Red Lion Hotels 10-Q 2010 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission File Number: 001-13957

Red Lion Hotels Corporation

(Exact name of registrant as specified in its charter)

Washington (State or other jurisdiction of incorporation or organization)	91-1032187 (I.R.S. Employer Identification No.)
201 W. North River Drive, Suite 100 Spokane Washington (Address of principal executive offices)	99201 (Zip Code)

Registrant’s Telephone Number, Including Area Code:(509) 459-6100

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

     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). Yeso Noo

     Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ 
Non-accelerated filer o
(Do not check if a smaller reporting company) Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ

     As of November 2, 2010, there were 18,654,263 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

Item No.	Description	Page No.
	PART I — FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited):
	Consolidated Balance Sheets September 30, 2010 and December 31, 2009	3
	Consolidated Statements of Operations Three and Nine Months Ended September 30, 2010 and 2009	4
	Consolidated Statements of Cash Flows Nine Months Ended September 30, 2010 and 2009	5
	Condensed Notes to Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4	Controls and Procedures	26
	PART II — OTHER INFORMATION
Item 1	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3	Defaults Upon Senior Securities	27
Item 4	Reserved	27
Item 5	Other Information	27
Item 6	Exhibits	28
	Signatures	29
EX-31.1
EX-31.2
EX-32.1
EX-32.2

2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

RED LION HOTELS CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, 2010 and December 31, 2009

	September 30,		December 31,
	2010		2009
	(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	3,046	$	3,881
Restricted cash		5,643		3,801
Accounts receivable, net		8,626		6,993
Inventories		1,329		1,341
Prepaid expenses and other		2,564		3,199
Assets of discontinued operations		—		61
Total current assets		21,208		19,276
Property and equipment, net		278,340		285,601
Goodwill		28,042		28,042
Intangible assets, net		10,067		10,199
Other assets, net		7,211		7,337
Noncurrent assets of discontinued operations		—		181
Total assets	$	344,868	$	350,636
LIABILITIES
Current liabilities:
Accounts payable	$	9,570	$	6,079
Accrued payroll and related benefits		3,417		2,402
Accrued interest payable		263		318
Advance deposits		725		496
Other accrued expenses		10,638		7,910
Revolving credit facility, due within one year		16,000		—
Current portion of long-term debt		20,481		3,171
Liabilities of discontinued operations		—		29
Total current liabilities		61,094		20,405
Revolving credit facility		—		26,000
Long-term debt, due after one year		57,483		77,151
Deferred income		8,068		8,638
Deferred income taxes		11,341		12,595
Debentures due Red Lion Hotels Capital Trust		30,825		30,825
Total liabilities		168,811		175,614
Commitments and contingencies
STOCKHOLDERS’ EQUITY
Red Lion Hotels Corporation stockholders’ equity
Preferred stock - 5,000,000 shares authorized; $0.01 par value; no shares issued or outstanding		—		—
Common stock - 50,000,000 shares authorized; $0.01 par value; 18,578,423 and 18,180,104 shares issued and outstanding		186		182
Additional paid-in capital, common stock		144,901		142,479
Retained earnings		30,957		32,346
Total Red Lion Hotels Corporation stockholders’ equity		176,044		175,007
Noncontrolling interest		13		15
Total equity		176,057		175,022
Total liabilities and stockholders’ equity	$	344,868	$	350,636

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

3

RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three and Nine Months Ended September 30, 2010 and 2009

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
				(In thousands, except per share data)
Revenue:
Hotels	$	46,221		$	44,756		$	115,473		$	115,929
Franchise		999			1,046			2,446			2,845
Entertainment		2,048			3,861			6,866			8,968
Other		575			592			1,815			1,986
Total revenues		49,843			50,255			126,600			129,728
Operating expenses:
Hotels		31,652			30,233			86,864			85,357
Franchise		789			646			2,177			1,764
Entertainment		1,545			2,987			5,544			7,375
Other		438			528			1,275			1,609
Depreciation and amortization		5,216			5,322			15,590			15,544
Hotel facility and land lease		1,987			1,750			5,512			5,271
Gain on asset dispositions, net		(118	)		(85	)		(273	)		(140	)
Undistributed corporate expenses		1,431			1,540			5,237			4,526
Total expenses		42,940			42,921			121,926			121,306
Operating income		6,903			7,334			4,674			8,422
Other income (expense):
Interest expense		(2,282	)		(2,268	)		(6,832	)		(6,297	)
Other income, net		265			49			312			111
Income (loss) before taxes		4,886			5,115			(1,846	)		2,236
Income tax expense (benefit)		1,729			1,723			(843	)		589
Net Income (loss) from continuing operations		3,157			3,392			(1,003	)		1,647
Discontinued Operations
Income (loss) from discontinued business units, net of income tax benefit (expense) of $36 and $(128) for the three months ended and $181 and $(97) for the nine months ended September 30, 2010 and 2009, respectively		(68	)		248			(351	)		188
Income (loss) on disposal of discontinued business units, net of income tax benefit (expense) of $20 and $0 for the three months ended and $20 and $3 for the nine months ended September 30, 2010 and 2009, respectively		(38	)		—			(38	)		(5	)
Net income (loss) from discontinued operations		(106	)		248			(389	)		183
Net Income (loss)		3,051			3,640			(1,392	)		1,830
Net income (loss) attributable to noncontrolling interest		(7	)		(5	)		3			(5	)
Net income (loss) attributable to Red Lion Hotels Corporation	$	3,044		$	3,635		$	(1,389	)	$	1,825
Earnings per share — Basic
Net income (loss) from continuing operations	$	0.17		$	0.19		$	(0.05	)	$	0.09
Net income (loss) from discontinued operations	$	(0.01	)	$	0.01		$	(0.02	)	$	0.01
Net income (loss) attributable to Red Lion Hotels Corporation	$	0.16		$	0.20		$	(0.07	)	$	0.10
Weighted average shares -basic		18,514			18,157			18,402			18,089
Earnings per share — Diluted
Net income (loss) from continuing operations	$	0.17		$	0.19		$	(0.05	)	$	0.09
Net income (loss) from discontinued operations	$	(0.01	)	$	0.01		$	(0.02	)	$	0.01
Net income (loss) attributable to Red Lion Hotels Corporation	$	0.16		$	0.20		$	(0.07	)	$	0.10
Weighted average shares -diluted		18,710			18,306			18,402			18,119

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

4

RED LION HOTELS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, 2010 and 2009

	Nine months ended September 30,
	2010			2009
	(In thousands)
Operating activities:
Net income (loss)	$	(1,392	)	$	1,830
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		15,624			15,603
Gain on disposition of property, equipment and other assets, net		(273	)		(132	)
Impairment Loss		58			—
Deferred income tax provision (benefit)		(1,254	)		872
Equity in investments		11			16
Stock based compensation expense		1,341			941
Provision for doubtful accounts		196			103
Change in current assets and liabilities:
Restricted cash		(1,842	)		178
Accounts receivable		(2,171	)		1,531
Inventories		21			123
Prepaid expenses and other		680			(679	)
Accounts payable		3,490			(5,344	)
Accrued payroll and related benefits		1,252			(1,011	)
Accrued interest payable		(55	)		1
Deferred income		—			900
Other accrued expenses and advance deposits		2,713			4,316
Net cash (used in) provided by operating activities		18,399			19,248
Investing activities:
Purchases of property and equipment		(7,902	)		(15,106	)
Proceeds from disposition of property and equipment		100			16
Advances to Red Lion Hotels Capital Trust		(27	)		(27	)
Other, net		395			(1,021	)
Net cash (used in) provided by investing activities		(7,434	)		(16,138	)
Financing activities:
Borrowings on revolving credit facility		10,500			5,000
Repayment of revolving credit facility		(20,500	)		(19,000	)
Repayment of long-term debt		(2,358	)		(2,237	)
Proceeds from stock options exercised		800			—
Proceeds from issuance of common stock under employee stock purchase plan		130			119
Additions to deferred financing costs		(292	)		(153	)
Common stock redeemed		(84	)		(11	)
Net cash (used in) provided by financing activities		(11,804	)		(16,282	)
Net cash in discontinued operations		4			(15	)
Change in cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents		(835	)		(13,187	)
Cash and cash equivalents at beginning of period		3,881			18,216
Cash and cash equivalents at end of period	$	3,046		$	5,029
Supplemental disclosure of cash flow information:
Cash paid during periods for:
Income taxes	$	—		$	—
Interest on long-term debt	$	6,777		$	6,752
Cash received during periods for:
Income taxes	$	672		$	—
Noncash investing activities:
Conversion of accounts receivable to note receivable	$	377		$	—

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

5

RED LION HOTELS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization

     Red Lion Hotels Corporation (“Red Lion” or the “Company”) is a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, operation and franchising of midscale full, select and limited service hotels under the Red Lion brand. As of September 30, 2010, the Red Lion system of hotels contained 43 hotels located in eight states and one Canadian province, with 8,384 rooms and 419,987 square feet of meeting space. As of that date, the Company operated 31 hotels, of which 19 are wholly owned and 12 are leased, and franchised 12 hotels that were owned and operated by various third-party franchisees.

     The Company is also engaged in entertainment operations, which includes TicketsWest.com, Inc., and through which the Company derives revenues from event ticket distribution and promotion and presentation of a variety of entertainment productions. In addition to hotel operations, the Company maintains a direct ownership interest in a retail mall that is attached to one of its hotels and in other miscellaneous real estate investments.

