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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 29, 1997.
or
[ ] TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File Number: 1-14058
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RED ROOF INNS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1393666
(State of Incorporation) (I.R.S. Employer Identification Number)
4355 DAVIDSON ROAD
HILLIARD, OHIO 43026-2491
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (614)876-3200
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Number of shares of Common Stock outstanding at March 29, 1997:
28,456,191
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and, (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
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PART I - FINANCIAL INFORMATION
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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The accompanying unaudited condensed consolidated financial statements
of Red Roof Inns, Inc. ("Red Roof" or the "Company"), a Delaware corporation,
have been prepared in accordance with the instructions to Form 10-Q, and
therefore do not include all information and notes necessary for complete
financial statements in conformity with generally accepted accounting
principles. The results for the periods indicated are unaudited, but reflect all
adjustments (consisting only of normal recurring accruals) which management
considers necessary for a fair presentation of operating results. Results of
operations for interim periods are not necessarily indicative of a full year of
operations or results for other interim periods. All material intercompany
transactions and balances between Red Roof Inns, Inc. and it subsidiaries have
been eliminated in consolidation. These consolidated condensed financial
statements should be read in conjunction with the Company's 1996 audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 28, 1996.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND MARCH 29, 1997
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 28, MARCH 29,
1996 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,659 $ 15,643
Receivables 10,977 14,955
Supplies and other 13,863 14,286
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Total current assets 44,499 44,884
PROPERTY AND EQUIPMENT:
Land 145,177 146,910
Buildings and improvements 562,366 564,655
Furniture, fixtures and equipment 71,070 84,334
Construction in progress 28,692 40,566
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Total property and equipment 807,305 836,465
Less accumulated depreciation and amortization 71,283 78,878
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Property and equipment - net 736,022 757,587
OTHER ASSETS:
Goodwill, net of accumulated amortization 72,446 71,880
Deferred loan fees and other - net 14,660 16,304
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Total other assets 87,106 88,184
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TOTAL $867,627 $890,655
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See notes to consolidated financial statements.
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DECEMBER 28, MARCH 29,
1996 1997
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,984 $ 16,796
Accrued expenses 21,210 24,735
Current maturities of long-term debt 12,020 12,724
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Total current liabilities 47,214 54,255
LONG-TERM DEBT (LESS CURRENT MATURITIES):
Mortgage notes payable and obligations under capital leases 208,008 204,601
Bank facility 76,150 96,400
Senior unsecured notes 200,000 200,000
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Total long-term debt 484,158 501,001
OTHER LONG-TERM LIABILITIES 17,156 18,640
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: 1996 - 28,412, 1997 - 28,456 284 285
Additional paid-in capital 266,516 267,107
Less treasury stock, at cost: 1996 - 500 shares, 1997 - 451 shares (6,476) (5,846)
Retained earnings 58,775 55,213
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Total stockholders' equity 319,099 316,759
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TOTAL $ 867,627 $ 890,655
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See notes to consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED MARCH 30, 1996 AND MARCH 29, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
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MARCH 30, MARCH 29,
1996 1997
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REVENUES $ 68,073 $ 72,694
OPERATING EXPENSES:
Direct room 41,123 42,653
Depreciation and amortization 7,262 8,327
Corporate and marketing 10,451 11,593
Inn renewal program 4,771
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Total operating expenses 58,836 67,344
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OPERATING INCOME 9,237 5,350
INTEREST EXPENSE - NET (11,436) (11,213)
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LOSS BEFORE INCOME TAXES (2,199) (5,863)
INCOME TAX CREDIT 888 2,301
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NET LOSS $ (1,311) $ (3,562)
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NET LOSS PER SHARE $ (0.05) $ (0.13)
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WEIGHTED AVERAGE SHARES OUTSTANDING 24,989 27,978
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PRO-FORMA INFORMATION INCLUDING SUPPLEMENTAL ADJUSTMENTS
OPERATING INCOME $ 9,687 $ 10,121
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NET LOSS $ (255) $ (663)
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NET LOSS PER SHARE $ (0.01) $ (0.02)
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See notes to consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MARCH 30, 1996 AND MARCH 29, 1997
(IN THOUSANDS)
(UNAUDITED)
THIRTEEN WEEKS ENDED
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MARCH 30, MARCH 29,
1996 1997
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CASH FLOWS FROM OPERATIONS:
Net loss $ (1,311) $ (3,562)
Adjustments to reconcile net loss to net cash provided
by operations:
Depreciation and amortization 7,186 8,128
Amortization of goodwill 566 566
Deferred income taxes 149 104
Change in assets and liabilities:
Receivables (2,966) (3,978)
Supplies and other 388 434
Accounts payable 1,299 1,126
Accrued expenses 3,684 4,048
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Net cash provided by operations 8,995 6,866
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (21,910) (27,474)
Change in other assets (475) (2,177)
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Net cash used by investing activities (22,385) (29,651)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage notes payable and bank facility 31,800 69,950
Principal reduction in mortgage notes payable and bank facility (160,805) (52,403)
Issuance of common stock 148,596 1,222
Other (125)
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Net cash provided by financing activities 19,466 18,769
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,076 (4,016)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,427 19,659
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,503 $ 15,643
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See notes to consolidated financial statements.
