RED ROOF INNS INC, DEF 14A, 1997-03-26

RED ROOF INNS INC
DEF 14A, 1997-03-26
HOTELS & MOTELS

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<PAGE> 1

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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
</TABLE>

RED ROOF INNS, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)

Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies: .......

(2) Aggregate number of securities to which transaction applies: ..........

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............

(4) Proposed maximum aggregate value of transaction: ......................

(5) Total fee paid: .......................................................

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid: ...............................................

(2) Form, Schedule or Registration Statement No.: .........................

(3) Filing Party: .........................................................

(4) Date Filed: ...........................................................

================================================================================
<PAGE> 2

[RED ROOF INNS LOGO]

RED ROOF INNS, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 22, 1997

To the Stockholders of
RED ROOF INNS, INC.:

Notice is hereby given that the Annual Meeting of Stockholders of Red Roof
Inns, Inc. (the "Company") will be held at the Greater Columbus Convention
Center, 400-500 North High Street, Columbus, Ohio 43215-2099, on Thursday, May
22, 1997, at 10 a.m., local time, for the following purposes:

1. To elect three Class I directors, each to hold office for a
two-year term and until a successor is elected and qualified.

2. To elect three Class II directors, each to hold office for a
three-year term and until a successor is elected and qualified.

3. To transact such other business as may properly come before the
meeting or any adjournment thereof.

The close of business on March 24, 1997 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
meeting and any adjournment thereof.

In order that your shares may be represented at this meeting and to assure
a quorum, please sign and return the enclosed proxy promptly. A return addressed
envelope, which requires no postage, is enclosed. In the event you are able to
attend and wish to vote in person, at your request we will cancel your proxy.

By Order of the Board of Directors,

JAMES C. BRASHARES
Secretary

Dated: March 28, 1997
<PAGE> 3

RED ROOF INNS, INC.

PROXY STATEMENT

GENERAL

This Proxy Statement is being furnished to the holders of shares of common
stock, $0.01 par value (the "Shares"), of Red Roof Inns, Inc., a Delaware
corporation (the "Company"), in connection with the solicitation of proxies by
the Board of Directors of the Company (the "Board") to be used at the Company's
Annual Meeting of Stockholders (the "Annual Meeting") to be held at the Greater
Columbus Convention Center, 400-500 North High Street, Columbus, Ohio
43215-2099, on Thursday, May 22, 1997, at 10 a.m., local time, for the purposes
set forth in the accompanying Notice of Annual Meeting.

The mailing address of the principal executive offices of the Company is
4355 Davidson Road, Hilliard, Ohio 43026. The approximate date on which this
Proxy Statement and the form of proxy will be first sent to stockholders is
March 28, 1997.

The close of business on March 24, 1997 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
Annual Meeting and any adjournment thereof. On the record date there were
outstanding and entitled to vote 28,004,838 Shares. Each Share is entitled to
one vote. In addition, the Company owns 451,353 Treasury Shares.

Shares represented by properly executed proxies will be voted at the Annual
Meeting in accordance with the choices indicated on the proxy. If no choices are
indicated, the Shares will be voted to elect as directors of the Company the
nominees named in this Proxy Statement. Any proxy may be revoked at any time
prior to its exercise by delivery to the Company of a subsequently dated proxy
or by giving notice of revocation to the Company in writing or in open meeting.
A stockholder's presence at the Annual Meeting does not by itself revoke the
proxy.

ELECTION OF DIRECTORS

The number of directors currently is fixed at nine. The board of directors
is divided into three classes, Class I, Class II, and Class III, with three
directors in each class. Directors in each class are elected to three-year
terms. The term of office of one class of directors expires each year at the
Annual Meeting and at such time as their successors are duly elected and
qualified. However, because no Annual Meeting was held during 1996 (the year in
which the Company completed its initial public offering), the term of office of
the directors in both Class I and Class II will expire concurrently with the
holding of this year's Annual Meeting. Each of the three incumbent directors in
Class I has been nominated for re-election for a two-year term, and each of the
three incumbent directors in Class II has been nominated for re-election for a
three-year term. There is no cumulative voting in the election of directors, and
the nominees receiving the highest number of votes will be elected. Abstentions
and broker non-votes will not be counted in determining the votes cast in the
election of directors and will not have a positive or negative effect on the
election.
<PAGE> 4

CLASS I DIRECTORS
(NOMINEES FOR ELECTION)

<TABLE>
<CAPTION>
DIRECTOR OF SHARES
NAME OF NOMINEE/DIRECTOR PRINCIPAL OCCUPATION(S) THE COMPANY BENEFICIALLY % OF
AND POSITION(S) WITH COMPANY AGE DURING PAST FIVE YEARS SINCE OWNED(1)(3) CLASS
- ------------------------------ --- ---------------------------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
David N. Chichester........... 51 Executive Vice President and 1996 31,000 *
Executive Vice President, Chief Financial Officer of
Chief Financial Officer, and the Company since February
Director 1996. Senior Vice President,
Finance, and then Executive
Vice President, Finance, for
Integrated Health Services,
Inc. from 1992 to 1996.
Thomas E. Dobrowski(2)........ 53 Managing Director, Real 1994 0 0
Director Estate and Alternative
Investments at General
Motors Investment Management
Corporation since 1984.
Serves on the partnership
committee of Taubman Realty
Group Limited Partnership,
the operating partnership of
Taubman Centers, Inc. Serves
on the board of directors of
Manufactured Home
Communities, Inc. and the
Pension Real Estate
Association. Serves on the
advisory committees of
Morgan Stanley Real Estate
Fund, Inc. and Trammell Crow
Equity Partners II.
C. William Hosler(2).......... 34 Joined Morgan Stanley & Co. 1995 0 0
Director Incorporated in 1989 and is
currently a Principal. Chief
Financial Officer of Morgan
Stanley Real Estate Fund,
Inc. since March 1995.
</TABLE>

CLASS II DIRECTORS
(NOMINEES FOR ELECTION)

2
<PAGE> 5

Set forth below is information about the directors whose terms of office
continue after the Annual Meeting.

