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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 April 4, 1998
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 April 4, 1998
27,662,410
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 1997 audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 3, 1998.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 3, 1998 and April 4, 1998
(in thousands)
(Unaudited)
January 3, April 4,
1998 1998
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,154 $ 9,018
Receivables 9,006 11,661
Supplies and other 14,422 13,800
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Total current assets 36,582 34,479
PROPERTY AND EQUIPMENT:
Land 155,456 157,372
Buildings and improvements 608,323 613,152
Furniture, fixtures and equipment 108,564 112,640
Construction in progress 49,326 55,673
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Total property and equipment 921,669 938,837
Less accumulated depreciation and amortization 89,287 97,141
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Property and equipment - net 832,382 841,696
OTHER ASSETS:
Goodwill, net of accumulated amortization 70,181 69,614
Deferred loan fees and other - net 15,613 15,249
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Total other assets 85,794 84,863
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TOTAL $954,758 $961,038
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See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
January 3, 1998 and April 4, 1998
(in thousands, except par values)
(Unaudited)
January 3, April 4,
1998 1998
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,128 $ 14,166
Accrued expenses 24,617 27,070
Current maturities of long-term debt 11,998 12,138
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Total current liabilities 51,743 53,374
LONG-TERM DEBT (LESS CURRENT MATURITIES):
Mortgage notes and obligations under capital leases 173,842 170,438
Bank facility 165,365 170,500
Senior unsecured notes 200,000 200,000
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Total long-term debt 539,207 540,938
OTHER LONG-TERM LIABILITIES 25,072 26,272
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000 shares authorized,
no shares issued
Common stock, $.01 par value; 100,000 shares authorized,
shares issued: 1997 - 28,531, 1998 - 28,579 285 286
Additional paid-in capital 268,140 268,810
Less treasury stock, at cost: 1997 - 951 shares, 1998 - 916 shares (13,822) (13,315)
Retained earnings 84,133 84,673
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Total stockholders' equity 338,736 340,454
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TOTAL $ 954,758 $ 961,038
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See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Thirteen Weeks Ended March 29, 1997 and April 4, 1998
(in thousands, except for per share amounts)
(Unaudited)
Thirteen Weeks Ended
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March 29, April 4,
1997 1998
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REVENUES $ 72,694 $ 83,603
OPERATING EXPENSES:
Direct room 40,038 47,396
Depreciation and amortization 8,327 9,536
Corporate 7,450 7,914
Marketing 6,758 5,892
Special charges 4,771 --
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Total operating expenses 67,344 70,738
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OPERATING INCOME 5,350 12,865
INTEREST EXPENSE - NET (11,213) (11,981)
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INCOME (LOSS) BEFORE INCOME TAXES (5,863) 884
INCOME TAX (EXPENSE) CREDIT 2,301 (344)
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NET INCOME (LOSS) $ (3,562) $ 540
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NET INCOME (LOSS) PER SHARE:
Basic $ (0.13) $ 0.02
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Diluted $ (0.13) $ 0.02
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WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 27,978 27,632
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Diluted 27,978 27,834
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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 Thirteen Weeks Ended March 29, 1997 and April 4, 1998
(in thousands)
(Unaudited)
Thirteen Weeks Ended
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March 29, April 4,
1997 1998
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CASH FLOWS FROM OPERATIONS:
Net income (loss) $ (3,562) $ 540
Adjustments to reconcile net income (loss) to net cash provided
by operations:
Depreciation and amortization 8,128 8,932
Amortization of goodwill 566 567
Net loss from sale, disposal or retirement of assets 480
Deferred income taxes and other - net 104 829
Change in assets and liabilities:
Receivables (3,978) (2,655)
Supplies and other 434 314
Accounts payable 1,126 1,531
Accrued expenses 4,048 3,132
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Net cash provided by operations 6,866 13,670
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CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 881
Expenditures for property and equipment (27,474) (21,495)
Change in other assets (2,177) (241)
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Net cash used by investing activities (29,651) (20,855)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank credit facility 69,950 61,455
Principal reduction in mortgage notes and bank credit facility (52,403) (59,584)
Issuance of common stock 1,222 1,178
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Net cash provided by financing activities 18,769 3,049
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NET DECREASE IN CASH AND CASH EQUIVALENTS (4,016) (4,136)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,659 13,154
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,643 $ 9,018
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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 ENDED MARCH 29, 1997 AND APRIL 4, 1998 (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.
