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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 30, 1999
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: 33-76848
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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
--------------------
Number of shares of Common Stock outstanding at September 30, 1999
1,000
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
- -----------------------------
On July 10, 1999, Red Roof Inns, Inc. (the "Company") entered into a
definitive Agreement and Plan of Merger (the "Merger Agreement") with ACCOR S.A.
("ACCOR"), a French based travel, tourism and service company, and RRI
Acquisition Corp., an indirect, wholly owned subsidiary of ACCOR (the
"Purchaser"), pursuant to which, among other things, the Purchaser commenced a
cash tender offer (the "Offer") for all of the issued and outstanding shares of
common stock, par value $.01, of the Company for $22.75 per Share. Under the
terms of the Merger Agreement, the Purchaser was merged with and into the
Company on August 13, 1999, with the Company continuing as the surviving
corporation and became an indirect, wholly owned subsidiary of ACCOR.
The Company was recapitalized with 1000 shares of common stock, par
value $.01, all of which is owned by an affiliate of ACCOR.
In connection with the Merger Agreement, on July 10, 1999, ACCOR
assumed the Company's operations and took effective control of the day to day
operations. For convenience, the date of acquisition for accounting purposes is
considered to be July 4, 1999. Predecessor and Successor are defined based upon
operations before or after July 4, 1999, respectively.
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 1998 audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 2, 1999.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 2, 1999 and September 30, 1999
(in thousands)
(Unaudited)
Predecessor Sucessor
January 2, September 30,
1999 1999
----------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,729 $ -
Receivables 11,619 16,138
Supplies and other 20,581 12,514
--------- -----------
Total current assets 34,929 28,652
PROPERTY AND EQUIPMENT:
Land 153,596 167,507
Buildings and improvements 654,564 685,785
Furniture, fixtures and equipment 135,861 81,579
Construction in progress 19,541 -
--------- -----------
Total property and equipment 963,562 934,871
Less accumulated depreciation and amortization 117,473 7,038
--------- -----------
Property and equipment - net 846,089 927,833
OTHER ASSETS:
Goodwill, net of accumulated amortization 67,915 224,193
Trademark, net of accumulated amortization - 119,250
Computer software and other assets - net 20,438 11,191
--------- -----------
Total other assets 88,353 354,634
--------- -----------
TOTAL $ 969,371 $ 1,311,119
========= ===========
See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
January 2, 1999 and September 30, 1999
(in thousands)
(Unaudited)
Predecessor Successor
January 2, September 30,
1999 1999
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,943 $ 7,453
Accrued expenses 28,131 77,385
Current maturities of long-term debt 15,048 3,993
--------- -----------
Total current liabilities 56,122 88,831
LONG-TERM DEBT (LESS CURRENT MATURITIES):
Mortgage notes and obligations under capital leases 153,960 2,011
Loans with affiliated companies - 353,931
Bank facility 186,545 -
Senior unsecured notes 172,385 165,285
--------- -----------
Total long-term debt 512,890 521,227
OTHER LONG-TERM LIABILITIES 31,183 64,052
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - -
Common stock 286 -
Additional paid-in capital 269,264 617,000
Less treasury stock (18,568) -
Retained earnings 118,194 20,009
--------- -----------
Total stockholders' equity 369,176 637,009
--------- -----------
TOTAL $ 969,371 $ 1,311,119
========= ===========
See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
(Unaudited)
Predecessor
---------------------------------------------------- Successor
Three Months Nine Months January 3, July 4,
Ended Ended to to
October 3, October 3, July 3, September 30,
1998 1998 1999 1999
--------------- --------------- -------------- ---------------
REVENUES:
Room $ 103,908 $ 288,659 $ 189,520 $ 107,458
Fee-based 780 2,390 2,861 1,113
--------- --------- --------- ---------
Total revenues 104,688 291,049 192,381 108,571
OPERATING EXPENSES:
