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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 June 29, 1996.
or
/ / TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to _________________
Commission File Number: 1-14058
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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 June 29, 1996:
28,409,224
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and, (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
- -----------------------------
The accompanying unaudited condensed consolidated 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 1995 audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended December
30, 1995.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 30, 1995 and June 29, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
December 30, June 29,
ASSETS 1995 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,427 $ 10,936
Receivables 7,990 8,973
Supplies and other 14,118 13,581
-------- --------
Total current assets 26,535 33,490
PROPERTY AND EQUIPMENT:
Land 127,397 133,506
Buildings and improvements 492,711 508,906
Furniture, fixtures and equipment 53,357 63,447
Construction in progress 13,068 30,290
-------- --------
Total property and equipment 686,533 736,149
Less accumulated depreciation and amortization 44,307 56,450
-------- --------
Property and equipment - net 642,226 679,699
OTHER ASSETS:
Goodwill, net of accumulated amortization 74,712 73,579
Deferred loan fees and other - net 11,875 11,970
-------- --------
Total other assets 86,587 85,549
-------- --------
TOTAL $755,348 $798,738
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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<TABLE>
RED ROOF INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
December 30, 1995 and June 29, 1996
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
December 30, June 29,
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1996
------------ ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 11,951 $ 10,660
Accounts payable 11,094 12,621
Accrued expenses 20,143 21,740
-------- --------
Total current liabilities 43,188 45,021
LONG-TERM DEBT (LESS CURRENT MATURITIES):
Notes payable 344,871 227,291
Senior notes 200,000 200,000
-------- --------
Total long-term debt 544,871 427,291
OTHER LONG-TERM LIABILITIES 14,578 14,875
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 and outstanding: 1995 - 18,400 shares; 1996 - 28,409 shares 184 284
Additional paid-in capital 117,816 266,480
Retained earnings 34,711 44,787
-------- --------
Total stockholders' equity 152,711 311,551
-------- --------
TOTAL $755,348 $798,738
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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<TABLE>
RED ROOF INNS, INC.
CONDENSED, CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS AND TWENTY SIX WEEKS ENDED JULY 1, 1995 AND JUNE 29, 1996
(IN THOUSANDS)
(UNAUDITED)
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
--------------------- ----------------------
JULY 1, JUNE 29, JULY 1, JUNE 29,
1995 1996 1995 1996
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 76,976 $ 83,793 $ 138,534 $ 151,865
OPERATING EXPENSES:
Direct room expenses 36,900 39,215 71,785 80,338
Depreciation and amortization 6,106 7,009 12,314 14,271
Corporate and marketing expenses 7,364 8,608 18,860 19,058
Change in management expense 2,827 2,827
-------- -------- --------- ---------
Total operating expenses 53,197 54,832 105,786 113,667
-------- -------- --------- ---------
OPERATING INCOME 23,779 28,961 32,748 38,198
INTEREST EXPENSE - NET (12,462) (9,861) (25,760) (21,297)
-------- -------- --------- ---------
INCOME BEFORE INCOME TAXES 11,317 19,100 6,988 16,901
INCOME TAX EXPENSE (4,571) (7,713) (2,796) (6,825)
-------- -------- --------- ---------
NET INCOME $ 6,746 $ 11,387 $ 4,192 $ 10,076
======== ======== ========= =========
EARNINGS PER SHARE $ 0.36 $ 0.40 $ 0.22 $ 0.37
======== ======== ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 18,740 28,625 18,740 26,985
======== ======== ========= =========
- ------------------------------------------------------------------------------------
PRO FORMA NET INCOME $ 9,675 $ 11,387 $ 8,600 $ 11,131
======== ======== ========= =========
PRO FORMA EARNINGS PER SHARE $ 0.34 $ 0.40 $ 0.30 $ 0.39
======== ======== ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 1, 1995 AND JUNE 29, 1996
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-six Weeks Ended
----------------------
July 1, June 29,
1995 1996
-------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net Income $ 4,192 $ 10,076
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 11,691 13,138
Amortization of goodwill 1,098 1,133
Deferred income taxes and other - net 289 1,835
Working capital changes:
Receivables (1,416) (983)
Supplies and other (195) 384
Accounts payable 139 (1,370)
Accrued expenses 2,439 1,029
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Net cash provided by operations 18,237 25,242
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (28,340) (48,424)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit and long-term borrowings 52,662 43,800
Principal payments on revolving credit and long-term borrowings (59,171) (162,670)
Proceeds from issuance of common stock and additional capital contributions 18,000 148,764
Other (1,275) (203)
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Net cash provided by financing activities 10,216 29,691
-------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 113 6,509
CASH AND CASH EQUIVALENTS, Beginning of Period 2,038 4,427
-------- ---------
CASH AND CASH EQUIVALENTS, End of Period $ 2,151 $ 10,936
======== =========
</TABLE>
See notes to condensed consolidated financial statements.
