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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 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
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 (Zip Code)
executive office)
Registrant's telephone number, including area code: (614) 876-3200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange on
Title of each class which registered
------------------- ----------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING WAS 28,454,191 AT
FEBRUARY 28, 1997.
BASED ON THE CLOSING SALES PRICE OF FEBRUARY 28, 1997, THE AGGREGATE
MARKET VALUE OF THE STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT
WAS $154,583,187
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into
the designated parts of this Form 10-K: definitive Proxy Statement, dated on or
about March 28, 1997 relating to Registrant's 1997 Annual Meeting of
Stockholders (in Part III), which Registrant intends to file not later than 120
days after the end of the fiscal year covered by this Form 10-K.
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Unless the context otherwise requires, the "Company," "Red Roof" or
"Red Roof Inns" refers to Red Roof Inns, Inc., a Delaware corporation and the
surviving corporation of the merger (the "Merger") in December 1993 with Red
Roof Inns, Inc., an Ohio corporation (the "Predecessor Company"), and includes
the Predecessor Company prior to the Merger and any subsidiaries of Red Roof
Inns, Inc. from time to time.
Unless otherwise indicated, inn data presented in this report is based
on 210 inns (the "Base Inns") that the Company owned and operated immediately
prior to June 1994. The Company believes that the 38 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 inns implement the Company's operating
standards and become integrated into the Company's central reservation system.
Red Roof Inns operates in the economy chain scale segment ("economy
segment") of the lodging industry as defined by Smith Travel Research ("STR"), a
leading industry research firm. STR categorizes lodging properties into the
following chain scale segments based upon average daily rates: upper upscale,
upscale, mid-scale with food beverage, mid-scale without food and beverage,
economy, budget and independents.
PART I
ITEM 1. BUSINESS
GENERAL
Red Roof Inns is the largest owner/operator of economy segment hotels
in the United States, with 248 inns containing more than 28,100 rooms in 33
states, located primarily throughout the Midwest, East, South and Gulf Coast
regions. Red Roof's hotels are designed to attract both the business and leisure
traveler seeking room quality and inn locations that are generally comparable to
those of mid-price hotels, but at lower average room rates. By not providing
full-service, management-intensive facilities and services, such as in-house
restaurants or cocktail lounges, banquet centers, conference rooms, room
service, recreational facilities or other services and facilities that the
Company's targeted customers do not typically value, Red Roof is able to deliver
a product that addresses its customers' needs and price expectations. In
general, Red Roof's guests are evenly divided between business and leisure
travelers.
According to STR, Red Roof has one of the highest occupancy rates in
the economy segment of the lodging industry. The Company's Base Inns had an
average occupancy percentage of 75.5% with an average daily room rate ("ADR") of
$45.10 for 1996. Base Inn revenue per available room ("REVPAR") has grown over
the past four years at a compound annual rate of 4.3% to $34.05 for 1996.
The following table sets forth certain data for the Company's Base
Inns for the years indicated:
Average
Occupancy (1) ADR (2) REVPAR (3)
----------------- ---------- ------------
Fiscal Year
1992 76.5% $37.58 $28.75
1993 79.6 37.80 30.09
1994 79.1 40.12 31.73
1995 77.3 42.71 33.01
1996 75.5 45.10 34.05
1992-96 Compound Annual
Growth Rate (0.3)% 4.7% 4.3%
<FN>
(1) Average occupancy percentage represents total rooms occupied divided by
total available rooms. Total available rooms represents the number of rooms
available multiplied by the number of days in the reported period.
(2) ADR represents total room revenues (before allowances) divided by the total
number of rooms occupied.
(3) REVPAR represents the average occupancy percentage multiplied by the
average daily room rate for the reported period.
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In 1996, the Company's Base Inns REVPAR increased by 3.2% over 1995 as
the result of a 5.6% increase in ADR and a 1.8 percentage point decline in the
average occupancy percentage. The Company's ADR remains lower than the average
for the economy segment overall in 1996, which provides the Company with the
flexibility to increase rates. In addition, for the four year period from 1992
through 1996, the Company increased operating income at a compound annual growth
rate of 7.5%. These increases in operating income were achieved by increasing
REVPAR and controlling costs.
Red Roof Inns is a price value leader in the economy segment of the
lodging industry and operates its inns with a view toward offering inn locations
and room quality comparable to many mid-priced hotels but at substantially lower
room rates. Management believes that the Company's customers' perception of
strong customer value is dependent on three components: price, location and
consistent quality. Guests who travel in the economy segment do so to save
money. Red Roof Inns is able to maintain its low prices by being a low-cost
provider as a result of a consistent company-wide emphasis on cost control. Red
Roof's inns are generally located near interstate highways, major traffic
arteries or major destination areas such as airports, business districts,
universities, hospitals or convention centers. All locations are well
constructed and maintained and are attractively landscaped to enhance their
appearance. In addition, the Company strives to deliver a consistent guest
experience throughout the chain by following a consistent chainwide set of
operating, marketing and hospitality standards. The Company's success in
providing customer value is demonstrated by its consistently high occupancy
levels compared to the average for the economy segment.
The Company believes that it has achieved significant brand name
awareness as a result of its ability to provide high-quality, well-located
accommodations and superior value, together with its national advertising
campaign featuring actor/comedian Martin Mull. This brand awareness and
reputation for price, quality and value have consistently placed Red Roof Inns
among the leaders in the economy segment in terms of occupancy rates and REVPAR,
according to STR. In addition, the brand name has earned the Company a strong
following of loyal guests. In 1996, Red Roof ranked second among economy chains
for repeat guests based upon survey results from a national travel market
research firm. Management believes that the Company's brand identity provides it
with a significant advantage over independent hotel operators and other economy
segment chains, and together with its operational expertise, will enhance the
performance of existing and newly constructed and acquired properties. As a
result, management is expanding the chain on a national basis through hotel
development and franchising. In its franchising program, the Company is
targeting qualified multi-unit hotel owners and developers who will perpetuate
the Company's strong brand identity by maintaining the Company's high product,
service and consistent standards.
The Company promotes and operates its own reservation center and
toll-free number (1-800-THE-ROOF) to accept reservations. During 1996, the
Company handled approximately 2.6 million calls through the toll-free number, of
which approximately 42% were converted to reservations, contributing to the
Company's high level of occupancy. Management believes that its leadership in
occupancy provides it with increased flexibility to set room pricing under
various economic conditions.
The Company has operated its inns since its formation in 1972. Red
Roof's management has substantial experience in the lodging industry. On
average, senior management has approximately 13 years experience in the lodging
industry and is supported by operational and administrative vice presidents with
an average of 14 years experience, and on-site general managers with an average
of seven years experience. Each Red Roof inn is operated as an individual profit
center by a general manager who oversees all day-to-day operating activities and
implements corporate rate management and cost containment strategies. Management
believes this structure reduces operating costs while creating incentives to
maximize REVPAR and enhance operating margins by adapting room rates to
prevailing market conditions at individual inns.
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STRATEGY
The Company's strategy is to increase cash flow and earnings by (i)
increasing REVPAR while maintaining the room price and value relationship and
controlling costs, (ii) increasing the number of inns through franchising and
(iii) increasing the number of inns the Company owns and operates through
selective new construction and acquisitions.
INCREASE REVPAR. The Company intends to increase cash flow through
REVPAR increases, primarily from increasing ADR, maintaining strong occupancy
levels and controlling costs. The Company believes that increases in REVPAR will
be achieved as a result of its chainwide inn renewal program ("Project BIG RED")
and through the implementation of an automated revenue management system as
described below. The Company also believes that it will be able to increase
REVPAR by stimulating room demand through extensive advertising and promotional
strategies.
- PROJECT BIG RED - In the fourth quarter of 1996, the Company
launched Project BIG RED, a chainwide property renewal program
which will refurbish and enhance both the interior decor and
exterior appearance of more than 85% of the Company's inns as
well as provide additional room amenities and services for
guests. Project BIG RED will give the rooms a more modern,
residential feel with new carpet, wallcovering, furniture,
bedspreads and drapes. A brighter paint shade, new signs,
improved lighting and additional landscaping will enhance the
exterior appeal of the inns and highlight the properties for
approaching travelers. The program will also add additional
amenities to all rooms, which management believes will reinforce
Red Roof Inns' position as a price value leader in the economy
segment. The program also includes adding additional features to
the Company's business king rooms which are designed to better
address the needs of the business traveler. Management believes
that Project BIG RED will reinforce the Company's commitment to
providing high value and service at reasonable prices, further
strengthen the Company's competitive position versus its economy
segment competitors and enhance revenues by allowing the Company
to increase ADR and REVPAR. Project BIG RED is expected to be
completed by mid-year 1997 with an expected total project cost
of approximately $55 to $60 million. The Company anticipates
total non-recurring charges to earnings of $20 to $25 million
related to early asset retirements and other expenses associated
with Project BIG RED. Approximately $10 million of the
non-recurring charges ($8 million related to early asset
retirements) were recognized by the Company during the fourth
quarter of 1996 and the balance is expected to be recognized
during the first two quarters of 1997. See "Item 8. Financial
Statements and Supplementary Data - Note 10 to the Consolidated
Financial Statements."
- REVENUE MANAGEMENT SYSTEM - In May 1996 the Company contracted
with Aeronomics, Inc., a leader in automated yield management
systems for the hotel and airline industries, to develop and
implement a fully automated revenue management system. The
automated system will be linked to both the central reservation
system and the individual property management systems, providing
real-time information. The system is essentially an inventory
control system that will enable the Company to better manage
both occupancy and rate by analyzing historical data and trends
and current reservation activity to forecast current trends. Inn
managers will be able to use the system to foresee peak
occupancy days and predict cancellations, no-shows, stay-overs,
and walk-in traffic. This will enable the managers to adjust
room rates and better manage both lengths of stay and discount
business. Management expects the revenue management system to be
fully implemented in late 1997. Based upon an analysis completed
by Aeronomics, Inc., management believes that implementation of
the automated yield management system can increase revenue by
two to four percent.
FRANCHISING. In August 1996, the Company implemented a program to
offer franchises of Red Roof Inns to qualified franchisees. The Company will
grant franchisees the right to use the Red Roof Inn name, obtain reservations
through the Company's central reservation system and use the Company's inn
designs, operating systems and procedures. In return, franchisees will pay
royalty, marketing and reservation fees to the Company. The amount of fees will
vary with the total revenues produced by the franchised inn as well as with
levels of customer service, as measured by an independent survey conducted by a
market research company, achieved by each inn. The Company believes this
strategy will allow it to continue to expand the Red Roof Inn brand nationally
without significant capital investment. The Company believes that its franchises
are attractive because of its superior occupancy, attractive operating profit
margins,
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the significant open territories in the Red Roof Inns system, the development,
operations, reservations and marketing support the Company provides and the
consistency of the Red Roof Inns product. The franchising program is focused on
developing relationships with experienced, multi-unit hotel owners who will
develop new Red Roof inns and/or convert existing inns to the Red Roof Inn name.
The Company believes that this strategy will allow it to increase revenues, cash
flow and the number of Red Roof Inns while maintaining consistent quality across
the entire chain.
As of December 28, 1996, the Company was in negotiations with several
multi-unit hotel owners for the development of 25 new franchised Red Roof inns
over the next few years. On February 18, 1997, Red Roof announced that it had
signed its first franchise Multi-Unit Development Agreement with Columbus Hotel
Properties, L.L.C. to develop 10 properties over the next three and a half years
and to franchise them as Red Roof Inns. Columbus Hotel Properties is currently
focusing on sites and potential acquisitions in the southeastern United States.
HOTEL DEVELOPMENT. The Company continues to expand through both the
construction of new inns and the acquisition of existing inns in strategic
markets. The Company evaluates expansion opportunities within existing markets,
as well as selected regions of the country where the Company has not
historically had a substantial presence. The Company seeks to concentrate on
properties within its selected target markets in order to maximize operating
efficiencies and regional brand recognition. In addition to the foregoing, the
Company may consider, under appropriate circumstances, the acquisition of local
or regional chains. The Company believes that it has a strong corporate
infrastructure in place to accommodate significant inn expansion, including an
experienced development and acquisition team, an effective central reservation
system, a well-developed property management system and an extensive management
training program.
As the Company pursues its strategy, acquisitions of existing inns
will be targeted in those markets where there are no suitable development sites
that meet the Company's stringent standards for quality, location, performance
and cost. Since June 1994, the Company has acquired 18 development sites located
in Arizona, Florida, Georgia, Ohio and Texas. The Company estimates that it will
construct a total of approximately 2,445 rooms on these development sites. A
total of 12 developed inns consisting of 1,430 rooms were open as of December
28, 1996.
Since June 1994, the Company has acquired 27 inns (26 of which were
open as of December 28, 1996) consisting of 3,654 rooms (after conversion and
room additions) located in Alabama, Arizona, California, Colorado, Connecticut,
Florida, Massachusetts, Mississippi, New Jersey, North Carolina, South Carolina,
Texas, Virginia and Washington, D.C.
Certain of the newly acquired inns differ from the Company's existing
inns in terms of construction, number of rooms, room size, building
configuration, signage and decor and in other respects. See "Item 2.
Properties." Each acquired inn receives Red Roof signage, installation of
computer hardware to accommodate electronic processing of reservations and the
transmission of financial and other data to the corporate offices in suburban
Columbus, Ohio, as well as lobby modifications designed to support operational
practices and procedures. In addition, the Company makes capital improvements,
where needed, to guest rooms and guest-sensitive areas to ensure that each
acquired property adheres to Red Roof's stringent operating standards. See "Item
7. Management's Discussion and Analysis of Results of Operations and Financial
Condition - Capital Resources and Liquidity - Capital Expenditures." Although
acquired properties, after conversion, differ in certain respects from existing
inns, the renovated properties offer quality accommodations and service
consistent with Red Roof's brand name identity.