     The Company was incorporated in the state of Washington in April 1978, and operated hotels until 1999 under various brand names including Cavanaughs Hotels. In 1999, the Company acquired WestCoast Hotels, Inc., and rebranded its Cavanaughs hotels to the WestCoast brand — changing the Company’s name to WestCoast Hospitality Corporation. In 2001, the Company acquired Red Lion Hotels, Inc. In September 2005, after rebranding most of its WestCoast hotels to the Red Lion brand, the Company changed its name to Red Lion Hotels Corporation. The financial statements encompass the accounts of Red Lion Hotels Corporation and all of its consolidated subsidiaries, including its 100% ownership of Red Lion Hotels Holdings, Inc., and Red Lion Hotels Franchising, Inc., and its approximately 99% ownership of Red Lion Hotels Limited Partnership (“RLHLP”). The 1% noncontrolling interest in RLHLP has been classified as a component of equity separate from equity of Red Lion Hotels Corporation.

     The financial statements also include an equity method investment in a 19.9% owned real estate venture, as well as certain cost method investments in various entities included as other assets, over which the Company does not exercise significant influence. In addition, the Company holds a 3% common interest in Red Lion Hotels Capital Trust (the “Trust”) that is considered a variable interest entity. The Company is not the primary beneficiary of the Trust; thus, it is treated as an equity method investment. As more fully discussed in Note 12, the consolidated financial statements also include all of the activities of the Company’s cooperative marketing fund, also a variable interest entity.

     All significant inter-company and inter-segment transactions and accounts have been eliminated upon consolidation. Certain amounts disclosed in prior period statements have been reclassified to conform to the current period presentation.

2. Basis of Presentation

     The unaudited consolidated financial statements included herein have been prepared by Red Lion pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Certain information and footnote disclosures normally included in financial statements have been condensed or omitted as permitted by such rules and regulations.

     The consolidated balance sheet as of December 31, 2009 has been compiled from the audited balance sheet as of such date. The Company believes the disclosures included herein are adequate; however, they should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2009, previously filed with the SEC on Form 10-K.

     In the opinion of management, these unaudited consolidated financial statements contain all of the adjustments of a normal and recurring nature necessary to present fairly the consolidated financial position of the Company at September 30, 2010, the consolidated results of operations for the three and nine months ended September 30, 2010 and 2009, and the consolidated cash flows for the nine months ended September 30, 2010 and 2009. The results of operations for the periods presented may not be indicative of those which may be expected for a full year.

     Management makes estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting period and the disclosures of contingent liabilities. Actual results could materially differ from those estimates.

6

3. Liquidity, Financial Condition and Risks of Refinancing Debt

     As of September 30, 2010 the Company had total long term debt maturing within one year of $20.5 million. In addition, another $5.0 million of debt that matures in October 2011 is included in the balance of long term debt, due after one year. Lastly, the outstanding balance under the Company’s revolving credit facility at September 30, 2010 of $16.0 million is included as a current liability because the facility expires in September 2011.

     The Company’s current liabilities at September 30, 2010 exceeded its current assets by $39.9 million. The Company is actively pursuing financing alternatives to address maturing debts and to supplement working capital. While the Company continues to be in compliance with its debt agreements, to generate positive cash flow from operations and positive operating income, and to have adequate liquidity to fund its ongoing operating activities, there can be no assurance that it will be able to refinance its debts when they mature.

     In addition to or in place of a new credit facility and new term debt, the Company may seek to raise additional funds through public or private financings, strategic relationships, sale of assets or other arrangements. The Company cannot assure that such funds, if needed, will be available on terms attractive to it, or at all. Furthermore, any additional equity financings may be dilutive to shareholders and debt financing, if available, may involve covenants that place substantial restrictions on the Company’s business. The Company’s failure to raise capital as and when needed could have a material adverse impact on its financial condition and its ability to pursue business strategies.

4. Property and Equipment

     Property and equipment used in continuing operations is summarized as follows (in thousands):

	September 30,			December 31,
	2010			2009
Buildings and equipment	$	302,420		$	295,704
Furniture and fixtures		46,822			46,226
Landscaping and land improvements		9,022			8,959
		358,264			350,889
Less accumulated depreciation and amortization		(148,667	)		(134,063	)
		209,597			216,826
Land		63,430			66,146
Construction in progress		5,313			2,629
	$	278,340		$	285,601

5. Notes Payable to Bank and Long-Term Debt

     The Company has a revolving credit facility with a syndicate of banks led by Credit Agricole Corporate and Investment Bank. Borrowings under the facility may be used to finance acquisitions or capital expenditures, for working capital and for other general corporate purposes. The obligations under the facility are collateralized by a company owned hotel, including a deed of trust and security agreement covering all of its assets. Because the facility expires in less than a year on September 13, 2011, the amounts owed under the facility at September 30, 2010 are reflected as a current liability.

     The credit facility requires the Company to comply with certain customary affirmative and negative covenants, the most restrictive of which are financial covenants dealing with leverage, interest coverage and debt service coverage. In February 2010, the Company amended the terms of the facility to modify the total leverage ratio and senior leverage ratio covenants, increase the interest rate on Eurodollar borrowings to LIBOR plus 3.25% and reduce borrowing capacity to $37.5 million. At September 30, 2010, $16.0 million was outstanding under the facility at an interest rate of 3.51%, and the Company was in compliance with all of its covenants.

     The Company also owes $12.6 million to a bank under a property note bearing interest at the bank’s prime rate and having covenants mirroring those in the credit facility. The interest rate on the outstanding balance at September 30, 2010 was 3.25%, and the Company was in compliance with all covenants.

     In addition to the credit facility, additional debt totaling $17.2 million under two notes maturing in September 2011 moved into current liabilities in the third quarter of 2010. An additional $5.0 million of debt matures in October 2011 and will move to current during the fourth quarter of 2010. The Company is actively pursuing financing alternatives to address maturing debts and to supplement working capital. This is more fully discussed in Note 3 “Liquidity, Financial Condition and Risks of Refinancing Debt”.

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6. Business Segments

     As of September 30, 2010 and December 31, 2009, the Company had three operating segments — hotels, franchise and entertainment. The “other” segment consists primarily of a retail mall and miscellaneous revenues and expenses, cash and cash equivalents, certain receivables and certain property and equipment which are not specifically associated with an operating segment. Management reviews and evaluates the operating segments exclusive of interest expense; therefore, it has not been allocated to the segments. All balances have been presented after the elimination of inter-segment and intra-segment revenues. Selected information with respect to continuing operations is as provided below (in thousands).

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Revenues:
Hotels	$	46,221		$	44,756		$	115,473		$	115,929
Franchise		999			1,046			2,446			2,845
Entertainment		2,048			3,861			6,866			8,968
Other		575			592			1,815			1,986
	$	49,843		$	50,255		$	126,600		$	129,728
Operating income (loss):
Hotels	$	8,383		$	8,241		$	10,055		$	12,101
Franchise		(97	)		319			(224	)		824
Entertainment		416			777			1,049			1,279
Other		(1,799	)		(2,003	)		(6,206	)		(5,782	)
	$	6,903		$	7,334		$	4,674		$	8,422

	September 30,		December 31,
	2010		2009
Identifiable assets:
Hotels	$	300,409	$	300,880
Franchise		17,308		16,853
Entertainment		5,094		5,143
Other		22,057		27,518
	$	344,868	$	350,394

7. Earnings (Loss) Per Share

     The following table presents a reconciliation of the numerators and denominators used in the basic and diluted income (loss) per share computations for the three and nine months ended September 30, 2010 and 2009 (in thousands, except per share amounts):

8

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Numerator — basic and diluted:
Net income (loss) from continuing operations	$	3,157		$	3,392		$	(1,003	)	$	1,647
Net income (loss) from discontinued operations	$	(106	)	$	248		$	(389	)	$	183
Net income (loss) attributable to noncontrolling interest		(7	)		(5	)		3			(5	)
Net income (loss) attributable to Red Lion Hotels Corporation	$	3,044		$	3,635		$	(1,389	)	$	1,825
Denominator:
Weighted average shares — basic		18,514			18,157			18,402			18,089
Weighted average shares — diluted		18,710			18,306			18,402			18,119
Earnings per share from continuing operations
Basic	$	0.17		$	0.19		$	(0.05	)	$	0.09
Diluted	$	0.17		$	0.19		$	(0.05	)	$	0.09
Earnings per share from discontinued operations
Basic	$	(0.01	)	$	0.01		$	(0.02	)	$	0.01
Diluted	$	(0.01	)	$	0.01		$	(0.02	)	$	0.01
Earnings per share attributable to Red Lion Hotels Corporation:
Basic	$	0.16		$	0.20		$	(0.07	)	$	0.10
Diluted	$	0.16		$	0.20		$	(0.07	)	$	0.10

     For the three months ended September 30, 2010, 109,924 of the 793,083 options to purchase common shares outstanding as of that date were considered dilutive as were 42,619of the 229,547 restricted stock units outstanding. For the three months ended September 30, 2009, 72,258 of the 1,212,771 options to purchase common shares outstanding as of that date were considered dilutive. Of the 250,195 restricted stock units outstanding, 31,310 shares were considered dilutive during the third quarter of 2009. For both comparative periods, all of the 44,837 convertible operating partnership units, respectively, were considered dilutive.

