<PAGE> 1
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 28, 1997
or
/ / TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 1-14058
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RED ROOF INNS, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1393666
(State of Incorporation) (I.R.S. Employer Identification
Number)
4355 DAVIDSON ROAD
HILLIARD, OHIO 43026-2491
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (614) 876-3200
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Number of shares of Common Stock outstanding at June 28, 1997
28,479,054
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 financial statements
of Red Roof Inns, Inc. ("Red Roof" or the "Company"), a Delaware corporation,
have been prepared in accordance with the instructions to Form 10-Q, and
therefore do not include all information and notes necessary for complete
financial statements in conformity with generally accepted accounting
principles. The results for the periods indicated are unaudited, but reflect all
adjustments (consisting only of normal recurring accruals) which management
considers necessary for a fair presentation of operating results. Results of
operations for interim periods are not necessarily indicative of a full year of
operations or results for other interim periods. All material intercompany
transactions and balances between Red Roof Inns, Inc. and its subsidiaries have
been eliminated in consolidation. These unaudited condensed consolidated
financial statements should be read in conjunction with the Company's 1996
audited consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 28,
1996.
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996 AND JUNE 28, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 28, JUNE 28,
1996 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,659 $ 10,915
Receivables 10,977 12,834
Supplies and other 13,863 14,096
-------- --------
Total current assets 44,499 37,845
PROPERTY AND EQUIPMENT:
Land 145,177 150,134
Buildings and improvements 562,366 570,076
Furniture, fixtures and equipment 71,070 99,683
Construction in progress 28,692 54,488
-------- --------
Total property and equipment 807,305 874,381
Less accumulated depreciation and amortization 71,283 86,128
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Property and equipment - net 736,022 788,253
OTHER ASSETS:
Goodwill, net of accumulated amortization 72,446 71,313
Deferred loan fees and other - net 14,660 16,150
-------- --------
Total other assets 87,106 87,463
-------- --------
TOTAL $867,627 $913,561
======== ========
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
<CAPTION>
DECEMBER 28, JUNE 28,
1996 1997
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<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 13,984 $ 12,153
Accrued expenses 21,210 23,044
Current maturities of long-term debt 12,020 12,579
--------- ---------
Total current liabilities 47,214 47,776
LONG-TERM DEBT (LESS CURRENT MATURITIES):
Mortgage notes payable and obligations under capital leases 208,008 201,416
Bank facility 76,150 118,500
Senior unsecured notes 200,000 200,000
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Total long-term debt 484,158 519,916
OTHER LONG-TERM LIABILITIES 17,156 19,828
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value; 10,000 shares authorized,
no shares outstanding
Common stock, $.01 par value; 100,000 shares authorized,
shares issued: 1996 - 28,412, 1997 - 28,479 284 285
Additional paid-in capital 266,516 267,422
Less treasury stock, at cost: 1996 - 500 shares, 1997 - 451 shares (6,476) (5,846)
Retained earnings 58,775 64,180
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Total stockholders' equity 319,099 326,041
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TOTAL $ 867,627 $ 913,561
========= =========
</TABLE>
See notes to consolidated financial statements.