In evaluating expansion opportunities, the Company generally reviews
the competitive environment of the market, including room supply, room demand,
average daily room rates and local market wages. The Company also evaluates
demand generators such as area businesses, conference centers, airports,
universities, hospitals, theme parks, and other business and leisure
attractions. Each potential development site and inn acquisition is evaluated
for accessibility, visibility and restrictive local ordinances. In addition, the
Company's evaluation of a potential inn acquisition includes an extensive review
of its historical operating and financial results, and the estimated cost of
converting the facility to Red Roof's standards of quality. Each anticipated
development site and inn acquisition is evaluated for an estimated return on
investment.
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LODGING INDUSTRY
The lodging industry, as a whole, has shown significant improvement
since the beginning of 1992. The key elements underlying the industry's strong
performance and increased profitability may be attributed to increased economic
activity, resulting in growth in demand for hotel rooms that exceeded growth in
available supply. The economy segment in which the Company operates has also
experienced favorable operating results. According to STR, 1996 increases in
room demand were slightly greater than increases in room supply for both the
industry as a whole and the economy segment. Red Roof has one of the highest
occupancy rates in the economy segment.
COMPETITION
Small chains and independent motels represent approximately one third
of the supply of rooms in the hotel industry. Direct competitors of Red Roof
include national chains which operate in the budget and economy segments, as
defined by STR, such as Super 8 Motels, Fairfield Inns, Holiday Inn Express,
Motel 6, Comfort Inns and Days Inns and regional chains such as Budgetel and
Drury Inns. In certain locations, the Company's inns also compete with mid-scale
properties, such as Holiday Inns, LaQuinta Inns and Hampton Inns. There is no
single competitor or group of competitors of Red Roof that is dominant in the
lodging industry. However, some of Red Roof's competitors have a larger network
of locations, greater resources and are less leveraged than Red Roof.
Each Red Roof Inn competes in its market area on the basis of price,
location and quality with major national lodging chains, regional brands and
privately owned motels. The Company is firmly established in most of its markets
and many of its inns are in locations superior to those available for
development today. Red Roof's inns are consistently well maintained,
attractively landscaped and competitively priced to appeal to both business and
leisure travelers.
OPERATIONS
The Red Roof chain is managed from the Company's corporate office in
suburban Columbus, Ohio. Centralized corporate functions include marketing,
reservations, treasury, accounting, financial reporting, information systems,
purchasing, repairs and maintenance, legal, human resources, and managerial
training. The corporate staff monitors inn-level consistency with its standards
for guest service through its guest satisfaction survey program, which is
conducted by an independent market research company, and its corporate office
customer service department. The corporate staff also monitors its standards for
maintenance and appearance through its experienced design and construction
staff.
Each Red Roof inn is operated as an individual profit center, with a
general manager who oversees all day-to-day operating activities. Red Roof's
managers devote their attention to assuring friendly guest service and clean,
well-maintained rooms, consistent with chainwide standards. Their
responsibilities also include recruiting, training and supervising the inn's
staff. A typical inn has 20 employees, including the general manager,
housekeepers, laundry attendants, skilled and general maintenance persons and
front desk guest services representatives, including a night auditor. Each
general manager reports to one of 16 district operations vice presidents, who in
turn report to senior management.
Red Roof's general managers receive a four week training program which
emphasizes operations, hospitality, rate management, legal issues, interviewing,
employee relations, training and budgeting before assuming responsibility at an
inn. The Company has managers who assist the general managers at certain inns,
providing a pool of experienced candidates to fill its needs for general
managers.
The Company uses target-driven operational budgets prepared by the
general managers, which are implemented after review with senior management.
Rates charged by Red Roof are continually reviewed by the inn managers and
operations vice presidents so that they can be appropriately adapted to the
prevailing market conditions at each inn. In addition, implementation of the
fully automated revenue management system will enable inn managers to monitor
rates in relation to peak demand periods. Each general manager can earn
financial incentives based upon achieving favorable results in comparison to the
revenue and profit budgets for their respective property. Management believes
this incentive program emphasizes both revenue and profit growth and increases
the general manager's focus on operating efficient and profit hotels.
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Each inn has property management software and hardware which is used
for the exchange of daily reservations, room rate changes, occupancy, payroll,
credit card authorizations and other financial data with the corporate office.
Management believes that this system has enhanced its ability to monitor and
maximize revenues and profitability of the inns. Data is transmitted to and from
the corporate office using the Company's computer network, which allows for
virtually unlimited data communications volume and real-time information.
SALES AND MARKETING
In general, Red Roof's guests are evenly divided between business
travelers and leisure travelers. Leisure travelers served by the Company are
typically en route by car to another destination or attending a nearby special
event or attraction. The Company also serves business travelers, many of whom
travel on a per diem or pay their own expenses. Leisure demand is highest on
Friday and Saturday nights and business demand is highest on Monday through
Thursday nights.
Red Roof's national advertising campaigns, featuring actor/comedian
Martin Mull, emphasize the consistency and value associated with its inns. The
Company markets through national and local market cable and network television,
radio, newspapers and other print media. The Company focuses its television and
radio advertising on specific programs and during certain months of the year and
times of the day for maximum impact.
During 1996, the Company spent approximately half of its marketing
expenditures (which were approximately $18 million) on more than 450 billboard
advertisements located along interstate highways near its inns. Management
estimates that approximately one-fourth of room sales are to guests who have not
made a reservation. As a result, the Company believes that billboard advertising
is necessary at certain locations to maximize room sales.
The Company utilizes its own central reservation center and toll-free
number (1-800-THE-ROOF) to accept reservations. During 1996, the reservation
center handled approximately 2.6 million calls through the toll-free number, of
which approximately 42% were converted to reservations. The reservation system
provides reservation agents with information about inn locations, available
rooms and prices in order to assist customers in reserving rooms. The agents are
trained in telephone sales and cross-selling techniques. Through its computer
network, the Company continually updates the number of rooms sold at a property,
permitting the sale of all available rooms through either the inn or the
reservation center. The Company has special reservation agents for large group
sales, motor coach sales and special event bookings. Management estimates that
approximately three-fourths of room sales are to customers who have made a
reservation through the central reservation center or by calling an inn
directly.
The Company offers a number of marketing programs aimed at creating
customer loyalty. The Company promotes a "RediCard" program which provides its
members with express reservation and check-in and additional amenities such as a
USA Today newspaper delivered to the member's room, personal check cashing,
pay-by-check privileges and a newsletter offering various discounts and coupons.
The RediCard+60 program for senior citizens offers the additional benefit of a
10% discount on each stay. The RediCard programs improve the administrative
efficiency of the reservation agents and front desk staff by providing a
personal profile of the member which includes information such as room type
preference, smoking or non-smoking rooms and preferred method of payment. The
Company currently has more than 210,000 active RediCard members and more than
184,000 active RediCard+60 members.
The Company's corporate sales group increases room sales through the
inclusion of Red Roof's inns in approved or preferred lodging lists of corporate
travel managers and travel agencies on a national basis. In addition, regional
sales representatives conduct sales programs to develop local corporate contacts
and encourage local companies to utilize the inns. These sales efforts include
developing brand loyalty through programs such as RediCard and Volume Plan Plus,
a plan which provides for negotiated rates based on the volume of room nights
per year that a company can offer Red Roof.
ENVIRONMENTAL CONSIDERATIONS
A limited number of Red Roof properties contained underground storage
tanks that were used to store petroleum products prior to the purchase of such
properties by the Company. The Company removed those tanks prior to construction
of its inns on those properties. In addition, five Red Roof properties currently
contain underground or above-ground storage tanks that are used to store propane
for use at those properties. A substantial number of the Red Roof properties are
adjacent to or near properties (mostly service stations, but including some
landfills and industrial operations) that contain or have contained storage
tanks or that have engaged or may in the future engage in activities that may
release petroleum products or other hazardous or toxic substances into the soil
or groundwater.
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Most of the Company's properties have not been tested for the presence
of hazardous substances. However, the Company is aware of three Red Roof
properties that were developed with the use of fill that has been found to
contain hazardous substances. With respect to two of these properties, the
Company has determined that no notification or remediation is required under
current laws and regulations. With respect to the third of these properties, in
exchange for the Company retaining certain institutional controls, state
regulatory authorities have issued a "No Further Action" letter.
Based on its present knowledge and currently applicable laws and
regulations, the Company does not believe that environmental matters are likely
to have a material adverse effect on the Company's business, assets, financial
condition, or results of operations. However, due to the absence of complete
information, possible future changes in laws and regulations, and other factors,
no assurance can be given that environmental matters will not ultimately have a
material adverse impact on the Company's business, assets, financial condition
or results of operations.
EMPLOYEES
As of December 28, 1996, Red Roof employed approximately 5,500
persons, of whom approximately 90% were compensated on an hourly basis.
Approximately 425 of these employees work at the corporate headquarters, of
which approximately 120 are employed at the Company's reservation center. The
Company's employees are not currently represented by labor unions and the
Company has never experienced any organized work stoppage. Management believes
that its ongoing labor relations are good.
SERVICEMARKS
Red Roof Inns, Red Roof, RediCard, Hit the Roof and Sleep Cheap are
each registered servicemarks of the Company, which the Company considers
important to its business. The Company monitors use of similar names and takes
appropriate action when possible infringements occur.
ITEM 2. PROPERTIES
The Company believes that it has frequently benefited from
identification and development of attractive locations in local markets prior to
many of its competitors. In addition, since Red Roof was one of the first
economy segment chains, the Company is firmly established in many of its
markets.
Red Roof adheres to rigorous standards in building and maintaining
each inn. Management believes that its high-quality construction standards are
superior to that of many of its competitors.
Red Roof Inns contain an average of approximately 114 rooms. In
addition to standard rooms, each inn has rooms equipped for the handicapped and
has "business king" rooms containing a king-sized bed, a desk and computer
tie-in services. Each inn features a choice of rooms for non-smokers and
smokers, free unlimited local telephone calls, remote-control television with
CNN, ESPN and Showtime, free coffee and USA Today newspaper in the lobby,
24-hour front desk and message service, direct corporate billing and free
parking. Many of the Company's inns are adjacent to free-standing restaurants
affiliated with restaurant chains such as Bob Evans, Shoney's and Cracker Barrel
that provide food service to Red Roof's guests.
To maintain the overall quality of the Company's existing inns, each
inn undergoes periodic renovations and capital improvements as required. These
renovations are completed in accordance with established maintenance programs
that list specific tasks to be completed, including such items as seasonal
landscaping and inspection of the condition of sidewalks, parking areas and
signage. In 1994, 1995 and 1996, the Company spent approximately $11.9 million,
$14.5 million and $15.4 million, respectively, on capital improvements to
existing inns.
In the fourth quarter of 1996, the Company commenced Project BIG RED
to refurbish and enhance the appearance of more than 85% of its inns. The
program enhances interior decor by updating guest rooms with new carpet,
wallcovering, furniture, bedspreads and drapes, and provides additional room
amenities and features. Painting, new signs, improved lighting, and additional
landscaping enhance exterior appeal. Management believes Project BIG RED will
allow the Company to increase ADR and REVPAR and will further strengthen its
competitive position within the economy segment of the lodging industry. Project
BIG RED is expected to be completed by mid-year 1997 with an expected total
project cost of approximately $55 to $60 million. The Company anticipates total
non-recurring charges to earnings of $20 to $25 million related to early asset
retirements and other expenses associated with Project BIG RED.
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Approximately $10 million of the non-recurring charges ($8 million related to
early asset retirements) were recognized by the Company during the fourth
quarter of 1996 and the balance is expected to be recognized during the first
two quarters of 1997. See "Item 8. Financial Statements and Supplementary Data -
Note 10 to the Consolidated Financial Statements."
In 1996, the Company introduced a new building design featuring all
interior corridors, regionally based decor packages and new bathroom designs.
This new building design offers approximately 77% rentable space.
Since June 1994, the Company has purchased 18 development sites in the
following locations: Texas - San Antonio (3), Houston (3), El Paso (2), Laredo,
Plano and DeSoto; Arizona - Phoenix, Tempe and Tucson; Florida - West Palm Beach
and Jacksonville; Georgia - Atlanta and Ohio - Youngstown. These inns will have
a total of approximately 2,445 rooms when fully developed.
As part of its expansion strategy, the Company has recently acquired,
and will continue to acquire, existing inn properties which may differ from inns
built by the Company in terms of construction, number of rooms, room size,
building configuration, signage, decor and other respects. After acquisition and
conversion by the Company, acquired inns are consistent with the Company's
enhanced quality and other standards. See "Item 1 - Business - Hotel
Development."
Since June 1994, the Company has acquired 27 inns in the following
locations: Alabama - Gadsden; Arizona - Tucson; Colorado - Colorado Springs;
California - San Dimas, Anaheim, Ontario, Victorville, Santa Ana and San
Francisco; Connecticut - Hartford; Florida - Naples, Ft. Lauderdale and Miami;
Massachusetts - Woburn; Mississippi - Tupelo; New Jersey - Tinton Falls; North
Carolina - Greenville and Cary; South Carolina - Myrtle Beach and Charleston;
Texas - Austin, Corpus Christi, Dallas/Fort Worth-Irving and Houston (2);
Virginia - Charlottesville and Washington, D.C. These inns will have a total of
3,654 rooms after conversion and room additions.
For information with respect to planned expenditures in connection
with newly acquired and developed properties, see "Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Capital Resources and Liquidity - Capital Expenditures."