     For the nine months ended September 30, 2010, none of the 793,083 options to purchase common shares outstanding as of that date were considered dilutive due to the net loss reported. Similarly, none of the 229,547 restricted stock units outstanding were considered dilutive due to the net loss reported. For the nine months ended September 30, 2009, none of the 1,212,771 options to purchase common shares outstanding as of that date were considered dilutive as the grant date stock price of all of these options was above the weighted average price of the Company’s common stock during that period. Similarly, none of the 250,195 restricted stock units outstanding were considered dilutive. For the nine months ended September 30, 2010 none of the 44,837 convertible operating partnership units were considered dilutive due the net loss in the period. For the nine months ended September 30, 2009, 29,946 of the 44,837 convertible operating partnership units were considered dilutive.

8. Change in Executive Officers

     In January 2010, the Company terminated the employment agreement of its President and Chief Executive Officer, who was also a director. In connection therewith, the Company recorded expense of $1.2 million for separation and other benefits during the first quarter of 2010, including $0.4 million in stock-based compensation expense. Under the terms of the agreement, 84,433 of the former executive’s restricted stock units vested. Pursuant to a separate agreement entered into in connection with the termination, the exercise period for 80,000 vested stock options was extended for six months. Cash amounts due related to this transaction were paid in July 2010.

9. Stock Based Compensation

     The 2006 Stock Incentive Plan authorizes the grant or issuance of various option and other awards including restricted stock units and other stock-based compensation. The plan was approved by the shareholders of the Company and allows awards of 2.0 million shares, subject to adjustments for stock splits, stock dividends and similar events. In May 2010, the board of directors granted to executive officers and other key employees 5,864 options to purchase common stock and 147,039 unvested restricted stock units, all of which will vest 25% each year for four years. In addition, directors of the Company were granted an aggregate of 23,415 shares of common stock with a fair value of $0.2 million as part of the existing director compensation arrangement. As of September 30, 2010, there were 1,122,163 shares of common stock available for issuance pursuant to future stock option grants or other awards under the 2006 plan.

     In the third quarter and first nine months of 2010, the Company recognized approximately $0.1 million and $0.3 million, respectively, in compensation expense related to options, compared to $0.1 million and $0.3 million, respectively, during the same

9

periods in 2009. The 2010 nine month period included expense recorded upon the separation of the Company’s former President and Chief Executive Officer, as discussed above in Note 8. As outstanding options vest, the Company expects to recognize approximately $0.3 million in additional compensation expense, before the impact of income taxes, over a weighted average period of 19 months, including $0.1 million during the remaining three months of 2010.

     A summary of stock option activity at September 30, 2010, is as follows:

				Weighted
				Average
	Number			Exercise
	of Shares			Price
Balance, December 31, 2009		1,194,460		$	7.36
Options granted		5,864		$	7.10
Options exercised		(150,754	)	$	5.32
Options forfeited		(256,487	)	$	9.22
Balance, September 30, 2010		793,083		$	7.14
Exercisable, September 30, 2010		676,464		$	6.80

     Additional information regarding stock options outstanding and exercisable as of September 30, 2010, is as follows:

			Weighted
			Average				Weighted		Aggregate				Weighted		Aggregate
Range of			Remaining				Average		Intrinsic				Average		Intrinsic
Exercise	Number		Contractual		Expiration		Exercise		Value (1)		Number		Exercise		Value (1)
Prices	Outstanding		Life (Years)		Date		Price		(in thousands)		Exercisable		Price		(in thousands)
$5.10 - 6.07		404,009		1.25		2011-2014	$	5.30	$	865,461		404,009	$	5.30	$	865,461
7.10 - 7.80		141,560		2.01		2011-2020		7.45		1,994		123,196		7.46		—
8.74 - 8.80		166,836		7.60		2018		8.76		—		86,159		8.76		—
10.88		5,974		5.82		2016		10.88		—		5,974		10.88		—
12.21-13.00		74,704		6.39		2016-2017		12.61		—		57,126		12.61		—
		793,083		3.24		2011-2020	$	7.14	$	867,455		676,464	$	6.80	$	865,461

     As of September 30, 2010 and 2009, there were 229,547 and 250,195 unvested restricted stock units outstanding, respectively. Since the Company began issuing restricted stock units, approximately 6.2% of total units granted have been forfeited. In the third quarter and first nine months of 2010, the Company recognized approximately $0.1 million and $0.6 million, respectively, in compensation expense related to restricted stock units compared to $0.2 million and $0.2 million, respectively, during the same periods in 2009. The 2010 nine month expense reflects $0.4 million recorded upon the separation of the Company’s former President and Chief Executive Officer.

     As the restricted stock units vest, the Company expects to recognize approximately $1.4 million in additional compensation expense over a weighted average period of 39 months, including $0.1 million during the remaining three months of 2010.

10

     A summary of restricted stock unit activity as of September 30, 2010, is as follows:

				Weighted
				Average
	Number			Grant Date
	of Shares			Value
Balance, December 31, 2009		239,318		$	5.24
Granted		147,039		$	7.10
Vested		(124,622	)	$	5.32
Forfeited		(32,188	)	$	5.99
Balance, September 30, 2010		229,547		$	6.29

     In March 2010, the Company issued 35,937 shares of common stock to non-executive employees as compensation for 2009 bonuses earned. Pursuant to the terms of the 2006 plan, this issuance was net of 16,741 shares repurchased at $6.59 per share in order to cover the employees’ tax withholding obligations.

     In January 2008, the Company adopted the 2008 employee stock purchase plan (the “2008 ESPP”) upon the expiration of its previous plan. Under the 2008 ESPP, a total of 300,000 shares of common stock are authorized for purchase by eligible employees at a discount through payroll deductions. No employee may purchase more than $25,000 worth of shares in any calendar year, or more than 10,000 shares during any six-month purchase period under the plan. As allowed under the 2008 ESPP, a participant may elect to withdraw from the plan, effective for the purchase period in progress at the time of the election with all accumulated payroll deductions returned to the participant at the time of withdrawal. In January and July 2010, 17,791 and 14,371 shares, respectively, were issued to participants under the terms of the plan.

10. Fair Value of Financial Instruments

     Estimated fair values of financial instruments (in thousands) are as indicated in the table below. The carrying amounts for cash and cash equivalents, accounts receivable and current liabilities are reasonable estimates of their fair values. The fair value of long-term debt is estimated based on the discounted value of contractual cash flows using the estimated rates currently offered for debt with similar remaining maturities. The debentures are valued at the closing price on September 30, 2010, of the underlying trust preferred securities on the New York Stock Exchange, plus the face value of the debenture amount representing the trust common securities held by the Company.

	September 30,				December 31,
	2010				2009
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents and restricted cash	$	8,689	$	8,689	$	7,682	$	7,682
Accounts receivable	$	8,626	$	8,626	$	6,993	$	6,993
Financial liabilities:
Current liabilities, excluding debt and discontinued operations	$	24,613	$	24,613	$	17,205	$	17,205
Total debt	$	93,964	$	90,071	$	106,322	$	105,073
Debentures	$	30,825	$	31,602	$	30,825	$	25,897

     The fair values provided above are not necessarily indicative of the amounts the Company or the debt holders could realize in a current market exchange. In addition, potential income tax ramifications related to the realization of gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration.

11. Commitments and Contingencies

     At any given time, the Company is subject to claims and actions incidental to the operations of our business. During the second quarter of 2010, a federal court ruled in favor of the Company in a lawsuit the Company filed against the owner of a former franchisee. The court awarded to the Company approximately $0.6 million in damages, which will accrue interest at 18% per annum pending the defendant’s appeal. During the first nine months of 2010, the Company incurred approximately $0.3 million in legal expense in connection with this matter. The Company is actively pursuing this action and cannot at this time reasonably predict the ultimate outcome of the proceedings. The Company does not expect that any sums it may receive or have to pay in connection with this or any other legal proceeding would have a materially adverse effect on its consolidated financial position or net cash flows.

11

12. Change in Accounting Principle

     Variable Interest Entities— In June 2009, the FASB issued changes to the consolidation guidance applicable to variable interest entities (“VIE”). These changes also amended the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis is to include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE.

     Under the new guidance, the Company determined that the Company’s cooperative marketing fund, the Central Program Fund (“CPF”) now meets the definition of a VIE and should be included in its consolidated financial statements. The Company adopted these changes retrospectively on January 1, 2010. For additional information on the CPF, see Note 2 of Notes to Consolidated Financial Statements for the year ended December 31, 2009, previously filed with the SEC in the Company’s annual report on Form 10-K.

     The CPF acts as an agent for the Company’s owned and leased hotels and for its franchisees, and was created to provide services to all member hotels including certain advertising services, frequent guest program administration, reservation services, national sales promotions and brand and revenue management services intended to increase sales and enhance the reputation of the Red Lion brand. The activities of the CPF benefit the Company’s owned and leased hotels as well as its franchise properties; however, historically only the proportionate share of CPF expense for its owned and leased hotels was recognized in the consolidated financial statements. Based on the new guidance, the Company will now include all of the expenses and other balances of the CPF in its consolidated financial statements, including revenue received from franchisees to support CPF activities. There have been no changes to the organization, structure or operating activities of the CPF since its inception in 2002.