6
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ITEM 1 - FINANCIAL STATEMENTS (continued)
- -----------------------------------------
RED ROOF INNS, INC.
Notes to Condensed Consolidated Financial Statements
For the Thirteen Weeks and Twenty-six Weeks Ended July 1, 1995 and June 29, 1996
(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 July 1, 1995 and June 29, 1996, the Company had a total of 222 and
237 inns, respectively.
Unaudited interim results for the thirteen weeks and twenty-six weeks
ended July 1, 1995 and June 29, 1996 contain all adjustments, consisting of
normal recurring accruals, which management considers necessary for a fair
presentation of interim financial position and results of operations for such
periods. The results are not necessarily indicative of the results for any other
interim period or the full fiscal year.
2. LONG-TERM DEBT
On April 17, 1996, the Company amended the $100 million bank credit
agreement executed in November 1995 to provide for an expanded commitment of
$150 million. The additional $50 million is available upon the perfection of
liens on additional collateral. All other terms of the original agreement remain
substantially the same.
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 possible inn acquisitions, conversions and new
developments 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.
During 1996, the Company has granted options to certain directors,
officers, and employees under the Company's stock option plans to purchase
438,100 shares at prices ranging from $13.13 to $16.00 per share.
On July 30, 1996, Red Roof Inns, Inc., announced that its Board of
Directors authorized a share repurchase program, pursuant to which the Company
may repurchase up to 500,000 of its common shares, either in the open market or
in privately negotiated transactions, depending on market conditions and other
factors. The shares will be used to fulfill the Company's 1996 requirements for
its employee stock purchase and management stock option plans.
4. SUPPLEMENTAL CASH FLOW INFORMATION
For the twenty-six weeks ended July 1, 1995 and June 29, 1996, interest
payments were $26,011,000 and $22,332,000, respectively, and interest
capitalized for the corresponding periods was $461,000 and $1,275,000,
respectively. Income tax payments for the twenty-six week periods in 1995 and
1996 were $2,606,000 and $3,001,000, respectively. Capital expenditures included
in accounts payable-trade at June 29, 1996 totalled $4,708,000.
5. PRO FORMA NET INCOME
The pro forma net income gives effect to the Offering and the
application of a portion of the net proceeds therefrom to reduce certain
mortgage debt and related interest expense. The thirteen and twenty-six week
amounts in 1995 exclude non-recurring charges of $2,827,000 ($1,685,000 after
tax) relating to a change in management. The twenty-six week amount in 1996
excludes a Statement of Financial Accounting Standards No. 121 non-recurring
charge of $450,000 ($268,000 after tax) to recognize the impairment of certain
long lived assets.
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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 achieved by the brand, continued growth in the number of inns,
the Company's ability to manage expenses, the level of competition and
seasonality. Demand, and thus room occupancy, is affected by normally recurring
seasonal patterns and, in most locations, is lower in the winter and early
spring months than the balance of the year. Historically, revenues have been
lower in the first quarter than in other quarters and the Company has
consistently incurred net losses in the first quarter.
Unless otherwise indicated, inn data presented in this report is based
on the 210 inns that the Company owned and operated immediately prior to June
1994 (the "Base Inns"). The Company believes that the 27 inns acquired or
constructed and opened subsequent to this date have not been operated by the
Company for a sufficient length of time to provide meaningful period-to-period
comparisons, as the Company has closed a significant number of rooms at the
newly acquired inns for conversion and, therefore, the average daily room rates
and occupancy for those inns are not comparable to a stabilized Red Roof inn.
Newly acquired and constructed inns historically begin with lower occupancy and
average daily rates and improve over time as they implement the Company's
operating policies and procedures and become integrated into the Company's
central reservation system.
During the second quarter, average daily rate increased $2.54, or 5.9%,
from $42.92 per occupied room during the second quarter 1995 to $45.46 per
occupied room in the comparable period in 1996. Occupancy decreased from 82.2%
in the second quarter 1995 to 80.0% in the second quarter 1996 primarily because
of increases in room rates and increased competition. For the year, average
daily rate increased $2.02, or 4.9%, from $41.37 per occupied room in 1995 to
$43.39 per occupied room in 1996. For the year occupancy decreased from 76.7% in
1995 to 75.6% in 1996.