CLASS III DIRECTORS
(TERMS EXPIRING IN 1998)

3
<PAGE> 6

<TABLE>
<CAPTION>
DIRECTOR OF SHARES
NAME OF NOMINEE/DIRECTOR PRINCIPAL OCCUPATION(S) THE COMPANY BENEFICIALLY % OF
AND POSITION(S) WITH COMPANY AGE DURING PAST FIVE YEARS SINCE OWNED(1)(3) CLASS
- ------------------------------ --- ---------------------------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
William M. Lewis, Jr.(2)...... 41 Joined Morgan Stanley & Co. 1995 0 0
Director Incorporated in 1978 and is
currently a Managing
Director. Chief Operating
Officer of Morgan Stanley
Realty since 1994 and
President of Morgan Stanley
Real Estate Fund, Inc. since
1995. Co-Head of Global
Mergers and Acquisitions
since February 1997. Member
of the Urban Land Institute,
the National Association of
Real Estate Investment
Trusts, and the
International Conference of
Shopping Centers.
Judith A. Rogala.............. 55 Consultant to Office Depot, 1997 0 0
Director Inc. since February 1997.
Executive Vice President,
Business Services Division
of Office Depot, Inc. from
June 1994 to February 1997.
President, Chief Executive
Officer, and Director of
EQ -- The Environmental
Quality Company, from August
1992 to May 1994. President,
Chief Executive Officer, and
Director of Flagship
Express, Inc. from August
1990 to August 1992.
Director of Butler
Manufacturing Co., since
April 1989.

<FN>
- ---------------
* Indicates ownership of less than 1%

(1) Beneficial ownership as of March 24, 1997. Except as otherwise indicated in
the notes to this table, the persons named in the table have sole voting and
investment power with respect to all Shares beneficially owned by them. This
table does not include options for Shares which are not currently
exercisable and will not be exercisable within 60 days of March 24, 1997.

(2) Morgan Stanley Real Estate Fund, Inc. and Morgan Stanley Real Estate
Investment Management, Inc. are principal shareholders of the Company. See
"Principal Holders of Voting Securities." Messrs. Dobrowski, Hosler, Thomas,
Allwin and Lewis disclaim beneficial ownership of Shares beneficially owned
by Morgan Stanley Real Estate Fund, Inc. and Morgan Stanley Real Estate
Investment Management, Inc.

(3) The number of Shares owned by all directors and executive officers as a
group (12 persons) as of March 24, 1997 was 259,700 (.01%).
</TABLE>

The Board held four meetings in 1996 and took action by unanimous written
consent seven times. Each director attended at least 75% of the meetings held by
the Board and by the committee or committees on which he served.

The Board has an audit committee whose only member during 1996 was Edward
D. Powers, an outside director. The current members of the audit committee are
Edward D. Powers, Judith A. Rogala, and C. William Hosler. The audit committee
is responsible for approving the engagement of the Company's independent public
accountants, reviewing with the independent public accountants the plans and
results of the audit engagement, reviewing the scope and nature of the services
provided by the independent public accountants, reviewing the independence of
the independent public accountants, considering the range of audit and other
fees of the independent public accountants, reviewing the scope and function of
the Company's

4
<PAGE> 7

internal audit department, and reviewing the adequacy of the Company's internal
controls. The audit committee met once during 1996.

The Board has a compensation committee whose members are James M. Allwin
and William M. Lewis, Jr. The compensation committee is responsible for
administering the Company's stock option plans and for determining the
compensation of the individuals listed in the Summary Compensation Table. The
compensation committee did not meet during 1996, but took action by unanimous
written consent nine times.

The Board has no standing nominating committee or other committee
performing similar functions.

COMPENSATION OF DIRECTORS

Employee directors receive no additional compensation for service on the
Board or its committees. Directors of the Company who are not employees of the
Company, Morgan Stanley Real Estate Fund, Inc., or General Motors Investment
Management Corporation receive an annual retainer of $10,000, paid in quarterly
installments of $2,500. Such directors also receive $2,000 for their attendance
and participation at board meetings; $500 for their attendance and participation
at committee meetings, when such meetings are independent of board meetings; and
$500 for participating in a telephonic meeting of the Board. In addition, upon
election to the Board, each outside director is granted an option to purchase
10,000 Shares of the Company at an exercise price equal to the closing price of
the Company's Shares on the day preceding the director's election to the Board.
Thereafter, each outside director is granted, on an annual basis, an option to
purchase 1,000 Shares of the Company at the then current market price.

EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
NAME TITLE AGE
- ------------------------------------- ------------------------------------------------ ---
<S> <C> <C>
Francis W. Cash...................... Chairman, President, and Chief Executive Officer 55
David N. Chichester.................. Executive Vice President, Chief Financial
Officer, and Director 51
Alan L. Tallis....................... Executive Vice President, Corporate Development 50
Douglas Longerbone................... Executive Vice President, Operations 49
</TABLE>

Francis W. Cash joined the Company as President, Chief Executive Officer,
and Director in July 1995 and became Chairman of the Board in June 1996. From
October 1992 to June 1995, Mr. Cash was President, Chief Operating Officer, and
Director of NovaCare, Inc., a leading medical rehabilitation company. Mr. Cash
was responsible for NovaCare's day-to-day operations.

