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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 September 27, 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
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Commission File Number: 1-14058
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RED ROOF INNS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1393666
(State of Incorporation) (I.R.S. Employer Identification 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 September 27, 1997
28,069,051
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and, (2) has been subject to such filing requirements
for the past 90 days.
Yes X NO
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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The accompanying unaudited condensed consolidated financial statements of
Red Roof Inns, Inc. ("Red Roof" or the "Company"), a Delaware corporation, have
been prepared in accordance with the instructions to Form 10-Q, and therefore do
not include all information and notes necessary for complete financial
statements in conformity with generally accepted accounting principles. The
results for the periods indicated are unaudited, but reflect all adjustments
(consisting only of normal recurring accruals) which management considers
necessary for a fair presentation of operating results. Results of operations
for interim periods are not necessarily indicative of a full year of operations
or results for other interim periods. All material intercompany transactions and
balances between Red Roof Inns, Inc. and its subsidiaries have been eliminated
in consolidation. These condensed consolidated financial statements should be
read in conjunction with the Company's 1996 audited 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 SEPTEMBER 27, 1997
(IN THOUSANDS)
(UNAUDITED)
DECEMBER 28, SEPTEMBER 27,
1996 1997
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,659 $ 10,000
Receivables 10,977 12,941
Supplies and other 13,863 14,416
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Total current assets 44,499 37,357
PROPERTY AND EQUIPMENT:
Land 145,177 152,795
Buildings and improvements 562,366 575,523
Furniture, fixtures and equipment 71,070 94,822
Construction in progress 28,692 71,231
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Total property and equipment 807,305 894,371
Less accumulated depreciation and amortization 71,283 81,318
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Property and equipment - net 736,022 813,053
OTHER ASSETS:
Goodwill, net of accumulated amortization 72,446 70,747
Deferred loan fees and other - net 14,660 15,040
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Total other assets 87,106 85,787
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TOTAL $ 867,627 $ 936,197
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See notes to condensed consolidated financial statements.
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DECEMBER 28, SEPTEMBER 27,
1996 1997
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,984 $ 12,851
Accrued expenses 21,210 27,446
Current maturities of long-term debt 12,020 12,263
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Total current liabilities 47,214 52,560
LONG-TERM DEBT (LESS CURRENT MATURITIES):
Mortgage notes payable and obligations under capital leases 208,008 176,288
Bank facility 76,150 140,250
Senior unsecured notes 200,000 200,000
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Total long-term debt 484,158 516,538
OTHER LONG-TERM LIABILITIES 17,156 25,545
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 - 28,520 284 285
Additional paid-in capital 266,516 267,983
Less treasury stock, at cost: 1996 - 500 shares, 1997 - 451 shares (6,476) (5,846)
Retained earnings 58,775 79,132
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Total stockholders' equity 319,099 341,554
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TOTAL $ 867,627 $ 936,197
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See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 27, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
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SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27,
1996 1997 1996 1997
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REVENUES $ 92,535 $ 99,661 $ 244,400 $ 264,611
OPERATING EXPENSES:
Direct room 40,665 40,815 116,285 120,968
Depreciation and amortization 6,771 7,824 21,042 24,523
Corporate 8,468 7,683 22,658 22,212
Marketing 3,068 5,165 12,655 16,593
Inn renewal program 2,333 11,874
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Total operating expenses 58,972 63,820 172,640 196,170
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OPERATING INCOME 33,563 35,841 71,760 68,441
INTEREST EXPENSE - NET (10,029) (11,229) (31,326) (33,704)
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INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 23,534 24,612 40,434 34,737
INCOME TAX EXPENSE (9,505) (9,660) (16,329) (13,634)
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INCOME BEFORE EXTRAORDINARY ITEM 14,029 14,952 24,105 21,103
EXTRAORDINARY ITEM (746)
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NET INCOME $ 14,029 $ 14,952 $ 24,105 $ 20,357
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EARNINGS PER SHARE BEFORE
EXTRAORDINARY ITEM $ .50 $ .53 $ .88 $ .75
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EARNINGS PER SHARE $ .50 $ .53 $ .88 $ .72
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WEIGHTED AVERAGE SHARES OUTSTANDING 28,332 28,370 27,389 28,337
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PRO FORMA INFORMATION INCLUDING