     The adoption of these changes was applied retrospectively, including the recording to retained earnings of the $1.0 million net of tax impact of cumulative effect of change in accounting principle as of January 1, 2008, and the consolidated financial statements have been adjusted to conform to the new treatment. On January 1, 2010, total assets decreased by $0.9 million primarily representing the consolidation of accounts receivable, and total liabilities increased $0.1 million. The impact of the CPF for the three and nine months ended September 30, 2010, added additional expense before income tax of $0.1 million and $1.0 million, respectively, compared to income of $0.6 million and expense of $0.4 million during the prior year comparable periods. The activities of the CPF are cyclical throughout any one year. For the quarters ended September 30, 2009 and December 31, 2009, net income (loss) before income tax was positively impacted by $0.6 million and $0.4 million, respectively. The total impact on net loss before income tax for the year ended December 31, 2009 related to the CPF was a negative adjustment of $24,000, compared to a positive impact of $105,000 for the year ended December 31, 2008.

13. Recent Accounting Pronouncements

     Fair Value Measurements —In January 2010, the FASB released Accounting Standards Update No. 2010-06. , The Company adopted this accounting guidance that requires disclosure of significant transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for these transfers and the reasons for any transfers in or out of Level 3 of the fair value hierarchy. In addition, the guidance clarifies certain existing disclosure requirements. This standard did not have a material impact on the Company’s disclosures in its consolidated financial statements.

14. Discontinued Operations

     During the three months ended September 30, 2010, the Company concluded that one of its leased hotels in Astoria, Oregon had reached the end of its useful life. Accordingly, the operations of this hotel have been classified as discontinued operations in the Company’s financial statements. The Company has segregated the assets and liabilities and operating results of this hotel from continuing operations on the Company’s balance sheet and in the consolidated statements of operations for this quarter and any comparable periods presented.

12

     The following table summarizes results of discontinued operations for the periods indicated (dollars in thousands):

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenues	$	—		$	870		$	—		$	1,457
Operating expenses		(97	)		(475	)		(498	)		(1,112	)
Depreciation and amortization		(7	)		(19	)		(34	)		(60	)
Income tax benefit (expense)		36			(128	)		181			(97	)
Net income (loss) from operations		(68	)		248			(351	)		188
Loss on disposal of discontinued business units		(58	)		—			(58	)		(8	)
Income tax benefit		20			—			20			3
Net loss on disposal of discontinued business units		(38	)		—			(38	)		(5	)
Net income (loss) from discontinued operations	$	(106	)	$	248		$	(389	)	$	183

     The following assets and liabilities have been segregated and classified as assets and liabilities of discontinued operations in the consolidated balance sheets as of September 30, 2010 and December 31, 2009 (dollars in thousands):

	September 30,		December 31,
	2010		2009
ASSETS
Cash and cash equivalents	$	—	$	4
Accounts receivable, net		—		2
Inventory		—		9
Prepaid expenses and other		—		46
Total current assets of discontinued operations		—		61
Property and equipment, net		—		181
Total assets of discontinued operations	$	—	$	242
LIABILITIES
Accounts payable	$	—	$	1
Accrued payroll and related benefits				2
Other accrued expenses				26
Current liabilities of discontinued operations	$	—	$	29

13

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This quarterly report onForm 10-Q includes forward-looking statements. We have based these statements on our current expectations and projections about future events. When words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “seek,” “should,” “will” and similar expressions or their negatives are used in this quarterly report, these are forward-looking statements. Many possible events or factors, including those discussed in “Risk Factors” under Item 1A of our annual report filed onForm 10-K for the year ended December 31, 2009, could affect our future financial results and performance, and could cause actual results or performance to differ materially from those expressed. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report.

     In this report, “we,” “us,” “our,” “our company” and “the company” refer to Red Lion Hotels Corporation and, as the context requires, all of its wholly and partially owned subsidiaries, including, but not limited to, its 100% ownership of Red Lion Hotels Holdings, Inc. and Red Lion Hotels Franchising, Inc. and its approximate 99% ownership of Red Lion Hotels Limited Partnership. “Red Lion” refers to the Red Lion brand. The term “the system,” “system-wide hotels” or “system of hotels” refers to our entire group of owned, leased and franchised hotels.

     The following discussion and analysis should be read in connection with our unaudited consolidated financial statements and the condensed notes thereto and other financial information included elsewhere in this quarterly report, as well as in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2009, previously filed with the SEC onForm 10-K.

Introduction

     We are a NYSE-listed hospitality and leisure company (ticker symbols RLH and RLH-pa) primarily engaged in the ownership, operation and franchising of midscale, full, select and limited service hotels under our proprietary Red Lion brand. Established over 30 years ago, the Red Lion brand is nationally recognized and particularly well known in the western United States, where most of our hotels are located. The Red Lion brand is typically associated with three star, full and select service hotels.

     The discussion and information given below excludes the results related to the Company’s leased hotel in Astoria, Oregon. The results related to the Astoria hotel have been segregated from continuing operations and reflected as discontinued operations for all periods presented. See “Note 14 — Discontinued Operations” of Condensed Notes to Consolidated Financial Statements.

     As of September 30, 2010, our hotel system contained 43 hotels located in eight states and one Canadian province, with 8,384 rooms and 419,987 square feet of meeting space as provided below:

			Total		Meeting
			Available		Space
	Hotels		Rooms		(sq. ft.)
Owned and Leased Hotels		31		6,121		304,566
Franchised Hotels		12		2,263		115,421
Total Red Lion Hotels		43		8,384		419,987

     We operate in three reportable segments:

• Thehotels segmentderives revenue primarily from guest room rentals and food and beverage operations at our owned and leased hotels.

• Thefranchise segmentis engaged primarily in licensing the Red Lion brand to franchisees, and generates revenue from franchise fees that are typically based on a percent of room revenues and are charged to hotel owners. It has also historically reflected revenue from management fees charged to the owners of managed hotels, although we have not managed any hotels for third parties since January 2008.

• Theentertainment segmentderives revenue primarily from ticketing services and promotion and presentation of entertainment productions.

     Our remaining activities, none of which constitute a reportable segment, have been aggregated into “other,” and are primarily related to our retail mall direct ownership interest that is attached to one of our hotels and other miscellaneous real estate investments.

14

Executive Summary

     Our company strategy is to focus on initiatives to grow revenues at our owned and leased hotels and expand our current franchise base, with an ongoing commitment to cost management and margin control. During the first quarter we announced the addition of resources to support our objectives, including executive leadership to concentrate on franchise development in markets where we have strong brand awareness which may augment our sales and marketing capabilities. During the third quarter and nine months ended September 30, 2010, we experienced some margin erosion compared to the prior year comparable periods due to revenue challenges combined with our investments made in sales, marketing and franchising that we believe will position us for long-term profitability and growth for shareholders.

     Our hotel operational strategy is to increase group, preferred corporate and higher-rated transient business to reduce reliance on discount on-line travel agent (“OTA”) and permanent business. We are also implementing centralized revenue management across our system of hotels to create greater consistency in pricing, to improve value perception and capture market share. We have added sales personnel at our properties and at the corporate office to expand our local and national reach in an effort to grow our mix of group and preferred corporate customer base. Non-qualified retail and preferred corporate room business increased during the first nine months of 2010 compared to the prior year, offset by targeted declines in room nights from heavily discounted segments. While these efforts are in their early stages, and pricing and guest capture continues to be highly competitive, we are encouraged by the gains we are reporting compared to the prior year period.

     RevPAR in the third quarter of 2010 for our owned and leased properties increased 8.3% from the third quarter of 2009, and increased 3.9% for the first nine months of 2010 from the same period of the prior year. Occupancy was up 160 basis points quarter-on-quarter and up 90 basis points year-over-year. ADR for the three months ended September 30, 2010 has increased to $90.50 from the prior year same quarter ADR of $85.57. ADR for the nine months ended September 30, 2010 was $85.74 compared to $83.74 for the same period of the prior year. Average occupancy, average daily rate and revenue per available room statistics are provided below on a comparable basis.

	For the three months ended September 30,																For the nine months ended September 30,
	2010									2009							2010									2009
	Average(1)						RevPAR			Average(1)					RevPAR		Average(1)						RevPAR			Average(1)					RevPAR
	Occupancy			ADR(2)			(3)			Occupancy			ADR(2)		(3)		Occupancy			ADR(2)			(3)			Occupancy			ADR(2)		(3)
Owned and Leased Hotels		70.1	%	$	90.50		$	63.46			68.5	%	$	85.57	$	58.58		59.3	%	$	85.74		$	50.83			58.4	%	$	83.74	$	48.90
Franchised Hotels		63.9	%	$	78.24		$	50.03			62.6	%	$	77.26	$	48.39		54.1	%	$	77.49		$	41.91			54.8	%	$	78.40	$	42.96
Total Red Lion Hotels		68.5	%	$	87.50		$	59.93			66.9	%	$	83.53	$	55.90		57.9	%	$	83.72		$	48.49			57.5	%	$	82.40	$	47.34
Change from prior comparative period:
Owned and Leased Hotels		1.6			5.8	%		8.3	%									0.9			2.4	%		3.9	%
Franchised Hotels		1.3			1.3	%		3.4	%									(0.7	)		-1.2	%		-2.4	%
Total Red Lion Hotels		1.6			4.8	%		7.2	%									0.4			1.6	%		2.4	%

(1)	Average occupancy represents total paid rooms divided by total available rooms. Total available rooms represents the number of rooms available multiplied by the number of days in the reported period and includes rooms taken out of service for renovation.
(2)	Average daily rate (“ADR”) represents total room revenues divided by the total number of paid rooms occupied by hotel guests.
(3)	Revenue per available room (“RevPAR”) represents total room and related revenues divided by total available rooms.