The Company opened three inns during the second quarter of 1996
increasing the total number of inns operating at the end of the quarter to 237.
At July 1, 1995, 222 inns were in operation.
THIRTEEN WEEKS ENDED JUNE 29, 1996 COMPARED TO THIRTEEN WEEKS ENDED
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JULY 1, 1995
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The Company's revenues are principally derived from room rentals.
Revenues increased $6.8 million, or 8.8%, from $77.0 million in 1995 to $83.8
million in 1996. Approximately $4.2 million of the increase in revenues was
caused by an increase in the number of inns from 222 in 1995 to 237 in 1996,
with approximately $100,000 of the increase caused by the addition of three inns
in the second quarter of 1996. Base Inn revenue per available room (REVPAR)
increased 3.1%, from $35.28 in 1995 to $36.37 in 1996 primarily because of an
increase in room rates.
Direct room expenses include salaries, wages, utilities, repairs and
maintenance, property taxes, advertising, room supplies and security. Direct
room expenses increased $.75 per occupied room, or 3.7%, from $20.25 in 1995 to
$21.00 in 1996. The expenses increased primarily because of fewer occupied rooms
and the impact of new inns, which generally attain occupancies below historical
Company averages resulting in higher average expense per occupied room. However,
aggregate direct room expenses for the Base Inns declined in 1996 from 1995,
partially offsetting the per room increase related to occupancy changes. Repairs
and maintenance expenses decreased due to scheduling less maintenance than in
1995. Payroll expenses decreased because of favorable adjustments ($1.0 million)
primarily relating to favorable claims experience with employees health
insurance and workers compensation. The overall expense decreases were partially
offset by higher expenses for security, travel agent commissions, and guest
hospitality adjustments.
Depreciation and amortization increased $.9 million, from $6.1 million
in 1995 to $7.0 million in 1996. The increase primarily reflects depreciation of
inns acquired since the second quarter of 1995.
8
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Corporate and marketing expenses include the cost of inn management
training and field supervision of inn managers, development, marketing and
administrative expenses. Corporate and marketing expenses increased $1.2
million, from $7.4 million in 1995 to $8.6 million in 1996. The increases
primarily result from higher employee compensation and employee benefit
expenses, increased marketing production, media and promotional expenses, and
higher consulting and legal fees. As a percentage of revenues, corporate and
marketing expenses were 9.6% and 10.3% in 1995 and 1996, respectively.
The change in management expense of $2.8 million reflects expenses for
severance benefits paid in 1995 to certain terminated officers under their
respective employment agreements and certain expenses associated with the
employment of a new Chief Executive Officer.
Interest expense decreased $2.6 million, from $12.5 million in 1995 to
$9.9 million in 1996 because of the Offering, the net proceeds of which were
primarily used to repay approximately $128 million of mortgage indebtedness.
Twenty-six Weeks Ended June 29, 1996 Compared to Twenty-six Weeks Ended
-----------------------------------------------------------------------
July 1, 1995
------------
Revenues increased approximately $13.4, or 9.7%, from $138.5 million in
1995 to $151.9 million in 1996. Approximately $7.5 million of the increase in
revenues was caused by an increase in the number of inns from 222 in 1995 to 237
in 1996, with $1.2 million of the increase caused by the addition of six inns in
the first half of 1996. Base Inn REVPAR increased 3.4%, from $31.73 in 1995 to
$32.80 in 1996 because of the increase in room rates.
Direct room expenses increased $1.63 per occupied room, or 7.7%, from
$21.15 in 1995 to $22.78 in 1996. The change in expenses was caused primarily by
increases in aggregate Base Inn expenses as follows: Utilities expense increased
reflecting the impact of adverse winter weather experienced in the first
quarter. Payroll expense, net of the adjustment discussed earlier, increased
primarily from budgeted wage and benefit increases and increased lobby staffing
hours. Repairs and maintenance expense and billboard advertising expense
increased through scheduling of work or contractual increases, respectively.
Also, contributing to the increase in direct room expenses per occupied room was
fewer occupied rooms because of reduced occupancy, and, as previously discussed,
the impact of new inns.
Depreciation and amortization increased $2.0 million, from $12.3
million in 1995 to $14.3 million in 1996. The increase generally reflects
depreciation of new inns.
