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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the period ended March 30, 1996.
or
TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File Number: 1-14058
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RED ROOF INNS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1393666
(State of Incorporation) (I.R.S. Employer Identification Number)
4355 DAVIDSON ROAD
HILLIARD, OHIO 43026-2491
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (614) 876-3200
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Number of shares of Common Stock outstanding at March 30, 1996:
28,400,000
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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 and, (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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The accompanying unaudited condensed financial statements of Red Roof
Inns, Inc. ("Red Roof" or the "Company"), a Delaware corporation, have been
prepared in accordance with the instructions to Form 10-Q, and therefore do not
include all information and notes necessary for complete financial statements
in conformity with generally accepted accounting principles. The results for
the periods indicated are unaudited, but reflect all adjustments (consisting
only of normal recurring accruals) which management considers necessary for a
fair presentation of operating results. Results of operations for interim
periods are not necessarily indicative of a full year of operations or results
for other interim periods. These condensed financial statements should be read
in conjunction with the Company's 1995 audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 30, 1995.
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RED ROOF INNS, INC.
CONDENSED BALANCE SHEETS
DECEMBER 30, 1995 AND MARCH 30, 1996
(IN THOUSANDS)
DECEMBER 30, MARCH 30,
ASSETS 1995 1996
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(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 4,427 $ 10,503
Receivables 7,990 10,956
Supplies and other 14,118 13,805
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Total current assets 26,535 35,264
PROPERTY AND EQUIPMENT:
Land 127,397 130,379
Buildings and improvements 492,711 500,886
Furniture, fixtures and equipment 53,357 56,807
Construction in progress 13,068 21,338
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Total property and equipment 686,533 709,410
Less accumulated depreciation and amortization 44,307 50,108
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Property and equipment - net 642,226 659,302
OTHER ASSETS:
Goodwill, net of accumulated amortization 74,712 74,146
Deferred loan fees and other - net 11,875 11,897
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Total other assets 86,587 86,043
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TOTAL $755,348 $780,609
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See notes to financial statements
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DECEMBER 30, MARCH 30,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
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(UNAUDITED)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 11,951 $ 11,633
Accounts payable 11,094 14,167
Accrued expenses 20,143 23,382
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Total current liabilities 43,188 49,182
LONG-TERM DEBT (LESS CURRENT MATURITIES):
Notes payable 344,871 216,184
Senior notes 200,000 200,000
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Total long-term debt 544,871 416,184
OTHER LONG-TERM LIABILITIES 14,578 15,247
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000 shares authorized,
no shares outstanding
Common stock, $.01 par value; 100,000 shares authorized,
shares issued and outstanding: 1995 - 18,400 shares; 1996 - 28,400 shares 184 284
Additional paid-in capital 117,816 266,312
Retained earnings 34,711 33,400
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Total stockholders' equity 152,711 299,996
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TOTAL $755,348 $780,609
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See notes to financial statements
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RED ROOF INNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED APRIL 1, 1995 AND MARCH 30, 1996
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
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APRIL 1, MARCH 30,
1995 1996
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REVENUES $ 61,558 $ 68,073
OPERATING EXPENSES:
Direct room expenses 34,885 41,123
Depreciation and amortization 6,208 7,262
Marketing and corporate expenses 11,496 10,451
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Total operating expenses 52,589 58,836
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OPERATING INCOME 8,969 9,237
INTEREST EXPENSE - NET (13,298) (11,436)
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LOSS BEFORE INCOME TAXES (4,329) (2,199)
INCOME TAX CREDIT 1,775 888
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NET LOSS $ (2,554) $ (1,311)
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NET LOSS PER SHARE $ (0.14) $ (0.05)
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WEIGHTED AVERAGE SHARES OUTSTANDING 18,400 24,989
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PRO FORMA NET LOSS $ (1,076) $ (255)
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PRO FORMA NET LOSS PER SHARE $ (0.04) $ (0.01)
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See notes to financial statements.