4
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THIRTEEN WEEKS AND TWENTY-SIX WEEKS ENDED JUNE 29,1996 AND JUNE 28,1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------------- --------------------------
JUNE 29, JUNE 28, JUNE 29, JUNE 28,
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES $ 83,793 $ 92,256 $ 151,865 $ 164,950
OPERATING EXPENSES:
Direct room 37,077 40,115 75,620 80,153
Depreciation and amortization 7,009 8,372 14,271 16,699
Corporate 7,335 7,079 14,189 14,529
Marketing 3,411 4,670 9,587 11,428
Inn renewal program 4,770 9,541
--------- --------- --------- ---------
Total operating expenses 54,832 65,006 113,667 132,350
--------- --------- --------- ---------
OPERATING INCOME 28,961 27,250 38,198 32,600
INTEREST EXPENSE - NET (9,861) (11,262) (21,297) (22,475)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 19,100 15,988 16,901 10,125
INCOME TAX EXPENSE (7,713) (6,275) (6,825) (3,974)
--------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 11,387 9,713 10,076 6,151
EXTRAORDINARY ITEM (746) (746)
--------- --------- --------- ---------
NET INCOME $ 11,387 $ 8,967 $ 10,076 $ 5,405
========= ========= ========= =========
EARNINGS PER SHARE BEFORE
EXTRAORDINARY ITEM $ 0.40 $ 0.34 $ 0.37 $ 0.22
========= ========= ========= =========
EARNINGS PER SHARE $ 0.40 $ 0.32 $ 0.37 $ 0.19
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 28,625 28,202 26,985 28,182
========= ========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------------
PRO FORMA INFORMATION INCLUDING SUPPLEMENTAL ADJUSTMENTS
OPERATING INCOME $ 28,961 $ 32,020 $ 38,648 $ 42,141
========= ========= ========= =========
NET INCOME $ 11,387 $ 12,610 $ 11,131 $ 11,947
========= ========= ========= =========
EARNINGS PER SHARE $ 0.40 $ 0.45 $ 0.39 $ 0.42
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
5
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RED ROOF INNS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 29, 1996 AND JUNE 28, 1997
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
--------------------------
JUNE 29, JUNE 28,
1996 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 10,076 $ 5,405
Adjustments to reconcile net income to net cash provided
by operations:
Depreciation and amortization 13,954 16,105
Amortization of goodwill 1,133 1,133
Loan fees written-off 1,228
Deferred income taxes 1,019 859
Changes in assets and liabilities:
Receivables (983) (1,857)
Supplies and other 384 (63)
Accounts payable (1,370) (1,146)
Accrued expenses 1,029 3,477
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Net cash provided by operations 25,242 25,141
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CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (47,524) (68,016)
Changes in other assets (900) (633)
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Net cash used by investing activities (48,424) (68,649)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage notes payable and bank facility 43,800 223,150
Principal reduction in mortgage notes payable and bank facility (162,670) (186,833)
Issuance of common stock 148,764 1,537
Other (203) (3,090)
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Net cash provided by financing activities 29,691 34,764
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,509 (8,744)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,427 19,659
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,936 $ 10,915
========= =========
</TABLE>
See notes to 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 JUNE 29, 1996 AND JUNE 28, 1997 (UNAUDITED)
1. GENERAL
The condensed consolidated financial statements include the accounts of
Red Roof Inns, Inc. and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.
At June 29, 1996 and June 28, 1997, the Company operated 237 inns and
251 inns, respectively.
Unaudited interim results for the thirteen weeks and twenty-six weeks
ended June 29, 1996 and June 28, 1997 contain all adjustments, consisting of
normal recurring accruals, which management considers necessary for a fair
presentation of interim financial position and results of operations for such
periods. The results are not necessarily indicative of the results for any other
interim period or the full fiscal year.
Certain amounts in the 1996 financial statements have been reclassed to
conform with the 1997 presentation.
2. LONG-TERM DEBT
On May 21, 1997, the Company refinanced its $150 million bank credit
facility with a $250 million bank credit facility. In connection with the
refinancing, the Company recognized an extraordinary charge against income of
$746,000, net of tax, ($.03 per share) in the thirteen and twenty-six week
periods ended June 28, 1997 related to the write-off of unamortized loan costs
on the $150 million credit facility. As of June 28, 1997, $131.5 million was
available for borrowing under the Company's $250 million bank credit facility.
3. STOCKHOLDERS' EQUITY
On January 31, 1996, the Company issued 10,000,000 shares of common
stock in a public offering (the "Offering") at a price of $16.00 per share. Net
proceeds of the Offering were approximately $149 million, which were used to
repay approximately $128 million of mortgage indebtedness. Approximately $21
million was retained for inn acquisitions, conversions, new development and for
general corporate purposes.
In connection with the sale of the common stock, $9.6 million in
underwriting discounts and commissions were paid to certain underwriters,
including an affiliate of The Morgan Stanley Real Estate Fund which, together
with affiliates, beneficially owns a majority of the outstanding common stock of
the Company.
In January 1997, the Company sold 48,647 shares of common stock out of
treasury to employees at $12.64 per share under the Employee Stock Purchase Plan
for the 1996 plan year.
In March and April 1997, the Company granted options to certain
directors, officers and employees under the Company's stock option plans to
purchase 457,000 shares at prices ranging from $15.13 to $17.00 per share. The
options vest at the rate of 25% per year.