At December 28, 1996, the Company had a total of 248 inns in 33 states
primarily throughout the Midwest, East, South and Gulf Coast regions of the
United States, with concentrations in Ohio (28), Michigan (20), Texas (20),
Pennsylvania (15), North Carolina (14) and Illinois (13). Nine Red Roof
properties are subject to ground leases. All ground leases have remaining terms
including renewal options aggregating longer than 25 years.
At four additional Red Roof properties, the Company leases both the
land and the buildings. At two of these four properties (the Harrisburg-North,
Pennsylvania and Parkersburg, West Virginia inns), the landlord in each case is
a partnership in which the Company owns or controls a substantial majority of
the partnership interests. At the Parkersburg, West Virginia property, the lease
expires in 2001 and the Company does not have an option to extend the lease or
purchase the property. At the Harrisburg, Pennsylvania property, the Company
subleases the property from the partnership which leases the property from the
Dauphin County Industrial Development Authority. The Harrisburg lease expires in
2004 and the partnership has the option to purchase the property at any time
during or within 90 days of the expiration of the term of the lease, for an
amount equal to $100,000 above the balance then due on the industrial revenue
bonds issued to finance the development of the property. The Company does not
have an option to extend the lease or purchase the Harrisburg property. At the
third property, located in Charleston, West Virginia, the lease expires in 2016
(including the exercise of all renewals) and the Company does not have an option
to extend the lease or purchase the property. At the fourth property, located in
Colorado Springs, Colorado, the lease expires in 2015 (including the exercise of
all renewals) and the Company has an option to purchase the property at fair
market value.
The remainder of the Company's inns are 100% owned in fee by the
Company. As of December 28, 1996, 108 inns were encumbered by mortgage loans or
industrial revenue bonds maturing in various years from 1997 to 2008. See "Item
8. Financial Statements and Supplementary Data - Note 4 to the Consolidated
Financial Statements." In addition, the Company has a $150 million bank credit
facility (the "Bank Facility"), of which $100 million is currently available and
is secured by 41 inns and $50 million is available upon perfection of liens on
approximately 20 inns.
8
10
The Company owns its corporate office building, which is located in
suburban Columbus, Ohio. It is encumbered by a mortgage loan maturing in 2009.
The Company believes that it maintains adequate aggregate insurance
coverage on its properties, subject to appropriate deductibles. The Company uses
a retrospective self-insurance plan for general liability and workers
compensation insurance. See "Item 8. Financial Statements and Supplementary Data
- - Note 1 to the Consolidated Financial Statements."
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal
course of business. The Company believes that the ultimate outcome of these
lawsuits will not have a material adverse effect on the Company's business,
assets, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year ended December 28, 1996,
no matter was submitted to a vote of the Company's security holders through the
solicitation of proxies or otherwise.
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11
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
On January 31, 1996, the Company issued 10,000,000 shares of common
stock, $.01 par value, in a public offering (the "Offering") at a price of $16
per share. See "Item 8. Financial Statements and Supplementary Data - Note 6 to
the Consolidated Financial Statements." The Company's common stock began trading
on the New York Stock Exchange (the "NYSE") on February 1, 1996. As of February
28, 1997, the approximate number of holders of record of the Company's common
stock was 239 and the closing sales price per share as reported by the NYSE was
$15 3/8. The following table presents the quarterly high and low sales prices of
the Company's common stock during 1996 as reported by the NYSE.
High Low
---- ---
First quarter 17 5/8 12 5/8
Second quarter 15 3/8 13 1/2
Third quarter 14 3/8 12 3/8
Fourth quarter 17 1/4 13 1/4
Subsequent to the Merger, the Company has not paid any dividends on its
common stock. It is the general policy of the Company to retain its earnings to
support the growth of its business. Any dividends declared will be at the
discretion of the Board of Directors and will depend upon the Company's
financial condition, earnings and other factors. The Merger was consummated
concurrently with the initial offering of the Company's 9 5/8% Senior Notes due
2003 (the "Notes") in a private placement. The Indenture pursuant to which the
Notes were issued, the Company's Bank Facility and an agreement relating to
certain of the Company's mortgage indebtedness contain restrictions or
limitations upon the payment of dividends by the Company. See "Item 8. Financial
Statements and Supplementary Data Notes 4 and 5 to the Consolidated Financial
Statements."
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data (excluding Base Inn statistics)
relating to the Company have been taken or derived from the historical financial
statements of the Company and are qualified in their entirety by reference to
such financial statements and notes. See "Item 8. Financial Statements and
Supplementary Data." The financial data as of January 2, 1994 and December 17,
1993 and for the fiscal year 1992 and the 50 weeks of 1993 have been derived
from audited financial statements of the Predecessor Company which are not
included in this report. The financial data as of January 1, 1994 and for the
two weeks of 1993 have been derived from audited statements of the Company which
are not included in this report.
Fiscal Years (1)
-------------------------------------------------------------------------------
(50 Weeks) (2 Weeks)
1992 1993 1993 1994 1995 1996
------- ------- -------- -------- ------ -------
(in thousands except per share data and Base Inn statistics)
STATEMENT OF OPERATIONS DATA
Revenues $248,059 $246,841 $ 8,467 $269,306 $291,445 $ 317,437
Direct room, corporate and marketing expenses 165,115 160,539 5,465 166,179 182,986 208,169
Depreciation and amortization 22,523 21,653 1,060 23,874 26,892 28,680
-------- -------- --------- -------- -------- ---------
Operating income 60,421 (2) 64,649 (3) 1,942 79,253 81,567 (4) 80,588 (5)
Interest expense 46,958 41,701 2,788 52,174 51,260 41,777
Income (loss) before income taxes 14,356 (2) 23,894 (3) (785) 28,100 30,838 (4) 39,676 (5)
Income taxes (credit)(6) (314) 11,240 12,516 15,612
Net income (loss)(6) 14,356 23,894 (3) (471) 16,860 18,322 (4) 24,064 (5)
Net income (loss) per share (0.03) 0.91(7) 0.98 (7) 0.87 (5)
Shares used in per share calculation 18,400 18,616 18,660 27,573
BALANCE SHEET DATA
Total assets $530,211 $482,620 $ 674,141 $687,023 $755,348 $ 867,627
Current maturities of debt 15,295 33,957 14,921 15,996 11,951 12,020
Long-term debt, excluding current maturities 459,798 393,165 522,374 510,646 544,871 484,158
Stockholders' equity 24,363 21,381 99,529 (8) 116,389(8) 152,711 (8) 319,099 (8)
OTHER DATA
Cash flow from operations $ 46,835 (2) $ 42,413 (3) $ 699 $ 44,824 $ 47,785 (4) $ 60,548 (5)
Net cash used by investing activities (8,225) (12,577) (182,288) (49,571) (87,414) (126,558)
Net cash provided (used) by financing activities (28,641) (68,117) 196,660 (8,286) 42,018 81,242
EBITDA (9) 83,837 (2) 87,248 (3) 3,063 104,148 108,990 (4) 117,980 (5)
EBITDA as a percentage of revenues (9) 33.8%(2) 35.3%(3) 36.2% 38.7% 37.4%(4) 37.2%(5)
Ratio of earnings to fixed charges (10) 1.3x 1.5x (785)(11) 1.5x 1.5x 1.8x
Capital expenditures:
Development, acquisitions and related
improvements (12) $ 31,677 $ 74,193 $ 101,494
Other $ 10,477 $ 11,518 $ 108 13,399 15,194 26,076
BASE INN STATISTICS
Inns open (at end of period) 210 210 210 210 210 210
Available rooms (at end of period) 23,442 23,431 23,431 23,417 23,397 23,374
Average occupancy percentage (13) 76.5% 80.5% 61.8% 79.1% 77.3% 75.5%
ADR (14) $ 37.58 $ 37.86 $ 36.33 $ 40.12 $ 42.71 $ 45.10
REVPAR (15) $ 28.75 $ 30.48 $ 22.45 $ 31.73 $ 33.01 $ 34.05
Room nights occupied (in thousands) 6,657 6,562 232 6,740 6,587 6,412
11
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(1) The Company operates on a 52-53 week fiscal year which ends on the
Saturday nearest to December 31. The 1992 fiscal year consisted of 53
weeks while the 1993 (combined), 1994, 1995 and 1996 fiscal years each
consisted of 52 weeks. The actual year end for each fiscal year was as
follows: January 2, 1993, December 17, 1993 (50 weeks pre-Merger),
January 1, 1994 (2 weeks post-Merger), December 31, 1994, December 30,
1995, and December 28, 1996.
(2) Operating income, income before income taxes, net income, cash flow
from operations and EBITDA for the fiscal year 1992 were reduced by a
non-recurring charge of $3,183 due to a loss from an affiliate's
obligations.
(3) Operating income, income before income taxes, net income, cash flow
from operations and EBITDA for the 50 weeks ended December 17, 1993
were reduced by a non-recurring charge of $3,814 related to payment to
participants in a stock appreciation rights plan as a result of the
change of control.
(4) Operating income, income before income taxes and EBITDA for 1995 were
reduced by a non-recurring expense of $3,142 relating to a change in
management. Had such expense not been incurred, operating income,
income before income taxes and EBITDA would have been $84,709, $33,980
and $112,132, respectively, with EBITDA as a percentage of revenues
being 38.5%. Net income and cash flow from operations for 1995 were
reduced by $1,873 ($.10 per share) due to such expense. Excluding this
expense, net income and cash flow from operations would have been
$20,195 ($1.08 per share) and $49,658, respectively. See "Item 8.
Financial Statements and Supplementary Data - Note 11 to the
Consolidated Financial Statements."
(5) Operating income and income before income taxes for 1996 were reduced
by non-recurring expenses of $10,398 relating to the inn renewal
program (including $7,847 related to early asset retirements) and $450
relating to an adjustment to recognize impairments of certain
long-lived assets. Had such expenses not been incurred, operating
income and income before income taxes would have been $91,436 and
$50,524, respectively. EBITDA was reduced by $2,551 relating to the
non-recurring expenses. EBITDA would have been $120,531 with EBITDA as
a percentage of revenues being 38.0%. Excluding these expenses, net
income and cash flow from operations would have been $30,545 ($1.11 per
share) and $62,072, respectively. See "Item 8. Financial Statements and
Supplementary Data - Notes 1 and 10 to the Consolidated Financial
Statements."
(6) Prior to the merger, the Company was a Qualified Subchapter S
Corporation and did not pay federal income taxes at the corporate
level. Following the Merger, the Company became subject to federal
income taxes and additional state income taxes.
(7) Adjusted to give effect solely to the issuance of an additional 10,000
shares in the Offering, 1994 and 1995 net income per share would have
been $.59 and $.64, respectively.
(8) Subsequent to the Merger, the Company has not paid any dividends on its
common stock.
(9) EBITDA is operating income plus the sum of interest income, other
income, depreciation and amortization, and loss on fixed asset
retirements. EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles, and
such information should not be considered as an alternative to net
income, cash flow from operations or any other measure of performance
prescribed by generally accepted accounting principles. EBITDA is
included herein because management believes that certain investors find
it to be a useful tool for measuring the ability to service debt.
(10) For purposes of calculating the ratio of earnings to fixed charges,
earnings include income before income taxes plus fixed charges,
excluding capitalized interest. Fixed charges consist of interest
expense, including capitalized interest, and the portion of rental
expense representative of an interest factor.
(11) Earnings were inadequate to cover fixed charges by $785 in the two
weeks ended January 1, 1994 due to the seasonality of the Company's
business. See "Item 7. Management's Discussion and Analysis of Results
of Operations and Financial Condition -Forward Looking Statements;
Certain Factors Affecting Future Results - Seasonality." The deficiency
for the two weeks in 1993 is due to the shortness of the period and
historically lower occupancy during the Christmas season.
(12) In 1994, the Company purchased 10 inns and one development site for an
aggregate cost, including renovation expenditures, of $31,677. In 1995,
the Company purchased 10 inns, nine development sites and land
previously under lease for an aggregate cost, including renovation and
construction costs, of $63,217 and also spent $10,976 related to
renovations and improvements to the 10 inns and one development site
acquired during the second half of 1994. In 1996, the Company purchased
seven inns and eight development sites for an aggregate cost, including
renovation and construction costs, of $62,581 and also spent $38,913
related to renovations and improvements to the 20 inns and 10
development sites purchased in 1994 and 1995. The Company had no such
capital expenditures in 1992 or 1993.
(13) Average occupancy percentage represents total rooms occupied divided by
total available rooms. Total available rooms represents the number of
rooms available multiplied by the number of days in the reported
period.
(14) ADR represents total room revenues (before allowances) divided by the
total number of rooms occupied.
(15) REVPAR represents the average occupancy percentage multiplied by the
average daily room rate for the reported period.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
The following tables sets forth certain operating data for the periods
indicated:
Fiscal Years (1)
----------------------------------------------
1994 1995 1996
---------- ---------- ---------
Base Inn Statistics
Inns open (at end of year) 210 210 210
Available rooms (at end of year) 23,417 23,397 23,374
Room nights occupied (in thousands) 6,740 6,587 6,412
Average occupancy percentage 79.1% 77.3% 75.5%
ADR $ 40.12 $ 42.71 $ 45.10
REVPAR 31.73 33.01 34.05
Revenues (in thousands) 269,306 291,445 317,437
Operating income (in thousands) 79,253 81,567(2) 80,588(3)
Operating income (as percentage of room revenues) 29.4% 28.0% 25.4%
<FN>
(1) The Company operates on a 52-53 week fiscal year which ends on the
Saturday nearest to December 31. The 1994, 1995 and 1996 fiscal years
each consisted of 52 weeks. The actual year end for each fiscal year
was as follows: December 31, 1994, December 30, 1995 and December 28,
1996.