Direct room 48,988 149,223 101,864 48,377
Depreciation and amortization 9,059 27,840 19,817 9,330
Corporate 6,193 19,569 14,951 6,544
Marketing 2,062 8,541 6,226 1,713
--------- --------- --------- ---------
Total operating expenses 66,302 205,173 142,858 65,964
--------- --------- --------- ---------
OPERATING INCOME 38,386 85,876 49,523 42,607
INTEREST EXPENSE - NET (11,150) (34,629) (22,533) (8,747)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 27,236 51,247 26,990 33,860
INCOME TAX EXPENSE (10,595) (19,935) (10,666) (13,851)
--------- --------- --------- ---------
NET INCOME $ 16,641 $ 31,312 $ 16,324 $ 20,009
========= ========= ========= =========
See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Predecessor
------------------------------------- Successor
Nine Months January 3, July 4,
Ended to to
October 3, July 3, September 30,
1998 1999 1999
----------------- ------------------ -----------------
CASH FLOWS FROM OPERATIONS:
Net income $ 31,312 $ 16,324 $ 20,009
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization 25,188 18,202 7,038
Amortization of goodwill and trademark 1,699 1,133 2,160
Imputed interest recorded in sale - - (896)
(Gain) loss from asset disposals and impairments 951 (220) -
Deferred income taxes and other - net 5,803 4,281 3,624
Change in assets and liabilities:
Receivables (4,209) (3,047) (1,472)
Supplies and other (1,221) 24 483
Accounts payable 587 2,969 (7,087)
Accrued expenses 13,373 5,559 7,569
----------------- ------------------ -----------------
Net cash provided by operations 73,483 45,225 31,428
----------------- ------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 24,128 3,709 -
Expenditures for property and equipment (61,085) (20,481) (5,525)
Change in other assets (3,742) (1,861) 175
Acquisition of predecessor company, net of cash acquired - - (659,571)
----------------- ------------------ -----------------
Net cash used by investing activities (40,699) (18,633) (664,921)
----------------- ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank facility 138,806 75,500 94,900
Proceeds from affiliate loans - - 353,931
Principal reduction in mortgage notes and bank facility (168,224) (94,076) (425,569)
Retirement of senior unsecured debt - - (11,225)
Issuance of common stock 1,178 734 617,000
Purchase of treasury stock (5,399) (7,023) -
----------------- ------------------ -----------------
Net cash used by financing activities (33,639) (24,865) 629,037
----------------- ------------------ -----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (855) 1,727 (4,456)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 13,154 2,729 4,456
----------------- ------------------ -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,299 $ 4,456 $ -
================= ================== =================
INTEREST PAID $ 31,157 $ 22,816 $ 5,131
INTEREST CAPITALIZED $ 2,093 $ 385 $ -
INCOME TAXES PAID $ 10,495 $ 1,344 $ 3,620
NON-CASH TRANSACTIONS:
Capital expenditures included in accounts payable $ 2,164 $ 974 $ 299
Prepaid insurance financed by note payable $ 6,569 $ - $ -
Sale of assets financed by notes receivable $ 1,439 $ 537 $ -
Liabilities assumed in merger:
Current liabilities $ 60,667
Notes payable and other long-term obligations $ 528,023
See notes to condensed consolidated financial statements.
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ITEM 1 - FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------
RED ROOF INNS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
General - On July 10, 1999, Red Roof Inns, Inc. (the "Company") entered
into a definitive Agreement and Plan of Merger (the "Merger Agreement") with
ACCOR S.A. ("ACCOR"), a French based travel, tourism and service company, and
RRI Acquisition Corp., an indirect, wholly owned subsidiary of ACCOR (the
"Purchaser"), pursuant to which, among other things, the Purchaser commenced a
cash tender offer (the "Offer") for all of the issued and outstanding shares of
common stock, par value $.01, of the Company for $22.75 per Share. Under the
terms of the Merger Agreement, the Purchaser was merged with and into the
Company on August 13, 1999, with the Company continuing as the surviving
corporation and became an indirect, wholly owned subsidiary of ACCOR.
The Company was recapitalized with 1000 shares of common stock, $.01
par value, all of which is owned by an affiliate of ACCOR.