During the twenty-six week period ended June 28, 1997, options were
exercised for 98,550 shares at prices ranging from $5.43 to $16.00 per share
under the Company's Management Stock Option Plan. In connection with the
termination of the employment of certain plan participants, 51,200 options
awarded under the Plan were canceled.
In February 1997, the Board of Directors authorized the Company to
repurchase up to 500,000 of its common shares, either in the open market or in
privately negotiated transactions. No shares were repurchased during the
twenty-six weeks ended June 28, 1997.
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In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share," which will require retroactive adoption in the Company's 1997 fiscal
year. The new standard simplifies the computation of earnings per share and
requires the presentation of basic and diluted earnings per share. Adoption of
SFAS No. 128 will not have a material effect on the earnings per share
presented herein.
4. INN RENEWAL PROGRAM
The Company substantially completed its inn renewal program to
refurbish more than 85% of its inns during the twenty-six weeks ended June 28,
1997. The program's final phase has been deferred until after the summer peak
travel season. When complete, total cost of the program is expected to be
approximately $60 million. For the twenty-six week period ended June 28, 1997,
the Company spent $39.1 million related to the inn renewal program, of which
$29.6 million was capitalized and $9.5 million was expensed. Costs incurred
through June 28, 1997 related to the inn renewal program totaled $49.8 million.
5. SUPPLEMENTAL CASH FLOW INFORMATION
For the twenty-six weeks ended June 29, 1996 and June 28, 1997,
interest payments were $22,332,000 and $23,568,000, respectively, and interest
capitalized for the corresponding periods was $1,275,000 and $1,120,000,
respectively. Income tax payments for the twenty-six week periods in 1996 and
1997 were $3,001,000 and $439,000, respectively. Capital expenditures included
in accounts payable at June 29, 1997 and December 28, 1996 totaled $6,496,000
and $7,181,000, respectively.
6. PRO-FORMA INFORMATION INCLUDING SUPPLEMENTAL ADJUSTMENTS
The following pro-forma supplemental information, which is presented
for purposes of facilitating meaningful comparisons to ongoing operations and to
other companies, summarizes the results of operations of the Company, adjusted
on a pro forma basis to reflect (a) the effect of the Offering, as if the
Offering had occurred at the beginning of 1996 and (b) the elimination of
certain non-recurring expenses.
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<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
June 29, June 28, June 29, June 28,
1996 1997 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Pro-forma information including supplemental adjustments:
Operating income $28,961 $32,020 $38,648 $42,141
Net income 11,387 12,610 11,131 11,947
Net income per share .40 .45 .39 .42
</TABLE>
Operating income and net income as reported in the Company's
consolidated financial statements are reconciled to the respective amounts in
the preceding table as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirteen Weeks Ended
June 29, 1996 June 28, 1997
--------------------- ---------------------
Operating Net Operating Net
Income Income Income Income
------- ------- ------- -------
<S> <C> <C> <C> <C>
As reported $28,961 $11,387 $27,250 $ 8,967
Pro-forma and supplemental adjustments:
Inn renewal program 4,770 2,897
Extraordinary item 746
------- ------- ------- -------
As adjusted $28,961 $11,387 $32,020 $12,610
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended Twenty-Six Weeks Ended
June 29, 1996 June 28, 1997
--------------------- ---------------------
Operating Net Operating Net
Income Income Income Income
------- ------- ------- -------
<S> <C> <C> <C> <C>
As reported $38,198 $10,076 $32,600 $ 5,405
Pro-forma and supplemental adjustments:
Asset impairment charge 450 268
Inn renewal program 9,541 5,796
Interest expense adjustment for
the Offering 787
Extraordinary item 746
------- ------- ------- -------
As adjusted $38,648 $11,131 $42,141 $11,947
======= ======= ======= =======
</TABLE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The principal factors affecting Red Roof Inns' results are: occupancy
and room rates, continued growth in the number of inns, the Company's ability to
manage expenses, the level of competition and seasonality. Demand, and thus
occupancy, is affected by normally recurring seasonal patterns and, in most
locations, is lower in the winter and early spring months than the balance of
the year. Historically, revenues have been lower in the first quarter than in
other quarters and the Company has consistently incurred net losses in the first
quarter.