The Company is an owner/operator and franchisor of economy chain
segment inns. At March 29, 1997, the Company operated 249 inns. At April 4,
1998, the Company operated 258 inns and had seven franchised inns.
Unaudited interim results for the thirteen weeks ended March 29, 1997
and April 4, 1998 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 1997 financial statements have been reclassed to
conform with the 1998 presentation.
2. LONG-TERM DEBT
As of April 4, 1998, there was $79.5 million available for borrowing
under the Company's $250 million bank credit facility.
3. STOCKHOLDERS' EQUITY
In January 1998, the Company sold 34,916 shares of common stock out of
treasury to employees at $15.19 per share under the Employee Stock Purchase Plan
for the 1997 plan year.
During the thirteen week period ended April 4, 1998, the Company
granted options to certain officers and employees under the Company's option
plans to purchase 725,500 shares at a weighted average price of $18.50 per
share. The options vest at the rate of 25% per year.
During the thirteen week period ended April 4, 1998, options were
exercised for 55,575 shares at prices ranging from $5.43 to $14.13 per share
under the Company's Management Stock Option Plan. In connection with the
termination of the employment of certain plan participants, 6,525 options
awarded under the Plan lapsed.
4. INN RENEWAL PROGRAM
The Company continued its inn renewal program to refurbish the majority
of its inns. The program is expected to be completed in the second quarter of
1998 at a total cost of approximately $68 million. For the thirteen week periods
ended March 29, 1997 and April 4, 1998, the Company spent $17.9 million and $1.9
million, respectively, related to the inn renewal program, of which $13.1
million and $1.9 million, respectively, was capitalized. Totals costs incurred
through April 4, 1998 related to the inn renewal program totaled $62.4 million.
5. SUPPLEMENTAL CASH FLOW INFORMATION
For the thirteen weeks ended March 29, 1997 and April 4, 1998, interest
payments were $6,807,000 and $7,683,000, respectively, and interest capitalized
for the corresponding periods was $513,000 and $926,000, respectively. Income
tax payments for the thirteen week periods in 1997 and 1998 were $205,000 and
$702,000, respectively. Capital expenditures included in accounts payable at
March 29, 1997 and April 4, 1998 totaled $8,867,000 and $3,806,000,
respectively.
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6. SPECIAL CHARGES
The Company recognized special charges of $4.8 million related to its
inn renewal program for the thirteen week period ended March 29, 1997. The
company incurred no such special charges for the thirteen week period ended
April 4, 1998.
7. SUBSEQUENT EVENT
On April 30, 1998, the Company sold at approximate net book value, four
of its California properties to a franchisee for a total of approximately $14
million. A fifth property in California was leased to the franchisee with an
option to purchase. The five inns contain a total of 575 rooms. Net proceeds of
approximately $12 million from the sale were used to repay mortgage
indebtedness. The sale of these properties will not have a significant effect on
the results of operations for 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
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 typically incurred net losses in the first quarter.
Four Company owned inns and two franchised inns opened during the first
quarter of 1998, increasing the total number of inns operating at April 4, 1998,
to 265 (including seven franchised inns). At March 29, 1997, 249 inns were in
operation all of which were Company owned. Unless otherwise indicated, inn data
presented in this report is based on the 243 inns (the "Comparable Inns") that
the Company owned and operated at the beginning of the 1998 fiscal year
following four successive quarters as open, operating, fully renovated or
constructed properties. Management believes that the remaining 15 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 that underwent renovation causing rooms to be out of service. Therefore,
the average daily room rates and occupancy for these inns are not comparable to
stabilized Red Roof inns. 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.