David N. Chichester joined the Company as Executive Vice President, Chief
Financial Officer, and Director in February 1996. From October 1992 to February
1996, Mr. Chichester served as Senior Vice President, Finance and then as
Executive Vice President, Finance for Integrated Health Services, Inc.

Alan L. Tallis joined the Company as Executive Vice President, Corporate
Development in March 1994. Since 1992, Mr. Tallis was a Managing Director of a
real estate development and consulting firm.

Douglas Longerbone joined the Company as Regional Director of Operations in
1981 and has held positions involving increased responsibility in operations
since then, including Division Vice President -- Operations and Group Vice
President -- Operations. Mr. Longerbone was promoted to Executive Vice
President, Operations in August 1996.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and persons who own more than 10% of the Company's Shares
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors, and persons who own more than 10% of
the Company's Shares are required by regulations issued by the Securities and
Exchange Commission to furnish the Company with copies of all Section 16(a)
forms that they have filed. Based solely on a review of

5
<PAGE> 8

the copies of such forms, the Company believes that during 1996 its officers and
directors and persons who own more than 10% of the Company's Shares complied
with all applicable filing requirements of Section 16(a).

VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF

The following table sets forth information as of March 24, 1997, with
respect to the only persons known by the Company to be beneficial owners of 5%
or more of the Company's Shares.

<TABLE>
<CAPTION>
SHARES
BENEFICIALLY(1)(2)
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED PERCENT
- --------------------------------------------------------------------- ------------------ -------
<S> <C> <C>
Morgan Stanley Real Estate Fund, Inc.(3)............................. 12,872,640 45.97%
1585 Broadway
New York, New York, 10036
Morgan Stanley Real Estate Investment Management, Inc.(4)............ 5,527,360 19.74%
1585 Broadway
New York, New York, 10036

<FN>
- ---------------

(1) Except as otherwise indicated in the notes to this table, the persons named
in the table have sole voting and investment power with respect to the
Shares owned by them.

(2) Messrs. Allwin, Hosler, Lewis and Thomas, directors of the Company, are
employed in various capacities by Morgan Stanley & Co. Incorporated, Morgan
Stanley Real Estate Fund, Inc., Morgan Stanley Real Estate Investment
Management, Inc., or one or more of their affiliated entities. Morgan
Stanley Real Estate Fund, Inc. and Morgan Stanley Real Estate Investment
Management, Inc. disclaim beneficial ownership of any Shares owned by these
directors.

(3) Morgan Stanley Real Estate Fund, Inc. has voting control of the affairs of
MSREF I, L.L.C., the general partner of The Morgan Stanley Real Estate Fund,
L.P., the record owner of the Shares shown above, and has voting and
investment power with respect to such Shares. Morgan Stanley Real Estate
Fund, Inc. is an indirect wholly owned subsidiary of Morgan Stanley Group,
Inc.

(4) Morgan Stanley Real Estate Investment Management, Inc. has voting control of
the affairs of MSREF I-CO, L.L.C., the general partner of Morgan Stanley
Real Estate Co-Investment Partnership II, L.P., the record owner of
4,625,760 Shares, and investment manager with respect to 901,600 Shares of
the Company, and has voting and investment power with respect to all such
Shares. Morgan Stanley Real Estate Investment Management, Inc. is a wholly
owned subsidiary of Morgan Stanley Group, Inc.
</TABLE>

6
<PAGE> 9

EXECUTIVE COMPENSATION

The following table sets forth information concerning compensation paid or
accrued by the Company for fiscal years 1996, 1995, and 1994 to the Company's
chief executive officer, to the four most highly compensated executive officers
of the Company whose compensation was in excess of $100,000, and to one
executive officer, John E. Campbell, who retired from the Company during 1996
but whose compensation exceeded $100,000.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------ AWARDS -- SECURITIES
NAMES AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OTHER(2) UNDERLYING OPTIONS
- ----------------------------------- ---- -------- -------- -------- ----------------------
<S> <C> <C> <C> <C> <C>
Francis W. Cash(3)................. 1996 $408,000 $408,000 $370,060 193,800(4)
Chairman of the Board, 1995 200,000 200,000 51,000(4)
President, and Chief 1994 0
Executive Officer
John E. Campbell(5)................ 1996 140,358 115,272 22,000
Executive Vice President 1995 218,400 190,008 33,000
and Chief Operating Officer 1994 210,000 189,000 55,000
David N. Chichester(3),(6)......... 1996 284,167 355,000 219,404 120,000
Executive Vice President, 1995
Chief Financial Officer, and
Director 1994
Alan L. Tallis(3).................. 1996 189,000 164,430 22,000
Executive Vice President, 1995 182,000 158,340 33,000
Corporate Development 1994 146,500 131,850 55,000
James C. Brashares(3).............. 1996 160,000 92,800 51,625 50,000
Senior Vice President, 1995 40,000 12,984 11,416
General Counsel, and 1994
Secretary
Douglas Longerbone................. 1996 135,417 64,512 65,000(4)
Executive Vice President, 1995 93,000 36,270 7,500
Operations 1994 86,333 31,820 0(4)
</TABLE>

- ---------------

(1) The amount included in bonuses for the year reflects the amount earned
during that year, whether or not such amount was paid in that year or a
subsequent year. The bonus plan was based upon the Company attaining certain
specific, predetermined levels of net income in 1996 and pre-tax net income
in 1995 and 1994, levels which, if attained, were to result in the payment
of a certain percentage of each executive's base salary. Mr. Cash, as the
Company's chief executive officer, who was eligible to receive a bonus
payment, also participated in the determination of awards under the bonus
plan. For 1994, 1995, and 1996, the Company exceeded its income targets and,
accordingly, paid the maximum bonus to each eligible executive in 1994,
1995, and 1996. Mr. Chichester's bonus for 1996 includes a signing bonus of
$150,000 that was granted to him in connection with his joining the Company
in 1996.