Unless otherwise indicated, inn data presented in this report is based
on the 223 inns (the "Comparable Inns") that the Company owned and operated at
the beginning of the fiscal year following four successive quarters as open
operating fully renovated or constructed properties. The Company believes that
the remaining 28 inns acquired or
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<PAGE> 10
constructed (the "Inns in Stabilization") have not been operated by the
Company for a sufficient period to provide meaningful period-to-period
comparisons. At the acquired inns, the Company has closed a significant number
of rooms and, therefore, the average daily room rates and occupancy for these
inns are not comparable to a stabilized Red Roof inn. Newly acquired and
constructed inns historically begin with lower occupancy and average daily rates
which improve over time as these inns implement the Company's operating policies
and procedures and become integrated into the Company's central reservation
system.
During the second quarter, the average daily rate ("ADR") increased
$3.42, or 7.5%, from $45.35 per occupied room in 1996 to $48.77 per occupied
room in 1997. Occupancy decreased from 78.5% in the second quarter of 1996 to
74.7% for the comparable period in 1997. Revenue per available room ("REVPAR")
increased $.83, or 2.3%, from $35.60 in 1996 to $36.43 in 1997. For the
twenty-six weeks, ADR increased $3.52, or 8.1%, from $43.35 per occupied room in
1996 to $46.87 per occupied room in 1997. Occupancy for the twenty-six weeks
decreased from 74.2% in 1996 to 68.7% in 1997. REVPAR for the twenty-six weeks
increased $.03, or.1%, from $32.17 in 1996 to $32.20 in 1997. The Company
attributes the decline in occupancy and nominal REVPAR growth for the twenty-six
weeks to aggressive price increases early in the first quarter, to low
occupancies due to the New Year's holiday falling on a Wednesday, and to a
significant reduction in demand for hotel rooms in the Atlanta and Texas markets
where approximately 10% of the Company's property are located. The Company
believes that the decrease in the Atlanta market is due to the high demand
generated in 1996 related to preparation for the Summer Olympic Games while the
decrease in the Texas market is due to an increase in room supply. The Company
believes that the improvements in both occupancy and REVPAR over the first
quarter is due to a pricing adjustment taken during the first quarter,
commencing a national advertising campaign and an increase in seasonal demand
during the second quarter.
The Company opened two inns during the second quarter of 1997,
increasing the total number of inns operating at June 28, 1997 to 251. At June
29, 1996, 237 inns were in operation.
THIRTEEN WEEKS ENDED JUNE 28, 1997 COMPARED TO THIRTEEN WEEKS ENDED
JUNE 29, 1996
The Company's revenues are principally derived from room rentals.
Revenues increased $8.5 million, or 10.1%, from $83.8 million in 1996 to $92.3
million in 1997. Revenues for the 223 Comparable Inns increased $2.2 million
from 1996 to 1997 and revenues increased approximately $6.2 million for the Inns
in Stabilization, of which approximately $4.6 million resulted from increasing
the number of inns from 237 in 1996 to 251 in 1997.
Direct room expenses include salaries, wages, utilities, repairs and
maintenance, property taxes, room supplies and security. Direct room expenses
increased $3.0 million, or 8.2%, from $37.1 million in 1996 to $40.1 million in
1997. The expenses increased primarily because of the addition of new inns and
generally higher salary and wage expenses. As a percentage of revenues, direct
room expense decreased from 44.2% in 1996 to 43.5% in 1997 primarily due to
the need for fewer routine repairs and maintenance expenditures as a result of
the inn renewal program.
Gross operating profit increased $5.4 million, or 11.6%, from $46.7
million in 1996 to $52.1 million in 1997 primarily as a result of a reduction in
operating expense margins and an increase in the number of inns. As a percentage
of revenues, gross operating profit was 55.8% in 1996 and 56.5% in 1997.
Depreciation and amortization increased $1.4 million from $7.0 million
in 1996 to $8.4 million in 1997. The increase primarily reflects depreciation of
inns acquired since the second half of 1996.
Corporate expenses include the cost of general management, training and
field supervision of inn managers, development, and administrative expenses.