Corporate and marketing expenses increased $.2 million, from $18.9
million in 1995 to $19.1 million in 1996, primarily due to higher salary and
benefit expenses related to higher staffing levels and budgeted wage and benefit
increases, and increased legal fees, consulting fees, and franchise taxes. These
expense increases were offset by lower marketing and promotional expenses. As a
percentage of revenue, corporate and marketing expenses were 13.6% and 12.5% in
1995 and 1996, respectively.
Interest expense decreased $4.5 million, from $25.8 million in 1995 to
$21.3 million in 1996 because of the Offering, the net proceeds of which were
used to repay approximately $128 million of mortgage indebtedness.
CAPITAL RESOURCES AND LIQUIDITY
- -------------------------------
GENERAL
Cash and cash equivalents increased approximately $6.5 million, from
$4.4 million on December 30, 1995 to $10.9 million on June 29, 1996. As of
December 30, 1995 and June 29, 1996, respectively, $50.8 million and $12.0
million were outstanding under the bank revolving credit facility. As of June
29, 1996, the unused commitment under the Company's bank credit facility was
$138.0 million, of which $50 million is available upon the perfection of liens
on additional collateral.
Management anticipates that its working capital needs will be financed
by internally-generated cash and the bank revolving credit facility.
9
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CAPITAL EXPENDITURES
For the twenty-six week period ended June 29, 1996, the Company spent
approximately $13 million primarily for improvements to Base Inns and expects to
spend a total of approximately $20 million for such improvements through the end
of the year. Additionally, the Company is completing renovation of properties
and construction sites acquired under its development program. In connection
with the renovation and improvement of these properties, the Company spent
approximately $22 million in 1996, and expects to spend a total amount of
approximately $37 million for the full year.
To date in 1996, the Company has purchased two inns and acquired six
construction sites for an aggregate purchase price, including improvements to
date, of approximately $17 million. Management expects to spend a total of
approximately $47 million through the end of the year for the acquisition and
improvements to these properties.
As of August 5, 1996, the Company had three inns and six construction
sites under contract to purchase, all of which are subject to the satisfactory
completion by the Company of its due diligence. The Company estimates the
purchase and related renovations and improvements to total approximately $24
million in 1996.
The Company is considering a major renewal program for its inns.
Although final determination has not been made, the scope of the program may
include room decor changes and exterior building improvements.
Management expects to fund the Company's capital expenditures for
improvements for inns from borrowings under the bank credit facility and cash
flow from operations. Expenditures for acquisition, renovation, and new
construction all of which are subject to the satisfactory completion by the
Company of its due diligence, will also be financed from these sources.
HISTORICAL CASH FLOWS
Cash provided by operations increased $7.0 million, from $18.2 million
in 1995 to $25.2 million in 1996, primarily as the result of an increase in net
income in 1996.
Net cash used by investing activities increased $20.1 million, from
$28.3 million in 1995 to $48.4 million in 1996, primarily as the result of
renovation and construction activities associated with the Company's expansion
program, as discussed above.
Net cash provided by financing activities increased $19.5 million,
from $10.2 million in 1995 to $29.7 million in 1996, primarily as the result of
proceeds from the Offering, net of mortgage indebtedness repayments.
EBITDA
Operating income plus the sum of interest income, other income,
depreciation and amortization and loss on fixed asset retirements (EBITDA)
increased $7.7 million, from $45.3 million in 1995 to $53.0 million in 1996.
EBITDA, which is presented to provide additional information regarding the
Company's ability to meet its future debt service, capital expenditures and
working capital requirements, should not be construed as an alternative to
operating income or cash flows from operating activities (each determined in
accordance with generally accepted accounting principles), and should not be
construed as an indication of the Company's operating performance or as a
measurement of liquidity.
FORWARD LOOKING STATEMENTS
- --------------------------
Any forward-looking statements contained in this Form 10-Q or any
other reports prepared by the Company or made by management of the Company
involve risks and uncertainties, and are subject to change based on various
important factors. The following factors, among others, in some cases have
affected, and in the future could affect, Red Roof's actual financial
performance. These risks and uncertainties include, but are not limited to:
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.
10
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PART II - OTHER INFORMATION
Item 5 - OTHER INFORMATION
- --------------------------
On July 30, 1996, Red Roof Inns, Inc., announced that its Board of
Directors has authorized a share repurchase program, pursuant to which the
Company may repurchase up to 500,000 of its common shares, either in the open
market or in privately negotiated transactions, depending on market conditions
and other factors. The shares will be used to fulfill the Company's 1996
requirements for its employee stock purchase and management stock option plans.
Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits:
Ex - 10.01 Fourth Amendment to Loan Agreement
Ex - 27 Financial Data Schedule
(b) Reports on Form 8-K.
On June 12, 1996, the Company filed a report announcing that President
and Chief Executive Officer Francis W. Cash will assume the additional position
of Chairman of the Board of Directors. Cash succeeds Peter C. Krause who
resigned.
11
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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 08/12/96 /s/ David N. Chichester
-------- ---------------------------------
David N. Chichester
Executive Vice President and
Chief Financial Officer
Date 08/12/96 /s/ Ray L. Druseikis
-------- ---------------------------------
Ray L. Druseikis
Vice President and
Chief Accounting Officer
12
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FOURTH AMENDMENT TO LOAN AGREEMENT
----------------------------------
This Fourth Amendment to Loan Agreement (this "Amendment") is entered
into at Columbus, Ohio, by and among The Huntington National Bank, Bank One,
Columbus, N.A., PNC Bank, National Association, NBD Bank, Harris Trust and
Savings Bank, The Fifth Third Bank of Columbus, Mitsui Leasing (U.S.A.) Inc.,
Star Bank, N.A. and Norwest Bank Minnesota, National Association through its
Norwest Loan Partners Division, as lenders (collectively, the "Banks"); The
Huntington National Bank, as agent (the "Agent"); and Red Roof Inns, Inc., as
borrower (the "Company"), as of the 27th day of June, 1996, in order to amend
the Loan Agreement entered into by and among The Huntington National Bank (in
its respective roles as lender and agent) and the Company as of the 9th day of
November, 1995 (the "Loan Agreement"), as the Loan Agreement has thereafter been
amended.
Whereas, the parties to this Amendment desire to permit the Company to
create or acquire certain subsidiaries, to permit the Company to transfer to
certain of those subsidiaries intellectual property owned by the Company, and to
amend certain provisions of the Loan Agreement in connection with the foregoing;
now, therefore, the Loan Agreement is hereby amended as follows:
1. The Banks hereby consent to the creation or acquisition by the
Company of the following subsidiaries: RRI Financial, Inc., a Nevada
corporation; RRI Holdings, Inc., a Nevada corporation; and Carousel Hotel Corp.,
a Georgia corporation. Effective on and after the date of this Amendment, so
long as any of the indebtedness provided for in the Loan Agreement remains
unpaid, the Company covenants as follows with respect to the subsidiaries
described in this Amendment (the "Permitted Subsidiaries"):
a. Carousel Hotel Corp. shall be merged into the Company on or
before the date on which the real property owned by this subsidiary is first
placed into operation as a Red Roof Inn motel.
b. All indebtedness now existing or hereafter arising from the
Company to the Permitted Subsidiaries shall be subordinated to all indebtedness
owing from the Company to the Banks, pursuant to agreements in form and
substance reasonably satisfactory to the Required Banks.
c. The Permitted Subsidiaries shall not enter into any
agreement that restricts the right of any of the Permitted Subsidiaries to pay
dividends or loan funds to the Company.
d. The Permitted Subsidiaries as a group shall not at any time
now or in the future hold more than 5% of the consolidated tangible net assets
of the Company and its affiliates or more than $2,000,000 of cash or cash
equivalents (excluding instruments evidencing indebtedness owing to another
subsidiary); provided, however, that a violation of this covenant shall not
become an Event of Default if (i) any such violation is unintentional and
inadvertent and (ii) the violation is cured within fifteen (15) days of the date
upon which any executive officer of the Company first learns of the violation.
2. Subject to the terms and conditions contained in this paragraph 2,
the Company hereby grants to the Banks and to the Agent: (i) a non-exclusive,
irrevocable sublicense right (the "Sublicense") to permit the entities defined
in paragraph 2.c. of this Amendment to use the Trademarks (as defined in
paragraph 4.b. of this Amendment) in the manner described, and subject to the
conditions set forth, in this Amendment; and (ii) a security interest in the
license the Company will receive from one or more of the Permitted Subsidiaries
(the "License") under the license agreement to be entered into between the
Company and one or more of the Permitted Subsidiaries as provided in paragraph
4.b. of this Amendment (the "License Agreement). The grant of the Sublicense
shall be subject to the following terms and conditions:
a. The Sublicense shall be irrevocable during the term of the
Loan Agreement but shall automatically expire upon the termination of the Loan
Agreement (without reference to any obligations that survive termination of the
Loan Agreement) and the voluntary payment by the
<PAGE> 14
Company of all indebtedness owing thereunder.
