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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 quarter ended September 28, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transaction period from to
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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 No.)
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 September 28, 1996:
27,911,875
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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 consolidated 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. All material intercompany
transactions and balances between Red Roof Inns, Inc. and its subsidiaries have
been eliminated in consolidation. These condensed consolidated 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 CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1995 AND SEPTEMBER 28, 1996
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 30, SEPTEMBER 28,
ASSETS 1995 1996
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CURRENT ASSETS:
Cash and cash equivalents $ 4,427 $ 12,083
Receivables 7,990 10,248
Supplies and other 14,118 13,796
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Total current assets 26,535 36,127
PROPERTY AND EQUIPMENT:
Land 127,397 134,775
Buildings and improvements 492,711 540,809
Furniture, fixtures and equipment 53,357 69,955
Construction in progress 13,068 16,799
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Total property and equipment 686,533 762,338
Less accumulated depreciation and amortization (44,307) (62,293)
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Property and equipment - net 642,226 700,045
OTHER ASSETS:
Goodwill, net of accumulated amortization 74,712 73,012
Deferred loan fees and other - net 11,875 13,234
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Total other assets 86,587 86,246
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TOTAL $ 755,348 $ 822,418
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See notes to condensed consolidated financial statements.
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DECEMBER 30, SEPTEMBER 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
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CURRENT LIABILITIES:
Current maturities of long-term debt $ 11,951 $ 13,416
Accounts payable 11,094 12,345
Accrued expenses 20,143 34,266
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Total current liabilities 43,188 60,027
LONG-TERM DEBT (LESS CURRENT MATURITIES):
Notes payable 344,871 224,928
Senior notes 200,000 200,000
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Total long-term debt 544,871 424,928
OTHER LONG-TERM LIABILITIES 14,578 18,323
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 - 28,412 shares 184 284
Additional paid-in capital 117,816 266,515
Retained earnings 34,711 58,816
Less treasury stock, at cost: 1996 - 500 shares (6,475)
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Total stockholders' equity 152,711 319,140
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TOTAL $ 755,348 $ 822,418
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See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 28, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
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SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28,
1995 1996 1995 1996
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REVENUES $ 84,513 $ 92,535 $ 223,047 $ 244,400
OPERATING EXPENSES:
Direct room expenses 39,237 43,035 111,022 123,373
Depreciation and amortization 6,549 6,771 18,863 21,042
Corporate and marketing expenses 7,889 9,166 26,749 28,225
Change in management expenses 58 2,885
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Total operating expenses 53,733 58,972 159,519 172,640
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OPERATING INCOME 30,780 33,563 63,528 71,760
INTEREST EXPENSE - NET (12,485) (10,029) (38,245) (31,326)
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INCOME BEFORE INCOME TAXES 18,295 23,534 25,283 40,434
INCOME TAX EXPENSE (7,368) (9,505) (10,164) (16,329)
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NET INCOME $ 10,927 $ 14,029 $ 15,119 $ 24,105
========= ========= ========= =========
EARNINGS PER SHARE $ 0.59 $ 0.50 $ 0.81 $ 0.88
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 18,638 28,332 18,638 27,389
========= ========= ========= =========
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PRO FORMA NET INCOME $ 12,245 $ 14,029 $ 20,844 $ 25,160
========= ========= ========= =========
PRO FORMA EARNINGS PER SHARE $ 0.43 $ 0.50 $ 0.73 $ 0.88
========= ========= ========= =========
See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996
(IN THOUSANDS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
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SEPTEMBER 30, SEPTEMBER 28,
1995 1996
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CASH FLOWS FROM OPERATIONS:
Net Income $ 15,119 $ 24,105
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 16,905 19,400
Amortization of goodwill 1,648 1,700
Deferred income taxes and other - net 1,384 4,490
Working capital changes:
Receivables (1,055) (2,258)
Supplies and other (224) 453
Accounts payable 1,264 (2,662)
Accrued expenses 14,877 14,123
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Net cash provided by operations 49,918 59,351
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (60,020) (75,561)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit and long-term borrowings 83,262 61,894
Principal payments on revolving credit and long-term borrowings (89,079) (180,372)
Proceeds from issuance of common stock and additional capital contributions 18,000 148,799
Purchase of treasury stock (6,475)
Other (2,453) 20
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Net cash provided by financing activities 9,730 23,866
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (372) 7,656
CASH AND CASH EQUIVALENTS, Beginning of Period 2,038 4,427
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CASH AND CASH EQUIVALENTS, End of Period $ 1,666 $ 12,083
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See notes to condensed consolidated financial statements.