(2) The Company reimbursed Messrs. Cash, Chichester, and Brashares for certain
of their relocation expenses, including moving expenses, real estate
commissions, and temporary housing, in accordance with their respective
employment agreements. The relocation expenses reimbursed in 1996 for
Messrs. Cash, Chichester, and Brashares were $361,360, $203,128, and $51,625
respectively, of which $166,869, $163,151, and $21,686, respectively,
related to gross-ups for federal and state income taxes.

(3) Executive officer's compensation was paid pursuant to an employment
agreement between the executive officer and the Company. See "Employment
Agreements and Executive Severance Agreements." Mr. Tallis' employment
agreement with the Company expired in 1996.

(4) In August 1996 the Company offered participants in the stock option plan the
opportunity to exchange options held by them to purchase Shares at an
exercise price of $5.43 per Share for options to purchase 2.8 times as many
Shares at an exercise price of $13.50 per Share. Pursuant to this offer, Mr.
Cash

7
<PAGE> 10

elected to exchange an option to purchase 51,000 Shares at an exercise price
of $5.43 per Share for an option to purchase 142,800 Shares (2.8 times
51,000) at an exercise price of $13.50 per Share. Mr. Longerbone elected to
exchange an option to purchase 12,500 Shares at an exercise price of $5.43
per Share for an option to purchase 35,000 Shares (2.8 times 12,500) at an
exercise price of $13.50 per Share. See "Ten-Year Option/SAR Repricings."

(5) Mr. Campbell retired from the Company in August 1996.

(6) Mr. Chichester joined the Company in February 1996 as Executive Vice
President, Chief Financial Officer, and Director. Mr. Chichester is employed
at an annual salary of $310,000 and is eligible for a bonus of up to 66% of
his annual salary.

STOCK OPTIONS GRANTED IN FISCAL YEAR 1996

The following table sets forth information concerning stock options that
were granted by the Company during fiscal year 1996 to the executive officers
listed in the Summary Compensation Table.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL
NUMBER OF RATES OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION ------------------------
NAME GRANTED(1) IN FISCAL YEAR ($/SH) DATE 5%(3) 10%(3)
- --------------------------- ---------- --------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Francis W. Cash............ 51,000 6.7% $ 16.00 1/31/06 $ 513,178 $ 1,300,494
142,800(2) 18.9% 13.50 10/5/05 867,904 2,321,542
John E. Campbell(4)........ 22,000 2.9% 16.00 1/31/06 221,371 560,997
David N. Chichester........ 120,000 15.9% 16.00 1/31/06 1,207,478 3,059,986
Alan L. Tallis............. 22,000 2.9% 16.00 1/31/06 221,371 560,997
James C. Brashares......... 50,000 6.6% 16.00 1/31/06 503,116 1,274,994
Douglas Longerbone......... 5,000 .7% 16.00 1/31/06 50,312 127,499
25,000 3.3% 13.13 7/30/06 206,435 523,146
35,000(5) 4.6% 13.50 12/29/04 180,092 474,323

<FN>
- ---------------
(1) Options for Shares vest in equal amounts over a four-year period. The
vesting period for all options will accelerate if the Company is sold or
there is a change in control of the Company.

(2) Represents the number of Shares issued to Mr. Cash as a result of his
election to exchange an option to purchase 51,000 Shares at an exercise
price of $5.43 per Share, an option granted to him on October 5, 1995, for
an option to purchase 2.8 times as many Shares (142,800 Shares) at an
exercise price of $13.50 per Share. Mr. Cash's option to purchase 142,800
Shares at an exercise price of $13.50 per Share was 50% vested on January 1,
1997 and will continue to vest at the rate of 25% per year. See "Ten-Year
Option/SAR Repricings."

(3) The dollar amounts under these columns are the result of calculations at the
5% and 10% rates dictated by the Securities and Exchange Commission when the
"Potential Realizable Value" alternative is used and are not intended to be
a forecast of the Company's stock price.

(4) Mr. Campbell retired from the Company in August 1996.

(5) Represents the number of Shares issued to Mr. Longerbone as a result of his
election to exchange an option to purchase 12,500 Shares at an exercise
price of $5.43 per Share, an option granted to him on December 29, 1994, for
an option to purchase 2.8 times as many Shares (35,000 Shares) at an
exercise price of $13.50 per Share. Mr. Longerbone's option to purchase
35,000 Shares at an exercise price of $13.50 per Share was 75% vested on
January 1, 1997 and will continue to vest at the rate of 25% per year. See
"Ten-Year Option/SAR Repricings."
</TABLE>

8
<PAGE> 11

AGGREGATED STOCK OPTION EXERCISES IN FISCAL YEAR 1996
AND STOCK OPTION VALUES AT END OF FISCAL YEAR 1996

The following table sets forth information concerning the exercise of stock
options during fiscal year 1996 by the executive officers named in the Summary
Compensation Table and also sets forth the value of all in-the-money stock
options held by such officers as of December 28, 1996, the last day of fiscal
year 1996.