     We expect economic conditions will continue to challenge our industry and create a difficult operating environment through the remainder of 2010. While our goal is to deliver bottom-line profitability through the above described initiatives, there can be no assurance that we will achieve this goal if economic conditions do not improve.

Results of Operations

     During the third quarter of 2010, we reported net income from continuing operations of $3.2 million compared to net income of $3.4 million during the third quarter of 2009. EBITDA from continuing operations decreased $0.3 million to $12.4 million, impacted primarily by our investments in direct sales and franchise development activities, and competitive rate pressures.

     For the first nine months of 2010, we reported a net loss from continuing operations of $1.0 million compared to net income of $1.6 million during the first nine months of 2009. In January 2010, we terminated the employment agreement of our President and Chief Executive Officer, which resulted in recorded expense of $1.2 million for separation and other benefits. The $1.2 million recorded during the first quarter of 2010 included $0.4 million in stock-based compensation expense related to the immediate vesting of 84,433 of the former executive’s restricted stock units, as well as for the extension of the exercise period for certain vested stock options. The following table details the impact of the $1.2 million in separation costs for the nine months ended September 30, 2010 on net loss, loss per share and EBITDA:

15

	Nine months ended
	September 30, 2010
	(in thousands)
Separation costs	$	(1,219	)
Income tax benefit		433
Impact of separation costs on net income	$	(786	)
Separation costs		(0.06	)
Income tax benefit		0.02
Impact of separation costs on earnings per share	$	(0.04	)
Impact of separation costs on EBITDA	$	(1,219	)

     A summary of our consolidated statement of operations is provided below (in thousands, except per share data). Certain amounts disclosed in the prior period have been reclassified to conform to the current period presentation as it relates to the consolidation of the Central Program Fund (“CPF”) as discussed in Note 12 in Condensed Notes to Consolidated Financial Statements and also discontinued operations as discussed in Note 14 in Condensed Notes to Consolidated Financial Statements. As a result, franchise segment revenue increased $0.6 million during the third quarter of 2010 and increased $0.7 million during the third quarter of 2009. Hotel and franchise segment expenses increased $0.6 million in the third quarter of 2010 and decreased $0.1 million in the third quarter of 2009.

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
Total revenue	$	49,843		$	50,255		$	126,600		$	129,728
Operating expenses		42,940			42,921			121,926			121,306
Operating income		6,903			7,334			4,674			8,422
Other income (expense):
Interest expense		(2,282	)		(2,268	)		(6,832	)		(6,297	)
Other income, net		265			49			312			111
Income (loss) before taxes		4,886			5,115			(1,846	)		2,236
Income tax expense (benefit)		1,729			1,723			(843	)		589
Net Income (loss) from continuing operations		3,157			3,392			(1,003	)		1,647
Discontinued operations:
Income (loss) from discontinued business units, net of income tax benefit (expense) of $36 and $(128) for the three months ended and $181and $(97) for the nine months ended September 30, 2010 and 2009, respectively		(68	)		248			(351	)		188
Loss on disposal of discontinued business units, net of income tax benefit of $20 and $0 for the three months ended and $20 and $3 for the nine months ended September 30, 2010 and 2009, respectively		(38	)		—			(38	)		(5	)
Net Income (loss)		3,051			3,640			(1,392	)		1,830
Income (loss) attributable to noncontrolling interest		(7	)		(5	)		3			(5	)
Net income (loss) attributable to Red Lion Hotels Corporation	$	3,044		$	3,635		$	(1,389	)	$	1,825
EBITDA	$	12,221		$	13,094		$	20,021		$	24,409
EBITDA as a percentage of revenues		24.5	%		26.1	%		15.8	%		18.8	%
EBITDA from continuing operations	$	12,377		$	12,700		$	20,579		$	24,072
EBITDA from continuing operations as a percentage of revenues		24.8	%		25.3	%		16.3	%		18.6	%

     EBITDA represents net income (loss) attributable to Red Lion Hotels Corporation before interest expense, income tax expense (benefit) and depreciation and amortization. We utilize EBITDA as a financial measure because management believes that investors find it a useful tool to perform more meaningful comparisons of past, present and future operating results and as a means to evaluate the results of core, on-going operations. We believe it is a complement to net income (loss) attributable to Red Lion Hotels

16

Corporation and other financial performance measures. EBITDA is not intended to represent net income (loss) attributable to Red Lion Hotels Corporation as defined by generally accepted accounting principles in the United States (“GAAP”), and such information should not be considered as an alternative to net income (loss), cash flows from operations or any other measure of performance prescribed by GAAP.

     We use EBITDA to measure the financial performance of our owned and leased hotels because we believe interest, taxes and depreciation and amortization bear little or no relationship to our operating performance. By excluding interest expense, EBITDA measures our financial performance irrespective of our capital structure or how we finance our properties and operations. We generally pay federal and state income taxes on a consolidated basis, taking into account how the applicable taxing laws apply to us in the aggregate. By excluding taxes on income, we believe EBITDA provides a basis for measuring the financial performance of our operations excluding factors that our hotels cannot control. By excluding depreciation and amortization expense, which can vary from hotel to hotel based on historical cost and other factors unrelated to the hotels’ financial performance, EBITDA measures the financial performance of our hotels without regard to their historical cost. For all of these reasons, we believe EBITDA provides us and investors with information that is relevant and useful in evaluating our business.

     However, because EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt nor does it show trends in interest costs due to changes in our borrowings or changes in interest rates. EBITDA, as defined by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net income (loss) attributable to Red Lion Hotels Corporation, which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net income (loss) determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.

     The following is a reconciliation of EBITDA to net income (loss) attributable to Red Lion Hotels Corporation for the periods presented (in thousands):

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
EBITDA	$	12,221		$	13,094		$	20,021		$	24,409
Income tax (expense) benefit		(1,674	)		(1,852	)		1,046			(683	)
Interest expense		(2,282	)		(2,268	)		(6,832	)		(6,297	)
Depreciation and amortization		(5,221	)		(5,339	)		(15,624	)		(15,604	)
Net income (loss) attributable to Red Lion Hotels Corporation	$	3,044		$	3,635		$	(1,389	)	$	1,825

	Three months ended September 30,						Nine months ended September 30,
	2010			2009			2010			2009
EBITDA from continuing operations	$	12,377		$	12,700		$	20,579		$	24,072
Income tax (expense) benefit		(1,729	)		(1,723	)		843			(589	)
Interest expense		(2,282	)		(2,268	)		(6,832	)		(6,297	)
Depreciation and amortization		(5,216	)		(5,322	)		(15,590	)		(15,544	)
Discontinued operations, net of tax		(106	)		248			(389	)		183
Net income (loss) attributable to Red Lion Hotels Corporation	$	3,044		$	3,635		$	(1,389	)	$	1,825

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Revenue

     A breakdown of our revenues for the three and nine months ended September 30, 2010 and 2009 is as follows (in thousands):

	Three months ended				Nine months ended
	September 30,				September 30,
Operating revenue	2010		2009		2010		2009
Hotels:
Rooms	$	35,734	$	32,988	$	84,934	$	81,722
Food and beverage		9,048		10,453		26,914		31,037
Other department		1,439		1,315		3,625		3,170
Total hotels segment		46,221		44,756		115,473		115,929
Franchise		999		1,046		2,446		2,845
Entertainment		2,048		3,861		6,866		8,968
Other		575		592		1,815		1,986
Total Operating Revenue	$	49,843	$	50,255	$	126,600	$	129,728

     Three Months Ended September 30, 2010 and 2009

     During the third quarter of 2010, revenue from the hotels segment increased $1.5 million, or 3.3%, compared to the third quarter of 2009. The increase in rooms revenue in the current period was driven by an increase in both ADR and occupancy. Third quarter 2010 ADR was up 5.8% from third quarter of 2009 primarily driven by group room rate increases and a decreased reliance on discounted OTA rooms. Occupancy for the third quarter of 2010 was 70.1% representing an increase of 160 basis points compared to the third quarter of 2009. The occupancy increase was primarily driven by the implementation of our mix change initiatives. Food and beverage revenues declined $1.4 million, or 13.4%, during the third quarter of 2010 compared to the third quarter of 2009, reflecting the impact of our breakfast-inclusive sales strategy and the decision to modify food and beverage offerings in select markets.

     Revenue from the franchise segment decreased $0.1 million compared to the prior year due to the fact that there was one less franchised hotel in the system. Revenues from the entertainment segment decreased $1.8 million, or 47.0%, quarter-over-quarter as a result of the impact of one less “Best of Broadway” production in the third quarter of 2010 than in the third quarter of 2009.

     Nine Months Ended September 30, 2010 and 2009

     In the first nine months of 2010, revenue from the hotels segment decreased $0.5 million, or 0.4%, compared to the first nine months of 2009, driven by a $4.1 million, or 13.3%, drop in food and beverage revenue. Room revenues in the first nine months of 2010 were positively impacted by our focus on higher-rated transient and preferred corporate guests and reduced room bookings from discount OTA channels. Compared to the first nine months of 2009, RevPAR increased 3.9% for owned and leased hotels on a 90 basis point increase in occupancy and a 2.4% increase in ADR. Current period results were also impacted by the introduction of our Variable Dining Option concept that includes a system-wide breakfast initiative to compete with the limited and select service hotels that offer free breakfast in our markets.

     Revenue from the franchise segment decreased $0.4 million compared to the first nine months of 2009, due to a one-time settlement received in 2009. Entertainment revenue was down 23.4% to $6.9 million as a result of the impact of one less “Best of Broadway” production in the nine month period ended September 30, 2010.

