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

 

Our entertainment division, which comprised 6.3% of our total revenues from continuing operations in 2006, engages in event ticketing and the presentation of various entertainment productions. Historically, we have attracted additional hotel guests by cross-selling tickets to entertainment events through our TicketsWest subsidiary. Our entertainment division is vulnerable to risks associated with changes in general regional and economic conditions, the potential for significant competition and a change in consumer trends, among other risks. In addition, we face the risk that entertainment productions will not tour the regions in which we operate or that such productions will not choose us as a presenter or promoter.

 

If we are unable to locate lessees for our office and retail space, our revenues and cash flow may be adversely affected.

 

We own and lease to others over 297,000 square feet of office and retail space in Spokane, Washington and Kalispell, Montana. We are subject to the risk that leases for this space might not be renewed upon their expiration, the space may not be relet or the terms of renewal or reletting such space, including the cost of required renovations, might be less favorable to us than current lease terms. Vacancies could result due to the termination of a tenant’s tenancy, the tenant’s financial failure or a breach of the tenant’s obligations. We may be unable to locate tenants for rental spaces vacated in the future or we may be limited to renting space on terms unfavorable to us. Delays or difficulties in attracting tenants and costs incurred in preparing for tenant occupancy could reduce cash flow, decrease the value of a property and jeopardize our ability to pay our expenses.

 

None.

 

Our mix of business is balanced between group, business travelers and leisure travelers with the mix varying by location. It is our mission to provide personalized, exuberant service and to create the most memorable guest experience possible. We strive to provide caring service and comfortable accommodations at our hotels, at competitive prices consistent with the markets we serve, and seek to maintain consistent quality and offer services such as dining, fitness centers, business services or other ancillary services. Most of our hotels offer flexible meeting space to service the group and convention markets. In addition, guest rooms are well equipped with products important to these travelers. We continue to invest in our hotel properties to maintain or improve quality conditions. In focus groups and market research, the Red Lion name is associated with superior service and is consistently identified by consumers when asked about their full service lodging selection and habits.

 

Under the Red Lion name as of December 31, 2006, we owned 19 hotels, leased 13, managed one third-party owned hotel and had 25 franchise arrangements owned and operated by third parties. To support our owned, leased, managed 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 and manage our own central reservation call center with links to various travel agent global distribution systems (“GDS”) 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, 2006.

 

 

 

 

Owned and Leased Hotels

 

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

 

Leased hotels are those properties which we operate and manage and may have ownership of some or all of the equipment and personal property on site, however, the hotel facility and the underlying land is occupied under an operating lease from a third party. We recognize revenues and expenses on these properties, including lease expense. The most significant leases, with expiration dates ranging from 2020 to 2033 and having renewal provisions, typically require us to pay fixed monthly rent and variable rent based on a percentage of revenue if certain sales thresholds are reached. In addition, we are responsible for repairs and maintenance, operating expenses and management of operations. For additional information on leases, refer to Note 13 of Notes to Consolidated Financial Statements.

 

Managed Hotels

 

As of December 31, 2006, we managed one third-party owned hotel with a total of 254 rooms and 36,000 square feet of meeting space. Under the typical hotel management agreement, we manage virtually all aspects of the hotel’s operations while the hotel owner is responsible for operating and other expenses. Our management fees are based on a percentage of the hotel’s gross revenue plus an incentive fee based on operating performance.

 

Franchised Hotels

 

As of December 31, 2006, we had franchise agreements with 25 hotels that were owned and operated by third parties under our licensed brand name. These hotels had at that date a total of 3,867 rooms and 157,301 square feet of meeting space. Under our franchise agreements, we receive royalties for the use of the Red Lion brand name. 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 our system hotels and franchisees. We do not have management or operational responsibility for these hotels.

 

Discontinued Operations and Assets Held For Sale

 

In November 2004, we announced our plan to divest non-strategic assets, including eleven of our owned hotels, certain commercial office buildings and certain other non-core properties including condominium units and certain parcels of excess land (collectively referred to as “the divestment properties”). The activities of the hotels and commercial office buildings are considered discontinued operations under generally accepted accounting principles. The net impact of the operations of these business units has been segregated and separately disclosed on our consolidated statement of operations, comparative for all periods presented when they existed. Likewise, the assets and liabilities of the business units have been segregated and separately stated on our consolidated balance sheet for all periods presented when they existed. The remaining other real estate has been considered as held for sale under generally accepted accounting principles but does not meet the definition of a discontinued operation.

 

We completed the sale of seven of the eleven hotels and one commercial office building in 2005, and three hotels sold in 2006, resulting in gross proceeds of approximately $15.8 million and $52.8 million, respectively. Proceeds from the sales have been used to finance the company-wide renovation program previously discussed. In the fourth quarter of 2006, we listed for sale another commercial office and retail complex located in Spokane, Washington. In addition, we continue to pursue the divestment of the WestCoast Outlaw Hotel in Kalispell, Montana and we continue to hold as assets held for sale some surplus undeveloped land. For additional information, see Note 3 of Notes to Consolidated Financial Statements.

 

Other Operations

 

In addition to the operations discussed above, we maintain a direct ownership interest in a retail mall in Kalispell, Montana that is attached to our Red Lion hotel and other miscellaneous real estate investments.