<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS
SHARES VALUE OPTIONS EXERCISABLE/ EXERCISABLE/
NAME ACQUIRED REALIZED($) UNEXERCISABLE UNEXERCISABLE(1)
- ------------------------------------- -------- ----------- ---------------------- ----------------
<S> <C> <C> <C> <C>
Francis W. Cash...................... 0 $ 0 109,650/135,150 $177,735/177,735
John E. Campbell..................... 0 0 63,250/46,750 437,993/161,067
David N. Chichester.................. 0 0 30,000/90,000 0/0
Alan L. Tallis....................... 0 0 63,250/46,750 437,993/161,067
James C. Brashares................... 0 0 15,625/34,375 0/0
Douglas Longerbone................... 0 0 25,104/43,396 46,309/93,217

<FN>
- ---------------
(1) The value of the in-the-money options is based on the difference between the
exercise price of the options and the market value of the Company's Shares
on December 28, 1996 ($15.50). The market value of the Company's shares was
determined from the closing price of the Shares on the New York Stock
Exchange on December 27, 1996. The Company operates on a 52-53 week fiscal
year, which always ends on the Saturday nearest to December 31.
</TABLE>

TEN-YEAR OPTION/SAR REPRICINGS

The following table sets forth information concerning the repricing in 1996
of certain options to purchase Shares of the Company. For additional information
about the repricing, see "Compensation Committee Report on Executive
Compensation."

<TABLE>
<CAPTION>
NUMBER OF LENGTH OF
SECURITIES MARKET PRICE ORIGINAL OPTION
UNDERLYING OF STOCK AT EXERCISE PRICE TERM REMAINING
OPTIONS TIME OF AT TIME OF NEW AT DATE OF
REPRICED OR REPRICING OR REPRICING OR EXERCISE REPRICING OR
NAME DATE AMENDED AMENDMENT AMENDMENT PRICE AMENDMENT
- ---------------------------------- ------- ----------- ------------ -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Francis W. Cash(1)................ 8/30/96 51,000 $12.63 $ 5.43 $13.50 9 years
Chairman of the Board, President
and Chief Executive Officer
Douglas Longerbone(2)............. 8/30/96 12,500 12.63 5.43 13.50 8 years
Executive Vice President,
Operations

<FN>
- ---------------
(1) On August 30, 1996, Mr. Cash cancelled an option to purchase 51,000 Shares
at an exercise price of $5.43 per Share, an option that was granted to him
on October 5, 1995. In exchange, Mr. Cash was granted an option to purchase
142,800 Shares at an exercise price of $13.50 per Share. See "Stock Options
Granted in Fiscal Year 1996." The option to purchase 142,800 Shares expires
on October 5, 2005, the same date on which Mr. Cash's option to purchase
51,000 Shares would have expired.

(2) On August 30, 1996, Mr. Longerbone cancelled an option to purchase 12,500
Shares at an exercise price of $5.43 per Share, an option that was granted
to him on December 29, 1994. In exchange, Mr. Longerbone was granted an
option to purchase 35,000 Shares at an exercise price of $13.50 per Share.
See "Stock Options Granted in Fiscal Year 1996." The option to purchase
35,000 Shares expires on December 29, 2004, the same date on which Mr.
Longerbone's option to purchase 12,500 Shares would have expired.
</TABLE>

9
<PAGE> 12

THE COMPANY'S RETIREMENT PLAN

The following table shows the estimated annual benefits payable upon
retirement to persons in specified remuneration and years-of-service
classifications under the Red Roof Inns, Inc. Retirement Plan (as amended and
restated effective January 1, 1989) (the "Retirement Plan"). The retirement
benefits shown are based upon retirement at the age of 65 and are computed on
the basis of a straight life annuity benefit. The benefits shown in the
following table are not subject to any offset or other deduction for amounts
payable under Social Security.

ESTIMATED ANNUAL RETIREMENT BENEFITS PAYABLE AT AGE 65
STRAIGHT LIFE ANNUITY BASIS
TO AN EMPLOYEE RETIRING IN 1996

<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
-------------------------------------------------------
FINAL AVERAGE EARNINGS 15 20 25 30 35
- --------------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
$ 50,000.......................... $ 6,900 $ 9,200 $11,500 $13,800 $16,100
75,000.......................... 11,800 15,700 19,600 23,500 27,500
100,000.......................... 16,600 22,200 27,700 33,300 38,800
125,000.......................... 21,500 28,700 35,900 43,000 50,200
150,000(1)....................... 26,400 35,200 44,000 52,800 61,600

<FN>
- ---------------
(1) The Revenue Reconciliation Act of 1993 limits the maximum amount of annual
compensation that can be taken into account for purposes of the Retirement
Plan to $150,000. The Company does not maintain any supplementary or excess
pension plan that would result in the payment or accrual of benefits for
compensation in excess of the $150,000 maximum. The Company agreed in its
employment agreement with Mr. Cash to establish a supplementary pension plan
for which he would be eligible, however, no such plan has yet been
established. Remuneration covered by the Retirement Plan is limited to base
compensation. Bonuses, overtime, or other special compensation are not
included in determining benefits under the Retirement Plan.
</TABLE>

With respect to the individuals named in the Summary Compensation Table,
Messrs. Cash, Chichester, Tallis, Brashares, and Longerbone have 2.0, 1.0, 3.0,
1.5, and 15.0 years of credited service respectively. Mr. Campbell had 6.9 years
of service upon his retirement from the Company in August 1996. Under the
Revenue Reconciliation Act of 1993, for purposes of the Retirement Plan, the
compensation of Messrs. Cash, Campbell, Chichester, Tallis, and Brashares was
limited to $150,000 in 1996. Mr. Longerbone's 1996 compensation for purposes of
the Retirement Plan was $135,416.

As of December 28, 1996, the Company intends to establish a 401(k) plan in
1997. The Company is no longer making contributions to the Retirement Plan.