In connection with the Merger Agreement, on July 10, 1999, ACCOR
assumed the Company's operations and took effective control of the day to day
operations. For convenience, the date of acquisition for accounting purposes is
considered to be July 4, 1999. Predecessor and Successor are defined based upon
operations before or after July 4, 1999, respectively.
Fiscal Year - The Company operated on a 52-53 week fiscal year which
ended on the Saturday nearest to December 31 and concurrent with the merger has
changed to a calendar year end. The accompanying condensed consolidated
financial statements of the Company present the results of operations for the
period from July 4, 1999 to September 30, 1999.
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 October 3, 1998, the Company operated 255 Inns and had 24
franchised Inns. At September 30, 1999, the Company operated 258 Inns and had 69
franchised Inns.
Unaudited interim results of the Predecessor for the three months and
nine months ended October 3, 1998 and interim balance sheet, operating
statements and cash flows of the Predecessor for the period from January 3, 1999
to July 3, 1999 and the Successor as of September 30, 1999 and for the period
from July 4, 1999 to September 30, 1999 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.
Supplies - Supplies inventory at September 30, 1999 is recorded at its
estimated fair value at the date of acquisition. Replacements needed to maintain
the original operating inventory are charged to expense in the period such
replacement occurs.
Property and Equipment - Property and equipment acquired through the
acquisition and merger of the Company are stated at their estimated fair values.
Depreciation and amortization of property and equipment is based on the
straight-line method over estimated composite useful lives which range from 2 to
40 years.
Trademark - The trademark was valued at estimated fair value based on
comparable values of similar companies and is being amortized on a straight-line
basis over 40 years.
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Goodwill - The excess of the purchase price over the fair values of net
assets acquired (goodwill) is being amortized on a straight-line basis over 40
years.
Reclassifications - Certain amounts in the 1998 financial statements
have been reclassified to conform with the 1999 presentation.
2. ACQUISITION AND MERGER OF THE COMPANY
The merger described in Note 1 has been accounted for using the
purchase method of accounting whereby the purchase cost was allocated first to
the identifiable assets and liabilities of the Company based upon their
estimated fair values, and is subject to adjustment when additional information
concerning asset and liability valuations are finalized, and the remainder
allocated to goodwill. Goodwill of approximately $225 million is being amortized
over 40 years. In connection with the acquisition, liabilities were as follows:
(in thousands)
Fair value of assets acquired $ 1,319,238
Cash paid for common stock of the Company (632,156)
Expenses incurred in connection with the acquisition
(66,871)
-----------
Fair value of liabilities assumed $ 620,211
===========
Included in current liabilities as of September 30, 1999 is $1,824,000
payable to an affiliate of ACCOR for expenses paid on behalf of the Company in
connection with the acquisition.
The Company has decided to move its corporate headquarters to Dallas,
Texas and has recorded in accrued expenses its estimate of such costs consisting
principally of employee severance. Management believes the Company's move to
Dallas, Texas will be completed by year end 2000.
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RED ROOF INNS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
The following unaudited pro forma results of operations were prepared
to illustrate the estimated effects of the merger and the related refinancings
as if those transactions had occurred as of the beginning of the periods
presented. The pro forma results of operations do not purport to represent what
the Company's results of operations would actually have been if such
transactions in fact had occurred at the beginning of the periods indicated or
to project the Company's results of operations for any future date or period.
Pro Forma
---------
Nine Months Ended October 3, 1998
---------------------------------
Revenues $ 291,049
Operating income 83,588
Net income 33,536
Nine Months Ended September 30, 1999
------------------------------------
Revenues $ 300,952
Operating income 91,149
Net income 38,072
3. LONG-TERM DEBT
As of September 30, 1999 there was $354.6 million outstanding on notes
payable of which $353.9 million is on borrowings with the Financial Consulting
Company ("FCC"), a partnership created by ACCOR S.A., the ultimate parent
company of Red Roof Inns, Inc. The loans with the FCC maturing at various dates
ranging from October 12, 1999 to February 18, 2000 are automatically extended
unless prior written notice is given by ACCOR. Loans with the FCC bear interest
at rates ranging from 5.66% to 6.07% based upon short-term borrowing rates as
negotiated by ACCOR plus a stated rate. Interest expense on loans with FCC for
the quarter ended September 30, 1999 was $2,395,000 including $915,000 paid
during the quarter.