Operating Expenses

     Operating expenses include direct expenses for each of the operating segments, hotel facility and land lease expense, depreciation and amortization, gain or loss on asset dispositions and undistributed corporate expenses. In the aggregate, operating expenses during the third quarter of 2010 compared to the third quarter of 2009 were essentially flat, while during the first nine months they increased $0.6 million year-over-year, as shown below:

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	Three months ended						Nine months ended
	September 30,						September 30,
Operating Expenses	2010			2009			2010			2009
	(In thousands)
Hotels	$	31,652		$	30,233		$	86,864		$	85,357
Franchise		789			646			2,177			1,764
Entertainment		1,545			2,987			5,544			7,375
Other		438			528			1,275			1,609
Depreciation and amortization		5,216			5,322			15,590			15,544
Hotel facility and land lease		1,987			1,750			5,512			5,271
Gain on asset dispositions, net		(118	)		(85	)		(273	)		(140	)
Undistributed corporate expenses		1,431			1,540			5,237			4,526
Total operating expenses	$	42,940		$	42,921		$	121,926		$	121,306
Hotels revenue — owned	$	33,316		$	32,354		$	83,582		$	84,545
Direct margin(1)	$	10,674		$	11,044		$	21,603		$	24,437
Direct margin %		32.0	%		34.1	%		25.8	%		28.9	%
Hotels revenue — leased	$	12,904		$	12,402		$	31,891		$	31,384
Direct margin(1)	$	3,895		$	3,478		$	7,006		$	6,134
Direct margin %		30.2	%		28.0	%		22.0	%		19.5	%
Franchise revenue	$	999		$	1,046		$	2,446		$	2,845
Direct margin(1)	$	210		$	400		$	269		$	1,081
Direct margin %		21.0	%		38.2	%		11.0	%		38.0	%
Entertainment revenue	$	2,048		$	3,861		$	6,866		$	8,968
Direct margin(1)	$	503		$	874		$	1,322		$	1,593
Direct margin %		24.6	%		22.6	%		19.3	%		17.8	%
Other revenue	$	575		$	592		$	1,815		$	1,986
Direct margin(1)	$	137		$	64		$	540		$	377
Direct margin %		23.8	%		10.8	%		29.8	%		19.0	%

(1) Revenues less direct operating expenses.

     Three Months Ended September 30, 2010 and 2009

     Direct hotel expenses in the third quarter of 2010 increased by $1.4 million, or 4.7%, compared to the third quarter of 2009. Room related expenses increased $1.4 million, or 15.6%, compared with a room revenue increase of $2.7 million. Food and beverage costs decreased $0.9 million, or 10.5%, compared with a food and beverage revenue decrease of $1.4 million. Quarter-on-quarter, the hotel segment reported a 15.8% increase in expense related to sales personnel and technology expense. Overall, the hotels segment had a direct profit of $14.6 million during the third quarter of 2010 compared to $14.5 million during the third quarter of 2009, providing for a direct operating margin in the current period of 31.5%, a 90 basis point decline compared to 32.4% during the same period in 2009.

     As discussed in Note 12 of Condensed Notes to Consolidated Financial Statements, in June 2009, the FASB issued changes to the consolidation guidance applicable to variable interest entities (“VIE”). Under the new guidance, we determined that our Central Program Fund (“CPF”) now meets the definition of a VIE and should be included in our consolidated financial statements. We adopted these changes retrospectively on January 1, 2010.

     The CPF acts as an agent for our owned and leased hotels and for our franchisees, and was created to provide services to all member hotels including certain advertising services, frequent guest program administration, reservation services, national sales promotions and brand and revenue management services intended to increase sales and enhance the reputation of the Red Lion brand. The activities of the CPF benefit our owned and leased hotels as well as our franchise properties. Historically, only the proportionate share of CPF expense for our owned and leased hotels was recognized in the consolidated financial statements. Based on the new guidance, we now include all of the expenses and other balances of the CPF in our consolidated financial statements, including revenue received from franchisees to support CPF activities. There have been no changes to the organization, structure or operating activities of the CPF since its inception in 2002.

     The adoption of these changes were applied retrospectively, including the recording to retained earnings of the $1.0 million impact of cumulative effect of change in accounting principle as of the earliest period presented, and the consolidated financial

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statements have been adjusted to conform to the new treatment. The table below represents the impact on consolidation of the CPF for the three months ended September 30, 2010 and 2009 (in thousands, except per share data), which added additional net loss of $0.1 million and net income of $0.6 million, respectively, before the impact of income tax expense.

	Three months ended September 30, 2010									Three months ended September 30, 2009
	Amounts									Amounts
	before			Impact of						before			Impact of
	CPF			CPF			As reported			CPF			CPF			As reported
Revenue:
Hotels	$	46,221		$	—		$	46,221		$	44,756		$	—		$	44,756
Franchise		393			606			999			389			657			1,046
Entertainment		2,048			—			2,048			3,861			—			3,861
Other		575			—			575			592			—			592
Total revenues		49,237			606			49,843			49,598			657			50,255
Operating expenses:
Hotels		31,720			(67	)		31,652			30,854			(621	)		30,233
Franchise		159			630			789			154			492			646
Entertainment		1,545			—			1,545			2,987			—			2,987
Other		438			—			438			528			—			528
Depreciation and amortization		5,216			—			5,216			5,322			—			5,322
Hotel facility and land lease		1,987			—			1,987			1,750			—			1,750
Gain on asset dispositions, net		(118	)		—			(118	)		(85	)		—			(85	)
Undistributed corporate expenses		1,431			—			1,431			1,540			—			1,540
Total expenses		42,378			563			42,940			43,050			(129	)		42,921
Operating income (loss)		6,859			44			6,903			6,548			786			7,334
Other income (expense):
Interest expense		(2,282	)		—			(2,282	)		(2,268	)		—			(2,268	)
Other income, net		368			(103	)		265			189			(140	)		49
Income (loss) before income taxes		4,945			(59	)		4,886			4,469			646			5,115
Income tax expense		1,729			—			1,729			1,723			—			1,723
Net income (loss) from continuing operations	$	3,216		$	(59	)	$	3,157		$	2,746		$	646		$	3,392
Net income (loss) per share from continuing operations	$	0.17		$	(0.00	)	$	0.17		$	0.15		$	0.03		$	0.19
Weighted-average shares outstanding — diluted		18,710			18,710			18,710			18,306			18,306			18,306
EBITDA from continuing operations	$	12,436		$	(59	)	$	12,377		$	12,054		$	646		$	12,700

     Direct costs for the franchise segment increased $0.1 million in the third quarter of 2010 compared to the third quarter of 2009, resulting in a direct margin decrease of $0.2 million from the decreased revenue as discussed above, due to an increase in legal fees quarter-over-quarter and the addition of personnel as part of our operating strategy of growing our franchise base. The entertainment segment reported decreased expenses of $1.4 million, or 48.3%, in-line with the revenue decrease of 47.0% during the third quarter of 2010 compared to the same period in 2009. Overall, the entertainment segment reported a direct margin profit of $0.5 million during the third quarter of 2010, a 42.4% decline from the third quarter of 2009.

     Depreciation and amortization expense decreased 2.0% quarter over quarter to $5.2 million, and total undistributed corporate expenses decreased 7.0% to $1.4 million. Undistributed corporate expenses include general and administrative charges such as corporate payroll, legal expenses, charitable contributions, director and officers insurance, bank service charges and outside accountants and various other consultants’ expense. We consider these expenses to be “undistributed” because the costs are not directly related to our business segments and therefore are not further distributed. However, costs that can be identified with a particular segment are distributed, such as accounting, human resources and information technology, and are included in direct expenses.

     Nine Months Ended September 30, 2010 and 2009

     Direct hotel expenses during the first nine months of 2010 were $86.9 million compared to $85.4 million for the first nine months of 2009, representing a 1.8% increase year over year. Rooms related expenses increased $2.9 million, offset by a food and beverage cost decrease of $2.9 million during the comparable periods, reflecting the impact of our breakfast-inclusive sales strategy and the

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decision to modify food and beverage offerings in select markets. As part of our operations strategy, the hotel segment reported a 15.9%, or $1.3 million, increase in expense related to sales personnel and technology expense during the first nine months of 2010 compared to the first nine months of 2009. Overall, the segment recorded direct profit during the first nine months of 2010 of $28.6 million compared to $30.6 million during the first nine months of 2009.

     As discussed above and in Note 12 of Condensed Notes to Consolidated Financial Statements, we have included our CPF in our consolidated financial statements retrospectively on January 1, 2010. The table below represents the impact on consolidation of the CPF for the nine months ended September 30, 2010 and 2009 (in thousands, except per share data), which added additional net loss of $1.0 million and $0.4 million, respectively, before the impact of income tax benefit.