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RED ROOF INNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED APRIL 1, 1995 AND MARCH 30, 1996
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
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APRIL 1, MARCH 30,
1995 1996
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CASH FLOWS FROM OPERATIONS:
Net Loss $ (2,554) $ (1,311)
Adjustments to reconcile net loss to net cash
provided by operations:
Depreciation and amortization 5,644 6,696
Amortization of goodwill 564 566
Deferred income taxes and other - net (1,543) 639
Working capital changes:
Receivables (473) (2,966)
Supplies and other 257 388
Accounts payable (109) 1,299
Accrued expenses 4,819 3,684
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Net cash provided by operations 6,605 8,995
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (11,826) (22,385)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit and long-term borrowings 35,262 31,800
Principal payments on revolving credit and long-term borrowings (22,902) (160,805)
Proceeds from issuance of common stock - net 148,596
Other (4,846) (125)
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Net cash provided by financing activities 7,514 19,466
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NET INCREASE IN CASH AND CASH EQUIVALENTS 2,293 6,076
CASH AND CASH EQUIVALENTS, Beginning of Period 2,038 4,427
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CASH AND CASH EQUIVALENTS, End of Period $ 4,331 $ 10,503
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See notes to financial statements.
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ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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RED ROOF INNS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED APRIL 1, 1995 AND MARCH 30, 1996 (UNAUDITED).
1. GENERAL
At April 1, 1995 and March 30, 1996, the Company had a total of 220
and 234 inns, respectively.
Unaudited interim results for the thirteen weeks ended April 1, 1995
and March 30, 1996 contain all adjustments, consisting of normal recurring
accruals which management considers necessary for a fair presentation of
interim financial position and results of operations for such periods. The
results are not necessarily indicative of the results for any other interim
period or the full fiscal year.
2. LONG-TERM DEBT
On April 17, 1996, the Company amended the $100 million bank credit
agreement originally closed in November 1995 to provide for an expanded
commitment of $150 million. The additional $50 million is available upon the
perfection of liens on additional collateral. All other terms of the original
agreement remain substantially the same.
3. STOCKHOLDERS' EQUITY
On January 31, 1996, the Company issued 10,000,000 shares of common
stock in a public offering (the "Offering") at a price of $16.00 per share. Net
proceeds of the Offering were approximately $149 million which were used to
repay approximately $128 million of mortgage indebtedness. Approximately $21
million was retained for possible inn acquisitions, conversions and new
developments and for general corporate purposes.
In connection with the sale of the common stock, $9.6 million in
underwriting discounts and commissions were paid to certain underwriters,
including an affiliate of Morgan Stanley Real Estate Fund which, together with
affiliates, beneficially owns a majority of the outstanding common stock of the
Company.
In January 1996, the Company granted options to certain officers and
employees under the Company's Management Stock Option Plan to purchase 322,600
shares at $16.00 per share. In connection with the termination of the
employment of certain plan participants, 12,350 unvested shares lapsed.
4. SUPPLEMENTAL CASH FLOW INFORMATION
For the thirteen weeks ended April 1, 1995 and March 30, 1996,
interest payments were $8,105,000 and $7,196,000, respectively, and interest
capitalized for the corresponding periods was $96,000 and $598,000,
respectively. Income tax payments for the thirteen week periods in 1995 and
1996 were $323,000 and $538,000, respectively.
5. PRO FORMA NET LOSS
The pro forma net loss gives effect to the Offering of 10,000,000
shares of common stock on January 31, 1996 and the application of a portion of
the net proceeds to reduce certain mortgage debt and related interest expense.
The 1996 amount excludes Statement of Financial Accounting Standards No. 121
non-recurring charge of $450,000 ($268,000 after tax) to recognize the
impairment of certain long lived assets.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
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FINANCIAL CONDITION
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RESULTS OF OPERATIONS
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The principal factors affecting Red Roof Inns' results are:
seasonality, occupancy and room rates achieved by the brand, continued growth
in the number of inns, the Company's ability to manage expenses and the level
of competition. Demand, and thus room occupancy, is affected by normally
recurring seasonal patterns and, in most locations, is lower in the winter and
early spring months than the balance of the year. Historically, revenues have
been lower in the first quarter than in other quarters and the Company has
consistently incurred net losses in the first quarter.