During the third quarter ended September 30, 1999, the Company
purchased $10,983,000 of its Senior Unsecured notes for $11,225,000 plus accrued
interest on the open market. The premium of $242,000 represents the fair market
value adjustment of the notes purchased on the purchase dates and, accordingly,
was charged to goodwill. The remaining $165,285,000 senior unsecured notes are
reported at fair value based upon the call price of 102.406 on December 15,
1999. The Company intends to repurchase the remaining notes as of December 15,
1999.
The Company retired all mortgage indebtedness and the $250 million bank
facility with proceeds received from the loans with the FCC. All prepayment
penalties of $16,900,000 associated with debt retirement were considered part of
the cost of acquisition.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
- --------------------------------------------------------------------------
FINANCIAL CONDITION
- -------------------
On July 10, 1999, Red Roof Inns, Inc. (the "Company") entered into a
definitive Agreement and Plan of Merger (the "Merger Agreement") with ACCOR S.A.
("ACCOR"), a French based travel, tourism and service company, and RRI
Acquisition Corp., an indirect, wholly owned subsidiary of ACCOR (the
"Purchaser"), pursuant to which, among other things, the Purchaser commenced a
cash tender offer (the "Offer") for all of the issued and outstanding shares of
common stock, par value $.01, of the Company for $22.75 per Share. Under the
terms of the Merger Agreement, the Purchaser was merged with and into the
Company on August 13, 1999, with the Company continuing as the surviving
corporation and became an indirect, wholly owned subsidiary of ACCOR.
The Company was recapitalized with 1000 shares of common stock, $0.1
par value, all of which is owned by an affiliate of ACCOR.
In connection with the Merger Agreement, on July 10, 1999, ACCOR
assumed the Company's operations and took effective control of the day to day
operations. For convenience, the date of acquisition for accounting purposes is
considered to be July 4, 1999. Predecessor and Successor are defined based upon
operations before or after July 4, 1999, respectively.
Unless otherwise indicated, all Inn data and financial information of
the Predecessor and Successor Company's are combined for 1999 and are presented
in this management's discussion and analysis.
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,
changes in interest rates, 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.
Seven franchised Inns opened during the third quarter of 1999 and the
Company terminated the franchise agreement of one franchised Inn, increasing the
total number of inns operating at September 30, 1999, to 327 (including 69
franchised Inns). At October 3, 1998, 279 Inns were in operation, (including 24
franchised Inns). Unless otherwise indicated, Inn data presented in this report
are based on the 246 Inns (the "Comparable Inns") that the Company owned and
operated at the beginning of and throughout the nine months ended September 30,
1999 following four successive quarters as open, operating, fully renovated or
constructed properties. Management believes that the remaining 12 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 third quarter
and nine months ended September 30, 1999 versus the comparable periods ended
October 3, 1998. During the third quarter, the average daily rate ("ADR"),
decreased $0.07 or 0.1%, to $51.13 per occupied room in 1999 from $51.20 per
occupied room in 1998. Occupancy increased 3.3 percentage points from 75.2% in
the third quarter of 1998 to 78.5% for the comparable period in 1999. Revenue
per available room ("RevPAR"), increased $1.64, or 4.3%, from $38.50 in 1998 to
$40.14 in 1999. For the nine months ended September 30, 1999, ADR increased
$0.49 or 1.0% from $47.62 per occupied room in 1998 to $48.11 per occupied room
in 1999. Occupancy for the nine months increased 0.6 percentage points from
74.6% in 1998 to 75.2% in 1999. RevPAR for the nine months increased $0.66 or
1.9% from $35.52 in 1998 to $36.18 in 1999. The Company attributes the increase
in RevPAR for the third quarter and the nine months ended September 30, 1999 to
effective rate management and enhanced programs to attract and capture rooms
booked via the Internet during the third quarter to increase occupancy.