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ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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RED ROOF INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 1995 AND
SEPTEMBER 28, 1996 (UNAUDITED)
1. GENERAL
The condensed consolidated financial statements include the accounts of
Red Roof Inns, Inc. and its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
At September 30, 1995 and September 28, 1996, the Company operated 225
inns and 239 inns, respectively.
Unaudited interim results for the thirteen weeks and thirty-nine weeks
ended September 30, 1995 and September 28, 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 executed in November 1995 to provide for an expanded commitment
totaling $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 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 The Morgan Stanley Real Estate Fund which, together
with affiliates, beneficially owns a majority of the outstanding common stock of
the Company.
During 1996, the Company has granted options to certain directors,
officers, and employees under the Company's stock option plans to purchase
463,100 shares at prices ranging from $12.625 to $16.00 per share.
On July 30, 1996, Red Roof Inns, Inc., announced that its Board of
Directors authorized a share repurchase program, pursuant to which the Company
may repurchase up to 500,000 of its common shares to fulfill the Company's
requirements for its employee stock purchase and management stock option plans.
In August 1996, the Company repurchased 500,000 shares of its common stock in
the open market for an aggregate purchase price of $6,475,000, or $12.95 per
share.
4. SUPPLEMENTAL CASH FLOW INFORMATION
For the thirty-nine weeks ended September 30, 1995 and September 28,
1996, interest payments were $33,957,000 and $27,997,000, respectively, and
interest capitalized for the corresponding periods was $968,000 and $2,007,000,
respectively. Income tax payments for the thirty-nine week periods in 1995 and
1996 were $3,643,000 and $4,366,000, respectively. Capital expenditures included
in accounts payable-trade at September 28, 1996 totaled $5,725,000.
5. PRO FORMA NET INCOME
The pro forma net income gives effect to the Offering and the
application of a portion of the net proceeds therefrom to reduce certain
mortgage debt and related interest expense. The thirteen and thirty-nine week
amounts in 1995 exclude non-recurring charges of $58,000 and $2,885,000,
respectively (after tax $35,000 and $1,720,000,
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respectively) relating to a change in management. The thirty-nine week amount in
1996 excludes a 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.
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: occupancies
and room rates, continued growth in the number of inns, the Company's ability to
manage expenses, the level of competition and seasonality. Demand, and thus
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 that the Company owned and operated immediately prior to June
1994 (the "Base Inns"). The Company believes that the 29 inns acquired or
constructed and opened subsequent to this date have not been operated by the
Company for a sufficient length of time 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 those inns are not comparable to a stabilized Red Roof inn.
Newly acquired and constructed inns historically begin with lower occupancy and
average daily rates and improve over time as they implement the Company's
operating policies and procedures and become integrated into the Company's
central reservation system.
During the third quarter, average daily rate increased $2.38, or 5.2%,
from $45.70 per occupied room during the third quarter 1995 to $48.08 per
occupied room in the comparable period in 1996. Occupancy decreased from 83.7%
in the third quarter 1995 to 82.4% in the third quarter 1996 primarily because
of increases in room rates and increased competition. For the thirty-nine week
period, average daily rate increased $2.15, or 5.0%, from $42.90 per occupied
room in 1995 to $45.05 per occupied room in 1996. For the thirty-nine week
period, occupancy decreased from 79.1% in 1995 to 77.9% in 1996.
The Company opened two inns during the third quarter of 1996 increasing
the total number of inns operating at the end of the quarter to 239. At
September 30, 1995, 225 inns were in operation.
THIRTEEN WEEKS ENDED SEPTEMBER 28, 1996 COMPARED TO THIRTEEN WEEKS ENDED
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SEPTEMBER 30, 1995
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The Company's revenues are principally derived from room rentals.