Corporate expenses decreased $.2 million, or 2.7%, from $7.3 million in 1996 to
$7.1 million in 1997. The decrease consists primarily of lower travel expenses
and a reduction in general and administrative expenses, which was offset by an
increase in wages and benefits as a result of additional staffing and a $.3
million write-off of costs associated with an aborted acquisition of a regional
lodging chain. As a percentage of revenue, corporate expenses were 8.7% and 7.7%
in 1996 and 1997, respectively.
Marketing expenses increased $1.3 million, or 38% from $3.4 million to
$4.7 million in 1997 as a result of an increase in national media expenses
related to the 1997 summer advertising campaign. No similar campaign was held in
1996. As a percentage of revenue, marketing expenses were 4.1% and 5.1% in 1996
and 1997, respectively.
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<PAGE> 11
In the fourth quarter of 1996, the Company commenced a chainwide inn
renewal program to refurbish more than 85% of its inns. The Company incurred
expenses of $4.8 million in 1997 associated with the inn renewal program.
Interest expense increased $1.4 million, or 14.2%, from $9.9 million in
1996 to $11.3 million in 1997 primarily because of increased borrowings on the
line of credit related to acquisitions, development and capital expenditures
associated with the inn renewal program.
The effective income tax rates for 1996 and 1997 were 40.4% and 39.3%,
respectively. The decline in the 1997 effective tax rate is due to an
anticipated reduction in state and local taxes.
TWENTY-SIX WEEKS ENDED JUNE 28, 1997 COMPARED TO TWENTY-SIX WEEKS ENDED
JUNE 29, 1996
Revenues increased approximately $13.1, or 8.6%, from $151.9 million in
1996 to $165.0 million in 1997. Revenues for the 223 Comparable Inns increased
$.5 million from 1996 to 1997 and revenues increased approximately $12.6 million
for the Inns in Stabilization, of which approximately $8.7 million resulted from
increasing the number of inns from 237 in 1996 to 251 in 1997, with $1.1 million
of the $8.7 million increase caused by the addition of three inns in the first
half of 1997.
Direct room expenses increased $4.6 million, or 6.1%, from $75.6
million in 1996 to $80.2 million in 1997. The expenses increased primarily
because of the addition of new inns and generally higher salary and wage
expenses which were partially offset by the need for fewer repairs and
maintenance expenditures as a result of the inn renewal program. As a percentage
of revenues, direct room expense decreased from 49.8% in 1996 to 48.6% in 1997.
Gross operating profit increased $8.6 million, or 11.2%, from $76.2
million in 1996 to $84.8 million in 1997 primarily as a result of a reduction in
operating expense margins and an increase in the number of inns. As a percentage
of revenues, gross operating profit was 50.2% in 1996 and 51.4% in 1997.
Depreciation and amortization increased $2.4 million, from $14.3
million in 1996 to $16.7 million in 1997. The increase generally reflects
depreciation of new inns acquired since the second half of 1996. In addition,
1996 includes a non-recurring charge of $.5 million related to fixed asset
impairments.
Corporate expenses increased $.3 million, from $14.2 million in 1996 to
$14.5 million in 1997, primarily due to higher salary and benefit expenses
related to higher staffing levels and to the $.3 million write-off of costs
associated with an aborted acquisition of a regional lodging chain which were
partially offset by lower travel expenses and a reduction in general and
administrative expenses. As a percentage of revenue, corporate expenses were
9.3% and 8.8% in 1996 and 1997, respectively.
Marketing expenses increased $1.8 million, from $9.6 million in 1996 to
$11.4 million in 1997 primarily due to higher salary and benefit expenses
related to an increased sales staff and to national media expenses related to
the 1997 summer advertising campaign. No similar campaign was held in 1996. As a
percentage of revenue, marketing expenses were 6.3% and 6.9% in 1996 and 1997,
respectively.
In the fourth quarter of 1996, the Company commenced a chainwide inn
renewal program to refurbish more than 85% of its inns. The Company incurred
expenses of $9.5 million in 1997 associated with the inn renewal program.
Interest expense increased $1.2 million, from $21.3 million in 1996 to
$22.5 million in 1997 because of increased borrowings on the line of credit
related to acquisitions, development and capital expenditures associated with
the inn renewal program.
