the American Arbitration Association and judgment upon any award rendered may be entered in any court having jurisdiction thereof, except in the event of a controversy relating to any alleged violation by the Executive of Section 7 or 8 hereof, the Company shall be entitled to seek injunctive relief from a court of competent jurisdiction without the requirement to seek arbitration. In addition to all other relief, the substantially prevailing party in any arbitration or court action shall be entitled to his or its reasonable attorney fees and costs incurred by reason of the controversy (including any appellate review and bankruptcy or enforcement proceedings).

(d)    The headings of the various sections of this Agreement are for convenience of reference only and shall not define or limit any of the terms or provisions hereof.
 
(e)    The provisions of this Agreement which by their terms call for performance subsequent to the expiration or termination of the Term shall survive such expiration or termination.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the Effective Date first above written.

EXECUTIVE:                COMPANY:

RED LION HOTELS CORPORATION


Thomas L. McKeirnan Executive Employment Agreement Page 8


_/s/ Thomas L. McKeirnan_ ___        By _ /s/ Gregory T. Mount__________________________
Thomas L. McKeirnan
Gregory T. Mount, President and
Chief Executive Officer



Thomas L. McKeirnan Executive Employment Agreement Page 9



February 27, 2015
Mr. Harry Sladich
2808 South Park Lane
Spokane, WA 99212

Dear Harry,
This letter amends and restates your original offer letter dated March 17, 2010, effective as of the date set forth above.
On behalf of Red Lion Hotels Corporation, I am delighted to offer you the position of Executive Vice President, Hotel Operations and Sales. In your new position, you will report to the President and CEO of the Company.
The following outlines the employment package for your position.
POSITION: Full-time Executive Vice President, Hotel Operations and Sales, for Red Lion Hotels Corporation located in Spokane, Washington. Your responsibilities will be those outlined in your job description, as may be modified, and as may be assigned to you from time to time by the President and CEO.
START DATE: You will report to work no later than Monday, May 3, 2010.
COMPENSATION: Your position is classified as a salaried exempt position, which means it is exempt from state and federal overtime laws. You will be paid a bi-weekly base salary of $9,319.62, which is equivalent to $242,310.00 per year, subject to normal withholdings and payroll taxes. Our company’s pay periods run on a biweekly basis.
BONUS: In addition to your base salary, you may be eligible to earn a bonus of up to 100% of your base salary, if you are continuously and actively employed throughout the applicable bonus period, and if you meet the other requirements outlined in the bonus plan, as may be amended from time to time, and any other specific bonus criteria that may be determined by Red Lion from time to time.
ANNUAL PERFORMANCE EVALUATION: Performance evaluations are generally conducted annually on or about February 1 st of each year. Red Lion may modify your salary based upon the annual performance evaluation or other facts. Any wage increase that you may be eligible for will be pro-rated based on your Start Date in this position or any merit increases granted throughout the previous year.
BENEFITS: You will be eligible to participate in all standard employee benefit programs on the same terms and conditions as other Red Lion Vice Presidents, as they may be modified from time to time, including:

4850-9255-9906.03
34402.00043

   •
Medical and Dental insurance eligible the first of the month following your Start Date (company paid)
   •
Employee Assistance Program (EAP)
   •
Long Term Disability insurance coverage starting the first of the month following your Start Date
   •
Flexible Spending Account — Section 125 Medical Reimbursement and Dependent Care accounts eligible within 30 days of your Start Date for the following 1 st  of the month effective date
   •
AFLAC — Voluntary Cancer Protection, Short Term Disability, Personal Recovery and Accident / Injury Protection Plans available following Start Date and also during open enrollment periods
   •
Paid vacation
   •
Paid sick leave
   •
Two weeks paid vacation within your first year of employment and three weeks paid vacation beginning in your third year of employment. Any additional weeks in vacation allowance will be subject to standard timing within the company’s normal benefit program.
   •
A special paid Year-End Break to be taken each calendar year between December 25 and January 1
   •
Eight (8) paid holidays each year and one (1) personal day
   •
Participation in the RLH 401(k) Retirement Savings Plan with a discretionary match which, if made, will be on a graduated basis based on length of service, eligible on your Start Date
   •
Direct Deposit
   •
Option to purchase shares of RLH stock at a 15% discount through payroll deduction (Employee Stock Purchase Program)
   •
Voluntary Term Life and AD&D Insurance coverage eligible the first of the month following your Start Date
   •
Continuing education reimbursement
   •
Complimentary Red Lion Family of Hotels accommodations for you and your family
A benefit book will be provided to you upon the commencement of your employment, describing RLH’s benefits and eligibility requirements in detail. You will also receive a copy of RLH’s Associate Handbook with information regarding the Company’s policies and procedures.
SEVERANCE BENEFITS:
UPON CHANGE OF CONTROL AND CONSTRUCTIVE TERMINATION: If, during the term of your employment with the Company, there is a Change of Control (defined below) and there is a Constructive Termination (defined below) of your employment without Cause within twelve (12) months after such Change of Control, you will be entitled to a lump sum payment equal to the sum of (a) your base annual salary for the then current fiscal year, plus (b) an amount equal to (i) your target annual bonus under the VPP for the then current fiscal year, multiplied by (ii) a fraction, the numerator of which is 365 plus the number of days elapsed in the then current fiscal year at the time of the termination, and the denominator of which is 365. In addition, (A) the Company shall accelerate vesting on any portion of any equity grant previously made to you under the Company’s 2006 Stock Incentive Plan, or any successor plan, that would otherwise have vested after the date of the termination of your employment; and (B) all Company imposed restrictions under any restricted stock, restricted stock unit or other similar equity-based awards granted to you by the Company shall be terminated upon the termination of your employment, and the Company shall issue all common stock that underlies such awards but has not yet been issued; provided that (i) if the terms of any such award require you to pay monetary consideration for such stock, the stock underlying such award shall be issued only if you pay such

4850-9255-9906.03
34402.00043     2

consideration, and (ii) if any restrictions under any such award are performance-based, such restrictions shall terminate and the stock underlying such award shall be issued only if and to the extent expressly provided in the agreement evidencing the award.
As used herein, the term “Cause” means: (i) your willful and intentional failure or refusal to perform or observe any of your material duties, responsibilities or obligations, if such breach is not cured within 30 days after notice thereof to you by the Company, which notice shall state that such conduct shall, without cure, constitute Cause; (ii) any willful and intentional act by you involving fraud, theft, embezzlement or dishonesty affecting the Company; or (iii) your conviction of (or a plea of nolo contendere to) an offense which is a felony in the jurisdiction involved.
“Constructive Termination” shall be deemed to occur if the Company terminates your employment without Cause, or if you voluntarily elect to terminate your employment within thirty (30) days after any of the following events occurring without your consent: (i) there is a significant reduction in your overall scope of duties, authorities and responsibilities (it being understood that a new position within a larger combined company is not a constructive termination if it is in the same area of operations and involves similar scope of management responsibility notwithstanding that you may not retain as senior a position overall within the larger combined company as your prior position within the Company); (ii) you are required to relocate your place of employment, other than a relocation within 40 miles of Spokane, Washington; or (iii) there is a reduction of more than 20% of your base salary or target bonus (other than any such reduction consistent with a general reduction of pay across the Company’s or its successor’s executive staff as a group, as an economic or strategic measure due to poor financial performance by the Company).
As used herein, the term “Change of Control” means the occurrence of any one of the following events: any merger or consolidation involving the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934), adoption of a plan for liquidation of the Company or for sale of all or substantially all of the assets of the Company or other similar transaction or series of transactions involving the Company, or the acquisition of 50% or more of the combined voting power of the outstanding securities of the Company by a “person” or “group” (as those terms are defined in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934).
The severance amounts hereunder shall, subject to COMPLIANCE WITH SECTION 409A below, be paid to you as soon as practicable following the occurrence of the event that entitles you to such payments.
COMPLIANCE WITH SECTION 409A
Notwithstanding any other provision of this letter to the contrary, the provision, time and manner of payment or distribution of all compensation and benefits provided by this letter (“Section 409A Deferred Compensation”) that constitute nonqualified deferred compensation subject to and not exempted from the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), shall be subject to, limited by and construed in accordance with the requirements of such section and all regulations and other guidance promulgated by the Secretary of the Treasury pursuant to such section (such section, regulations and other guidance being referred to herein as “Section 409A”), including the following:
(a)     Separation from Service . Payments and benefits constituting Section 409A Deferred Compensation otherwise payable or provided pursuant to this letter upon your Constructive Termination shall be paid or provided only at the time of a termination of your employment that constitutes a Separation from Service. For the purposes of this letter, a “Separation from Service” is a separation from service within the meaning of Treasury Regulation Section 1.409A-1(h).