(2) Operating income for 1995 was reduced by a non-recurring expense of
$3,142 relating to a change in management. Had such expense not been
incurred, operating income for 1995 would have been $84,709 and
operating income as a percentage of revenues would have been 29.1%. See
"Item 8. Financial Statements and Supplementary Data Note 11 to the
Consolidated Financial Statements."
(3) Operating income for 1996 was reduced by non-recurring expenses of
$10,398 and $450 relating to the inn renewal program and an adjustment
to recognize impairments of certain long-lived assets, respectively.
Had such expenses not been incurred, operating income for 1996 would
have been $91,436 and operating income as a percentage of revenues
would have been 28.8%. See "Item 8. Financial Statements and
Supplementary Data Notes 1 and 10 to the Consolidated Financial
Statements."
RECENT DEVELOPMENTS
During the third quarter of 1996, the Company successfully completed a
500,000 common share repurchase program. In February 1997, the Board of
Directors authorized a new common share repurchase program, pursuant to which
the Company may repurchase up to another 500,000 of its common shares, either in
the open market or in privately negotiated transactions, depending on market
conditions and other factors. The shares will be used to fulfill the Company's
requirements for its employee stock purchase and management stock option plans.
See "Item 8. Financial Statements and Supplementary Data - Note 6 to the
Consolidated Financial Statements."
RESULTS OF OPERATIONS
1996 Compared To 1995
- ---------------------
The Company's revenues are principally derived from room rentals.
Revenues increased $26.0 million, or 8.9%, from $291.4 million in 1995 to $317.4
million in 1996. REVPAR for Base Inns increased $1.04, or 3.2%, from $33.01 in
1995 to $34.05 in 1996. The revenue increase for the Base Inns was primarily
caused by an increase in ADR of $2.39, or 5.6%, from $42.71 in 1995 to $45.10 in
1996. The average occupancy percentage for the Base Inns decreased from 77.3% in
1995 to 75.5% in 1996. Management attributes the decrease in the average
occupancy percentage primarily to market sensitivity to increases in ADR.
Approximately $18.3 million of the increase in revenues was caused by an
increase in the operations of 20 inns acquired and one inn developed through
1995 ($16.5 million) and six inns acquired and 11 inns developed in 1996 ($1.8
million). Management expects newly acquired inns to initially operate below
historical company averages of occupancy and ADR and to experience an occupancy
stabilization period after renovation.
Direct room expenses include salaries, wages, utilities, repairs and
maintenance, property taxes, advertising,
13
15
room supplies and security. Direct room expenses increased $1.64 per occupied
room, or 7.7%, from $21.18 in 1995 to $22.82 in 1996. The Company experienced
operating expense increases for payroll, primarily from higher labor rates;
repairs and maintenance, because of an increase in planned maintenance projects;
security, because of heightened customer awareness and concern; commissions on
travel agent sales due to increased travel agent bookings, primarily from the
1996 summer Olympics; and billboard advertising due to additional billboards
associated with operating additional inns. The expense increases were partially
offset by higher telephone commissions income from customers' long distance
calls under a long distance commission program. The overall occupancy decline in
1996 also contributed to the increase in direct room expenses per occupied room.
The increase was also caused, in part, by operating additional inns acquired in
the second half of 1994 and in 1995 and 1996, which generally obtained
occupancies below historical Company averages, resulting in a higher average
expense per occupied room. As a percentage of revenues, direct room expenses
increased from 50.3% in 1995 to 51.1% in 1996.
Depreciation and amortization increased $1.8 million, or 6.7%, from
$26.9 million in 1995 to $28.7 million in 1996. The increase primarily reflects
depreciation on inns opened in 1995 and 1996 and the recognition in 1996 of a
non-recurring charge of $.5 million related to fixed asset impairments. See
"Item 8. Financial Statements and Supplementary Data - Note 1 to the
Consolidated Financial Statements." Had this non-recurring charge not been
incurred, depreciation and amortization for 1996 would have been $28.2 million.
Also included in 1995 is a provision for approximately $1.0 million resulting
from management's decision to demolish and rebuild, due to unstable soil
conditions, one of the buildings, containing 55 rooms, at its Jackson,
Mississippi inn.
Corporate and marketing expenses include the cost of general
management, training and field supervision of inn managers, development,
marketing and administrative expenses. Corporate and marketing expenses
increased $2.1 million, or 6.3%, from $33.3 million in 1995 to $35.4 million in
1996. The increase consists primarily of increases in payroll costs, relocation
expenses and franchise taxes, which were partially offset by a reduction in
marketing media expenses during 1996. Payroll increased as a result of the
Company incurring a full year's expense in 1996 for positions vacated during
1995 due to the change in management. In addition, the Company incurred
increases in staffing and relocation expenses related to the Company's
development and franchise departments. Franchise taxes increased due to an
increase in equity as a result of the Offering. The Company expects to incur
additional management expenses as the expansion program continues. As a
percentage of revenue, corporate and marketing expenses were 11.4% and 11.2% in
1995 and 1996, respectively. The Company currently does not pay any post
retirement benefits other than pension benefits. See "Item 8. Financial
Statements and Supplementary Data - Notes 6 and 11 to the Consolidated Financial
Statements."
In the fourth quarter of 1996, the Company commenced a chainwide inn
renewal program to refurbish more than 85% of its inns. The Company incurred
expenses of $10.4 million, including $7.8 million related to asset retirements,
associated with the inn renewal program. See "Item 1. Business - Strategy,"
"Item 2. Properties," " - Capital Resources and Liquidity-Capital
Expenditures" and "Item 8. Financial Statements and Supplementary Data - Note 10
to the Consolidated Financial Statements."
Had the non-recurring expenses of $10.4 million related to the inn
renewal program and the $.5 million related to fixed asset impairments not been
incurred, operating expenses for 1996 would have been $226.0 million and
operating income would have been $91.5 million, as compared to $236.9 million
and $80.6 million in actual operating expenses and operating income,
respectively, for 1996.
Interest expense decreased $9.5 million, or 18.5%, from $51.3 million
in 1995 to $41.8 million in 1996, primarily because of the retirement of $128
million of debt out of the proceeds from the Offering. At December 28, 1996,
approximately $90.4 million of the Company's debt bore interest at variable
rates.
1995 Compared To 1994
- ---------------------
Revenues increased $22.1 million, or 8.2%, from $269.3 million in 1994
to $291.4 million in 1995. REVPAR for Base Inns increased $1.28, or 4.0%, from
$31.73 in 1994 to $33.01 in 1995. The revenue increase for the Base Inns was
primarily caused by an increase in ADR of $2.59, or 6.5%, from $40.12 in 1994 to
$42.71 in 1995. The average occupancy percentage for the Base Inns decreased
from 79.1% in 1994 to 77.3% in 1995. Management attributes the decrease in the
average occupancy percentage primarily to market sensitivity to increases in
ADR. Approximately $11.9 million of the increase in revenues was caused by an
increase in the operation of 10 inns acquired in the second half of 1994 ($8.1
million) and 10 inns acquired and one developed inn in 1995 ($3.8 million).
14
16
Direct room expenses increased $1.29 per occupied room, or 6.5%, from
$19.89 in 1994 to $21.18 in 1995. The Company experienced operating expense
increases for payroll, primarily from higher labor rates; repairs and
maintenance, because of an increase in planned maintenance projects; security,
because of heightened customer awareness and concern; and billboard advertising.
The expense increases were partially offset by reductions in utilities expenses
and higher telephone commissions income from customers' long distance calls
under a long distance commission program. The overall occupancy decline in 1995
also contributed to the increase in direct room expenses per occupied room. The
increase was also caused, in part, by operating additional inns acquired in the
second half of 1994 and 1995, which generally obtained occupancies below
historical Company averages, resulting in a higher average expense per occupied
room. As a percentage of revenues, direct room expenses increased from 50.1% in
1994 to 50.3% in 1995.
Depreciation and amortization increased $3.0 million, or 12.6%, from
$23.9 million in 1994 to $26.9 million in 1995. The increase primarily reflects
depreciation on inns acquired since the second half of 1994. Also included in
1995 is a provision for approximately $1.0 million resulting from management's
decision to demolish and rebuild, due to unstable soil conditions, one of the
buildings, containing 55 rooms, at its Jackson, Mississippi inn.
Corporate and marketing expenses increased $2.1 million, or 6.7%, from
$31.2 million in 1994 to $33.3 million in 1995. The increase consists primarily
of increases in marketing media expenses, consulting expenses associated with
development of the Company's strategic plan and provisions for unresolved
litigation. As a percentage of revenue, marketing and corporate expenses were
11.6% and 11.4% in 1994 and 1995, respectively.
The change in management expense of $3.1 million in 1995 reflects a
non-recurring expense for severance benefits paid to certain executive officers
under their respective employment agreements upon termination of their
employment and certain expenses associated with the employment of a new
President and Chief Executive Officer, General Counsel and Chief Financial
Officer. See "Item 8. Financial Statements and Supplementary Data - Note 11 to
the Consolidated Financial Statements."
Interest expense decreased $.9 million, or 1.7%, from $52.2 million in
1994 to $51.3 million in 1995, primarily because of a decrease in average
outstanding borrowings.
PRO-FORMA SUPPLEMENTAL INFORMATION
The following pro forma supplemental information, which is presented
for purposes of facilitating meaningful comparisons to ongoing operations and to
other companies, summarizes the results of operations of the Company, adjusted
on a pro-forma basis to reflect (a) the effect of the Offering, as if the
Offering had occurred at the beginning of each year being presented and (b) the
elimination of certain non-recurring expenses (in thousands, except per share
amounts).
1995 1996
----- ----
Pro-forma information including supplemental adjustments:
Operating income $ 84,709 $ 91,436
Net income 25,716 31,335
Net income per share .90 1.10
Operating income and net income as reported in the Company's
consolidated financial statements are reconciled to the respective amounts in
the preceding table as follows:
1995 1996
----------------------- ------------------------
Operating Net Operating Net
Income Income Income Income
As reported $81,567 $18,322 $80,588 $24,064
Pro-forma and supplemental adjustments:
Change in management expense 3,142 1,873
Asset impairment charge 450 269
Inn renewal program 10,398 6,212
Interest expense adjustment for the
Offering 5,521 790
------- ------- ------- -------
As adjusted $84,709 $25,716 $91,436 $31,335
======= ======= ======= =======
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CAPITAL RESOURCES AND LIQUIDITY
GENERAL
The following table sets forth certain capital resource and liquidity
information for the years indicated (dollars in thousands):
Fiscal Years
------------------------------------------------------
1994 1995 1996
---------- ---------- ----------
Cash flow from operations $ 44,824 $ 47,785 (1) $ 60,548 (2)
Net cash used by investing activities (49,571) (87,414) (126,558)
Net cash provided (used) by financing activities (8,286) 42,018 81,242
Gross operating profit (3) 134,312 144,860 155,072
Gross operating profit as a percentage of revenue (3) 49.9 % 49.7% 48.9 %
EBITDA (4) $ 104,148 $ 108,990 (1) $ 117,980 (2)
EBITDA as percentage of revenue (4) 38.7 % 37.4%(1) 37.2%(2)
Ratio of earnings to fixed charges (5) 1.5 x 1.5 x 1.8 x
<FN>
(1) EBITDA for 1995 was reduced by a non-recurring expense of $3,142 relating
to a change in management. Had such expense not been incurred, EBITDA would
have been $112,132 and EBITDA as a percentage of revenues would have been
38.5%. Cash flow from operations for 1995 was reduced by $1,873 due to such
expense. Had such expense not been incurred, cash flow from operations
would have been $49,658. See "Item 8. Financial Statements and
Supplementary Data - Note 11 to the Consolidated Financial Statements."
(2) EBITDA and cash flow from operations for 1996 were reduced by a
non-recurring expense of $2,551 relating to the inn renewal program. Had
such expense not been incurred, EBITDA would have been $120,531 and EBITDA
as a percentage of revenues would have been 38.0%. Excluding this expense,
cash flow from operations would have been $62,072. See "Item 8. Financial
Statements and Supplementary Data - Note 10 to the Consolidated Financial
Statements."
(3) Gross operating profit is revenues less direct room expenses.
(4) EBITDA is operating income plus the sum of interest income, other income,
depreciation and amortization, and loss on fixed asset retirements. EBITDA
is not intended to represent cash flow from operations as defined by
generally accepted accounting principles, and such information should not
be considered as an alternative to net income, cash flow from operations or
any other measure of performance prescribed by generally accepted
accounting principles. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for measuring
the ability to service debt.
(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings include income before income taxes plus fixed charges, excluding
capitalized interest. Fixed charges consist of interest expense, including
capitalized interest, and the portion of rental expense representative of
an interest factor.
In general, the Company has historically financed its development
through internal cash flow and secured debt. As of December 28, 1996, 149 of the
Company's 248 inns, in addition to the Company's corporate facilities, were
pledged to secure its long-term debt and its Bank Facility. The Company may
pledge additional inns to secure additional long-term debt in order to continue
to fund the Company's acquisition and development program.
Cash and cash equivalents increased approximately $15.3 million from
$4.4 million at December 30, 1995 to $19.7 million at December 28, 1996.
The Company has in the past frequently operated with current
liabilities in excess of current assets as a result of partially financing its
expansion through internally generated cash. The Company believes that cash flow
from operations will be sufficient to satisfy its working capital needs in 1997.
At December 28, 1996, the Company had current liabilities of $47.2 million,
including current maturities of long-term debt of $12.0 million, and current
assets of $44.5 million.
16
18
Current maturities of long-term debt remained unchanged at $12.0
million at December 30, 1995 and at December 28, 1996 due to an increase of $.6
million related to normal amortization of mortgage notes and a reduction of $.6
million in the maturities of obligations under capital lease as a result of
purchasing land and equipment during 1996 that was previously under capital
lease.