Revenues increased $8.0 million, or 9.5%, from $84.5 million in 1995 to $92.5
million in 1996. Approximately $4.0 million of the increase in revenues was
caused by an increase in the number of inns operated from 225 in 1995 to 239 in
1996, with approximately $.2 million of the increase caused by the addition of
two inns in the third quarter of 1996. Base Inn revenue per available room
(REVPAR) increased 3.6%, from $38.25 in 1995 to $39.62 in 1996 because of the
increase in room rates.
Direct room expenses include salaries and wages, advertising,
utilities, repairs and maintenance, property taxes, room supplies and security.
Direct room expenses increased $3.8 million, or 9.7%, from $39.2 million in 1995
to $43.0 million in 1996. The expenses increased primarily because of the
addition of new inns and generally higher salary and wage expenses. Direct room
expenses as a percentage of revenues were 46.4% in 1995 and 46.5% in 1996.
Gross operating profit increased $4.2 million, or 9.3%, from $45.3
million in 1995 to $49.5 million in 1996, primarily as a result of increases in
REVPAR and the number of inns. As a percentage of room revenues, gross operating
profit was 53.6% in 1995 and 53.5% in 1996.
Depreciation and amortization increased $.3 million, from $6.5 million
in 1995 to $6.8 million in 1996. The increase primarily reflects depreciation of
inns acquired since the third quarter of 1995.
Corporate and marketing expenses include inn management training, field
supervision of inn managers, development, marketing and administrative expenses.
Corporate and marketing expenses increased $1.3 million, or 16.5%, from $7.9
million in 1995 to $9.2 million in 1996. The increase primarily results from
higher employee staffing,
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benefit and incentive compensation expenses. As a percentage of revenues,
corporate and marketing expenses were 9.3% and 9.9%, in 1995 and 1996,
respectively.
The change in management expenses reflect expenses for severance
benefits paid in 1995 to certain officers under their respective employment
agreements upon termination of their employment and certain expenses associated
with the employment of a new Chief Executive Officer, General Counsel and Chief
Financial Officer.
Interest expense-net decreased $2.5 million, from $12.5 million in 1995
to $10.0 million in 1996 because of the Offering, the net proceeds of which were
primarily used to repay approximately $128 million of mortgage indebtedness.
Income tax expense increased $2.1 million, from $7.4 million in 1995 to
$9.5 million in 1996. The tax rate was approximately 40% for both 1995 and 1996.
Net income increased $3.1 million, or 28.4%, from $10.9 million in 1995
to $14.0 million in 1996, primarily from the increase in gross operating profit
and the reduction in interest expense from the repayment of debt as a result of
the Offering.
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 COMPARED TO THIRTY-NINE WEEKS ENDED
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SEPTEMBER 30, 1995
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Revenues increased approximately $21.4 million, or 9.6%, from $223.0
million in 1995 to $244.4 million in 1996. Approximately $9.0 million of the
increase in revenues was caused by an increase in the number of inns operated
from 225 in 1995 to 239 in 1996. Base Inn REVPAR increased 3.4%, from $33.93 in
1995 to $35.09 in 1996 because of the increase in room rates.
Direct room expenses increased $12.4 million, or 11.1%, from $111.0
million in 1995 to $123.4 million in 1996. The increase in expenses was caused
primarily by an increase in the number of inns and anticipated increases in inn
operating expenses for salaries and wages, advertising, utilities, and security
expenses. Direct room expenses as a percentage of revenues was 49.8% in 1995 and
50.5% in 1996. The increase in the direct room expense percentage primarily
reflects the impact of new inns, which typically operate at lower sales volumes
while incurring relatively fixed operating expenses.
Gross operating profit increased $9.0 million, or 8.0%, from $112.0
million in 1995 to $121.0 million in 1996, primarily as a result of increases in
REVPAR and the number of inns. As a percentage of room revenues, gross operating
profit was 50.2% in 1995 and 49.5% in 1996. The decline in gross operating
profit percentage primarily reflects the impact of new inns, which typically
operate at lower sales volumes and incur relatively fixed expenses.
Depreciation and amortization increased $2.1 million, from $18.9
million in 1995 to $21.0 million in 1996. The increase generally reflects
depreciation of new inns.