SUPPLEMENTAL ADJUSTMENTS
OPERATING INCOME $ 33,563 $ 38,174 $ 72,210 $ 80,315
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NET INCOME $ 14,029 $ 16,369 $ 25,160 $ 28,316
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EARNINGS PER SHARE $ .50 $ .58 $ .88 $ 1.00
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See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 AND SEPTEMBER 27, 1997
(IN THOUSANDS)
(UNAUDITED)
THIRTY-NINE WEEKS ENDED
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SEPTEMBER 28, SEPTEMBER 27,
1996 1997
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CASH FLOWS FROM OPERATIONS:
Net income $ 24,105 $ 20,357
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 19,400 22,598
Amortization of goodwill 1,700 1,699
Net loss from sale or retirement of assets 896
Loan fees written off 1,228
Deferred income taxes and other - net 4,490 8,432
Working capital changes:
Receivables (2,258) (1,964)
Supplies and other 453 (619)
Accounts payable (2,662) (540)
Accrued expenses 14,391 7,300
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Net cash provided by operations 59,619 59,387
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (73,031) (101,968)
Change in other assets (2,530) 46
Proceeds from sale of assets 1,302
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Net cash used by investing activities (75,561) (100,620)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage notes payable and bank facility 61,894 293,750
Principal reduction in mortgage notes payable and bank facility (180,372) (261,127)
Issuance of common stock 148,799 2,098
Purchase of treasury stock (6,475)
Other (248) (3,147)
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Net cash provided by financing activities 23,598 31,574
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,656 (9,659)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 4,427 19,659
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,083 $ 10,000
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See notes to condensed consolidated financial statements.
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ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
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RED ROOF INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS AND THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996 AND
SEPTEMBER 27, 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 September 28, 1996 and September 27, 1997, the Company operated 239
inns and 252 inns, respectively.
Unaudited interim results for the thirteen weeks and thirty-nine weeks
ended September 28, 1996 and September 27, 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.
Certain amounts in the 1996 financial statements have been reclassed to
conform with the 1997 presentation.
2. LONG-TERM DEBT
On May 21, 1997, the Company refinanced its $150 million bank credit
facility with a $250 million bank credit facility. In connection with the
refinancing, the Company recognized an extraordinary charge against income of
$746,000, net of tax, ($.03 per share) in the thirty-nine weeks ended September
27, 1997 related to the write off of unamortized loan costs on the $150 million
credit facility. As of September 27, 1997, there was $109.8 million available
for borrowing under the Company's $250 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.
During the thirty-nine week period ended September 27, 1997, the
Company granted stock options to certain directors, officers and employees under
the Company's stock option plans to purchase 487,000 shares at prices ranging
from $15.13 to $17.44 per share. The options vest at the rate of 25% per year.
During the thirty-nine week period ended September 27, 1997, stock
options were exercised for 141,275 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, 90,325 options
awarded under the Plan were canceled.
In February 1997, the Board of Directors authorized the Company to
repurchase up to 500,000 of its common shares, either in the open market or in
privately negotiated transactions. No shares were repurchased during the
thirty-nine weeks ended September 27, 1997.
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
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1997 fiscal year. The new standard simplifies the computation of earnings per
share and requires the presentation of basic diluted earnings per share.
Adoption of SFAS No. 128 will not have a material effect on the earnings per
share presented herein.
4. INN RENEWAL PROGRAM
The Company's inn renewal program to refurbish more than 85% of its
inns was substantially completed as of September 27, 1997. The Company has
decided to expand the program to include refurbishing the remaining 15% of the
Company's inns, replacing all remaining outdated furniture and installing energy
efficient lighting. This program will commence in the fourth quarter of 1997, is
expected to be completed by the second quarter of 1998 at a total cost of
approximately $10 million and will result in non-recurring charges of
approximately $5 million which will be recognized in the fourth quarter of 1997.
When complete, the total cost of the program is expected to be approximately $70
million. For the thirty-nine week period ended September 27, 1997, the Company
spent $46.2 million related to the inn renewal program, of which $35.3 million
was capitalized and $10.9 million was expensed. In addition, the Company wrote
off assets with a net book value of approximately $1 million that were disposed
of in connection with the program. Total costs incurred from inception of the
inn renewal program through September 27, 1997 totaled $56.9 million.