4850-9255-9906.03
34402.00043     3

(b)     Six-Month Delay Applicable to Specified Employees . If, at the time of your Separation from Service, you are a “specified employee” within the meaning of Section 409A(a)(2)(B)(i) of the Code, then any payments and benefits constituting Section 409A Deferred Compensation to be paid or provided pursuant to this letter upon your Separation from Service shall be paid or provided commencing on the later of (i) the first business day after the date that is six months after the date of such Separation from Service or, if earlier, the date of your death (in either case, the “Delayed Payment Date”), or (ii) the date or dates on which such Section 409A Deferred Compensation would otherwise be paid or provided in accordance with this letter without regard to this paragraph. All such payments and benefits that would, but for this paragraph, become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment Date.
(c)     Installments . Your right to receive any amounts payable hereunder in two or more installments shall be treated as a right to receive a series of separate payments and, accordingly, each such installment payment shall at all times be considered a separate and distinct payment for purposes of Section 409A.
(d)     Notice Upon Constructive Termination . If you voluntarily elect to terminate your employment under circumstances that would otherwise constitute a Constructive Termination under this letter, a Constructive Termination shall not be deemed to have occurred unless (i) you have given the Company written notice that a specified event has occurred giving you the right to voluntarily terminate your employment and have that be treated as a Constructive Termination, (ii) the Company fails to cure such event within a period of thirty (30) days after the receipt of such notice, and (iii) you voluntarily terminate your employment within thirty (30) days following the end of that period.
PROOF OF ELIGIBILITY TO WORK IN U.S.: Our offer is contingent upon your submission of satisfactory proof of your identity and your legal authorization to work in the United States. If you fail to submit this proof, federal law prohibits us from hiring you.
LOYALTY, NONDISCLOSURE OF CONFIDENTIAL INFORMATION: By accepting this offer, you agree that you will act at all times in the best interest of RLH. You also agree that, except as required for performance of your work, you will not use, disclose or publish any Confidential Information of RLH either during or after your employment, or remove any such information from the Company’s premises. Confidential Information includes, but is not limited to, lists of actual and prospective customers and clients, financial and personnel-related information, projections, operating procedures, budgets, reports, business or marketing plans, compilations of data created by RLH or by third parties for the benefit of RLH.
NONCOMPETITION AND NONSOLICITATION: You agree that during your employment with the Company and for any period that is equivalent to a period for which you are being paid severance after termination, you will not, directly or indirectly, engage or participate or make any financial investments in (other than ownership of up to 5% of the aggregate of any class of securities of any corporation if such securities are listed on a national stock exchange or under section 12(g) of the Securities Exchange Act of 1934) or become employed by, or act as an agent or principal of, or render advisory or other management services to or for, any Competing Business. As used herein the term “Competing Business” means any business which includes hotel ownership, hotel management, hotel services or hotel franchising that competes directly or indirectly with the Company.
You also agree that during your employment at the Company and during any period that is equivalent to a period for which you are being paid severance after termination, you will not solicit, raid, entice or induce any person that then is or at any time during the twelve-month period prior to the end of your employment was an employee of the Company (other than a person whose employment with the Company has been terminated by the Company), to become employed by any person, firm or corporation.

4850-9255-9906.03
34402.00043     4

COMPLAINT RESOLUTION: By accepting this offer with RLH, you also agree to continue to familiarize yourself with its policies, including its policies on equal opportunity and anti-harassment, and to promptly report to the appropriate RLH supervisors or officers any matters which require their attention.
KEY EMPLOYEE STATUS: You are regarded as a key employee under certain federal regulations governing family and medical leave. This status will require that you work closely with us in planning if you develop a need for family or medical leave.
NATURE OF EMPLOYMENT: As explained to you on the application for employment you submitted, RLH is an at-will employer. This means that your employment is not for a set amount of time; either you or the Company may terminate employment at any time, with or without cause.
DRUG SCREEN AND BACKGROUND CHECK: RLH has a vital interest in maintaining safe, healthful and efficient working conditions for its employees. With this in mind, employment at RLH is contingent on your satisfactory completion of a drug screen and background check.
ENTIRE AGREEMENT: This letter contains all of the terms of your employment with RLH, and supersedes any prior understandings or agreements, whether oral or in writing.
Red Lion Hotels Corporation reserves the right, subject to limitations and provisions of applicable law and regulations, to change, interpret, withdraw, or add to any of its policies, benefits, or terms and conditions of employment at its sole discretion, and without prior notice or consideration to any associate. The Company’s policies, benefits or terms and conditions of employment do not create a contract or make any promises of specific treatment.