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THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE THIRTEEN WEEKS ENDED
- --------------------------------------------------------------------------
OCTOBER 3, 1998
- ---------------
The Company's revenues are principally derived from room rentals and
fee-based income. The Company's financial strategy was focused on increasing its
fee-based income from franchising and partner programs. As part of this
strategy, the Company significantly scaled back the development of company-owned
Inns. As a result, revenue growth from company-owned Inns has slowed, while
growth related to franchised Inns and other fee-based programs has increased.
Management of the Company is currently evaluating various strategies for future
revenue growth.
Room revenues increased $3.6 million, or 3.5%, from $103.9 million in
1998 to $107.5 million in 1999. Room revenues for the 246 Comparable Inns
increased $3.6 million from 1998 to 1999 primarily as a result of the increase
in RevPAR. Room revenues for the Inns in Stabilization increased $0.2 million.
Fee-based revenues increased $0.3 million in 1999 over 1998 from
programs to franchise the Company brand and from the formation of partnership
alliances with well-known consumer product and service companies to promote
partners' products and services. The Company had 69 franchised Inns open at
September 30, 1999 compared to 24 at October 3, 1998.
Direct room expenses include salaries, wages, utilities, repairs and
maintenance, property taxes, local and outdoor advertising, room supplies,
security, reservations, general and administrative expenses. Direct room
expenses decreased $0.6 million, or 1.2%, from $49 million in 1998 to $48.4
million in 1999. The decrease is primarily due to reduced repairs and
maintenance expenses and room supplies as part of cost saving initiatives
implemented during the quarter partially offset by increased labor costs and
general and administrative expenses. As a percentage of room revenues, direct
room expenses decreased 2.1% from 47.1% in 1998 to 45% in 1999.
Gross operating profit (room revenues less direct expenses) increased
$4.2 million, or 7.7% , from $54.9 million in 1998 to $59.1 million in 1999. As
a percentage of room revenues, gross operating profit increased 2.1% from 52.9%
in 1998 to 55% in 1999.
Depreciation and amortization increased $0.2 million from $9.1 million
in 1998 to $9.3 million in 1999. The increase is attributed to depreciation of
operating Inns acquired or developed during 1998 and 1999 and the increase in
the basis of the assets as a result of the merger.
Corporate expenses include the cost of general management, training and
field supervision of Inn managers, franchising, development, information systems
and administrative expenses. Corporate expenses increased $0.3 million, or 4.8%,
from $6.2 million in 1998 to $6.5 million in 1999. The increase is primarily
related to an increase in franchise expenses due to increased staffing for
services and administrative support of the franchise effort, and increased
information systems expenses. As a percentage of revenue, corporate expenses
increased from 5.9% in 1998 to 6.0% in 1999.
Marketing expenses include the cost of media advertising and related
production costs, expenses associated with the Company's corporate sales group
and target based marketing programs. Marketing expenses decreased $0.4 million,
or 16.9%, from $2.1 million in 1998 to $1.7 million in 1999. The decrease is
attributed to an increase in marketing fees received from franchisees partially
offset by increases in media and target based marketing programs. As a
percentage of revenue, marketing expenses decreased from 2% in 1998 to 1.6% in
1999.
Net interest expense decreased $2.5 million from $11.2 million in 1998
to $8.7 million in 1999 primarily due to lower average outstanding borrowings,
lower interest rates and the early retirement of debt in conjunction with the
merger.
The effective income tax rates for 1998 and 1999 were 38.9% and 40.3%,
respectively. The increase in the 1999 effective tax rate is a result of minor
increases in permanent differences.
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NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 3,
- -----------------------------------------------------------------------------
1998
- ----
Room revenues increased $8.3 million or 2.9% from $288.7 million in
1998 to $297 million in 1999. Room revenues for the 246 Comparable Inns
increased $2.7 million, or 1.0%, from $280.6 million in 1998 to $283.3 million
in 1999. Room revenues increased $7.8 million for the Inns in Stabilization.