b. The scope and permitted use of the Trademarks under the
Sublicense, and the scope of the Banks' security interest in the License, shall
be limited to the use of the Trademarks and the operation of motel businesses
upon the forty-two (42) Red Roof Inn motels owned by the Company and mortgaged
to the Banks in connection with the Loan Agreement and in all substitutions
therefor and additions thereto as provided in the Loan Agreement, as from time
to time amended (the "Properties"). The 42 motels in which mortgage liens have
been conveyed as of the date of this Amendment are described on Revised Exhibit
C, which is attached hereto and hereby substituted for Exhibit C to the Loan
Agreement as in effect on the date of execution of that agreement.
c. The Sublicense shall not be assignable by the Banks, the
Agent or any successor agent to the Agent. The rights under the Sublicense shall
be exercisable only by the Banks, the Agent, any successor agent to the Agent,
any court-appointed or authorized receiver for the Properties, any manager or
operator retained or appointed by any of the foregoing, and all their respective
officers, employees and agents (in such capacity), all of which shall be subject
at all times to the terms and conditions of the License Agreement (except as
provided in paragraph 2.d. of this Amendment).
d. The duration of the Sublicense shall be (i) for a period
not to exceed ten (10) years after the first date that the Agent or a successor
agent or receiver takes possession of any of the Properties, with such use to be
without charge, and (ii) for an indefinite period after such ten-year period,
upon payment to the Company by the Banks of an annual fee in an amount then
customary for such rights within the budget motel industry; provided, however,
that the Sublicense shall expire at such time as the Banks have disposed of all
interest of the Banks in the Properties, and, as the Sublicense applies to any
one or more of the Properties, upon the Banks' voluntary release of their lien
against any such Property.
e. The Company covenants that it will take all action required
to preserve for the Agent and the Banks the right to use the Trademarks under
the terms and conditions contained in this Amendment and agrees that the loss of
such right by the Banks, whether as a result of the Company's loss of its
License from Holdings, or otherwise, shall constitute an additional Event of
Default under the Loan Agreement.
3. Except to the extent that the Banks are granted hereunder a
sublicense and security interest in the Company's license in the Trademarks, the
Banks hereby release and discharge the security interest in the Trademarks
required by the terms of the Loan Agreement and granted to them by the Company
pursuant to the mortgage deeds and deeds of trust encumbering the Properties and
executed in connection therewith. The Banks hereby further consent to the
assignment, sale or transfer of the Trademarks to RRI Financial, Inc. and the
sale of the Trademarks by RRI Financial, Inc. to Holdings. The Banks agree that,
upon the request of the Company and the payment by the Company of all the
Agent's expenses (including without limitation the Agent's attorneys' fees), the
Agent will execute and permit the filing of any Uniform Commercial Code partial
release financing statements that may be reasonably deemed to be necessary in
order further to effectuate the release provided in this Paragraph 3.
4. The parties agree that this Amendment shall become effective only
upon the following:
a. The Company obtaining from all other lenders that have been
granted a security interest in the Trademarks releases comparable to those
provided in this Amendment, copies of which releases shall be furnished to the
Agent, and evidence or legal opinions satisfactory to the Agent establishing
that the transactions approved hereunder will not cause a default by the Company
pursuant to the Indenture; and
b. RRI Holdings, Inc. ("Holdings") becoming the owner of all
the registered service marks and trademarks (collectively, the "Trademarks")
used by the Company in the
-2-
<PAGE> 15
operation of its motels and Holdings granting to the Company an exclusive
license for the use of the Trademarks (subject only to such usage rights as have
been granted to other parties prior to the date of this Amendment or in
connection with obtaining the consents described in paragraph 4.a., above).
5. The parties agree that each of the financial tests and financial
covenants contained in the Loan Agreement, including without limitation the
covenants contained in Sections 10.11, 10.13 and 10.14, shall be determined
based upon the Company's consolidated financial position and operating results
and after eliminating the effects of all intercompany transactions and
indebtedness.
6. The Company covenants that it will not issue, transfer or encumber
any of the shares of capital stock of any of the Permitted Subsidiaries unless
any such issuance or transfer is to one of the other Permitted Subsidiaries.