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ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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RED ROOF INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED MARCH 30, 1996 AND MARCH 29, 1997 (UNAUDITED)
1. GENERAL
The condensed consolidated financial statements include the accounts of
Red Roof Inns, Inc. and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
At March 30, 1996 and March 29, 1997, the Company operated 234 inns and
249 inns, respectively.
Unaudited interim results for the thirteen weeks ended March 30, 1996
and March 29, 1997 contain all adjustments, consisting of normal recurring
accruals, which management considers necessary for a fair presentation of
interim financial position and results of operations for such periods. The
results are not necessarily indicative of the results for any other interim
period or the full fiscal year.
2. LONG-TERM DEBT
As of March 29, 1997, $53.6 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.
3. STOCKHOLDERS' EQUITY
On January 31, 1996, the Company issued 10,000,000 shares of common
stock in a public offering (the "Offering") at a price of $16.00 per share. Net
proceeds of the Offering were approximately $149 million, which were used to
repay approximately $128 million of mortgage indebtedness. Approximately $21
million was retained for inn acquisitions, conversions, new development and for
general corporate purposes.
In connection with the sale of the common stock, $9.6 million in
underwriting discounts and commissions were paid to certain underwriters,
including an affiliate of The Morgan Stanley Real Estate Fund which, together
with affiliates, beneficially owns a majority of the outstanding common stock of
the Company.
In January 1997, the Company sold 48,647 shares of common stock out of
treasury to employees at $12.64 per share under the Employee Stock Purchase Plan
for the 1996 plan year.
In March 1997, the Company granted options to a certain employee under
the Company's Management Stock Option Plan to purchase 25,000 shares at $15.88.
The options vest at the rate of 25% per year.
During the thirteen week period ended March 29, 1997, options were
exercised for 44,316 shares at prices ranging from $5.43 to $16.00 per share
under the Company's Management Stock Option Plan. In connection with the
termination of the employment of certain plan participants, 19,000 options
awarded under the Plan lapsed.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share," which will require retroactive adoption in the Company's 1997 fiscal
year. The new standard simplifies the computation of earnings per share and
requires the presentation of basic and diluted earnings per share. Due to the
Company's net loss in the thirteen weeks ended March 30, 1996 and March 29,
1997, SFAS No. 128 had no impact on the Company's loss per share for such
periods.
In February 1997, the Board of Directors authorized the Company to
repurchase up to 500,000 of its common shares, at prices not to exceed $18.00
per share, either in the open market or in privately negotiated transactions. No
shares were repurchased during the thirteen weeks ended March 29, 1997.
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4. INN RENEWAL PROGRAM
The Company continued its inn renewal program to refurbish more than
85% of its inns. The program is expected to be completed mid-year 1997 at a
total cost of approximately $55 to $60 million. For the thirteen week period
ended March 29, 1997, the Company spent $17.9 million related to the inn renewal
program, of which $13.1 million was capitalized and $4.8 million was expensed.