Revenues in 1999 were reduced by $2.2 million compared to 1998 as a result of
the sale of four properties and the lease of one property located in California
to a franchisee early in the second quarter of 1998 and the sale of a property
located in Florida early in the second quarter of 1999.
Fee-based revenues increased $1.6 million in 1999 over 1998 from
programs to franchise the Company brand and from the formation of partnership
alliances with well-known consumer product and service companies to promote
partners' products and services.
Direct room expenses increased $1 million, or 0.7% from $149.2 million
in 1998 to $150.2 million in 1999. The expenses increased primarily because of
the addition of new Inns, increased occupancy, generally higher salary and wage
expenses, an increase in reservation expenses attributed to operating a second
reservation center and room supplies expenses. As a percentage of room revenues,
direct room expense decreased from 51.7% in 1998 to 50.6% in 1999.
Gross operating profit (room revenues less direct expenses) increased
$7.3 million, or 5.2%, from $139.4 million in 1998 to $146.7 million in 1999
primarily as a result of operating additional Inns, increased REVPAR and a
reduction in billboard expenses. As a percentage of revenues, gross operating
profit was 48.3% in 1998 and 49.4% in 1999.
Depreciation and amortization increased $1.3 million, from $27.8
million in 1998 to $29.1 million in 1999. The increase generally reflects
depreciation of new inns acquired or developed since the third quarter of 1998,
and the increase in the basis of the assets acquired as a result of the merger.
Corporate expenses increased $1.9 million, or 9.7%, from $19.6 million
in 1998 to $21.5 million in 1999, primarily due to increased franchise expenses
related to the franchise program. As a percentage of revenue, corporate expenses
were 6.7% in 1998 and 7.1% in 1999.
Marketing expenses decreased $0.6 million, or 7.1%, from $8.5 million
in 1998 to $7.9 million in 1999. The decrease is primarily related to a
reduction in national media expenses related to a special rate promotion in the
first and third quarter of 1998 which was offset, in part, by expenses
associated with target based marketing programs. As a percentage of revenue,
marketing expenses decreased from 2.9% in 1998 to 2.6% in 1999.
Net interest expense decreased $3.3 million, from $34.6 million in 1998
to $31.3 million in 1999 primarily due to lower average outstanding borrowings,
lower interest rates and the early retirement of debt in conjunction with the
merger.
The effective income tax rates for 1998 and 1999 were 38.9% and 40.3%,
respectively. The increase in the 1999 effective tax rate is due to minor
increases in permanent differences.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
GENERAL
Cash and cash equivalents decreased $2.7 million from January 2, 1999
to September 30, 1999.
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As of September 30, 1999 there was $354.6 million outstanding on notes
payable of which $353.9 million is on borrowings with the Financial Consulting
Company ("FCC"), a partnership created by ACCOR S.A., the ultimate parent
company of Red Roof Inns, Inc. The loans with the FCC maturing at various dates
ranging from October 12, 1999 to February 18, 2000 are automatically extended
unless prior written notice is given by ACCOR. Notice has not been received as
of November 15, 1999. Loans with the FCC bear interest at rates ranging from
5.66% to 6.07% based upon short-term borrowing rates as negotiated by ACCOR plus
a stated rate. Interest expense on loans with FCC for the quarter ended
September 30, 1999 was $2,395,000 including $915,000 paid during the quarter.
Proceeds from loans with the FCC were used to retire all mortgage indebtedness
and the outstanding balance on the $250 million bank credit facility assumed at
acquisition.
During the third quarter ended September 30, 1999, the Company
purchased $10,983,000 of its Senior Unsecured notes for $11,225,000 plus accrued
interest on the open market. The premium of $242,000 represents the fair market
value adjustment of the notes purchased on the purchase dates and, accordingly,
was charged to goodwill. The remaining $165,285,000 Senior unsecured notes are
reported at fair market value based upon the call price of 102.406 on December
15, 1999. The Company intends to repurchase the remaining notes on December 15,
1999.