Unless otherwise indicated, inn data presented in this report is based
on the 210 inns (the "Base Inns") that the Company owned and operated
immediately prior to June 1994. The Company believes that the 24 inns acquired
or developed and opened subsequent to this date have not been operated by the
Company for a sufficient period to provide meaningful period-to-period
comparisons, as the Company has closed a significant number of rooms at the
newly acquired inns for conversion and therefore the average daily room rates
and occupancy for these inns are not comparable to a stabilized Red Roof inn.
Newly acquired and developed inns historically begin with lower occupancy and
average daily room rates and improve over time as these implement the Company's
operating standards and become integrated into the Company's central
reservation system.
For the Company's 210 comparable base inns, average daily rate
increased $1.49, or 3.8%, from $39.59 per room sold during the first quarter
1995 to $41.08 per room sold in the comparable period in 1996. Occupancy
decreased slightly from 71.3% in the first quarter 1995 to 71.2% in the first
quarter 1996 primarily due to severe winter weather experienced in the East
Coast and Midwest.
The Company opened three inns during the first quarter of 1996
increasing the total number of inns operating at the end of the quarter to 234.
At April 1, 1995, 220 inns were in operation.
THIRTEEN WEEKS ENDED MARCH 30, 1996 COMPARED TO THIRTEEN WEEKS ENDED
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APRIL 1, 1995
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The Company's revenues are principally derived from room rentals.
Revenues increased $6.5 million, or 10.6%, from $61.6 million in 1995 to $68.1
million in the corresponding period of 1996. Approximately $4.2 million of the
increase in revenues was caused by an increase in the number of inns from 220
in 1995 to 234 in 1996, with $.1 million of the increase caused by the addition
of three inns in the first quarter of 1996. Base inn revenue per available room
(REVPAR) increased 3.6% from $28.23 in 1995 to $29.25 in 1996 primarily because
of an increase in room rates.
Direct room expenses include salaries, wages, utilities, repairs and
maintenance, property taxes, advertising, room supplies and security. Direct
room expenses increased $2.60 per occupied room, or 11.7%, from $22.18 in 1995
to $24.78 in 1996. As discussed below, the expenses generally increased because
of changes in operational methods to enhance customer service, contractual
increases, and general increases in utility expense rate structures. Repairs
and maintenance expenses increased due to scheduling maintenance in the low
occupancy periods so as not to conflict with the Company's peak season. Payroll
expenses increased primarily through wage and salary increases and additional
lobby staffing hours. Utility expenses increased because of anticipated rate
increases and the severe winter weather. Billboard advertising expenses
primarily increased due to contractual rental arrangements. To a much lesser
extent, the operation of new inns, which generally attain occupancies below
historical Company averages resulting in higher average expense per occupied
room, also contributed to the increase.
Depreciation and amortization increased $1.1 million from $6.2 million
in 1995 to $7.3 million in 1996. The increase primarily reflects depreciation
of inns acquired during 1995. Reflecting the implementation of Statement of
Financial Accounting Standards No. 121 (accounting for the impairment of long
lived assets), the amount also includes a provision of $.5 million in 1996 to
adjust certain long lived assets to estimated fair value. Had such a charge not
been incurred, operating income would have been $9.7 million and the net loss
would have been $1.0 million ($.04 per share).
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Marketing and corporate expenses include the cost of general
management training and field supervision of inn managers, development,
marketing and administrative expenses. Marketing and corporate expenses
decreased $1.0 million from $11.5 million in 1995 to $10.5 million in 1996. The
decreases primarily consist of reductions in marketing production, media and
promotional expenses ($1.8 million), which were partially offset by higher
compensation and travel expenses. As a percentage of revenue, marketing and
corporate expenses were 18.7% and 15.4% in 1995 and 1996, respectively.
Interest expense decreased $1.9 million from $13.3 million in 1995 to
$11.4 million in 1996 because of the Offering, the net proceeds of which were
primarily used to repay approximately $128 million of mortgage indebtedness.
CAPITAL RESOURCES AND LIQUIDITY
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GENERAL
Cash and cash equivalents increased approximately $6.1 million from
$4.4 million on December 30, 1995 to $10.5 million on March 30, 1996. As of
March 30, 1996, availability under the Company's bank credit facility was
$100.0 million. As of December 30, 1995, $50.8 million was outstanding under
the bank credit facility. In April 1996, the Company expanded by amendment its
$100 million revolving bank credit facility to a $150 million revolving bank
credit facility. The additional $50 million is available upon the perfection of
liens on additional collateral.