4850-9255-9906.03
34402.00043     5

Harry, I am very pleased and proud to be adding your talents to our management team which is dedicated to making a difference in the communities we serve, creating fulfilling jobs and environments conducive to success, and providing the foundation for ongoing success of Red Lion Hotels Corporation.
Sincerely,
_/s/ Gregory T. Mount __________
Gregory T. Mount
President & Chief Executive Officer
Red Lion Hotels Corporation
Accepted as of the date first set forth above
_ _/s/ Harry Sladich __________
Harry Sladich

4850-9255-9906.03
34402.00043     6


Exhibit 21


RED LION HOTELS CORPORATION
List of Subsidiaries of Red Lion Hotels Corporation as of February 20, 2015



 
 
 
Name
 
State of Organization
 
 
 
Bellevue Inn, LLC (1)
 
Washington
ConnectUs Hotels, LLC (1)
 
Washington
Red Lion Hotels Holdings, Inc.  (1)
 
Delaware
TicketsWest.com, Inc.  (1)
 
Washington
Red Lion Hotels Franchising, Inc.  (1)
 
Washington
WestCoast Hotel Properties, Inc.  (1)
 
Washington
WHC805, LLC (1)
 
Washington
Red Lion Anaheim, LLC (1)
 
Washington
Red Lion Hotels Management, Inc.  (1)
 
Washington
Red Lion Hotels Limited Partnership (1) (2)
 
Delaware
RL Venture LLC (3)
 
Delaware




(1)
Each of these subsidiaries is directly or indirectly wholly owned by Red Lion Hotels Corporation.
(2)
This limited partnership is owned by Red Lion Hotels Corporation and Bellevue Inn, LLC.
(3)
Red Lion Hotels Corporation owns 55% of the member interests in this limited liability company, which wholly owns one Delaware limited liability company that wholly owns 12 limited liability companies, each of which holds one hotel property.





Exhibit 23




Consent of Independent Registered Public Accounting Firm

Red Lion Hotels Corporation
Spokane, Washington
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-135561, No. 333-60791, No. 333-15989 and 333-160485) of Red Lion Hotels Corporation of our reports dated February 26, 2015, relating to the consolidated financial statements, and the effectiveness of Red Lion Hotels Corporation’s internal control over financial reporting, which appear in this Form 10-K.


/s/ BDO USA, LLP


Spokane, WA
February 26, 2015

































Exhibit 31.1
RED LION HOTELS CORPORATION
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, Gregory T. Mount, certify that:
1.
I have reviewed this annual report on Form 10-K of Red Lion Hotels Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 26, 2015

/s/ Gregory T. Mount
Gregory T. Mount
President and Chief Executive Officer
(Principal Executive Officer)




Exhibit 31.2
RED LION HOTELS CORPORATION
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(a)
I, James A. Bell, certify that:
1.
I have reviewed this annual report on Form 10-K of Red Lion Hotels Corporation;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and;
5.
The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors:
a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 26, 2015

/s/ James A. Bell
James A. Bell
Executive Vice President, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)




Exhibit 32.1
RED LION HOTELS CORPORATION
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(b)
In connection with the annual report of Red Lion Hotels Corporation (the “Company”) on Form 10-K for the period ended December 31, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gregory T. Mount, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

February 26, 2015
 
/s/ Gregory T. Mount
Gregory T. Mount
President and Chief Executive Officer
(Principal Executive Officer)




Exhibit 32.2
RED LION HOTELS CORPORATION
CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13a-14(b)
In connection with the annual report of Red Lion Hotels Corporation (the “Company”) on Form 10-K for the period ended December 31, 2014 , as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James A. Bell, Executive Vice President, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

February 26, 2015
 
/s/ James A. Bell
James A. Bell
Executive Vice President, Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)