Costs incurred through March 29, 1997 related to the inn renewal program totaled
$28.6 million.
5. SUPPLEMENTAL CASH FLOW INFORMATION
For the thirteen weeks ended March 30, 1996 and March 29, 1997,
interest payments were $7,196,000 and $6,807,000, respectively, and interest
capitalized for the corresponding periods was $598,000 and $513,000,
respectively. Income tax payments for the thirteen week periods in 1996 and 1997
were $538,000 and $205,000, respectively. Capital expenditures included in
accounts payable at March 29, 1997 and December 28, 1996 totaled $8,867,000 and
$7,181,000, respectively.
6. PRO-FORMA INFORMATION INCLUDING SUPPLEMENTAL ADJUSTMENTS
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 1996 and (b) the elimination of
certain non-recurring expenses.
Thirteen Weeks Ended
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March 30, March 29,
1996 1997
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Pro-forma information including supplemental adjustments:
Operating income $ 9,687 $10,121
Net loss (255) (663)
Net loss per share (.01) (.02)
Operating income and net loss as reported in the Company's
consolidated financial statements are reconciled to the respective amounts in
the preceding table as follows:
Thirteen Weeks Ended Thirteen Weeks Ended
March 30, 1996 March 29, 1997
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Operating Net Operating Net
Income Loss Income Loss
As reported $ 9,237 $ (1,311) $ 5,350 $(3,562)
Pro-forma and supplemental adjustments:
Asset impairment charge 450 268
Inn renewal program 4,771 2,899
Interest expense adjustment for
the Offering 788
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As adjusted $ 9,687 $ (255) $ 10,121 $ (663)
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7. SUBSEQUENT EVENT
The Company has a commitment to refinance its $150 million bank credit
facility with a $250 million bank credit facility and expects to execute the
credit agreement by the end of May 1997, although there can be no assurance
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that such refinancing will be completed. In connection with the refinancing, the
Company will recognize an extraordinary charge against income of $746,000, net
of tax, ($.03 per share) in the thirteen week period ended June 28, 1997 related
to the write-off of unamortized loan costs on the $150 million credit facility.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
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FINANCIAL CONDITION
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RESULTS OF OPERATIONS
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The principal factors affecting Red Roof Inns' results are: occupancy
and room rates, continued growth in the number of inns, the Company's ability to
manage expenses, the level of competition and seasonality. Demand, and thus
occupancy, is affected by normally recurring seasonal patterns and, in most
locations, is lower in the winter and early spring months than the balance of
the year. Historically, revenues have been lower in the first quarter than in
other quarters and the Company has consistently incurred net losses in the first
quarter.
Unless otherwise indicated, inn data presented in this report is based
on the 223 inns (the "Comparable Inns") that the Company owned and operated at
the beginning of the fiscal year following four successive quarters as open
operating fully renovated or constructed properties. The Company believes that
the remaining 26 inns acquired or constructed (the "Inns in Stabilization") have
not been operated by the Company for a sufficient period to provide meaningful
period-to-period comparisons. At the acquired inns, the Company has closed a
significant number of rooms and, therefore, the average daily room rates and
occupancy for these inns are not comparable to a stabilized Red Roof inn. Newly
acquired and constructed inns historically begin with lower occupancy and
average daily rates which improve over time as these inns implement the
Company's operating policies and procedures and become integrated into the
Company's central reservation system.
During the first quarter, the average daily rate ("ADR") increased
$3.50, or 8.5%, from $41.11 per occupied room in 1996 to $44.61 per occupied
room in 1997. Occupancy decreased from 70.0% in the first quarter of 1996 to
62.6% for the comparable period in 1997. Revenue per available room ("REVPAR")
decreased $.85, or 3.0%, from $28.78 in 1996 to $27.93 in 1997. The Company
attributes the decline in occupancy and REVPAR to aggressive price increases
early in the quarter, to low occupancies due to the New Year's holiday falling
on a Wednesday, Easter weekend falling in the first quarter of 1997 versus the
second quarter of 1996 and to a significant reduction in demand for hotel rooms
in the Atlanta and Texas markets where approximately 10% of the Company's
property are located. The Company believes that the decrease in the Atlanta
market is due to the high demand generated in 1996 related to preparation for
the Summer Olympic Games while the decrease in the Texas market is due to an
increase in room supply. The Company adjusted its prices at mid-quarter and,
accordingly, has begun to see positive results in both occupancy and REVPAR.