Management anticipates that its working capital needs will be financed
by internally generated cash and cash from affiliates of the Company.
CAPITAL EXPENDITURES
For the nine months ended October 3, 1998 and September 30, 1999, the
Company spent $18.7 million and $19 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 $20
million for such capital maintenance improvements for 1999. Additionally, the
Company has completed construction of four new Inns and renovation of one
acquired property. In connection with the construction and renovation of these
properties, the Company spent $6.6 million during the nine months ended
September 30, 1999.
In the third quarter of 1998, the Company substantially completed its
Inn renewal program to refurbish the majority of its Inns. For the nine months
ended October 3, 1998, the Company spent $7.8 million for such capital
improvements.
The Company acquired one development site in 1998 for an aggregate
cost, including pre-development costs, of $3.5 million. The Company currently
does not intend to develop this site. This asset was recorded at its estimated
fair value at the acquisition date.
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 from affiliates. Expenditures
for new construction, acquisitions and renovations will be financed from these
sources and available cash.
HISTORICAL CASH FLOWS
Cash provided by operations increased $3.2 million from $73.5 million
in 1998 to $76.7 million in 1999, primarily due to increases in net income of $5
million and non-cash charges of $1.7 million offset by a decrease in working
capital of $3.5 million.
Net cash used by investing activities increased $642.9 million from
$40.7 million in 1998 to $683.6 million in 1999, primarily due to $659.6 million
related to the acquisition of the Predecessor Company which was offset by a
reduction in spending associated with the Inn renewal program and the
curtailment of company-owned Inn development. Expenditures for property and
equipment in 1999 include $6.6 million related to construction on four
development sites and renovation of one acquired property.
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Net cash provided by financing activities increased $637.8 million from
a use of $33.6 million in 1998 to a source of $604.2 million in 1999. This
increase is primarily due to capital contributions from ACCOR S.A. in
conjunction with the merger with the Predecessor Company which was offset by the
retirement of mortgage debt and the bank facility and the $11.2 million purchase
of senior unsecured notes.
EBITDA
EBITDA is operating income plus the sum of interest income, other
income, depreciation and amortization. EBITDA for the nine months ended
September 30, 1999 increased $7.6 million, or 6.6%, from $114.3 million in 1998
to $121.9 million in 1999. 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 and fund the Company's operations.
YEAR 2000 ISSUES
The Company uses computer technologies throughout its business.
Computer technologies include both information technology in the form of
hardware and software, as well as embedded technology in the Company's
facilities and equipment. Similar to most businesses, the Company must determine
whether its computer systems are capable of recognizing and processing
date-sensitive information properly as the year 2000 approaches. The Company has
assembled a task force of Company personnel to assess the potential impact of
the year 2000 on the Company's operations and to develop solutions and
contingency plans to assure that the Company's ability to meet the needs of its
employees, suppliers and customers will not be impaired.
The Company has substantially completed its assessment of all
date-sensitive hardware and software and has identified four critical areas
requiring remediation: property management systems at the Inns; reservations
system; accounting systems; and telephone switching equipment. The Company has
taken the following actions to address year 2000 issues for these critical
areas:
- Property management systems at the Inns - All modifications
necessary to make the software year 2000 compliant have been
completed. These modifications have been tested and were
implemented by the end of the fourth quarter of 1998.
- Reservations system - New software that is year 2000 compliant
was developed by Company personnel and was implemented during
January of 1999.
- Accounting systems - The Company has purchased accounting
systems software and hardware from outside vendors that are
year 2000 compliant and has installed and tested these systems
and related sub-systems. Implementation of the accounting
systems was completed during the second quarter of 1999.
- Telephone switching equipment - The Company has identified all
telephone switching equipment that is not year 2000 compliant.
Equipment that will not function properly as a result of
non-compliance will be replaced during 1999.