7. The Company shall cause the Permitted Subsidiaries to comply with,
observe and perform all covenants set forth in Section 10 of the Loan Agreement,
to the extent applicable to the respective business of each Permitted
Subsidiary. Notwithstanding the foregoing, the Banks and the Agent hereby (a)
consent to the transfer of the Trademarks to RRI Financial, Inc. and the sale of
the Trademarks from RRI Financial, Inc. to Holdings; (b) agree that the proceeds
arising from the sale of the Trademarks from RRI Financial, Inc. to Holdings
will not be applied as stated in Section 10.3(a)(ii) of the Loan Agreement; (c)
consent to the execution and delivery of a promissory note and related
instruments from Holdings to RRI Financial, Inc. in consideration of the
transfer of the Trademarks from RRI Financial, Inc., to Holdings; (d) agree that
the transactions described in this Amendment are within the scope of the
permitted transactions under Section 10.9 of the Loan Agreement; and (e) agree
that a merger of any Permitted Subsidiaries into the Company will not constitute
a "change of control" under Section 10.11 of the Loan Agreement.
8. The Company covenants that none of the Permitted Subsidiaries will
(a) cause or permit or (b) agree or consent to cause or permit in the future
(upon the happening of a contingency or otherwise) any of its property to be
subject to a lien or encumbrance, excepting only liens or encumbrances arising
by operation of law in the ordinary course of business and not materially and
adversely affecting the Permitted Subsidiaries' financial condition or business
operations.
9. The Company covenants that none of the Permitted Subsidiaries will
incur any indebtedness exceeding in the aggregate $25,000 other than to the
Company or other Permitted Subsidiaries, nor will the Permitted Subsidiaries
make any loan or advance to any person or entity other than to the Company or
another Permitted Subsidiary.
10. The following definitions are added to Section 13.10 of the Loan
Agreement:
"Holdings" means RRI Holdings, Inc.
"License" has the meaning described in paragraph 2. of the Fourth
Amendment to Loan Agreement.
"License Agreement" has the meaning described in paragraph 2 of the
Fourth Amendment to Loan Agreement.
"Permitted Subsidiaries" has the meaning described in paragraph 1.
of the Fourth Amendment to Loan Agreement.
"Properties" has the meaning described in paragraph 2.b. of the
Fourth Amendment to Loan Agreement.
"Sublicense" has the meaning described in paragraph 2. of the
Fourth Amendment to Loan Agreement.
-3-
<PAGE> 16
"Trademarks" has the meaning described in paragraph 4.b. of the
Fourth Amendment to Loan Agreement.
11. The Company shall pay all the reasonable costs and expenses of the
Agent incidental to the extension of credit provided for in this Amendment. Such
costs shall include but not be limited to reasonable fees and out-of-pocket
expenses of counsel to the Agent in the preparation and approval of this
Amendment. The Company shall have no obligation to pay the fees and expenses of
any counsel employed by any Bank other than the Agent or any other expenses
incurred by any such Bank in connection with this Amendment.
12. The Company represents and warrants that no Event of Default has
occurred and is continuing, nor will any occur immediately after the execution
and delivery of this Amendment by the performance or observance of any provision
hereof.
13. Each reference to the Loan Agreement, whether by use of the phrase
"Loan Agreement," "Agreement," the prefix "herein" or any other term, and
whether contained in the Loan Agreement itself, in this Amendment, in any
document executed concurrently herewith or in any loan documents executed
hereafter, shall be construed as a reference to the Loan Agreement as amended by
previous amendments and by this Amendment.
14. Except as modified as expressly provided or contemplated herein,
the Loan Documents shall remain as written originally and in full force and
effect in all respects, and nothing herein shall affect, modify, limit or impair
any of the rights and powers which the Banks may have thereunder.
15. The Company agrees to perform and observe all the covenants,
agreements, stipulations, and conditions to be performed on its part under the
Loan Documents, as amended by this Amendment.
16. The Company hereby represents and warrants to the Banks that (a)
the Company has legal power and authority to execute and deliver the within
Amendment; (b) the respective officers executing the within Amendment on behalf
of the Company have been duly authorized to execute and deliver the same and
bind the Company with respect to the provisions provided for herein and therein;
(c) the execution and delivery hereof by the Company and the performance and
observance by the Company of the provisions hereof do not violate or conflict
with the articles of incorporation, regulations or by-laws of the Company or any
law applicable to the Company or result in the breach of any provision of or
constitute a default under any agreement, instrument or document binding upon or
enforceable against the Company; and (d) this Amendment constitutes a valid and
legally binding obligation upon the Company, subject to applicable bankruptcy,
insolvency, reorganization or other similar laws affecting creditors' rights
generally, to general equitable principles and to applicable doctrines of
commercial reasonableness.