5. SUPPLEMENTAL CASH FLOW INFORMATION
For the thirty-nine weeks ended September 28, 1996 and September 27,
1997, interest payments were $27,997,000 and $30,911,000, respectively, and
interest capitalized for the corresponding periods was $2,007,000 and
$1,820,000, respectively. Income tax payments for the thirty-nine week periods
in 1996 and 1997 were $4,366,000 and $712,000, respectively. Capital
expenditures included in accounts payable-trade at September 27, 1997 and
December 28, 1996 totaled $6,588,000 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 Thirty-Nine Weeks Ended
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September 28, September 27, September 28, September 27,
1996 1997 1996 1997
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Pro-forma information including supplemental
adjustments:
Operating income $33,563 $38,174 $72,210 $80,315
Net income 14,029 16,369 25,160 28,316
Net income per share .50 .58 .88 1.00
Operating income and net income as reported in the Company's condensed
consolidated financial statements are reconciled to the respective amounts in
the preceding table as follows:
Thirteen Weeks Ended Thirteen Weeks Ended
September 28, 1996 September 27, 1997
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Operating Net Operating Net
Income Income Income Income
As reported $33,563 $14,029 $35,841 $14,952
Pro-forma and supplemental adjustments:
Inn renewal program 2,333 1,417
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As adjusted $33,563 $14,029 $38,174 $16,369
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Thirty-Nine Weeks Ended Thirty-Nine Weeks Ended
September 28, 1996 September 27, 1997
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Operating Net Operating Net
Income Income Income Income
As reported $ 71,760 $ 24,105 $ 68,441 $ 20,357
Pro-forma and supplemental adjustments:
Asset impairment charge 450 268 11,874 7,213
Inn renewal program
Interest expense adjustment for the
Offering 787
Extraordinary item 746
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As adjusted $ 72,210 $ 25,160 $ 80,315 $ 28,316
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7. SUBSEQUENT EVENT
During the third quarter, the Company evaluated staffing, policies,
procedures, processes and existing technology in an effort to streamline the
organization, increase productivity and reduce costs. In the fourth quarter of
1997, the Company will recognize approximately $2 million in severance costs
related to a reduction in corporate staffing caused by consolidating departments
within the Company.
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, fee based income from
franchising and partner programs, 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.
One company owned inn and two franchised inns opened during the third
quarter of 1997, increasing the total number of inns operating at September 27,
1997, including the two franchised inns, to 254 compared to 239 inns at
September 28, 1996. 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.
Management believes that the remaining 29 company operated 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.
Included in the Inns in Stabilization are acquired inns which underwent
renovation resulting in rooms out of service and, therefore, the average daily
room rates and occupancy for these inns are not comparable to a stabilized Red
Roof inn. Both acquired and newly constructed inns historically begin with lower
occupancy and average daily rates which should 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 third quarter, revenue per available ("REVPAR") increased
$.37 or 1.0% from $38.77 in 1996 to $39.14 in 1997. The REVPAR increase is the
result of a $3.17 or 6.6% increase in the average daily rate ("ADR") from $47.86
in 1996 to $51.03 per occupied room in 1997, offset by a 4.3 percentage point
decrease in occupancy from 81.0% in 1996 to 76.7% in 1997. The REVPAR increase
was limited by the unusually high results attained at the Atlanta area
properties in 1996 related to the 1996 Summer Olympic Games. Excluding the
Company's eight Atlanta area properties, the REVPAR increase would have been
2.3% or $.90. For the thirty-nine weeks, ADR increased $3.42, or 7.6%, from
$44.94 per occupied room in 1996 to $48.36 per occupied room in 1997. Occupancy
for the thirty-nine weeks decreased from 76.5% in 1996 to 71.3% in 1997. REVPAR
for the thirty-nine weeks increased $.10, or .3%, from $34.38 in 1996 to $34.48
in 1997. The Company attributes the decline in occupancy and nominal REVPAR
growth for the thirty-nine weeks to the increased supply of competitive hotel
rooms, aggressive price increases early in the first quarter, low
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occupancies due to the New Year's holiday falling on a Wednesday, and 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 the Summer Olympic Games while the decrease in the
Texas market is due to an increase in room supply. The Company expects full year
1997 REVPAR results to be in line with the results for the first thirty-nine
weeks.