In addition to the four critical areas identified above, the Company is
actively testing and correcting or replacing non-critical systems that are not
year 2000 compliant. The Company currently believes it will be able to modify,
replace, or mitigate all affected systems in time to avoid any material
detrimental impact on its operations. The Company will verify the accuracy of
this belief by further testing significant critical and non-critical systems
during the fourth quarter of 1999 and then remediating any remaining
non-compliance that may be revealed during these tests. If the Company
determines that it may be unable to complete timely remediation and testing of
an affected system, the Company intends to develop appropriate contingency plans
(to the extent reasonable alternatives are available) for any non-compliant
system that the Company may determine would have a potential material
detrimental impact upon Company operations.
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The Company is not currently aware of any significant possibility that
its systems will not be properly remediated on a timely basis. However, there
can be no assurance that all year 2000 remediation processes will be completed
and properly tested before the year 2000, or that contingency plans will
sufficiently mitigate the risk of a year 2000 readiness problem. An interruption
of the Company's ability to conduct its business due to a year 2000 readiness
problem could have a material adverse effect on the Company.
In addition to its internal systems, the Company is heavily dependent
on public utility services for its Inns and for its corporate operations, as
well as a national carrier for its telephone services both at Inn level and for
its reservations system and a national processing service for its credit card
transactions. The inability of these vendors to provide services to the Company
due to year 2000 issues could have a material adverse effect on the Company.
The Company has initiated formal communications with its significant
suppliers and critical partners to determine the extent to which the Company
might be vulnerable if any of those parties fails to remediate its own year 2000
issues. The Company has taken steps to monitor the progress made by those
parties and has started to test critical system interfaces. The Company will
develop appropriate contingency plans (including the potential to convert to
other vendors or service providers if reasonable alternatives are available) to
be implemented if significant exposure is identified relative to the Company's
dependency on a non-compliant third-party system. While the Company is not
currently aware that any critical third-party system on which the Company relies
is likely to be non-compliant at the beginning of the year 2000, there can be no
guarantee that the systems of third-parties on which the Company relies will be
converted in a timely manner, or that a failure to properly convert by another
vendor or service provider would not have a material adverse effect on the
Company.
The Company estimates that the aggregate costs (exclusive of internal
salaries and wages) for remediation of year 2000 issues will be approximately $7
million, including $6.6 million of costs already incurred. The anticipated
impact and costs of the year 2000 remediation project, as well as the date on
which the Company expects to complete the project, are based on management's
best estimates using information currently available. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Based on current estimates and information
currently available, the Company does not anticipate that the costs associated
with this project will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows in future
periods.
FORWARD LOOKING STATEMENTS
This Form 10-Q includes forward-looking statements, including, without
limitation, statements relating to; expected performance of stabilized Inns;
future fee-based revenues; the financing of the Company's working capital needs;
expected capital expenditures in connection with improvements to existing
properties; the use of joint venture or pre-sale structures to develop
construction sites purchased; the cost of improvements and renovations to newly
acquired properties; and timing and cost of year 2000 remediation. These and
other statements containing words or phrases such as "believes", "anticipates",
"estimates", "expects", "intends", and "the Company will" should be considered
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
The Company wishes to caution readers that these forward-looking
statements involve known and unknown risks and uncertainties, and are subject to
change based on various important risk factors that could cause actual Company
plans, goals, objectives, policies, operations, results and performance to
differ materially from those expressed or implied by the 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: company
expansion risks, lodging industry risks, financial market risks, cyclicality,
seasonality, competition, year 2000 issues, regulatory issues, environmental
matters and franchising risks. 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 Predecessor Company's Annual
Report on Form 10-K for the fiscal year ended January 2, 1999.
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PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
- --------------------------
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
Ex - 27 Financial Data Schedule
(b) Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter ended
September 30, 1999.
On July 10, 1999 the Company filed a report announcing Accor S.A.'s
intention to launch a cash tender offer for all of the issued and outstanding
shares of common stock of the Company at a price of $22.75 per share.
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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: November 15, 1999 /s/ Armand E. Sebban
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Armand E. Sebban
Group Executive Vice President and Chief
Financial Officer
Date: November 15, 1999 /s/ William E. Tassin
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William E. Tassin
Senior Vice President and Controller
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