EMPLOYMENT AGREEMENTS AND EXECUTIVE SEVERANCE AGREEMENTS

The Company and Mr. Cash entered into an employment agreement dated as of
June 26, 1995 for a term of two years. Under his employment agreement, Mr. Cash
is entitled to receive an annual salary of $400,000 and a bonus in accordance
with the annual cash bonus plan maintained by the Company, both of which may be
increased from time to time by the Board. In addition, if Mr. Cash's employment
is terminated for one of the reasons set forth in the employment agreement, Mr.
Cash will be entitled to severance benefits. The severance benefits include the
payment of Mr. Cash's base salary for a period of 12 months if the Company
elects not to renew his employment agreement and the payment of his base salary
for a period of 24 months if his employment is terminated for certain other
reasons set forth in the employment agreement.

The Company and Mr. Chichester entered into an employment agreement dated
as of January 31, 1996 for an initial term of two years that continues
automatically thereafter from year to year unless terminated in accordance with
the terms and conditions of the agreement. Under his employment agreement, Mr.
Chichester is entitled to receive an annual salary of $310,000, a bonus of
$205,000 for 1996, and subsequent bonuses in accordance with the annual cash
bonus plan maintained by the Company. Both his

10
<PAGE> 13

salary and bonus may be increased from time to time by the Board. Mr. Chichester
also received a signing bonus of $150,000 in 1996. In addition, if Mr.
Chichester's employment is terminated for one of the reasons set forth in the
employment agreement, Mr. Chichester will be entitled to severance benefits. The
severance benefits include the payment of Mr. Chichester's base salary for a
period of 24 months.

The Company and Mr. Brashares entered into an employment agreement dated as
of August 30, 1995, for an indefinite term. Under his employment agreement, Mr.
Brashares is entitled to receive an annual salary of $160,000 and a bonus of up
to 58% of his salary. In addition, if Mr. Brashares' employment is terminated
without cause, he will be entitled to continue to receive his salary then in
effect until he secures other employment, up to a maximum period of 12 months
from the date of his termination.

In January 1997, the Company entered into an executive severance agreement
with Messrs. Cash, Chichester, Tallis, and Longerbone for a term of three years.
Under this agreement, the Company must pay severance benefits to Messrs. Cash,
Chichester, Tallis, and Longerbone if their employment is terminated as a result
of a change in control of the Company, as defined in the agreement, and the
termination otherwise falls within the scope of the agreement. The benefits to
which Messrs. Cash, Chichester, Tallis, and Longerbone will be entitled if such
an event occurs include a lump-sum payment equal to three times their annual
base salary then in effect. If such an event occurs, they will also be entitled
to a lump-sum payment equal to three times the highest bonus or short-term
incentive compensation paid to them in the year preceding the change in control,
unless this amount is less than three times the amount they could have earned in
the year in which the change in control occurred, in which case they will be
entitled to receive the higher amount.

In January 1997, the Company also entered into an executive severance
agreement with Mr. Brashares. Under this agreement, whose term is also three
years, the Company must pay severance benefits to Mr. Brashares if his
employment is terminated as a result of a change in control of the Company, as
defined in the agreement, and the termination otherwise falls within the scope
of the agreement. The benefits to which Mr. Brashares will be entitled if such
an event occurs include a lump-sum payment equal to two times his annual base
salary then in effect. If such an event occurs, Mr. Brashares will also be
entitled to a lump-sum payment equal to two times the highest bonus or
short-term incentive compensation paid to him in the year preceding the change
in control, unless this amount is less than two times the amount that he could
have earned in the year in which the change in control occurred, in which case
he will be entitled to receive the higher amount.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the compensation committee are James M. Allwin and William
M. Lewis, Jr., both outside directors employed by Morgan Stanley & Co.
Incorporated. Morgan Stanley Real Estate Fund, Inc. and Morgan Stanley Real
Estate Investment Management, Inc. are beneficial owners of more than 5% of the
Company's Shares. For a description of certain transactions between the Company
and affiliates of The Morgan Stanley Real Estate Fund, L.P., see "Certain
Relationships and Transactions." There are no interlocking relationships between
any executive officers of the Company and any entity whose directors or
executive officers serve on the Company's Board or compensation committee.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The compensation committee of the Board regularly reviews executive
compensation policies and levels and evaluates the performance of management in
the context of the Company's performance. The compensation committee regards
compensation as a means for attracting, retaining, rewarding, and motivating
highly-qualified individuals to manage the Company to meet corporate growth and
earnings objectives and to maximize shareholder value. The compensation
committee determines the compensation of the chief executive officer, who in
turn determines the compensation of the other senior executives, all of whom
report to him. This procedure ensures that the full attention of the senior
executives will be focused on the directives and policies set by the chief
executive officer for the management of the Company. The compensation
committee's philosophy is to provide incentives for short-term performance
through an annual cash bonus program. For 1996, the amount of bonuses to be
earned was based upon percentages of a predetermined level

11
<PAGE> 14

of net income, with maximum bonuses to be earned if net income in 1996 exceeded
$31,350,000. Because net income, adjusted to give effect to the elimination of
non-recurring charges and to the Company's issuance on January 31, 1996, of
10,000,000 Shares in its initial public offering, exceeded this amount, maximum
bonuses were awarded in 1996. The compensation committee provides incentives for
long-term growth through grants of options to purchase Shares. Options will
become of value to executives if the price of the Company's Shares increases.

The compensation committee awards options to purchase Shares to executive
officers and key employees to encourage ownership of the Company's Shares and to
give these individuals a stake in the performance of the Company. Such awards
are considered annually. The specific number of Shares underlying the options
granted is determined by the compensation committee based upon its perception of
the relative contribution or anticipated contribution of each eligible
individual to overall Company performance. The compensation committee also
reviews the total number of Shares underlying options already held by these
individuals at the time of the award. The compensation committee believes that
the Company's management stock option plan advances the interests of the Company
and its stockholders by providing a means of attracting and retaining key
employees for the Company, by providing key employees with a proprietary
interest in the Company, and by providing an additional incentive to key
employees for the development and financial success of the Company.