Management anticipates that its working capital needs will be financed
by internally-generated cash and the bank credit facility.
CAPITAL EXPENDITURES
For the thirteen week period ended March 30, 1996, the Company spent
$4.5 million in connection with improvements to base inns and expects to spend
a total of approximately $20 million for such improvements through the end of
the year. Additionally, the Company is completing renovation of properties and
construction sites acquired since the second half of 1994. In connection with
the renovation and improvement of these properties, the Company spent $11.2
million in 1996, and expects to spend a total of approximately $38 million
through the end of the year.
To date in 1996, the Company has purchased one inn and acquired four
construction sites for an aggregate purchase price, including improvements, of
approximately $6.2 million. Management expects to spend a total of
approximately $27 million through the end of the year for improvements to these
properties.
As of May 6, 1996, the Company had one inn and two construction sites
under contract to purchase. The Company estimates the purchase and related
renovations and improvements to total approximately $20 million in 1996.
Management expects to fund the Company's capital expenditures
associated with improvements for inns from proceeds from the Offering, cash
flow from operations and from borrowings under the bank credit facility.
Expenditures for acquisition, renovation, and new construction will also be
financed from these sources, all of which are subject to the satisfactory
completion by the Company of its due diligence.
HISTORICAL CASH FLOWS
Cash provided by operations increased $2.4 million from $6.6 million
in 1995 to $9.0 million in 1996, generally as the result of a decrease in the
net loss for 1996 compared to 1995 and an increase in non-cash charges in 1996.
Net cash used by investing activities increased $10.6 million from
$11.8 million in 1995 to $22.4 million in 1996, primarily as the result of
renovation and construction activities associated with the Company's expansion
program. As discussed above, expenditures for property and equipment to date in
1996 include the acquisition of one inn and four construction sites.
Net cash provided by financing activities increased $12.0 million
from $7.5 million in 1995 to $19.5 million in 1996, primarily as the result of
proceeds from the Offering, net of mortgage indebtedness repayments.
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EBITDA
Operating income plus the sum of interest income, other income,
depreciation and amortization and loss on fixed asset retirements (EBITDA)
increased $1.5 million from $15.3 million in 1995 to $16.8 million in 1996.
EBITDA, which is presented to provide additional information regarding the
Company's ability to meet its future debt service, capital expenditures and
working capital requirements, should not be construed as an alternative to
operating income or cash flows from operating activities (each determined in
accordance with generally accepted accounting principles), and should not be
construed as an indication of the Company's operating performance or as a
measurement of liquidity.
FORWARD LOOKING STATEMENTS
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Any forward-looking statements contained in this Form 10-Q or any
other reports prepared by the Company or made by management of the Company
involve risks and uncertainties, and are subject to change based on various
important factors. The following factors among others, in some cases have
affected, and in the future could affect Red Roof's actual financial
performance. These risks and uncertainties include, but are not limited to:
economic conditions, both national and regional; oversupply of hotel rooms;
competition; expansion into new markets; pricing and availability of
construction materials, changes in interest rates; availability of financing
and changes in federal, state and local government regulations pertaining to
building requirements and environmental matters.
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PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
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On April 25, 1996, Red Roof Inns, Inc., announced the appointment of
Edward D. Powers to its Board of Directors effective April 24, 1996. Mr. Powers
is chairman of the board and chief executive officer of Powers Holdings, Inc.,
in Milwaukee, Wisconsin.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
Ex - 10.01 First Amendment to Loan Agreement
Ex - 10.02 Second Amendment to Loan Agreement
Ex - 10.03 Third Amendment to Loan Agreement
Ex - 10.04 Red Roof Inns, Inc. 1996 Management Incentive
Compensation Plan
Ex - 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8K required to be reported herein were filed
during the thirteen weeks ended March 30, 1996.
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SIGNATURE
Pursuant to the requirement 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 ROOF INNS, INC.
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(Registrant)
Date 05/09/96 /s/ David N. Chichester
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David N. Chichester
Executive Vice President and
Chief Financial Officer
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