	Nine months ended September 30, 2010									Nine months ended September 30, 2009
	Amounts									Amounts
	before			Impact of						before			Impact of
	CPF			CPF			As reported			CPF			CPF			As reported
Revenue:
Hotels	$	115,473		$	—		$	115,473		$	115,929		$	—		$	115,929
Franchise		1,022			1,424			2,446			1,397			1,448			2,845
Entertainment		6,866			—			6,866			8,968			—			8,968
Other		1,815			—			1,815			1,986			—			1,986
Total revenues		125,176			1,424			126,600			128,280			1,448			129,728
Operating expenses:
Hotels		86,352			512			86,864			85,383			(26	)		85,357
Franchise		595			1,582			2,177			300			1,464			1,764
Entertainment		5,544			—			5,544			7,375			—			7,375
Other		1,275			—			1,275			1,609			—			1,609
Depreciation and amortization		15,590			—			15,590			15,544			—			15,544
Hotel facility and land lease		5,512			—			5,512			5,271			—			5,271
Gain on asset dispositions, net		(273	)		—			(273	)		(140	)		—			(140	)
Undistributed corporate expenses		5,237			—			5,237			4,526			—			4,526
Total expenses		119,832			2,094			121,926			119,868			1,438			121,306
Operating income (loss)		5,344			(670	)		4,674			8,412			10			8,422
Other income (expense):
Interest expense		(6,832	)		—			(6,832	)		(6,297	)		—			(6,297	)
Other income, net		653			(341	)		312			537			(426	)		111
Income (loss) before income taxes		(835	)		(1,011	)		(1,846	)		2,652			(416	)		2,236
Income tax (benefit) expense		(843	)		—			(843	)		589			—			589
Net income (loss) from continuing operations	$	8		$	(1,011	)	$	(1,003	)	$	2,063		$	(416	)	$	1,647
Net income (loss) per share from continuing operations	$	0.00		$	(0.05	)	$	(0.05	)	$	0.11		$	(0.02	)	$	0.09
Weighted-average shares outstanding		18,402			18,402			18,402			18,119			18,119			18,119
EBITDA from continuing operations	$	21,590		$	(1,011	)	$	20,579		$	24,488		$	(416	)	$	24,072

     Direct costs for the franchise segment increased $0.4 million during the first nine months of 2010 over the 2009 period, for a segment margin decline of $0.8 million year over year. Entertainment costs decreased $1.8 million, or 24.8%, on a revenue decline of $2.1 million from the prior year period. Overall, the entertainment segment reported a direct margin profit decrease of 17.0% to $1.3 million during the first nine months of 2010 compared to the first nine months of 2009.

     Undistributed corporate expenses during the first nine months of 2010 increased $0.7 million, or 15.7%, over the prior year period. These expenses included the $1.2 million expense recorded during the first quarter of 2010 upon the separation of our former President and Chief Executive Officer as discussed above.

Income Taxes

     During the third quarter of 2010, we reported income tax expense of $1.7 million on income from continuing operations compared to income tax expense of $1.7 million during the third quarter of 2009. During the first nine months of 2010, we recognized an income tax benefit of $0.8 million compared to $0.6 million income tax expense during the same period in 2009. The experienced

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rate on pre-tax net income differed from the statutory combined federal and state rates primarily due to the utilization of certain incentive tax credits allowed under federal law.

Liquidity and Capital Resources

     As of September 30, 2010 we had total long term debt maturing within one year of $20.5 million. In addition, another $5.0 million of debt that matures in October 2011 is included in the balance of long term debt, due after one year. Lastly, the outstanding balance under our revolving credit facility at September 30, 2010 of $16.0 million is included as a current liability because the facility expires in September 2011.

     Our current liabilities at September 30, 2010 exceeded our current assets by $39.9 million. We are actively pursuing financing alternatives to address maturing liabilities and to supplement working capital. While we continue to be in compliance with our debt agreements, to generate positive cash flow from operations and positive operating income, and to have adequate liquidity to fund our ongoing operating activities, there can be no assurance that we will be able to refinance our debts when they mature.

     In addition to or in place of a new credit facility and new term debt, we may seek to raise additional funds through public or private financings, strategic relationships, sale of assets or other arrangements. We cannot assure that such funds, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financings may be dilutive to shareholders and debt financing, if available, may involve covenants that place substantial restrictions on our business. Our failure to secure funding as and when needed could have a material adverse impact on our financial condition and our ability to pursue business strategies.

     At September 30, 2010, outstanding debt was $124.8 million. In addition to the $16.0 million outstanding under the credit facility, we had other outstanding bank debt of $12.6 million under a variable rate note, $30.8 million in the form of trust preferred securities and a total of $65.4 million in 13 fixed-rate notes collateralized by individual properties. Our average pre-tax interest rate on debt was 6.9% at September 30, 2010, of which 77.1% was fixed at an average rate of 7.9% and 22.9% was at an average variable rate of 3.4%. In July 2010, we extended the maturity date for the credit facility to September 2011 under the terms of the agreement. Our first fixed-rate term debt maturity is in September 2011. Only the credit facility and a variable rate bank note have financial covenants, with which we were in compliance as of September 30, 2010.

     In February 2010, we signed an amendment to our credit facility in order to increase our financial flexibility. The amendments to the facility, secured by our Seattle Red Lion Hotel on Fifth Avenue property, modified our total leverage ratio and senior leverage ratio covenants for 2010 and 2011, increased the interest rate on Eurodollar borrowings to LIBOR plus 3.25% and reduced borrowing capacity to $37.5 million from the previous $50 million. We also have a prime rate property note secured by our Red Lion Bellevue location, with a balance of $12.6 million at September 30, 2010 and due in 2013. This note has financial covenants that mirror those of our credit facility, and was also amended in February 2010. The interest rate on this note was 3.25% at September 30, 2010.

     A comparative summary of our balance sheets at September 30, 2010 and December 31, 2009 is provided below:

	September 30,			December 31,
	2010			2009
Consolidated balance sheet data (in thousands):
Cash and cash equivalents	$	3,046		$	3,881
Working capital(1)	$	(39,886	)	$	(1,161	)
Assets of discontinued operations	$	—		$	242
Property and equipment, net	$	278,340		$	285,601
Total assets	$	344,868		$	350,636
Liabilities of discontinued operations	$	—		$	29
Total debt	$	93,964		$	106,322
Debentures due Red Lion Hotels Capital Trust	$	30,825		$	30,825
Total liabilities	$	168,811		$	175,614
Total stockholders’ equity	$	176,057		$	175,022

(1) Represents current assets less current liabilities.

     During the remaining three months of 2010, we expect cash expenditures to primarily include the funding of operating activities, interest payments on our outstanding indebtedness and capital expenditures.

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Operating Activities

     Net cash provided by operations totaled $18.4 million during the first nine months of 2010, a 4.4% decrease from the net cash provided by operations of $19.2 million during the first nine months of 2009. The net income, adjusted for non-cash income statement expenses, including depreciation and amortization, provision for deferred tax and stock based compensation, provided cash from operations of $14.3 million compared to $19.2 million during the first nine months of 2009. Working capital changes, including restricted cash, receivables, accruals, payables and inventories, were $4.1 million positive during the first nine months of 2010 compared with a net zero change during the comparable period of 2009. During the first nine months of 2010 and 2009, the changes in accounts payable and accrued payroll balances were $4.7 million and ($6.4) million, respectively, were due to timing of payments, offset by an increase in our accounts receivable and restricted cash balances of $4.0 million and a decrease of accounts receivable and restricted cash balances of $1.7 million, respectively. We realized a $5.3 million negative change in accounts payable in the first nine months of 2009, primarily as a result of renovation activities that were completed at our Red Lion Anaheim property in February 2009, offset by a $1.5 million positive change in accounts receivable in 2009. In June 2009, we received $0.9 million in deferred lease income pursuant to an amendment to the sublease agreement for the Red Lion Hotel Sacramento. The $0.9 million will be recognized over the life of the sublease agreement.

Investing Activities

     Net cash used in investing activities totaled $7.4 million during the first nine months of 2010 compared to $16.1 million during 2009. Cash additions to property and equipment decreased $7.2 million from the first nine months of 2009, as the prior year period included the completion of renovations at our Red Lion Anaheim, Seattle’s Fifth Avenue and Denver properties. Capital expenditures in 2010 are expected to be $10.8 million, and will primarily support essential investments in maintenance, technology and basic hotel improvement projects. For the remainder of 2010, we will continue to manage our capital and expect our cash expenditures to primarily include the funding of operating activities and interest payments on our outstanding indebtedness. We may reduce our anticipated level of capital spending to match appropriate needs and circumstances.

     During 2009, we utilized $0.3 million of restricted cash to fulfill our commitment of $0.9 million in tenant improvements at the Red Lion Hotel Sacramento in connection with an amendment to the sublease agreement. This commitment was completed by the end of 2009.

Financing Activities

     Net cash used in financing activities was $11.8 million during the first nine months of 2010 compared to $16.3 million used during the first nine months of 2009. Net financing activities during the first nine months of 2010 benefited from the exercise by employees of stock options resulting in proceeds to us of $0.8 million, with no options having been exercised during 2009. During the current period, we had a net repayment on our credit facility of $10.0 million, and made scheduled long-term debt principal payments similar to the prior year period of $2.4 million.

     At September 30, 2010, we had total debt obligations of $124.8 million, of which $65.4 million was under 13 notes collateralized by individual hotels with fixed interest rates ranging from 5.9% to 8.1%. These 13 notes mature beginning in 2011 and continuing through 2013. Included within outstanding debt are debentures due to the Red Lion Hotels Capital Trust of $30.8 million, which are uncollateralized and due to the trust in 2044 at a fixed rate of 9.5%. Our average pre-tax interest rate on debt was 6.9% at September 30, 2010.

     Of the $124.8 million in total debt obligations, three pools of cross securitized debt exist: (i) one consisting of five properties with total borrowings of $19.7 million; (ii) a second consisting of two properties with total borrowings of $17.7 million; and (iii) a third consisting of four properties with total borrowings of $22.0 million. Each pool of securitized debt and the other collateralized hotel borrowings include defeasance provisions for early repayment.