The Company opened one inn during the first quarter of 1997, increasing
the total number of inns operating at March 29, 1997 to 249. At March 30, 1996,
234 inns were in operation.
THIRTEEN WEEKS ENDED MARCH 29, 1997 COMPARED TO THIRTEEN WEEKS
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ENDED MARCH 30, 1996
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The Company's revenues are principally derived from room rentals.
Revenues increased $4.6 million, or 6.8%, from $68.1 million in 1996 to $72.7
million in 1997. Revenues for the 223 Comparable Inns decreased approximately
$1.7 million from 1996 to 1997 however revenues increased approximately $6.3
million for the Inns in Stabilization, of which approximately $5.1 million
resulted from increasing the number of inns from 234 in 1996 to 249 in 1997.
Direct room expenses include salaries, wages, utilities, repairs and
maintenance, property taxes, billboard and local advertising, room supplies and
security. Direct room expenses increased $1.6 million, or 3.9%, from $41.1
million in 1996 to $42.7 million in 1997. The expenses increased primarily
because of the addition of new inns and generally higher salary and wage
expenses. As a percentage of revenues, direct room expense decreased from 60.4%
in 1996 to 58.7% in 1997 primarily due to savings in routine repairs and
maintenance as a result of the inn renewal program.
Gross operating profit increased $3.0 million, or 11.1%, from $27.0
million in 1996 to $30.0 million in 1997 primarily as a result of a reduction in
operating expense margins and an increase in the number of inns. As a percentage
of room revenues, gross operating profit was 39.6% in 1996 and 41.3% in 1997.
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Depreciation and amortization increased $1.0 million from $7.3 million
in 1996 to $8.3 million in 1997. The increase primarily reflects depreciation of
inns acquired during 1996. In addition, 1996 includes a non-recurring charge of
$.5 million related to fixed asset impairments.
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 $1.1 million, or 10.9%, from $10.5 million in 1996 to $11.6 million in
1997. The increase consists primarily of increases in marketing production,
media and promotional expenses, which were partially offset by lower travel
expenses. As a percentage of revenue, corporate and marketing expenses were
15.4% and 15.9% in 1996 and 1997, respectively.
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 $4.8 million in 1997 associated with the inn renewal program.
Interest expense decreased $.2 million, or 2%, from $11.4 million in
1996 to $11.2 million in 1997 primarily because of the retirement of $128
million of debt out of the proceeds from the Offering which was offset by
increased borrowings on the line of credit related to acquisitions and the inn
renewal program.
The effective income tax rates for 1996 and 1997 were 40.4% and 39.3%,
respectively. The decline in the 1997 effective tax rate is due to an
anticipated reduction in state and local taxes.
CAPITAL RESOURCES AND LIQUIDITY
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GENERAL
Cash and cash equivalents decreased approximately $4.0 million from
$19.7 million on December 28, 1996 to $15.7 million on March 29, 1997. Total
debt outstanding increased approximately $17.5 million from $496.2 million on
December 28, 1996 to $513.7 million on March 29, 1997. Total debt includes $76.2
million and $96.4 million outstanding under the bank revolving credit facility
as of December 28, 1996 and March 29, 1997, respectively. As of March 29, 1997,
$53.6 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.
The Company has a commitment to refinance its $150 million bank credit
facility with a $250 million bank credit facility and expects to execute the
credit agreement by the end of May 1997, although there can be no assurance that
such refinancing will be completed. In connection with the refinancing, the
Company will recognize an extraordinary charge against income of $746,000, net
of tax, ($0.3 per share) in the thirteen week period ended June 28, 1997 related
to the write-off of unamortized loan costs on the $150 million bank credit
facility.
Management anticipates that its working capital needs will be financed
by internally generated cash and the bank credit facility.