In August 1996, participants in the stock option plan were offered the
opportunity to exchange existing options to purchase Shares for options to
purchase additional Shares at a higher exercise price. Specifically, the
compensation committee offered participants who held options to purchase Shares
at an exercise price of $5.43 per Share the opportunity to cancel these options
and replace them with options to purchase 2.8 times as many Shares at an
exercise price of $13.50 per Share, a price that was closer to the market price
of the Company's Shares at the time. The 2.8 conversion factor was derived from
the compensation committee's selection of $18.00 as the price at which the
participants in the stock option plan would be economically indifferent to the
exchange offer. That is, only when the Share price was above $18.00 would these
participants be better off exchanging their existing options. The compensation
committee presented this plan to eliminate an incentive for these participants
to cash out options with a low exercise price and to give these participants an
incentive to seek to increase the value of the Company's Shares, thereby better
aligning their interests with those of the stockholders.

The compensation committee's policies as to the chief executive officer's
salary and bonus compensation are also applied by the chief executive officer in
determining the salaries and bonuses of senior executives of the Company. The
base salary of senior executives is reviewed approximately every 12 months by
the chief executive officer, who grants merit raises each year that reflect his
assessment of the senior executive's performance in achieving corporate goals
established at the beginning of the year. The overall performance of the Company
is also considered by the chief executive officer in evaluating salary increases
for senior executives. In individual cases, raises may reflect a senior
executive's assumption of additional duties and responsibilities during the
year.

In addition to determining the chief executive officer's salary, the
compensation committee establishes and monitors an annual incentive compensation
plan for the chief executive officer, senior executives, and key management
personnel of the Company. The incentive compensation plan awards bonuses to
these individuals if the Company achieves a certain high level of net income in
the current fiscal year. The amount of the bonus under the incentive
compensation plan is equal to a percentage of the individual's base salary; such
percentages ranged from a low of 9% to a high of 100% in 1996. All individuals
who participated in the incentive compensation plan in 1996 were awarded the
maximum bonus for which they were eligible.

James M. Allwin
William M. Lewis, Jr.

12
<PAGE> 15

PERFORMANCE GRAPH

The following graph provides a comparison of the total return for the
period from February 1, 1996, the date on which the Company's Shares began
trading, through and including December 27, 1996, the last trading day of fiscal
year 1996.

<TABLE>
<CAPTION>
Measurement Period S&P 500 Peer Group
(Fiscal Year Covered) Red Roof Inns Index Index
<S> <C> <C> <C>
February 1, 1996 $ 100 $ 100 $ 100
December 27, 1996 91.18 120.98 127.98
</TABLE>

The foregoing graph assumes an investment of $100 on February 1, 1996 and
reinvestment of dividends. The Company paid no dividends during 1996. The peer
group consists of the following lodging companies: Bristol Hotels, LaQuinta
Inns, Hilton Hotels, John Q. Hammons, Prime Hospitality, Host Marriott, and
Marriott International, Promus Hotels. The returns of each member of the peer
group have been weighted according to the member's stock market capitalization
on February 1, 1996, the beginning of the period for which a return is provided.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Morgan Stanley & Co. Incorporated, a representative of the underwriters in
the Company's issuance on January 31, 1996, of 10,000,000 Shares of the Company
in an initial public offering (the "Offering"), is an affiliate of The Morgan
Stanley Real Estate Fund, L.P., which directly or indirectly beneficially owns
approximately 65% of the outstanding Shares of the Company. In connection with
the Offering, certain underwriters, including Morgan Stanley & Co. Incorporated,
were paid $9.6 million by the Company for underwriting discounts and
commissions.

From time to time, affiliates of The Morgan Stanley Real Estate Fund, L.P.
may provide financial advisory and investment banking services to the Company.
Morgan Stanley Real Estate Fund, L.P., or its affiliates, also have direct or
indirect interests in properties or corporate entities that may give rise to
conflicts of interest with the Company. Any services or arrangements entered
into by the Company with any affiliate will be subject to certain restrictions
on transactions with affiliates contained in the documents governing the
Company's outstanding debt and in certain other contracts that are binding on
the Company. Subject to the exceptions described below, the Company may not
enter into any transaction with an affiliate unless the terms of such
transaction are fair and reasonable and no less favorable to the Company than
would be available in a comparable transaction on an arms-length basis with an
unrelated third party. The foregoing limitation does not apply to (i)
transactions (a) approved by a majority of the disinterested members of the
Board or (b) for which the Company obtains a fairness opinion of an investment
bank; (ii) transactions between the Company and any of its subsidiaries or
between subsidiaries of the Company; (iii) the payment of reasonable and

13
<PAGE> 16

customary regular fees to directors of the Company who are not employees of the
Company; (iv) payments or other transactions pursuant to any tax-sharing
agreement between the Company and any other person with which the Company is
required or permitted to file a consolidated tax return or with which the
Company is or could be part of a consolidated group for tax purposes; (v)
payments not prohibited by certain covenants in an indenture to which the
Company is a party; or (vi) loans or advances by the Company to employees of the
Company in the ordinary course of business and in furtherance of the Company's
business, in an aggregate amount not to exceed $2 million at any one time
outstanding. The Company believes that the fiduciary duties imposed under
Delaware law and the presence of independent directors on the Board will provide
adequate protections in the future against transactions by the Company with
affiliates which may be adverse to the Company's best interests.