As of December 28, 1996, $73.9 million was available for borrowing
(including $50 million available upon perfection of liens on additional
collateral) under the Company's $150 million bank credit facility. Borrowings
under the Bank Facility bear interest at either the bank's prime rate or LIBOR
plus tiered spreads based upon the Company's leverage ratios. The Bank Facility
contains various covenants typical of senior secured bank facilities, and will
require the Company to maintain a net worth of not less than $213 million and to
maintain the following financial ratios: operating income provided by collateral
properties to debt service related to the Bank Facility of not less than 1.35 to
1.0, funded debt to EBITDA of not more than 5.0 to 1.0 and EBITDA to fixed
charges and restricted payments (including payment of dividends on the Company's
Common Stock) of not less than 1.10 to 1.0. The Bank Facility contains events of
default for breach of these covenants as well as other events of default
customary for financings of similar size and nature, including a change in
control of the Company.
As of December 28, 1996, the Company's total long-term indebtedness
(including current maturities) was approximately $496.2 million. Approximately
$292.4 million of such indebtedness is mortgage indebtedness and approximately
$90.4 million of such indebtedness bears interest at variable rates. For a
further description of the Company's mortgage indebtedness, see "Item 8.
Financial Statements and Supplementary Data - Note 4 to the Consolidated
Financial Statements."
CAPITAL EXPENDITURES
The following table sets forth certain information regarding the
Company's cash flow from operations and capital expenditures, excluding
acquisitions, development and related improvements, for 1994, 1995 and 1996.
Fiscal Years
-----------------------------------------------
1994 1995 1996
---------- ---------- --------
Cash flow from operations $44,824 $47,785 $60,548
Capital expenditures(1) 13,399 15,194 26,076(2)
<FN>
(1) Includes furniture, fixtures, equipment, lobby conversions, room
renovations, exterior renovations such as roofing, paving and concrete
walks and general corporate expenditures.
(2) 1996 capital expenditures include $8.2 million in improvements related
to the Company's inn renewal program.
The Company has substantially completed renovation of 20 inns and 10
development sites acquired prior to 1996. In connection with the renovation and
improvement of these inns, the Company spent $38.9 million in 1996, and expects
to spend approximately $3 million in 1997 to complete these renovations and
improvements. In 1996, the Company acquired seven inns and eight development
sites for an aggregate cost, including renovation and construction costs, of
$41.6 million and $21.0 million, respectively. Management expects to spend
approximately $11 million and $22 million, respectively, for renovation and
improvements to these properties over the next 18 months.
Subsequent to December 28, 1996, the Company purchased two development
sites for an aggregate cost of $1.8 million. Currently, the Company has nine
development sites under contract to purchase, which are subject to the
satisfactory completion by the Company of its due diligence, for an estimated
total cost of approximately $6 million. There is no assurance that these
contracts to purchase will result in an acquisition by the Company.
Management expects to fund the Company's 1997 capital expenditures
associated with improvements to the Base Inns from cash flow from operations and
from borrowings under the Bank Facility. Estimated 1997 expenditures associated
with the acquired inns and undeveloped properties will be financed from these
sources together with available cash. The Company may issue additional equity or
debt, or expand its Bank Facility to fund future expansion activities.
17
19
HISTORICAL CASH FLOWS
1996 Compared To 1995
- ---------------------
Cash provided by operations increased $12.7 million, or 26.6%, from
$47.8 million in 1995 to $60.5 million in 1996, generally as the result of an
increase in net income and non-cash charges to income and a change in various
working capital components.
Net cash used by investing activities increased $39.2 million from
$87.4 million in 1995 to $126.6 million in 1996, primarily as the result of
expenditures for acquisitions, renovation and construction activities associated
with the Company's expansion program. Expenditures for property and equipment in
1996 include the acquisition of seven inns and eight development sites for a
total cost, including improvements, of $62.6 million and $38.9 million related
to renovations and improvements to 20 properties and 10 development sites
acquired prior to 1996.
Net cash provided by financing activities increased $39.2 million from
$42.0 million in 1995 to $81.2 million in 1996, primarily as a result of $148.6
million in proceeds of the Offering and net borrowings under the Bank Facility
of $25.4 million, which were partially offset by the purchase of treasury stock
for $6.5 million and principal payments of long term debt of $86.0 million.
1995 Compared To 1994
- ---------------------
Cash provided by operations increased $3.0 million, or 6.7%, from
$44.8 million in 1994 to $47.8 million in 1995, generally as the result of an
increase in net income and non-cash charges to income and a change in various
working capital components.
Net cash used by investing activities increased $37.8 million from
$49.6 million in 1994 to $87.4 million in 1995, primarily as the result of
expenditures for acquisitions, renovation and construction activities associated
with the Company's expansion program. Expenditures for property and equipment in
1995 include the acquisition of 10 inns, nine development sites and land
previously under lease for a total cost, including improvements of $63.2 million
and $11.0 million related to renovations and improvements to ten properties and
one development site acquired during the second half of 1994.
Net cash provided by financing activities increased $50.3 million from
a use of cash of $8.3 million in 1994 to a source of cash of $42.0 million in
1995, primarily as a result of stockholders capital contributions of $18.0
million, borrowing under the Bank Facility of $44.9 million, payment of a bank
overdraft of $4.4 million and principal payments of long term debt of $14.7
million.
EBITDA
EBITDA increased $9.0 million, or 8.3%, from $109.0 million in 1995 to
$118.0 million in 1996. EBITDA increased $4.9 million, or 4.7%, from $104.1
million in 1994 to $109.0 million in 1995. EBITDA in 1995 includes a
non-recurring expense of $3.1 million for the change in management. EBITDA in
1996 includes a non-recurring expense of $2.6 million related to the inn renewal
program. Had such non-recurring expenses not been incurred, EBITDA would have
been $112.1 million and $120.5 million in 1995 and 1996, respectively. EBITDA is
not intended to represent cash flow from operations as defined by generally
accepted accounting principles, and such information should not be considered as
an alternative to net income, cash flow from operations or any other measure of
performance prescribed by generally accepted accounting principles. EBITDA is
included herein because management believes that certain investors find it to be
a useful tool for measuring the ability to service debt.
INFLATION
The rate of inflation as measured by changes in the average consumer
price index has not had a material effect on the revenues or net earnings of the
Company in the three most recent years.
18
20
FORWARD LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS
This Form 10-K includes forward looking statements, including without
limitation statements concerning the Company's ability to increase ADR,
occupancy and REVPAR, statements concerning the time and cost of completion of
renovation and construction of and improvements to newly acquired inns and
development sites, the inn renewal program and the revenue management system,
statements concerning the impact of the revenue management system on REVPAR and
statements concerning the expected stabilization of newly acquired or developed
inns. Any forward looking statements contained in this Form 10-K or any other
reports or documents 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 the Company's actual financial
performance.
Expansion Risks. The Company's ability to expand depends on a number of
factors, including the selection and availability of suitable locations at
acceptable prices, the hiring and training of sufficiently skilled management
and personnel and the availability of financing. There can be no assurance that
financing or desirable locations for acquisition or new development will be
available or, if available, will be on terms acceptable to the Company. The
Company expects that its franchising business will face risks that suitable
franchisees will not be found, that competition from other hotel franchising
businesses will impair the Company's ability to attract franchisees and that
franchisees may fail to uphold the Company's standards of quality and service or
fail to fulfill their financial and other obligations to the Company.
Furthermore, provisions in the indenture (the "Indenture") governing the Notes,
in the Bank Facility and in certain mortgage indebtedness agreements may
restrict the Company's ability to meet its expansion objectives. See "-
Capital Resources and Liquidity." Although the Company believes that it has the
infrastructure in place to accommodate the planned expansion, the Company's
corporate management expenses will increase as the number of inns grows, which
could adversely affect the Company's financial performance.
There can be no assurance that the Company's expansion plans will be
completed successfully or that the nature of such expansion will not be modified
to reflect future events or economic conditions. There can be no assurance that
newly acquired inns will conform to the Company's previous standards of
construction and design or that the Company's new inn design will achieve guest
acceptance. The Company's inability to successfully implement its expansion
plans would limit the Company's ability to grow its revenue base.
Lodging Industry Risks. The Lodging industry in general, including the
Company, may be adversely affected by such factors as changes in national and
regional economic conditions (particularly in geographic areas in which the
Company has a high concentration of inns), changes in local market conditions,
oversupply of hotel space or a reduction in local demand for rooms and related
services, competition in the hotel industry, changes in interest rates, the
availability of financing and other factors relating to the operation of economy
hotels.
Operating factors affecting the lodging industry generally, including
the Company, include (i) competition from other hotels, motels and recreational
properties, (ii) demographic changes, (iii) the recurring need for renovations,
refurbishment and improvements of hotels and increased expenses related to inn
security, (iv) restrictive changes in zoning and similar land use laws and
regulations that influence or determine wages, prices or construction costs, (v)
changes in the characteristics of hotel locations, (vi) the inability to secure
property and liability insurance to fully protect against all losses or to
obtain such insurance at reasonable costs, (vii) changes in real estate tax
rates and other operating costs, (viii) changes or cancellations in local
tourist, athletic or cultural events, (ix) changes in travel patterns which may
be affected by increases in transportation costs or gasoline prices, changes in
airline schedules and fares, strikes, weather patterns or relocation or
construction of highways, (x) increases in operating expense and litigation as a
result of on-premise assaults of guests by third parties and (xi) changes in
brand identity and reputation. Unexpected or adverse changes in any of the
foregoing factors could have a material adverse effect on the Company's
business, assets, financial condition or results of operations.
Cyclicality. The hotel industry is subject to periods of cyclical
growth and downturn. From late 1990 through 1992, for example, the U. S. hotel
industry experienced a cyclical downturn which resulted from, among other
things, over-building in the industry and sluggish general economic conditions
in the United States. According to STR, in 1996, increases in room demand were
slightly greater than increases in supply for both the industry as a whole and
the economy segment. There can be no assurance that downturns or prolonged
adverse conditions in the hotel industry, in real estate or capital markets or
in national or local economies will not have a material adverse impact on the
Company.
19
21
Seasonality. Demand, and thus room occupancy, is affected by normally
recurring seasonal patterns and, in most locations, is higher in the summer and
early fall months (May through October) than the balance of the year.
Historically, revenues in the first quarter have been lower than in other
quarters and the Company has incurred net losses in the first quarter.
Competition. The economy segment of the hotel industry is highly
competitive. The Company's inns generally operate in areas that contain numerous
competitors. Demographic, geographic, or other changes in one or more of the
Company's markets could impact the convenience or desirability of the sites of
certain hotels, which would adversely affect the operations of those hotels.
There can be no assurance that new or existing competitors will not
significantly lower rates or offer greater convenience, services or amenities or
significantly expand or improve facilities in a market in which the Company's
hotels compete, thereby adversely affecting the Company's operations. See "Item
2. Business - Competition." In addition, some of the Company's competitors have
a larger network of locations and greater resources than the Company and are
less leveraged than the Company. Competition may generally reduce the number of
suitable hotel development or acquisition opportunities offered to the Company
and increase the bargaining power of property owners seeking to sell, which
could adversely affect the Company's financial performance.
Regulatory Risks. The lodging industry is subject to numerous federal,
state and local government regulations, including building and zoning
requirements. Also, the Company is subject to laws governing its relationship
with employees, including minimum wage requirements, overtime, working
conditions and work permit requirements. An increase in the minimum wage rate,
employee benefit costs or other costs associated with employees, could adversely
affect the Company. Under the Americans with Disabilities Act of 1990 (the
"ADA"), all public accommodations are required to meet certain federal
requirements related to access and use by disabled persons. These and other
initiatives could adversely affect the Company, as well as the lodging industry
in general.
Environmental Matters. Various federal, state and local laws,
ordinances and regulations impose liability on present and former real property
owners and operators for the cost of cleaning up or removing contamination
caused by hazardous or toxic materials. Such liability may be imposed without
regard to fault or legality of the original actions, and may be joint and
several with other responsible parties. If the liability is joint and several,
the Company could be responsible for payment of the full amount of the
liability, whether or not any other responsible party is also liable. The
presence of contamination at, or even adjacent to or near, a property also can
affect the valuation of that property or the ability of the owner to sell, lease
or obtaining financing for the property and may in certain circumstances form
the basis for liability to third persons for personal injury or other damages.
See "Item 2. Business-Environmental Considerations."
20
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report of the Company 22
Consolidated Balance Sheets of the Company as of December 30, 1995 and December 28, 1996 23
Consolidated Statements of Income of the Company for the years ended December 31, 1994,
December 30, 1995 and December 28, 1996 25
Consolidated Statements of Stockholders' Equity of the Company for the years ended
December 31, 1994, December 30, 1995 and December 28, 1996 26
Consolidated Statements of Cash Flows of the Company for the years ended
December 31, 1994, December 30, 1995, and December 28, 1996 27
Notes to Consolidated Financial Statements of the Company 28
21
23
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Red Roof Inns, Inc.
We have audited the accompanying consolidated balance sheets of Red
Roof Inns, Inc. and its subsidiaries as of December 30, 1995 and December 28,
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 28,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Red Roof Inns, Inc. and its
subsidiaries at December 30, 1995 and December 28, 1996, and the results of
their operations and their cash flows for each of three years in the period
ended and December 28, 1996 in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 10, 1997
22
24
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 30, 1995 AND DECEMBER 28, 1996
(IN THOUSANDS)
December 30, December 28,
1995 1996
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,427 $ 19,659
Receivables:
Trade 6,710 6,798
Income taxes 1,280 4,179
Supplies 8,960 9,810
Prepaid expenses 1,054 1,012
Deferred income taxes 4,204 3,041
-------- --------
Total current assets 26,535 44,499
PROPERTY AND EQUIPMENT:
Land 127,397 141,125
Buildings and improvements 492,711 566,418
Furniture, fixtures and equipment 53,357 71,070
Construction in progress 13,068 28,692
-------- --------
Total property and equipment 686,533 807,305
Less accumulated depreciation and amortization 44,307 71,283
-------- --------
Property and equipment - net 642,226 736,022
OTHER ASSETS:
Goodwill, net of accumulated amortization 74,712 72,446
Deferred loan fees and costs, net of accumulated amortization 8,134 7,049
Other 3,741 7,611
-------- --------
Total other assets 86,587 87,106
-------- --------
TOTAL $755,348 $867,627
======== ========
See notes to consolidated financial statements.