The following Comparable Inns data is a comparison of the thirteen
weeks ended April 4, 1998 versus the thirteen weeks ended April 5, 1997. During
the first quarter, the average daily rate ("ADR") decreased $2.21 or 4.9%, from
$45.52 per occupied room in 1997 to $43.31 per occupied room in 1998. Occupancy
increased 8.4 percentage points from 63.8% in the first quarter of 1997 to 72.2%
for the comparable period in 1998. Revenue per available room ("REVPAR")
increased $2.23, or 7.7%, from $29.04 in 1997 to $31.27 in 1998. The Company
attributes the increase in occupancy and REVPAR to substantial completion of the
inn renewal program, effective occupancy and rate management, greater emphasis
on customer service resulting in repeat business from guests and aggressive
targeting of new guests through corporate sales efforts and sales promotions.
Thirteen Weeks Ended April 4, 1998 Compared to Thirteen Weeks Ended
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March 29, 1997
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The Company's revenues are principally derived from room rentals.
Revenues increased $10.9 million, or 15.0%, from $72.7 million in 1997 to $83.6
million in 1998. Revenues for the 243 Comparable Inns increased approximately
$7.3 million from 1997 to 1998 as a result of the significant REVPAR increase.
Revenues for the Inns in Stabilization increased approximately $3.2 million of
which approximately $3.0 million resulted from increasing the number of Company
owned inns from 249 in 1997 to 258 inns in 1998.
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Direct room expenses include salaries, wages, utilities, repairs and
maintenance, property taxes, room supplies and security. Direct room expenses
increased $7.4 million, or 18.4%, from $40.0 million in 1997 to $47.4 million in
1998. As a percentage of revenues, direct room expenses increased from 55.1% in
1997 to 56.7% in 1998. The expenses increased primarily because of higher
occupancy levels, the addition of new inns and planned increases in routine
repairs and maintenance and salary and wage expenses.
Gross operating profit (revenues less direct expenses) increased $3.5
million, or 10.7%, from $32.7 million in 1997 to $36.2 million in 1998 primarily
as a result of increased revenues and an increase in the number of inns. As a
percentage of room revenues, gross operating profit was 44.9% in 1997 and 43.3%
in 1998.
Depreciation and amortization increased $1.2 million from $8.3 million
in 1997 to $9.5 million in 1998. The increase primarily reflects depreciation of
operating inns acquired or developed during 1997 and 1998.
Corporate expenses include the cost of general management, training and
field supervision of inn managers, franchising, development, reservations and
administrative expenses. Corporate expenses increased $.5 million, or 6.2%, from
$7.4 million in 1997 to $7.9 million in 1998. The increase is primarily related
to annual payroll increases for salaried and hourly employees and increased
reservation costs, primarily telecommunication expenses, attributed to the
occupancy increase. As a percentage of revenue, corporate expenses decreased 0.7
percentage points from 10.2% in 1997 to 9.5% in 1998.
Marketing expenses include the cost of media advertising and related
production costs, billboard expenses and expenses associated with the Company's
corporate sales group. Marketing expenses decreased $.9 million, or 13.2%, from
$6.8 million in 1997 to $5.9 million in 1998. The decrease is primarily related
to the elimination of a winter advertising program, a less expensive spring
advertising campaign and a reduction in outdoor advertising costs. These
decreases were partially offset by increases in payroll costs and expenses
associated with additional corporate sales staff. As a percentage of revenue,
marketing expenses decreased 2.3 percentage points from 9.3% in 1997 to 7.0% in
1998.
In the fourth quarter of 1996, the Company commenced a chainwide inn
renewal program to refurbish the majority of its inns. The Company incurred
expenses of $4.8 million in 1997 associated with the inn renewal program. The
Company incurred no such expenses in 1998.
Interest expense increased $.8 million, or 7.1%, from $11.2 million in
1997 to $12.0 million in 1998 primarily because of a higher outstanding balance
on the Company's bank credit facility to fund construction and renovation
activity.
The effective income tax rates for 1997 and 1998 were 39.3% and 38.9%,
respectively. The decline in the 1998 effective tax rate is due to a reduction
in state and local income taxes.