17. This Amendment shall become effective only upon its execution by
all parties hereto, which execution may be in any number of counterparts, but
all of which when taken together shall constitute one and the same document.
18. The capitalized terms used herein shall have the same meanings as
the capitalized terms used in the Loan Agreement.
-4-
<PAGE> 17
IN WITNESS WHEREOF, the Company, the Banks and the Agent have hereunto
set their hands as of the 27th day of June, 1996.
THE HUNTINGTON NATIONAL BANK
By: /s/ Robert H. Friend
-------------------------------------
Its: Vice President
-------------------------------------
BANK ONE, COLUMBUS, N.A.
By: /s/ Elizabeth Cadwallader
-------------------------------------
Its: Vice President
-------------------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Brad Carpenter
-------------------------------------
Its: Vice President
-------------------------------------
NBD BANK
By: /s/ Linnet E. Walla
-------------------------------------
Its: Second Vice President
-------------------------------------
HARRIS TRUST AND SAVINGS BANK
By: /s/ Jeffrey C. Nicholson
-------------------------------------
Its: Vice President
-------------------------------------
-5-
<PAGE> 18
THE FIFTH THIRD BANK OF COLUMBUS
By: /s/ Charles D. Hale
-------------------------------------
Its: Vice President
-------------------------------------
MITSUI LEASING (U.S.A.) INC.
By: /s/ Jerry Parisi
-------------------------------------
Its: Senior Vice President
-------------------------------------
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION, BY ITS
NORWEST LOAN PARTNERS
DIVISION
By: /s/ R. Duncan Sinclair
-------------------------------------
Its: Vice President
-------------------------------------
STAR BANK, N.A.
By: /s/ Bonnie Birath
-------------------------------------
Its: Assistant Vice President
-------------------------------------
THE HUNTINGTON NATIONAL BANK,
as Agent
By: /s/ Robert H. Friend
-------------------------------------
Its: Vice President
-------------------------------------
RED ROOF INNS, INC.
By: /s/ Scott L. Moore
-------------------------------------
Its: Vice President
-------------------------------------
-6-
<PAGE> 19
REVISED EXHIBIT C
LIST OF COLLATERAL INNS
-----------------------
<TABLE>
<CAPTION>
No. Property St
--- -------- --
<S> <C> <C>
47 Little Rock AR
197 Milford CT
204 Kissimmee FL
83 Pensacola FL
166 Atlanta Indian Trail GA
78 Lansing IL
57 Peoria IL
87 Chicago (Downers Grove) IL
67 South Holland IL
7 Michigan City IN
74 Indy Speedway IN
134 Louisville Southeast KY
5 Saginaw MI
63 St. Paul (Woodbury) MN
65 Minneapolis (Burnsville) MN
51 Kansas City North MO
143 St. Louis (St. Charles) MO
146 Asheville (West) NC
91 Charlotte University NC
124 Charlotte/Mecklenburg NC
122 Nashua NH
66 Mt. Laurel NJ
196 Toledo North OH
23 Dayton North OH
19 Canton OH
28 Cleveland Independence OH
53 Cleveland Willoughby OH
207 Akron South OH
58 Toledo Holland OH
10 Danville PA
54 Erie PA
27 Harrisburg South PA
85 Columbia West SC
148 Hilton Head SC
90 Columbia East SC
208 Johnson City TN
73 Knoxville North TN
153 Dallas Northwest TX
108 Hampton VA
86 Richmond VA
93 Virginia Beach VA
64 Fairmont WV
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000920941
<NAME> RED ROOF INNS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> JUN-29-1996
<CASH> 10,936
<SECURITIES> 0
<RECEIVABLES> 9,432
<ALLOWANCES> 459
<INVENTORY> 9,306
<CURRENT-ASSETS> 33,490
<PP&E> 736,149
<DEPRECIATION> 56,450
<TOTAL-ASSETS> 798,738
<CURRENT-LIABILITIES> 45,021
<BONDS> 0
<COMMON> 284
0
0
<OTHER-SE> 311,267
<TOTAL-LIABILITY-AND-EQUITY> 798,738
<SALES> 0
<TOTAL-REVENUES> 151,865
<CGS> 0
<TOTAL-COSTS> 80,338
<OTHER-EXPENSES> 33,329
<LOSS-PROVISION> 111
<INTEREST-EXPENSE> 21,297
<INCOME-PRETAX> 16,901
<INCOME-TAX> 6,825
<INCOME-CONTINUING> 10,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,076
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
</TABLE>