23
25
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 30,1995 AND DECEMBER 28,1996
(IN THOUSANDS, EXCEPT PAR VALUES)
December 30, December 28,
1995 1996
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,094 $ 13,984
Accrued expenses:
Insurance 5,045 4,496
Compensation 4,626 5,396
Property taxes 1,850 3,025
Sales and use taxes 2,696 2,567
Other 5,926 5,726
--------- ---------
Total accrued expenses 20,143 21,210
Current maturities of long-term debt:
Notes payable 9,921 10,521
Obligations under capital leases 2,030 1,499
--------- ---------
Total current liabilities 43,188 47,214
LONG-TERM DEBT (LESS CURRENT MATURITIES):
Notes payable 291,513 205,745
Bank facility 50,800 76,150
Senior notes 200,000 200,000
Obligations under capital leases 2,558 2,263
--------- ---------
Total long-term debt 544,871 484,158
OTHER LONG-TERM LIABILITIES (LESS CURRENT MATURITIES):
Pension obligation 1,993 638
Insurance 5,562 6,570
Deferred income taxes 7,023 9,948
--------- ---------
Total other long-term liabilities 14,578 17,156
COMMITMENTS AND CONTINGENCIES
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: 1995 - 18,400, 1996-28,412 184 284
Additional paid-in capital 117,816 266,516
Less treasury stock, at cost: 1996-500 shares (6,476)
Retained earnings 34,711 58,775
--------- ---------
Total stockholders' equity 152,711 319,099
--------- ---------
TOTAL $ 755,348 $ 867,627
========= =========
See notes to consolidated financial statements.
24
26
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1994, December 30, 1995 and December 28, 1996
(in thousands except per share amounts)
Years Ended
---------------------------------------
December 31, December 30, December 28,
1994 1995 1996
----------- ----------- ------------
REVENUES $269,306 $291,445 $317,437
OPERATING EXPENSES:
Direct room 134,994 146,585 162,365
Depreciation and amortization 23,874 26,892 28,680
Corporate and marketing 31,185 33,259 35,406
Inn renewal program 10,398
Change in management 3,142
-------- -------- --------
Total operating expenses 190,053 209,878 236,849
-------- -------- --------
OPERATING INCOME 79,253 81,567 80,588
INTEREST INCOME 555 152 394
INTEREST EXPENSE (52,174) (51,260) (41,777)
OTHER INCOME 466 379 471
-------- -------- --------
INCOME BEFORE INCOME TAXES 28,100 30,838 39,676
INCOME TAXES (11,240) (12,516) (15,612)
-------- -------- --------
NET INCOME $16,860 $18,322 $24,064
======= ======= =======
NET INCOME PER SHARE $0.91 $0.98 $0.87
======= ======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING 18,616 18,660 27,573
======= ======= =======
See notes to consolidated financial statements.
25
27
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1994, December 30, 1995 and December 28, 1996
(in thousands)
Retained
Common Stock Treasury Stock Additional Earnings
-------------- ----------------- Paid-in (Accumulated
Shares Amount Shares Amount Capital Deficit) Total
------ ------ ------ ------ -------- ------------- -------
BALANCES AT JANUARY 1, 1994 10 $100,000 ($471) $99,529
Stock split 18,390 $184 (184)
Net income 16,860 16,860
------ ---- ---- ------- -------- ------- --------
BALANCES AT DECEMBER 31, 1994 18,400 184 99,816 16,389 116,389
Capital contribution 18,000 18,000
Net income 18,322 18,322
------ ---- ---- ------- -------- ------- --------
BALANCES AT DECEMBER 30, 1995 18,400 184 117,816 34,711 152,711
Public stock offering (net of $11,368 of expenses) 10,000 100 148,532 148,632
Stock options exercised 12 168 168
Purchase of treasury stock (500) ($6,476) (6,476)
Net income 24,064 24,064
------ ---- ---- ------- -------- ------- --------
BALANCES AT DECEMBER 28, 1996 28,412 $284 (500) ($6,476) $266,516 $58,775 $319,099
====== ==== ==== ======= ======== ======= ========
See notes to consolidated financial statements.
26
28
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30,1995 AND DECEMBER 28, 1996
(IN THOUSANDS)
Years Ended
---------------------------------------------
December 31, December 30, December 28,
1994 1995 1996
------------ ------------ ------------
CASH FLOWS FROM OPERATIONS:
Net income $ 16,860 $ 13,322 $ 24,064
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization 21,244 23,238 25,477
Deferred income taxes 678 2,455 4,088
Amortization of goodwill 2,290 2,265 2,266
Loss from asset disposals and impairments 975 8,297
Amortization of other assets (principally deferred loan costs) 1,174 1,455 2,010
Change in assets and liabilities:
Receivables (2,569) (1,068) (2,987)
Supplies (329) (1,021) (950)
Prepaid expenses (782) (99) 42
Accounts payable 2,079 (484) (2,479)
Accrued expenses 4,179 1,747 720
--------- --------- ---------
Net cash provided by operations 44,824 47,785 60,548
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (45,076) (87,575) (122,201)
Change in other assets (548) 161 (4,357)
Acquisition of affiliated partnership interests (3,947)
--------- --------- ---------
Net cash used by investing activities (49,571) (87,414) (126,558)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft 4,375 (4,375)
Proceeds from notes payable and bank facility 151,900 139,375 160,706
Principal reduction in notes payable and bank facility (162,466) (110,396) (220,962)
Principal reduction in obligations under capital leases (2,095) (586) (826)
Issuance of common stock and additional capital contributions 18,000 148,800
Purchase of treasury stock (6,476)
--------- --------- ---------
Net cash provided (used) by financing activities (8,286) 42,018 81,242
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (13,033) 2,389 15,232
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 15,071 2,038 4,427
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,038 $ 4,427 $ 19,659
========= ========= =========
INTEREST PAID $ 51,433 $ 51,503 $ 43,229
========= ========= =========
INTEREST CAPITALIZED $ 1,547 $ 2,841
========= =========
INCOME TAXES PAID $ 11,306 $ 10,591 $ 14,399
========= ========= =========
NON-CASH TRANSACTIONS:
Reallocation of goodwill to property $ 3,708
=========
Capital expenditures included in accounts payable $ 1,812 $ 7,181
========= =========
See notes to consolidated financial statements.
27
29
RED ROOF INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General - The Company was formed in November 1993 and is a subsidiary
of The Morgan Stanley Real Estate Fund, L.P. (MSREF). The Company operates on a
52-53 week fiscal year which ends on the Saturday nearest to December 31. At
December 31, 1994 (1994), December 30, 1995 (1995) and December 28, 1996 (1996),
the Company operated 220, 231 and 248 inns, respectively.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Red Roof Inns, Inc. and its wholly owned
subsidiaries, RRI Investment Co. and RRI Financial Inc. All material
intercompany transactions and balances have been eliminated in consolidation.
Nature of Operations - The Company is an owner/operator of economy
inns and revenues are primarily derived from room rentals. The Company's
properties are primarily located throughout the Midwest, East, South and Gulf
Coast regions of the United States.
Use of Estimates - The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from these estimates, but it is management's opinion that any
changes in estimates would not have a material effect on the consolidated
financial statements.
Supplies - Supplies inventory is stated at cost which represents the
cost to supply the inns with their respective initial operating inventories.
Replacements needed to maintain the original operating inventory are charged to
expense in the period such replacement occurs.
Property and Equipment - Property and equipment are stated at cost.
Depreciation and amortization of property and equipment is based on the
straight-line method over estimated composite useful lives which range from 3 to
15 years for furniture, fixtures and equipment and 12 to 40 years for buildings
and improvements.
Capitalization of Development Expenses - Costs incurred by the Company
related to site acquisition and development are capitalized and allocated to the
properties acquired or developed. No such costs were capitalized during 1994.
Costs capitalized during 1995 and 1996 totaled $1,138,000 and $2,162,000,
respectively.
Goodwill - The excess of the purchase price over the fair values of
net assets acquired (goodwill) is being amortized on a straight-line basis over
35 years. During 1994 based on updated fair value information, the Company
reallocated $3,708,000 to property from goodwill. The amount at December 30,
1995 and December 28, 1996 is net of accumulated amortization of $4,656,000 and
$6,922,000, respectively.
Deferred Loan Fees and Costs - Deferred loan fees and costs are
amortized using the straight-line method over the terms of the loans ranging
from 2 to 15 years. The amount at December 30, 1995 and December 28, 1996 is net
of accumulated amortization of $1,700,000 and $2,958,000, respectively.
Other Assets - Other assets principally include software costs, net of
accumulated amortization using the straight-line method over a useful life of
five years, preliminary site acquisition costs, escrow deposits for furniture
replacements and investments in affiliates.
Asset Impairments - Annually, or more frequently if events or
circumstances change, a determination is made by management, in accordance with
Statement of Financial Accounting Standards (SFAS) No. 121, to ascertain whether
property and equipment, goodwill, and other intangible assets have been impaired
based on the sum of estimated future undiscounted cash flows from operating
activities. If the estimated net cash flows are less than the carrying amount of
such assets, the Company recognizes an impairment loss in an amount necessary to
write down such assets to a fair value as determined from expected discounted
cash flows. During 1996, the Company recorded an impairment charge of
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30
$450,000 related to land held for sale (included in depreciation and
amortization expense) and a charge of $7,847,000 related to assets being
disposed of in connection with its inn renewal program (see Note 10).
Based upon its most recent analysis, the Company believes that
property, goodwill and other intangibles at December 28, 1996 are realizable and
the depreciation and amortization periods are appropriate.
Income Taxes - The Company is subject to federal, state, and local
income taxes. Income taxes are provided for all taxable items included in the
statements of income in accordance with SFAS No. 109.
Self-Insurance Programs - The Company uses a retrospective
self-insurance plan for general liability and workers' compensation. A liability
has been recorded in the financial statements based on information currently
available as to the estimated ultimate cost for incidents incurred prior to the
balance sheet dates. Losses in excess of certain limits are insured with
third-party insurance companies. Estimated payments against the insurance
liability for each of the next five years are: 1997 - $4,496,000; 1998 -
$2,030,000; 1999 - $2,039,000; 2000 - $1,367,000 and 2001 - $471,000.
Advertising - The Company expenses the costs of advertising (including
production costs) the first time advertising takes place. Advertising expenses
consist of billboard and local advertising, which is included in direct room
expenses, and national media advertising, which is included in corporate and
marketing expenses. Advertising expense was $16,279,000, $17,728,000 and
$17,907,000 for 1994, 1995 and 1996, respectively.
Net Income Per Share - Net income per share is based on the weighted
average number of shares of common stock and common stock equivalents (stock
options) outstanding during the years presented adjusted to reflect the 1840 for
1 stock split in December 1994.
Cash Equivalents - Cash in excess of daily requirements is invested in
money market and government securities with maturities of three months or less.
Such investments are considered to be cash equivalents. The majority of such
funds are held by the Company's lead bank. The Company has not experienced any
losses on these investments.
Reclassifications - Certain amounts in the prior years financial
statements have been reclassed to conform with the 1996 presentation.
2. TRANSACTIONS WITH AFFILIATES
The Company operates two motels under long-term capital lease
agreements with affiliated partnerships which own the motels. Such affiliation
exists because the Company is a partner in the partnerships. The Company's
ownership interests in the operating profits and losses of such partnerships are
3% and 29%, respectively, and ownership in the residual values of such
partnerships is 73% and 80%, respectively. The partnerships are consolidated as
capital leases and are immaterial to the consolidated financial statements.
The Company was provided certain underwriting services through an
affiliate of MSREF in connection with the Company's 1996 public stock offering
and obtains certain shared administrative services with unrelated parties
through master contracts available through MSREF.
3. LEASES
The Company leases certain assets used in its operations under
long-term capital leases, principally three motels (including one with an
unrelated party), land, telecommunication equipment and televisions. These
leases typically contain renewal privileges and purchase options and expire at
various dates through 2006. The leases generally require payment of property
taxes, insurance and maintenance costs. The Company leases land, a motel, a
warehouse and billboard advertising space under noncancelable operating leases.
Land leases expire at various dates through 2034 and other leases expire at
various dates through 2005. Total operating rent expense for 1994, 1995 and 1996
was $9,952,000, $11,269,000 and $12,622,000, respectively.