During the third quarter of 1997, the Company evaluated staffing,
policies, procedures, processes and existing technology in an effort to
streamline the organization, increase productivity and reduce costs. Through the
implementation of operational efficiencies and a more effective use of
technology, the Company expects to recognize a cash savings of approximately of
$6 million in 1998 which includes both expensed and capitalized items. This
savings is exclusive of approximately $2 million in severance costs to be
recognized in the fourth quarter of 1997.
The Company's defined benefit pension plan (the Plan) was frozen
effective December 31, 1996. During 1997 the Company issued a notice of intent
to terminate the Plan. Earned benefits through the date the Plan was frozen,
will be paid to employees, probably in 1998, upon receipt of appropriate
regulatory approvals, at which time, a final settlement cost of approximately $2
million will be paid by the Company.
THIRTEEN WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO THIRTEEN WEEKS ENDED
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SEPTEMBER 28, 1996
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The Company's revenues are principally derived from room rentals.
Revenues increased $7.2 million, or 7.7%, from $92.5 million in 1996 to $99.7
million in 1997. Revenues for the 223 Comparable Inns increased $1.2 million
from 1996 to 1997 and revenues increased approximately $5.6 million for the Inns
in Stabilization, of which approximately $4.5 million resulted from increasing
the number of inns from 239 in 1996 to 252 in 1997.
The Company's direct room expenses include salaries, wages, utilities,
repairs and maintenance, property taxes, room supplies and security. Direct room
expenses increased $.1 million, or .4%, from $40.7 million in 1996 to $40.8
million in 1997. Direct room expenses increased as a result of operating new
inns. These expenses were partially offset by retirement benefit savings from
implementation of a 401(k) savings plan in place of the Company's defined
benefit pension plan and savings in repairs and maintenance as a result of the
inn renewal program. As a percentage of revenues, direct room expense decreased
from 43.9% in 1996 to 41.0% in 1997 primarily due to the savings in retirement
benefits and the need for fewer routine repairs and maintenance expenditures as
a result of the inn renewal program.
Gross operating profit increased $6.9 million, or 13.3%, from $51.9
million in 1996 to $58.8 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 revenues, gross operating profit was 56.1% in 1996 and 59.0% in 1997.
Depreciation and amortization increased $1.0 million from $6.8 million
in 1996 to $7.8 million in 1997. The increase primarily reflects depreciation of
inns acquired since the third quarter of 1996.
Corporate expenses include the cost of general management, training and
field supervision of inn managers, development, and administrative expenses.
Corporate expenses decreased $.8 million, or 9.3%, from $8.5 million in 1996 to
$7.7 million in 1997. The decrease consists primarily of lower travel and
entertainment expenses and reduced performance based inn incentive expenses. As
a percentage of revenue, corporate expenses were 9.1% and 7.7% in 1996 and 1997,
respectively.
Marketing expenses include the costs of sales and marketing personnel,
direct selling expenses, market research, media and outdoor advertising.
Marketing expenses increased $2.1 million, or 67.7% from $3.1 million to $5.2
million in 1997 as a result of an increase in national media expenses related to
the 1997 summer advertising campaign. No similar campaign was held in 1996. As a
percentage of revenue, marketing expenses were 3.3% and 5.2% 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 $2.3 million in 1997 associated with the inn renewal program. The
Company decided to expand the program which will include refurbishing the
remaining 15% of the Company's inns, replacing all remaining outdated furniture
and installing energy efficient lighting. This program will commence in the
fourth quarter of 1997, is expected to be completed by the second quarter of
1998 at a total cost of approximately $10 million and will result in
non-recurring charges of approximately $5 million which will be recognized in
the fourth
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quarter of 1997. When complete, the total cost of the program is expected to be
approximately $70 million.
Net interest expense increased $1.2 million, or 12.0%, from $10.0
million in 1996 to $11.2 million in 1997 primarily because of increased
borrowings on the line of credit related to acquisitions, development and
capital expenditures associated with 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 multi-state
tax restructuring implemented last year.