The Company and the stockholders listed on the "Principal Holders of Voting
Securities" table (the "Principal Stockholders") have entered into a
stockholders agreement dated as of April 6, 1994, as amended (the "Stockholders
Agreement"). The Stockholders Agreement provides that no Principal Stockholder
other than The Morgan Stanley Real Estate Fund, L.P., may encumber, sell, or
otherwise transfer any Shares of the Company without the unanimous written
consent of all Principal Stockholders. The Stockholders Agreement further
provides that if The Morgan Stanley Real Estate Fund, L.P. proposes to sell all
of its Shares, it may require under certain circumstances that each of the
remaining Principal Stockholders sell, on the same terms and conditions, all of
its Shares. The Stockholders Agreement further provides that any sale or other
disposition by a Principal Stockholder of any number of its Shares is subject to
the right of the other Principal Stockholders to sell, or dispose of, on the
same terms and conditions, an equivalent portion of such other Principal
Stockholder's Shares. In addition, pursuant to the terms of the Stockholders
Agreement, as amended, the Principal Stockholders and their transferees are
entitled to certain demand registration rights ("Demand Rights") with respect to
Shares held by them. In addition to the Demand Rights, the Principal
Stockholders and their transferees are, subject to certain limitations, entitled
to register Shares in connection with future registration statements prepared by
the Company to register its equity securities. The Stockholders Agreement also
contains customary terms and provisions with respect to, among other things,
registration procedures and certain rights to indemnification granted by the
parties to the Stockholders Agreement in connection with the registration of
common stock pursuant to the Stockholders Agreement. As previously noted,
affiliates of Morgan Stanley Group, Inc. control the voting and disposition of
all Shares owned by the Principal Stockholders and, as a result, all actions
taken under the Stockholders Agreement remain under the sole control of Morgan
Stanley Group, Inc. None of the provisions of the Stockholders Agreement
described in this paragraph are applicable to any stockholders of the Company
other than the Principal Stockholders.

The Company has engaged the law firm of Mintz, Levin, Cohn, Ferris,
Glovsky, and Popeo, P.C. to provide some legal services. It is expected that the
fees paid to this firm for legal services during 1997 will exceed $60,000. Mr.
Brashares, senior vice president, general counsel, and secretary of the Company,
is the brother of one of the partners in this firm.

INDEPENDENT PUBLIC ACCOUNTANTS

Deloitte & Touche LLP served as the independent public accountants for the
Company for the fiscal year ended December 28, 1996, and the Board has selected
Deloitte & Touche LLP to serve as the independent public accountants for the
Company for the fiscal year ending January 3, 1998.

The Company expects a representative of Deloitte & Touche LLP to be present
at the Annual Meeting, to be given an opportunity to make a statement, if
desired, and to respond to appropriate questions.

STOCKHOLDER PROPOSALS

Proposals of stockholders intended to be presented at the 1998 Annual
Meeting must be received by the Company for inclusion in the proxy statement and
form of proxy on or prior to November 28, 1997.

14
<PAGE> 17

OTHER MATTERS

The Company does not know of any other matters that may come before the
Annual Meeting. However, if any other matters properly come before the Annual
Meeting, it is the intention of the persons named in the accompanying form of
proxy to vote the Shares in accordance with their judgment on such matters.

The Company will bear the cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by officers, directors, and
regular employees, personally or by telephone or telegraph, and the Company will
reimburse banks, brokers, and nominees for their out-of-pocket expenses incurred
in sending proxy materials to the beneficial owners of Shares held by them. If
there are follow-up requests for proxies, the Company may employ other persons
for such purpose.

JAMES C. BRASHARES
Secretary

15
<PAGE> 18
PROXY PROXY

RED ROOF INNS, INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 22, 1997

The undersigned appoints Francis W. Cash, David N. Chichester and James C.
Brashares, or any of them, proxies for the undersigned, each with full power of
substitution, to attend the Annual Meeting of Shareholders of Red Roof Inns,
Inc. to be held on May 22, 1997 at 10:00 a.m., Eastern Time, and at any
adjournments or postponements of the Annual Meeting, and to vote as specified
in this Proxy all the Common Shares of the Company which the undersigned would
be entitled to vote if personally present. This Proxy when properly executed
will be voted in accordance with your indicated directions. If no direction is
made, this Proxy will be voted FOR the election of Directors.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTIONS OF DIRECTORS.

YOUR VOTE IS IMPORTANT! PLEASE MARK, SIGN AND DATE THIS PROXY ON THE
REVERSE SIDE AND RETURN IT PROMPTLY IN THE ACCOMPANYING ENVELOPE.

(Continued and to be signed on reverse side.)
<PAGE> 19

RED ROOF INNS, INC.

PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [ ]

1. Election of Class I Directors--
Nominees: D.N. Chichester, T.E. Dobrowski, C.W. Hosler

For Withhold For All
All All Except

[ ] [ ] [ ]

------------------------------------------------------
(Except nominee(s) written above.)

2. Election of Class II Directors--
Nominees: F.W. Cash, E.D. Powers, O.D. Thomas

For Withhold For All
All All Except

[ ] [ ] [ ]

------------------------------------------------------
(Except nominee(s) written above.)

The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and of the Proxy Statement.

Dated: , 1997
--------------------

Signature(s)
--------------------------------------------

- --------------------------------------------------------
Please sign exactly as your name appears. Joint owners
should each sign personally. Where applicable, indicate
your official position or representative capacity.

FOLD AND DETACH HERE

YOUR VOTE IS IMPORTANT.

PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
IN THE ACCOMPANYING ENVELOPE.