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Future minimum lease payments under non-cancelable leases at December 28,
1996 are as follows (in thousands):
Capital Operating
Leases Leases
------- ----------
Year
1997 $1,729 $9,269
1998 510 5,609
1999 510 2,959
2000 497 1,179
2001 359 1,014
Thereafter 1,212 13,770
------ -------
Total minimum lease payments 4,817 $33,800
Less amount representing interest 1,055 =======
------
Present value of minimum lease payments 3,762
Less current maturities 1,499
------
Total non-current $2,263
======
The following is a summary of property and equipment under capital leases
(in thousands):
December 30, December 28,
1995 1996
------------ ------------
Land $1,633 $1,220
Buildings 3,251 3,251
Equipment 467
------ ------
Total 5,351 4,471
Less accumulated depreciation and amortization 1,040 999
------ ------
Property and equipment under capital
leases - net $4,311 $3,472
====== ======
4. NOTES PAYABLE AND BANK FACILITY
December 30, December 28,
1995 1996
------------- ------------
(in thousands)
Mortgage notes payable, weighted average fixed interest rates of 10.1%
at December 30, 1995 and 10.0% at December 28, 1996, monthly
payments of principal and interest due through January 2009 $252,267 $202,035
Mortgage notes payable, weighted average variable interest rates of 8.4%
at December 30, 1995 and 7.0% at December 28, 1996, interest
adjustable at intervals from one month to six years, varying monthly
payments of principal and interest due through January 2000 49,167 14,231
Bank facility, weighted average variable interest rates of 8.5% at
December 30, 1995 and 7.6% at December 28, 1996 due January 1999 50,800 76,150
-------- --------
Total 352,234 292,416
Less current maturities 9,921 10,521
-------- --------
Total notes payable and bank facility (less current maturities) $342,313 $281,895
======== ========
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Principal payments due for each of the next five years are: 1997 -
$10,521,000; 1998 - $21,833,000; 1999 - $122,617,000; 2000 - $20,436,000; and
2001 - $27,476,000.
In November 1995, the Company replaced its secured $50 million bank
credit facility with a $100 million bank facility, which matures in January
1999. In April 1996, the Company amended the $100 million bank credit agreement
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. Borrowings
under the bank facility bear interest at either the bank's prime rate or LIBOR
plus tiered spreads based upon the Company's leverage ratios. The bank facility
contains various covenants typical of senior secured bank facilities that
include restrictions on the incurrence of additional debt and the payment of
dividends which are similar to the covenants related to the senior notes. The
bank facility contains events of default for breach of these covenants as well
as other events of default customary for financing of similar size and nature,
including a change in control of the Company.
Notes payable and the bank facility are collateralized by certain
property and equipment with a net book value totaling $461,000,000 and
$380,000,000 at December 30, 1995 and December 28, 1996, respectively.
As of December 28, 1996, the Company has $6,475,000 in standby letters
of credit from banks, expiring at various dates through December 2005.
5. SENIOR NOTES
In December 1993, the Company issued $200,000,000 of senior notes (the
"Notes") due 2003. The Notes are unsecured and bear interest at 9 5/8% payable
semi-annually. The Notes contain covenants that include restrictions on the
incurrence of additional debt. The Notes also restrict the payment of dividends
to 50% of cumulative net income (as defined) plus $7,500,000 plus the aggregate
net proceeds received from sale of the Company's common stock to an unrelated
party. At December 28, 1996, $179,412,000 is available for the payment of
dividends under the terms of the Notes of which $36,888,000 is available from
retained earnings.
The Notes are not redeemable by the Company until December 15, 1998
when they become redeemable at 104.813% of their principal amount, declining
ratably to par on and after December 15, 2000, plus accrued interest.
6. STOCKHOLDERS' EQUITY
During 1995, the Company's stockholders made a capital contribution of
$18,000,000 to provide funds for inn acquisitions. 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 and approximately $21 million was retained for inn
acquisitions, conversions, new development and for general corporate purposes.
In connection with the Offering, $9.6 million in underwriting
discounts and commissions were paid to certain underwriters, including an
affiliate of MSREF.
In August 1996, the Company repurchased 500,000 shares of its common
stock in the open market for an aggregate purchase price of $6,476,000, or
$12.95 per share and placed the shares in treasury. The shares will be used to
fulfill the Company's requirements for its stock option and stock purchase
plans.
7. EMPLOYEE AND DIRECTOR STOCK PLANS
In March 1995, the Company adopted a non-qualified Management Stock
Option Plan for certain officers and employees effective as of December 29,
1994. In December 1995, the Company's Board of Directors adopted the Amended and
Restated 1994 Management Equity Incentive Plan (the "Plan"). The Plan is
administered by the Compensation Committee appointed by the Board of Directors
which is comprised of not less than two directors.
Under the terms of the Plan, awards may be granted in the form of: (i)
incentive stock options, which are intended to qualify under Sec. 422 of the
Internal Revenue Code of 1986, as amended; (ii) stock options which are not
intended to so qualify; (iii) shares of the Company's common stock which will be
subject to certain conditions and restrictions ("restricted shares"); or (iv)
performance units ("performance units"), which represent the right to receive an
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33
amount equal to the value related to the performance units awarded, such as the
fair market value of a share of common stock. Awards may be granted by the
committee at its discretion to key employees (including officers and directors
who are employees) of the Company. The Plan generally provides that the number
of shares of common stock with respect to which options, restricted shares and
performance units may be granted to any individual employee may not exceed
400,000 during any single fiscal year. The aggregate number of shares of common
stock which may be issued under the Plan is 2,400,000 provided that in no event
shall more than 10% of the shares of common stock authorized for issuance under
the Plan be granted in the form of awards other than options.
Generally, each option will have a term ending 10 years from the date
of grant. Each option will vest and become exercisable on such date or dates and
on the basis of other criteria, including without limitation the performance of
the Company, as the committee may determine at its discretion and as shall be
specified in the option agreement evidencing the grant of such options. The
option price is determined by the committee at the time of the grant and may not
be less than the fair market value of the shares of common stock on the date of
grant (exclusive of the options granted in 1994, which were issued at less than
fair market value at the time of the grant.) Options granted in 1994, 1995 and
1996 vest at the rate of 25% per year.
In October 1995, the Company adopted the 1995 Director Stock Option
Plan for directors who are not officers or employees of the Company. The plan is
administered by a committee of not less than two directors appointed by the
Board of Directors. Any eligible director is automatically granted an initial
option to purchase 10,000 shares. Subsequently, following each annual meeting of
the stockholders of the Company, each eligible director shall be granted an
option to purchase 1,000 shares. The initial option to purchase 10,000 shares
vests in equal amounts over a five-year period and future grants vest
immediately. The exercise price of the options is based on the fair market value
of the common stock on the last trading day prior to the date on which the
option is granted. All options expire 10 years after the date of grant. The
Company has reserved 60,000 shares under the Plan and, in 1996, granted options
to purchase 10,000 shares.
The following table summarizes option activity for the years
presented:
Number Option Price Total
of Shares Range Per Share Option Price
--------- --------------- ------------
Outstanding January 1, 1994
Granted 410,500 $5.43 $ 2,229,015
---------- -------------
Outstanding December 31, 1994 410,500 5.43 2,229,015
Granted 408,200 5.43 - 16.00 5,417,666
Canceled (176,000) 5.43 - 14.13 (1,529,880)
---------- -------------
Outstanding December 30, 1995 642,700 5.43 - 16.00 6,116,801
Granted 756,400 12.63 - 16.00 11,089,920
Exercised (14,175) 5.43 - 14.13 (86,758)
Canceled (117,925) 5.43 - 14.13 (698,405)
---------- -------------
Outstanding December 28, 1996 1,267,000 $ 16,421,558
========== =============
At December 31, 1994, December 30, 1995 and December 28, 1996, options
exercisable under the Company's stock option plans totaled 102,625; 210,550 and
518,149 shares, respectively, and had a weighted average option price per share
of $5.43, $7.66 and $11.51, respectively. For options outstanding at December
28, 1996, the option price per share ranged from $5.43 to $16.00 and the
weighted average contractual life of the options was 8.4 years.
At December 28, 1996, 1,178,825 shares are available for future grants
of stock options.
During 1994, 1995 and 1996, the Company recognized compensation
expense in corporate and marketing expenses of $875,000, $488,000 and $339,000,
respectively, related to the granting of options in 1994 at less than fair
market value at the date of grant. Grants in 1995 and 1996 were issued at fair
market value.
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value method of accounting for stock options and similar equity instruments.
Under the fair value method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized over the service period,
which is usually the vesting period. Companies are encouraged, but not required,
to adopt the fair value method of accounting for employee stock-based
32
34
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion (APB) No. 25, "Accounting
for Stock Issued to Employees," but are required to disclose in a note to the
financial statements pro forma net income and earnings per share as if the
company had applied the new method of accounting. The Company applies APB No. 25
in accounting for its stock-based compensation plans. Had compensation cost been
determined on the basis of fair value pursuant to SFAS No. 123, for options
granted in 1995 and 1996, net income and earnings per share would have been as
follows:
1995 1996
-------- --------
Net income
- ----------
As reported $ 18,322 $ 24,064
======== ========
Pro forma $ 18,107 $ 22,729
======== ========
Earnings per share
- ------------------
As reported $ .98 $ .87
======== ========
Pro forma $ .97 $ .82
======== ========
The following weighted average assumptions were used in the option
pricing model: a risk free interest rate of 7.7% and 6.7% for 1995 and 1996,
respectively; an expected life of the options of 7.5 years; no expected dividend
yield and a volatility factor of .25. The weighted average per share fair value
of the options granted in 1995 and 1996 was $6.91 and $6.59, respectively.
Due to the inclusion of only 1995 and 1996 option grants, the effects
of applying SFAS No. 123 in 1995 and 1996 may not be representative of the pro
forma impact in future years.
8. EMPLOYEE STOCK PURCHASE PLAN
In December 1995, the Company's Board of Directors adopted the
Company's 1996 Employee Stock Purchase Plan (the "stock purchase plan") which is
intended to qualify under Sec. 423 of the Internal Revenue Code. The purpose of
the stock purchase plan is to provide employees of the Company with an
opportunity to acquire or increase a proprietary interest in the Company by
applying payroll deductions or contributions to the purchase of shares of the
Company's common stock. All employees of the Company are eligible to participate
in the stock purchase plan. The purchase price is 85% of the fair market value
of the Company's common stock at the beginning of the contribution period, which
begins on the last Sunday of January and ends on the last Saturday of the
following January of each year (except for 1996 which began on April 1 and ended
on January 25, 1997) or, if less, 85% of such fair market value on the last day
of the contribution period. The stock purchase plan allows employees to purchase
shares through contribution or payroll deductions of up to 10% of base pay, and
limits each employee to a purchase of not more than 1,000 shares during any
contribution period, and also provides that no employee may purchase in any
calendar year shares having a value (determined at the time the right to
purchase is granted) in excess of $25,000. The aggregate number of shares of
common stock reserved for purchase under the stock purchase plan is 100,000.
Such shares may be either authorized by unissued shares or issued shares
reacquired by the Company and held as treasury shares.
In January 1997, the Company sold 48,647 shares of common stock out of
treasury to employees at $12.64 per share for the 1996 plan year.
9. RETIREMENT PLAN
The Company had a defined benefit pension plan covering all employees
except seasonal employees. The benefits are based on years of service, final
average compensation and final average compensation in excess of average social
security covered compensation at retirement. The Company's funding policy is to
contribute annually at least the minimum amount required under the funding
standards of ERISA. Plan assets are held by a bank trust company and are
invested primarily in fixed income and equity funds. On December 28, 1996, the
Company froze the Plan which decreased the Company's projected benefit
obligations by $2,500,000 and resulted in a curtailment gain of $286,000. Earned
benefits through the date the Plan was frozen will be paid at the employees
normal retirement date (as defined).
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7% and 7.25% at November
30, 1995 and December 28, 1996, respectively. The increase in the discount
33
35
rate for 1996 reflects the current market rates for long-term debt investments.
The rate of increase in future compensation was 5% and the expected long-term
rate of return on assets was 9% for both 1995 and 1996.
The following table sets forth the plan's funded status as of November
30, 1995 (previous measurement date) and December 28, 1996 and amounts
recognized in the financial statements (in thousands):
November 30, December 28,
1995 1996
----- ----
Actuarial present value of benefit obligations:
Vested benefit obligation $ 5,795 $ 8,005
========== =======
Accumulated benefit obligation $ 6,203 $ 8,313
========== =======
Projected benefit obligation $ (8,192) $(8,313)
Plan assets at fair value 5,590 7,753
---------- -------
Plan assets less than projected benefit obligation (2,602) (560)
Unrecognized prior service cost (26)
Unrecognized net loss 738
---------- -------
Sub-total at November 30 (1,890) (560)
Pension income(cost) accrual for December (62) 7
---------- -------
Pension liability at end of year $ (1,952) $ (553)
========= =======
1994 1995 1996
------ ------ ------
Components of pension cost:
Service cost $ 632 $ 545 $ 736
Interest cost 436 475 588
Actual return on plan assets (362) (373) (543)
Net amortization and deferral (5) (5) 52
Curtailment gain (286)
------- ------- -------
Pension cost $ 701 $ 642 $ 547
======= ======= =======
In addition to the pension plan described above, the Company agreed to
establish a supplementary pension plan for the President and Chief Executive
Officer. Accordingly, the Company has an additional accrued liability of $41,000
and $85,000 as of December 30, 1995 and December 28, 1996, respectively, related
to such supplementary plan.
The Company intends to adopt an employee 401(k) retirement plan in
1997.
10. INN RENEWAL PROGRAM
In 1996, the Company commenced an inn renewal program to refurbish
substantially all of its inns. The program is expected to be completed during
1997 at a cost of approximately $55 to $60 million. Included in the program are
expenditures to update guest rooms with new carpet, wallcovering, furniture,
bedspreads and drapes. Improvements to the exterior of the properties include
painting, new signs, improved lighting and additional landscaping. In 1996, the
Company spent $10,745,000 related to the inn renewal program, of which
$8,194,000 was capitalized and $2,551,000 was expensed. In addition, the Company
wrote off assets with a net book value of approximately $7,847,000 that are
being disposed of in connection with the program.