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 COMPARED TO THIRTY-NINE WEEKS ENDED
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SEPTEMBER 28, 1996
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Revenues increased approximately $20.2 million, or 8.3%, from $244.4
million in 1996 to $264.6 million in 1997. Revenues for the 223 Comparable Inns
increased $1.7 million from 1996 to 1997 and revenues increased approximately
$18.2 million for the Inns in Stabilization, of which approximately $11.9
million resulted from increasing the number of inns from 239 in 1996 to 252 in
1997, with $2.4 million of the $11.9 million increase caused by the addition of
four inns during the first three quarters of 1997.
The Company's direct room expenses increased $4.7 million, or 4.0%,
from $116.3 million in 1996 to $121.0 million in 1997. The expenses increased
primarily because of the addition of new inns and generally higher salary and
wage expenses which were partially offset by the need for fewer repairs and
maintenance expenditures as a result of the inn renewal program. As a percentage
of revenues, direct room expense decreased from 47.6% in 1996 to 45.7% in 1997.
Gross operating profit increased $15.5 million, or 12.1 %, from $128.1
million in 1996 to $143.6 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 revenues, gross operating profit was 52.4% in 1996 and 54.3% in
1997.
Depreciation and amortization increased $3.5 million, from $21.0
million in 1996 to $24.5 million in 1997. The increase generally reflects
depreciation of new inns acquired since the third quarter of 1996. In addition,
1996 includes a non-recurring charge of $.5 million related to fixed asset
impairments.
Corporate expenses decreased $.5 million, from $22.7 million in 1996 to
$22.2 million in 1997, primarily due to lower travel and entertainment expenses
and reduced performance based inn incentive expenses which were offset by a $.3
million write off of costs associated with an aborted acquisition of a regional
lodging chain. As a percentage of revenue, corporate expenses were 9.3% and 8.4%
in 1996 and 1997, respectively.
Marketing expenses increased $3.9 million, from $12.7 million in 1996
to $16.6 million in 1997 primarily due to higher salary and benefit expenses
related to an increased sales staff and to national media expenses related to
the 1997 summer advertising campaign. No similar campaign was held in 1996. As a
percentage of revenue, marketing expenses were 5.2% and 6.3% 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 $11.9 million in 1997 associated with the inn renewal program. The
Company decided to expand the program which will include refurbishing the
remaining 15% of the Company's inns, replacing all remaining outdated furniture
and installing energy efficient lighting. This program will commence in the
fourth quarter of 1997, is expected to be completed by the second quarter of
1998 at a total cost of approximately $10 million and will result in
non-recurring charges of approximately $5 million which will be recognized in
the fourth quarter of 1997. When complete, the total cost of the program is
expected to be approximately $70 million.
Net interest expense increased $2.4 million, from $31.3 million in 1996
to $33.7 million in 1997 because of increased borrowings on the line of credit
related to acquisitions, development and capital expenditures associated with
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 multi-state
tax restructuring implemented last year.
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CAPITAL RESOURCES AND LIQUIDITY
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GENERAL
Cash and cash equivalents decreased approximately $9.7 million from
$19.7 million on December 28, 1996 to $10.0 million on September 27, 1997. Total
debt outstanding increased approximately $32.6 million from $496.2 million on
December 28, 1996 to $528.8 million on September 27, 1997. Total debt includes
$76.2 million and $140.2 million outstanding under the bank credit facility as
of December 28, 1996 and September 27, 1997, respectively. As of September 27,
1997, there was $109.8 million available for borrowing under the Company's $250
million bank credit facility.
On May 21, 1997, the Company refinanced its $150 million bank credit
facility with a $250 million bank credit facility. In connection with the
refinancing, the Company recognized an extraordinary charge against income of
$746,000, net of tax, ($0.03 per share) in the thirty-nine weeks ended September
27, 1997 related to the write off of unamortized loan costs on the $150 million
bank credit facility.
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. Management anticipates that its
working capital needs will be financed by internally generated cash and the bank
credit facility. At September 27, 1997, the Company had current liabilities of
$52.6 million, including current maturities of long-term debt of $12.3 million,
and current assets of $37.4 million.