CAPITAL EXPENDITURES
The Company continued its inn renewal program to refurbish
substantially all of its inns. For the thirteen week period ended March 29,
1997, the Company spent approximately $13.1 million for such capital
improvements and expects to spend approximately $21 million to complete the
refurbishment.
For the thirteen week period ended March 29, 1997, the Company spent
$3.5 million in connection with normal recurring capital maintenance
improvements to existing inns, corporate facilities and equipment and expects to
spend a total of approximately $8 million for such capital maintenance
improvements through the end of the year. Additionally, the Company is
completing renovation of properties and construction sites acquired since 1995.
In connection with the renovations and improvements of these properties, the
Company has spent $8.7 million during the thirteen week period ended March 29,
1997, and expects to spend a total of approximately $30 million through the end
of the year.
During the thirteen week period ended March 29, 1997, the Company
acquired two construction sites for an aggregate cost, including construction
costs of $2.2 million. Management expects to spend a total of approximately $9
million for improvements to these properties over the next 18 months.
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Currently, the Company has 10 construction sites under contract to
purchase, which are subject to the satisfactory completion of due diligence, for
an estimated total cost of approximately $7 million. Management expects to spend
approximately $54 million to construct inns on these sites. There is no
assurance that these contracts to purchase will result in an acquisition by the
Company.
Management expects to fund the Company's capital expenditures
associated with improvements to the Comparable Inns and Inns in Stabilization
from cash flow from operations and from borrowings under the bank credit
facility. Expenditures for new construction, acquisitions and renovations will
be financed from these sources, together with available cash.
HISTORICAL CASH FLOWS
Cash provided by operations decreased $2.1 million from $9.0 million
in 1996 to $6.9 million in 1997, because of an increase in the net loss for 1997
compared to 1996, which was primarily the result of a non-recurring cash expense
in 1997 related to the inn renewal program.
Net cash used by investing activities increased $7.3 million from
$22.4 million in 1996 to $29.7 million in 1997, primarily due to expenditures
for acquisitions, renovations and construction activities associated with the
Company's expansion program. Expenditures for property and equipment in 1997
include the acquisition of two development sites for a total cost of $2.2
million and $8.7 million related to renovations and improvements on 17
properties and 18 development sites which have been acquired or under
construction since 1995.
Net cash provided by financing activities decreased $.7 million from
$19.5 million in 1996 to $18.8 million in 1997, primarily as the result of
borrowings under the bank facility to fund the Company's expansion program. Cash
flow from financing activities in 1996 primarily resulted from proceeds from the
Offering, net of the retirement of debt.
EBITDA
EBITDA is operating income plus the sum of interest income, other
income, depreciation and amortization. EBITDA decreased $3.0 million from $16.8
million in 1996 to $13.8 million in 1997. EBITDA in 1997 includes a
non-recurring expense of $4.8 million related to the inn renewal program. Had
such non-recurring expense not been incurred, EBITDA would have been $18.6
million in 1997. 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.
FORWARD - LOOKING STATEMENTS
This Form 10-Q includes certain forward looking statements, including
without limitation statements concerning the expected time of completion of the
inn renewal program, the expected completion of the refinancing of the Company's
bank credit facility, financing of the Company's working capital needs and
expected capital expenditures in connections with the inn renewal program,
improvements to existing properties, renovations and improvements of newly
acquired properties and construction sites and the purchase of and construction
on sites under contract to purchase. Any forward-looking statements contained in
this Form 10-Q 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: economic conditions, both national and regional;
oversupply of hotel rooms; competition; expansion into new markets; pricing and
availability of construction materials; changes in interest rates; availability
of financing; and changes in federal, state and local government regulations
pertaining to building requirements and environmental matters. For a more
detailed discussion of these factors, please refer to the section entitled
"Managment's Discussion and Analysis of Results of Operations and Financial
Condition -- Forward-Looking Statements; Certain Factors Affecting Future
Results" in the Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996.
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PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
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None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits:
Ex - 27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K required to be reported herein were filed
during the thirteen weeks ended March 29, 1997.
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SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RED ROOF INNS, INC.
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(Registrant)
Date 05/12/97 /s/ David N. Chichester
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David N. Chichester
Executive Vice President and
Chief Financial Officer
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