11. CHANGE IN MANAGEMENT EXPENSE
On June 30, 1995, the Company appointed Francis W. Cash to the
position of President, Chief Executive Officer and Director succeeding Jack Van
Fossen who had retired. In addition, on June 30, 1995, the Executive Vice
President
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and Chief Financial Officer; Vice President, General Counsel and Secretary; and
Vice President and Corporate Counsel terminated their employment with the
Company and received severance benefits provided under their respective
employment agreements. Accordingly, the Company recorded an expense of
$3,142,000 for such severance benefits and certain expenses associated with the
employment of new executive officers.
12. INCOME TAXES
The components of the provision for income taxes consist of the
following (in thousands):
1994 1995 1996
--------- --------- ---------
Federal:
Current $ 8,427 $ 8,340 $ 9,304
Deferred 390 1,612 3,660
--------- --------- ---------
Total federal 8,817 9,952 12,964
--------- --------- ---------
State and local:
Current 2,135 1,721 2,220
Deferred 288 843 428
--------- --------- ---------
Total state and local 2,423 2,564 2,648
--------- --------- ---------
Total $ 11,240 $ 12,516 $ 15,612
========= ========= =========
Effective tax rate 40.0 % 40.6 % 39.4 %
========= ========= =========
The effective tax rate differs from the statutory rate as follows:
Statutory rate 35.0 % 35.0 % 35.0 %
State and local taxes, net of federal tax effect 5.6 5.4 4.3
Jobs tax credit (0.5) (0.2)
Other (0.1) 0.4 0.1
--------- --------- ---------
Total 40.0 % 40.6 % 39.4 %
========= ========= =========
The tax effects of significant items comprising the Company's net
deferred tax balances are as follows (in thousands):
December 30, December 28,
1995 1996
------------ ------------
Deferred tax assets:
Self-insured expenses $ 4,262 $ 4,340
Capital lease obligations 1,047 1,007
Other expense accruals 3,234 1,841
--------- ---------
Total deferred tax assets 8,543 7,188
--------- ---------
Deferred tax liabilities:
Goodwill and basis of assets acquired 8,292 11,308
Excess tax over book depreciation and amortization 3,070 2,787
--------- ---------
Total deferred tax liabilities 11,362 14,095
--------- ---------
Net deferred tax liability $ 2,819 $ 6,907
========= =========
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13. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal proceedings
arising from the normal course of business. While the ultimate liability, if
any, from these proceedings is presently indeterminable, in the opinion of
management, these matters should not have a material adverse effect on the
consolidated financial statements of the Company.
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments disclosed below as
of December 30, 1995 and December 28, 1996 were determined using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented may not be
indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies could have a significant effect on the estimated fair value
amounts.
The following methods and assumptions were used to estimate the fair
value of financial instruments (in thousands); (i) notes payable - the estimated
fair value is based on current rates and payment terms offered to the Company
and (ii) senior notes - the estimated fair value is based upon a quoted
published market price (in thousands):
Carrying Value Estimated Fair Value
-------------------------------- ---------------------------------
December 30, December 28, December 30, December 28,
1995 1996 1995 1996
------------ ------------ ------------ ------------
Notes payable $352,234 $292,416 $373,000 $307,000
Senior notes 200,000 200,000 190,000 199,000
15. SELECTED QUARTERLY FINANCIAL DATA AND PRO-FORMA SUPPLEMENTAL INFORMATION
(UNAUDITED)
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- ----
(in thousands, except per share amounts)
1995
- ----
Revenues $61,558 $76,976 $84,513 $68,398 $291,445
Operating income 8,969 23,779 (1) 30,780 18,039 (2) 81,567
Net income (loss) (2,554) 6,746 (1) 10,927 3,203 (2) 18,322
Net income (loss) per share (.14) .36 (1) .59 .17 (2) .98
1996
- ----
Revenues $68,073 $83,793 $92,535 $73,036 $317,437
Operating income 9,237 (3) 28,961 33,563 8,827 (4) 80,588
Net income (loss) (1,311) (3) 11,387 14,029 (41)(4) 24,064
Net income (loss) per share (.05) (3) .40 .50 .00 (4) .87
<FN>
(1) Operating income and net income were reduced by a non-recurring expense
relating to a change in management of $2,827 and $1,696 ($.09 per share),
respectively.
(2) Operating income and net income were reduced by $975 and $579 ($.03 per
share), respectively, due to loss from demolition of one building
containing 55 rooms located in Jackson, Mississippi.
(3) Operating income was reduced and net loss was increased by a non-recurring
expense related to a SFAS No. 121 adjustment to recognize impairment of
fixed assets of $450 and $269 ($.01 per share), respectively.
(4) Operating income and net income were reduced by non-recurring expenses
related to the inn renewal program of $10,398 and $6,212 ($.23 per share),
respectively.
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The following pro-forma supplemental information, which is presented
for purposes of facilitating meaningful comparisons to ongoing operations and to
other companies, summarizes the results of operations of the Company, adjusted
on a pro-forma basis to reflect (a) the effect of the Offering, as if the
Offering had occurred at the beginning of each year being presented and (b) the
elimination of certain non-recurring expenses.
1995 1996
---------- ----------
Pro-forma information including supplemental adjustments:
Operating income $ 84,709 $ 91,436
Net income 25,716 31,335
Net income per share .90 1.10
Operating income and net income as reported in the Company's
consolidated financial statements are reconciled to the respective amounts in
the preceding table as follows:
1995 1996
----------------------- ------------------------
Operating Net Operating Net
Income Income Income Income
As reported $81,567 $18,322 $80,588 $24,064
Pro-forma and supplemental
adjustments:
Change in management expense 3,142 1,873
Asset impairment charge 450 269
Inn renewal program 10,398 6,212
Interest expense adjustment for
the Offering 5,521 790
-------- -------- ------- --------
As adjusted $84,709 $25,716 $91,436 $31,335
======== ======== ======= ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information in the proxy statement for the Company's 1997 annual meeting of
stockholders under the headings "Election of Directors," "Compensation of
Directors," "Executive Officers" and "Section 16 (a) Beneficial Ownership
Reporting Compliance" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the proxy statement for the Company's 1997 annual meeting of
stockholders under the heading "Executive Compensation" is incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the proxy statement for the Company's 1997 annual meeting of
stockholders under the heading "Principal Holders of Voting Securities" is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the proxy statement for the Company's 1997 annual meeting of
stockholders under the headings "Election of Directors," "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions" is incorporated herein by reference.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements
- Independent Auditors' Report of the Company.
- Consolidated Balance Sheets of the Company as of
December 30, 1995 and December 28, 1996.
- Consolidated Statements of Income of the Company for the
years ended December 31, 1994, December 30, 1995 and
December 28, 1996.
- Consolidated Statements of Stockholders' Equity of the
Company for the years ended December 31, 1994, December
30, 1995 and December 28, 1996.
- Consolidated Statements of Cash Flows of the Company for
the years ended December 31, 1994, December 30, 1995 and
December 28, 1996.
- Notes to Consolidated Financial Statements of the
Company.
(2) Financial Statement Schedules
The financial statement schedules listed below are included in
the pages following.
- Financial Statement Schedule II, Valuation and
Qualifying Accounts, For The Years Ended December 31,
1994, December 30, 1995 and December 28, 1996.
Schedules other than those mentioned above are omitted
because the conditions requiring their inclusion in this
document do not exist or because the information is
given in the financial statements or notes thereto.
(3) The following exhibits are filed as a part of this report:
2.1 - The Merger Agreement dated as of August 12, 1993, as
amended, among the Company, MSREF and the Trueman Trust
(incorporated by reference to Exhibit 2.01 to the Company's
Registration Statement on Form S-1, File No. 33-76848).
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40
3.01 - Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.01 to the Company's Annual
Report on Form 10-K for the fiscal year ended December 30, 1995).
3.02 - Form of Amended and Restated Bylaws of the Company (incorporated
by reference to Exhibit 3.02 to the Company's Registration
Statement on Form S-1, File No. 33-97914).
4.01 - Form of certificate representing shares of Common stock, par
value $.01 per share (incorporated by reference to Exhibit 4.01 to
the Company's Registration Statement on Form S-1, File No.
33-97914).
10.01 - Indenture, dated as of December 17, 1993, from the Company to
The Bank of New York, as Trustee (incorporated by reference to
Exhibit 4.02 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).
* 10.02 - Employment Agreements between the Company and Messrs. Campbell
and Tallis (incorporated by reference to Exhibit 10.02 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
* 10.03 - Employment Agreement between the Company and Mr. Cash
(incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the 26 weeks ended
July 1, 1995).
10.04 - Loan Agreement, dated as of November 9, 1995, between the
Company and Huntington National Bank and a bank group
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the 39 weeks ended September 30,
1995).
10.05 - First, Second and Third Amendments dated November 21, 1995,
December 12, 1995 and April 16, 1996, respectively, to Loan
Agreement, dated as of November 9, 1995, between the Company and
Huntington National Bank and a bank group (incorporated by
reference to Exhibits 10.01, 10.02 and 10.03 to the Company's
Quarterly Report on Form 10-Q for the 13 weeks ended March 30,
1996).
10.06 - Fourth Amendment dated June 27, 1996 to Loan Agreement, dated as
of November 9, 1995, between the Company and Huntington National
Bank and a bank group (incorporated by reference to Exhibit 10.01
to the Company's Quarterly Report of Form 10-Q for the 26 weeks
ended June 29, 1996).
* 10.07 - 1995 Director Stock Option Plan (incorporated by reference
to Exhibit 10.02 to the Company's Quarterly Report on Form 10-Q
for the 39 weeks ended September 30, 1995).
10.08 - Shareholders Agreement among the Company and all its
shareholders, dated as of April 6, 1994 (incorporated by reference
to Exhibit 10.07 to the Company's Registration Statement on Form
S-1, File No. 33-97914).
10.09 - Amendment No. 1 to Shareholders Agreement among the Company and
all its shareholders (incorporated by reference to Exhibit 10.07
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 30, 1995).
* 10.10 - Form of 1996 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.09 to the Company's Registration Statement
on Form S-1, File No. 33-97914).
* 10.11 - Form of Amended and Restated 1994 Management Equity Incentive
Plan (incorporated by reference to Exhibit 10.10 to the Company's
Registration Statement on Form S-1, File No. 33-97914).
* 10.12 - Employment Agreement between the Company and Mr. Chichester
(incorporated by reference to Exhibit 10.11 to the Company's
Annual Report on Form 10-K for the fiscal year ended December
30, 1995).
* 10.13 - 1996 Management Incentive Compensation Plan (incorporated by
reference to Exhibit 10.04 to the Company's Quarterly Report of
Form 10-Q for the 13 weeks ended March 30, 1996).
11.01 - Statement re computation of per share earnings.
12.01 - Statement re computation of ratios.
23.00 - Consent of Deloitte & Touche LLP.
* Executive plans and arrangements required to be filed pursuant to
Item 601 (b) (10) of Regulation S-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the last quarter of the
reporting period.
(c) Exhibits:
The exhibits are submitted following the signatures.
(d) Financial Statement Schedules:
The financial statement schedules and the independent auditor's
report thereon are submitted following the signatures.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934, RED ROOF INNS, INC. HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THIS 25TH
DAY OF MARCH 1997.
RED ROOF INNS, INC.
By /s/ Francis W. Cash
-----------------------------------------
Name: Francis W. Cash
Title: Chairman of the Board, President,
Chief Executive Officer and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF RED ROOF INNS,
INC. AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Francis W. Cash Chairman of the Board, President, March 25, 1997
- -------------------------------------- Chief Executive Officer and Director
Francis W. Cash
/s/ David N. Chichester Executive Vice President, Chief Financial Officer March 25, 1997
- -------------------------------------- and Director
David N. Chichester
/s/ James M. Allwin Director March 25, 1997
- --------------------------------------
James M. Allwin
/s/ Thomas E. Dobrowski Director March 25, 1997
- --------------------------------------
Thomas E. Dobrowski
/s/ C. William Hosler Director March 25, 1997
- --------------------------------------
C. William Hosler
/s/ William M. Lewis, Jr. Director March 25, 1997
- --------------------------------------
William M. Lewis, Jr.
/s/ Edward D. Powers Director March 25, 1997
- --------------------------------------
Edward D. Powers
/s/ Judith A. Rogala Director March 25, 1997
- --------------------------------------
Judith A. Rogala
/s/ Owen D. Thomas Director March 25, 1997
- --------------------------------------
Owen D. Thomas
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SCHEDULE II
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance at Charged to Charged to Deductions Balance at
Description Beginning Costs and Other from End
------------ of Period Expenses Accounts Reserves of Period
--------- -------- -------- -------- ---------
YEAR ENDED DECEMBER 28, 1996
Allowance for doubtful accounts $ 490 $ 368 $ $ (438)(1) $ 420
======= ======= ====== ====== =========
YEAR ENDED DECEMBER 30, 1995
Allowance for doubtful accounts $ 259 $ 467 $ $ (236)(1) $ 490
======= ======= ====== ====== =========
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts $ 0 $ 355 $ $ (96)(1) $ 259
====== ======= ====== ====== =========
<FN>
(1) Uncollectible accounts written off, net of amounts recovered.
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INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Stockholders of
Red Roof Inns, Inc.
We have audited the consolidated financial statements of Red Roof
Inns, Inc. and its subsidiaries as of December 30, 1995 and December 28, 1996
and for each of the three years in the period ended December 28, 1996 and have
issued our report thereon dated February 10, 1997; such report is included
elsewhere in this Form 10-K. Our audits also included the consolidated financial
statement schedules of Red Roof Inns, Inc. and its subsidiaries listed in Item
14. These consolidated financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audit. In our opinion, such consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 10, 1997
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EXHIBIT INDEX
Exhibit
No. Description
- ------- -----------
11.01 Statement re computation of per share earnings
12.01 Statement re computation of ratios.
23.00 Consent of Deloitte & Touche LLP
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