CAPITAL EXPENDITURES
The Company has substantially completed its inn renewal program to
refurbish more than 85% of its inns. For the thirty-nine week period ended
September 27, 1997, the Company spent approximately $46.2 million related to the
inn renewal program of which $35.3 million was for capital improvements. As of
September 27, 1997 the Company decided to expand the inn renewal program to
refurbish the remaining 15% of its inns. The Company expects to spend
approximately $8.0 million for capital improvements related to completion of the
expanded inn renewal program.
For the thirty-nine week period ended September 27, 1997, the Company
spent $10.2 million in connection with normal recurring capital maintenance
improvements to existing inns, corporate facilities and equipment and expects to
spend approximately $2 million for additional capital maintenance improvements
through the end of the year. Additionally, the Company is completing renovations
and improvements of 17 acquired properties and 18 development sites acquired
prior to 1997. In connection with the renovations and improvements of these
properties, the Company spent $34.0 million during the thirty-nine week
period ended September 27, 1997 and expects to spend an additional $18 million
to complete the properties over the next 18 months.
During the thirty-nine week period ended September 27, 1997, the
Company acquired one inn, nine construction sites and signed leases on two
properties for an aggregate cost, including renovations and improvements of
$23.1 million. Management expects to spend approximately $51 million to complete
construction of these properties over the next 18 months.
Currently, the Company has one construction site under contract to
purchase and one lease pending, which are subject to the satisfactory completion
of due diligence, for an estimated total cost of approximately $.5 million.
Management expects to spend approximately $29 million to construct inns on these
sites. There is no assurance that these contracts to purchase or lease 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 million from $59.6 million in
1996 to $59.4 million in 1997, primarily because of a decrease in the net income
for 1997 due to non-recurring cash expenses related to the inn renewal program,
which were offset by an increase in non-cash expenses for depreciation and
amortization for new inns and loan fees written-off in connection with
refinancing the Company's bank credit facility.
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Net cash used by investing activities increased $25.0 million from
$75.6 million in 1996 to $100.6 million in 1997, primarily due to expenditures
for acquisitions, renovations and construction activities associated with the
Company's expansion program and inn renewal program. Expenditures for property
and equipment in 1997 include the acquisition of one inn, nine development
sites, two leased properties and related renovation and improvements for a total
of $23.1 million, and expenditures of $34.0 million related to renovations and
improvements on 17 acquired properties and 18 development sites which were
acquired or under construction prior to 1997.
Net cash provided by financing activities increased $8.0 million from
$23.6 million in 1996 to $31.6 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 for the thirty-nine weeks
increased $.3 million from $93.4 million in 1996 to $93.7 million in 1997.
EBITDA in 1997 includes a non-recurring expense of $11.9 million related to the
inn renewal program. Had such non-recurring expense not been incurred, EBITDA
would have been $105.6 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 cash savings from
implementation of operational efficiencies in 1998, the expected full year 1997
REVPAR results, the expected final settlement costs in 1998 associated with the
Company's terminated pension plan, the expected time of completion and costs of
the inn renewal program, financing of the Company's working capital needs and
expected capital expenditures in connection with the inn renewal program,
improvements to existing properties, renovations and improvements to 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 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
- --------------------------
In June of 1997 the Company established a task force to look at
streamlining the organization to re-engineer processes, increase productivity
and reduce costs. The Company commenced implementation of various re-engineering
initiatives during the fourth quarter of 1997. As a result of recommendations to
streamline corporate staffing and consolidate departments, Douglas Longerbone,
Executive Vice President, Operations and James C. Brashares, Senior Vice
President, General Counsel and Secretary, left the Company. Alan L. Tallis,
Executive Vice President, Corporate Development was appointed General Counsel
and Secretary.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- ------------------------------------------
(a) Exhibits:
Ex - 27 Financial Data Schedule
(b) Reports on Form 8-K.
No Form 8-K's filed during the quarter.
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SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RED ROOF INNS, INC.
-------------------------------------
(Registrant)
Date 11/07/97 /s/ DAVID N. CHICHESTER
-------------------------------------
David N. Chichester
Executive Vice President and
Chief Financial Officer
Date 11/07/97
/s/ ROBERT M. HARSHBARGER
-------------------------------------
Robert M. Harshbarger
Senior Vice President, Controller and
Chief Accounting Officer
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