SUPPLEMENTAL INFORMATION
Management believes the following supplemental information presents
meaningful summary comparisons of on-going operations of the Company, adjusted
to reflect the elimination of certain special charges to arrive at adjusted
operating income, net income (loss) and earnings (loss) per share amounts. These
amounts do not represent operating income, net income (loss), and earnings
(loss) per share as defined by generally accepted accounting principles.
Thirteen Weeks Ended Thirteen Weeks Ended
March 29, 1997 April 4, 1998
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Operating Net Operating Net
Income Income Income Loss
As reported $ 5,350 $ (3,562) $12,865 $540
Special charge:
Inn renewal program 4,771 2,899
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As adjusted $ 10,121 $ (663) $12,865 $540
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Earnings (loss) per share:
Basic $(.02) $.02
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Diluted $ (.02) $.02
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CAPITAL RESOURCES AND LIQUIDITY
General
Cash and cash equivalents decreased $4.2 million from $13.2 million on
January 3, 1998 to $9.0 million on April 4, 1998. Total debt outstanding
increased approximately $1.9 million from $551.2 million at January 3, 1998 to
$553.1 million at April 4, 1998 because of net borrowings under the bank credit
facility, which were partially offset by scheduled principal amortization of
mortgage notes and obligations under capital leases.
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 periods ended March 29,
1997 and April 4, 1998, the Company spent $13.1 million and $1.9 million,
respectively, for such capital improvements.
For the thirteen week periods ended March 29, 1997 and April 4, 1998,
the Company spent $3.0 million and $2.8 million, respectively, in connection
with normal recurring capital maintenance improvements to existing inns,
corporate facilities and equipment and expects to spend a total of approximately
$16 million for such capital maintenance improvements for the year.
Additionally, the Company is completing construction and renovation of
properties acquired since 1996. In connection with the improvements and
renovations of these properties, the Company spent $16.3 million during the
thirteen week period ended April 4, 1998, and expects to spend an additional
$29.8 million through the end of the year.
During the thirteen week period ended April 4, 1998, the Company spent
approximately $0.5 million to acquire one construction site. Management is
currently evaluating whether to develop the site or sell the parcel to a
franchisee.
Currently, the Company has no construction sites or properties under
contract to purchase.
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 increased $6.8 million from $6.9 million in
1997 to $13.7 million in 1998, due to the $4.1 million increase in net income, a
$1.3 million increase in non-cash expenses and a $1.4 million increase in
various working capital components.
Net cash used by investing activities decreased $8.8 million from $29.7
million in 1997 to $20.9 million in 1998, primarily due to a reduction in
spending associated with the inn renewal program. Expenditures for property and
equipment in 1998 include the acquisition of one development site for a total
cost of $0.5 million and $16.3 million related to renovations and improvements
on 20 development sites and eight properties which have been acquired or under
construction since 1996.
Net cash provided by financing activities decreased $15.7 million from
$18.8 million in 1997 to $3.1 million in 1998, primarily as the result of
reduced borrowings under the bank credit facility to fund the Company's
expansion and inn renewal programs.
EBITDA
EBITDA is operating income plus the sum of interest income, other
income, depreciation and amortization. EBITDA increased $8.6 million from $13.8
million in 1997 to $22.4 in 1998. EBITDA in 1997 includes a special charge of
$4.8 million related to the inn renewal program. Had such special charge not
been incurred, EBITDA would have
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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 an 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 and fund the Company's operations.
FORWARD LOOKING STATEMENTS
This Form 10-Q includes certain forward looking statements, including
without limitation statements concerning the financing of the Company's working
capital needs and expected capital expenditures in connection with improvements
to existing properties, the purchase of and construction on sites under contract
to purchase and improvements and renovations to newly acquired properties. 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 that could cause actual results to differ materially from such forward
looking statements. 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 "Management'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 January 3, 1998.
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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 were filed during the thirteen weeks ended April 4, 1998.
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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: May 18, 1998 /s/ David N. Chichester
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David N. Chichester
Executive Vice President and
Chief Financial Officer
Date: May 18, 1998 /s/ Robert M. Harshbarger
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Robert M. Harshbarger
Senior Vice President, Controller
and Chief Accounting Officer
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