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Contractual Obligations

     The following table summarizes our significant contractual obligations as of September 30, 2010 (in thousands):

			Less than						After
	Total		1 year		1-3 years		4-5 years		5 years
Long-term debt (1)	$	105,223	$	42,094	$	63,129	$	—	$	—
Operating leases (2)		65,003		8,692		14,032		12,014		30,265
Service agreements		1,689		655		1,034		—		—
Debentures due Red Lion Hotels Capital Trust (1)		128,681		2,928		5,857		5,857		114,039
Total contractual obligations (3)	$	300,596	$	54,369	$	84,052	$	17,871	$	144,304

(1)	Including estimated interest payments and commitment fees over the life of the debt agreement.
(2)	Operating lease amounts are net of estimated sublease income of $10.5 million annually.
(3)	With regard to purchase obligations, we are not party to any material agreements to purchase goods or services that are enforceable or legally binding as to fixed or minimum quantities to be purchased or stated price terms.

     In 2001, we assumed a master lease agreement for 17 hotel properties, including 12 that were part of the Red Lion acquisition. Subsequently, we entered into an agreement with Doubletree DTWC Corporation whereby Doubletree DTWC Corporation is subleasing five of these hotel properties from Red Lion. During the second quarter of 2010, we amended the master lease agreement to exclude the Astoria, Oregon property due to its closure earlier in the year. Total fees paid to amend the agreement were $0.3 million. The master lease agreement requires minimum monthly payments of $1.2 million plus contingent rents based on gross receipts from the 16 hotels, of which approximately $0.8 million per month is paid by a sub-lease tenant. The lease agreement expires in December 2020, although we have the option to extend the term on a hotel-by-hotel basis for three additional five-year terms.

     In October 2007, we completed an acquisition of a 100-year (including extension periods) leasehold interest in a hotel in Anaheim, California for $8.3 million, including costs of acquisition. As required under the terms of the leasehold agreement, we will pay $1.8 million per year in lease payments through April 2011, the amounts of which have been reflected in the above table. At our option, we are entitled to extend the lease for 19 additional terms of five years each, with increases in lease payments tied directly to the Consumer Price Index. Beyond the monthly payments through April 2011, we have not included any additional potential future lease commitment related to the Anaheim property in the table above.

     In May 2008, we completed an acquisition of a hotel in Denver, Colorado. In connection with the purchase agreement, we assumed an office lease used by guests contracted to stay at the hotel for approximately $0.7 million annually. As part of this contract business, we are reimbursed the entire lease expense amount. The lease expires in August 2012, and its expense has been included in the table above.

Franchise Contracts

     At September 30, 2010, our system of hotels included 12 hotels under franchise agreements, representing a total of 2,263 rooms and 115,421 square feet of meeting space. During the second quarter of 2010, a franchise agreement for the Red Lion Hotel Bakersfield (165 rooms) ended by agreement and was not renewed, and this property left our system of hotels. Subsequent to the end of the quarter and prior to the filing of this quarterly report, we signed two more hotels into the Red Lion system. Both properties are located in Northern California. The first will be a Red Lion Inn located in Rancho Cordova, a suburb of Sacramento, California. This 111 room limited service hotel is expected to open as a Red Lion Inn in January 2011. The second will be the Red Lion Hotel, Oakland International Airport. This property is an independent full service airport hotel with 189 rooms, and is expected to be converted to the Red Lion flag in early 2011.

Off-balance Sheet Arrangements

     As of September 30, 2010, we had no off-balance sheet arrangements, as defined by SEC regulations, which have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

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Critical Accounting Policies and Estimates

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect: (i) the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and (ii) the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates. We consider a critical accounting policy to be one that is both important to the portrayal of our financial condition and results of operations and requires 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 included in our annual report on Form 10-K for the year ended December 31, 2009.

     Management has discussed the development and selection of our critical accounting policies and estimates with the audit committee of our board of directors, and the audit committee has reviewed the disclosures presented on Form 10-K for the year ended December 31, 2009. Since the date of our 2009 Form 10-K, there have been no material changes to our critical accounting policies, nor have there been any changes to our methodology and assumptions applied to these policies.

New Accounting Pronouncements

     Variable Interest Entities— In June 2009, the FASB issued changes to the consolidation guidance applicable to variable interest entities (“VIE”). These changes also amended the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis is to include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Under the new guidance, we determined that our Central Program Fund (“CPF”) now meets the definition of a VIE and should be included in our consolidated financial statements. We adopted these changes retrospectively on January 1, 2010.

     The CPF acts as an agent for our owned and leased hotels and for our franchisees, and was created to provide services to all member hotels including certain advertising services, frequent guest program administration, reservation services, national sales promotions and brand and revenue management services intended to increase sales and enhance the reputation of the Red Lion brand. The activities of the CPF benefit our owned and leased hotels as well as our franchise properties; however, historically only the proportionate share of CPF expense for our owned and leased hotels was recognized in the consolidated financial statements. Based on the new guidance, we will now include all of the expenses and other balances of the CPF in our consolidated financial statements, including revenue received from franchisees to support CPF activities. There have been no changes to the organization, structure or operating activities of the CPF since its inception in 2002.

     The adoption of these changes were applied retrospectively, including the recording to retained earnings of the $1.0 million net of tax impact of cumulative effect of change in accounting principle as of January 1, 2008, and the consolidated financial statements have been adjusted to conform to the new treatment. On January 1, 2010, total assets decreased by $0.9 million primarily representing the consolidation of accounts receivable, and total liabilities increased $0.1 million. The impact of the CPF for the three and nine months ended September 30, 2010 and 2009, added additional expense before income tax of $0.1 million and income of $0.6 million, and expense of $1.0 million and $0.4 million, respectively. The activities of the CPF are cyclical throughout any one year. For the quarters ended September 30, 2009 and December 31, 2009, net income (loss) before income tax was positively impacted by $0.6 million and $0.4 million, respectively. The total impact on net loss before income tax for the year ended December 31, 2009 related to the CPF was a negative adjustment of $24,000, compared to a positive impact of $105,000 for the year ended December 31, 2008. We anticipate the activities of the CPF will not have a material impact on the consolidated financial statements for the full year 2010.

     Fair Value Measurements —In January 2010, the FASB released Accounting Standards Update No. 2010-06 (“ASU 2010-06”), we adopted new accounting guidance that requires disclosure of significant transfers between Level 1 and Level 2 of the fair value hierarchy, the reasons for these transfers and the reasons for any transfers in or out of Level 3 of the fair value hierarchy. In addition, the guidance clarifies certain existing disclosure requirements. This standard did not have a material impact on our disclosures in its consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     At September 30, 2010, $96.2 million of our outstanding debt was subject to currently fixed interest rates and was not exposed to market risk from rate changes. In February 2010, we amended the terms of our credit facility to modify our total leverage ratio and senior leverage ratio covenants for 2010 and 2011, increase the interest rate on Eurodollar borrowings to LIBOR plus 3.25% and reduce borrowing capacity to $37.5 million from the previous $50 million. At the same time, we also amended the variable rate property note secured by our Red Lion Bellevue location. The interest rate on the $12.6 million outstanding under that note is now based on Prime at 3.25%. Outside of these changes, we do not foresee any other changes of significance in our exposure to

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fluctuations in interest rates, although we will continue to manage our exposure to this risk by monitoring available financing alternatives.

     The below table summarizes our debt obligations at September 30, 2010 on our consolidated balance sheet (in thousands). During the first nine months of 2010, principal payments of $12.4 million were made that were included as debt obligations at December 31, 2009, including $10.0 million in net repayments on our credit facility.

	2010		2011		2012		2013		2014		Thereafter		Total			Fair Value
Long-term debt	$	812	$	41,275	$	1,974	$	49,903	$	—	$	—	$	93,964		$	90,071
Average interest rate														5.9	%
Debentures due Red Lion Hotels Capital Trust	$	—	$	—	$	—	$	—	$	—	$	30,825	$	30,825		$	31,602
Average interest rate														9.5	%

Item 4. Controls and Procedures

     As of September 30, 2010, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our former Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the CEO and CFO, concluded that our disclosure controls and procedures were effective to ensure that material information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within time periods specified in Securities and Exchange Commission rules and forms.

     There were no changes in internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the first nine months of 2010 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

     At any given time, we are subject to claims and actions incidental to the operation of our business. For additional information on our commitments and contingencies, see Note 11 of Condensed Notes to Consolidated Financial Statements. While the outcome of these proceedings cannot be predicted, it is the opinion of management that none of such proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, cash flows or results of operations.

Item 1A.Risk Factors

     In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A Risk Factors in our annual report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results. The risks described in our annual report may not be the only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results in the future.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     None.

Item 3. Defaults Upon Senior Securities

     None.

Item 4. Reserved

Item 5. Other Information

     None.

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Item 6. Exhibits

Index to Exhibits

Exhibit
Number	Description
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)
31.2	Certification of Principal Financial Officer pursuant to Exchange Act Rule 13a-14(a)
32.1	Certification of Chief Executive Officer pursuant to Exchange Act Rule 13(a)-14(b)
32.2	Certification of Principal Financial Officer pursuant to Exchange Act Rule 13(a)-14(b)

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Red Lion Hotels Corporation
Registrant

	Signature	Title	Date
By:	/s/ Jon E. EliassenJon E. Eliassen	President and Chief Executive Officer (Principal Executive Officer) and (Principal Financial Officer)	November 8, 2010

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