Corporate and marketing expenses increased $1.5 million, or 5.6%, from
$26.7 million in 1995 to $28.2 million in 1996. The increase was generally due
to higher salary and benefit expenses related to higher staffing levels and wage
and benefit increases. As a percentage of revenue, corporate and marketing
expenses were 12.0% and 11.5% in 1995 and 1996, respectively.
The change in management expenses of $2.9 million reflects expenses for
severance benefits paid in 1995 to certain officers under their respective
employment agreements upon termination of their employment and certain expenses
associated with the employment of a new Chief Executive Officer, General Counsel
and Chief Financial Officer.
Interest expense-net decreased $6.9 million, from $38.2 million in 1995
to $31.3 million in 1996 because of the Offering, the net proceeds of which were
used to repay approximately $128 million of mortgage indebtedness.
Income tax expense increased $6.1 million, from $10.2 million in 1995
to $16.3 million in 1996. The tax rate was approximately 40% for both 1995 and
1996.
Net income increased $9.0 million, or 59.6%, from $15.1 million in 1995
to $24.1 million in 1996, primarily from the increase in gross operating profit,
the reduction in interest expense associated with the repayment of debt as a
result of the Offering, and the elimination of the non-recurring charge in 1995.
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CAPITAL RESOURCES AND LIQUIDITY
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GENERAL
Cash and cash equivalents increased approximately $7.7 million, from
$4.4 million on December 30, 1995 to $12.1 million on September 28, 1996. Total
debt outstanding decreased approximately $118.5 million, from $556.8 million on
December 30, 1995 to $438.3 million on September 28, 1996. Total debt includes
$50.8 million and $0 outstanding under the bank revolving credit facility as of
December 30, 1995 and September 28, 1996, respectively. As of September 28,
1996, the unused commitment under the Company's bank credit facility was $150
million, of which $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 revolving credit facility.
CAPITAL EXPENDITURES
The Company is launching a property renewal program encompassing more
than 85% of the inns, commencing in the fourth quarter of 1996, with all work
scheduled for completion in mid-1997. The total cost of the project is
approximately $50 million, of which approximately $16 million will be expended
in 1996. Management anticipates incurring total non-recurring charges to
earnings of approximately $15 million related to early retirement of assets
and other costs associated with the chainwide renewal program, of which
approximately $10 million will be incurred in the fourth quarter 1996.
The Company is completing renovation of acquired properties and
construction of new properties. In connection with the renovation and
construction of these properties, the Company expects to spend an additional $30
million through the end of the year.
As of November 6, 1996, the Company had four inns and 10 construction
sites under contract to purchase, all of which are subject to the satisfactory
completion by the Company of its due diligence. The Company estimates the
purchases will total approximately $34 million, of which approximately $5
million will be incurred in the fourth quarter 1996.
Management expects to fund the Company's capital expenditures for the
renewal program and improvements to inns from borrowings under the bank credit
facility and cash flow from operations. Expenditures for acquisition, renovation
and new construction will also be financed from these sources.
HISTORICAL CASH FLOWS
Cash provided by operations increased $9.5 million, from $49.9 million
in 1995 to $59.4 million in 1996, primarily as the result of an increase in net
income in 1996.
Net cash used by investing activities increased $15.6 million, from
$60.0 million in 1995 to $75.6 million in 1996. Of the total expended in 1996,
approximately $18.0 million related to Base Inns and corporate expenditures and
$57.6 million related to renovation and construction activities associated with
the Company's expansion program.
Net cash provided by financing activities increased $14.2 million,
from $9.7 million in 1995 to $23.9 million in 1996, primarily as the result of
proceeds from the Offering, net of mortgage indebtedness repayments and the
purchase of treasury stock.
EBITDA
Operating income plus the sum of interest income, other income,
depreciation and amortization and loss on fixed asset retirements (EBITDA)
increased $10.6 million, from $82.8 million for the thirty-nine weeks ended
September 30, 1995 to $93.4 million for the thirty-nine weeks ended September
28, 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.
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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 6 - EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
Ex - 27 Financial Data Schedule
(b) Reports on Form 8-K.
No Form 8-K's filed during the quarter.
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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 11/12/96 /s/ David N. Chichester
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David N. Chichester
Executive Vice President and
Chief Financial Officer
Date 11/12/96 /s/ Ray L. Druseikis
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Ray L. Druseikis
Vice President, Controller and
Chief Accounting Officer
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