The effective income tax rates for 1996 and 1997 were 40.4% and 39.3%,
respectively. The decline in the 1997 effective tax rate is due to an
anticipated reduction in state and local taxes.
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<PAGE> 12
CAPITAL RESOURCES AND LIQUIDITY
GENERAL
Cash and cash equivalents decreased approximately $8.8 million from
$19.7 million on December 28, 1996 to $10.9 million on June 28, 1997. Total debt
outstanding increased approximately $36.3 million from $496.2 million on
December 28, 1996 to $532.5 million on June 28, 1997. Total debt includes $76.2
million and $118.5 million outstanding under the bank credit facility as of
December 28, 1996 and June 28, 1997, respectively. As of June 28, 1997, $131.5
million was available for borrowing under the Company's $250 million bank credit
facility.
On May 21, 1997, the Company refinanced its $150 million bank credit
facility with a $250 million bank credit facility. In connection with the
refinancing, the Company recognized an extraordinary charge against income of
$746,000, net of tax, ($0.03 per share) in the thirteen and twenty-six week
periods ended June 28, 1997 related to the write-off of unamortized loan costs
on the $150 million bank credit facility.
Management anticipates that its working capital needs will be financed
by internally generated cash and the bank credit facility.
CAPITAL EXPENDITURES
The Company continued its inn renewal program to refurbish
substantially all of its inns. For the twenty-six week period ended June 28,
1997, the Company spent approximately $29.6 million for such capital
improvements and expects to spend approximately $4.7 million to complete the
refurbishment.
For the twenty-six week period ended June 28, 1997, the Company spent
$7.2 million in connection with normal recurring capital maintenance
improvements to existing inns, corporate facilities and equipment and expects to
spend a total of approximately $10.0 million for such capital maintenance
improvements through the end of the year. Additionally, the Company is
completing renovation of 17 properties and 18 construction sites acquired prior
to 1997. In connection with the renovations and improvements of these
properties, the Company has spent $24.4 million during the twenty-six week
period ended June 28, 1997 and expects to spend an additional $27.8 million to
complete the properties over the next 18 months.
During the twenty-six week period ended June 28, 1997, the Company
acquired seven construction sites for an aggregate cost, including construction
costs of $7.1 million. Management expects to spend approximately $30.0 million
to complete construction of these properties over the next 18 months. Subsequent
to June 28, 1997, the Company has acquired one inn, two construction sites and
has signed leases on two properties for an aggregate cost of $8.4 million.
Management expects to spend approximately $34.8 million to renovate or construct
inns on these sites.
Currently, the Company has four construction sites under contract to
purchase, which are subject to the satisfactory completion of due diligence, for
an estimated total cost of approximately $2.4 million. Management expects to
spend approximately $19.6 million to construct inns on these sites. There is no
assurance that these contracts to purchase will result in an acquisition by the
Company.
Management expects to fund the Company's capital expenditures
associated with improvements to the Comparable Inns and Inns in Stabilization
from cash flow from operations and from borrowings under the bank credit
facility. Expenditures for new construction, acquisitions and renovations will
be financed from these sources, together with available cash.
HISTORICAL CASH FLOWS
Cash provided by operations decreased $.1 million from $25.2 million in
1996 to $25.1 million in 1997, primarily because of a decrease in the net income
for 1997 due to a non-recurring cash expense related to the inn renewal program,
which was offset by an increase in non-cash expenses for depreciation and
amortization from new inns and loan fees written-off in connection with
refinancing the Company's bank credit facility.
Net cash used by investing activities increased $20.2 million from
$48.4 million in 1996 to $68.6 million in 1997, primarily due to expenditures
for acquisitions, renovations and construction activities associated with the
Company's expansion program and inn renewal program. Expenditures for property
and equipment in 1997 include the
12
<PAGE> 13
acquisition of seven development sites for a total cost of $7.1 million and
$24.4 million related to renovations and improvements on 17 properties and 18
development sites which have been acquired or under construction prior to 1997.
Net cash provided by financing activities increased $5.1 million from
$29.7 million in 1996 to $34.8 million in 1997, primarily as the result of
borrowings under the bank facility to fund the Company's expansion program. Cash
flow from financing activities in 1996 primarily resulted from proceeds from the
Offering, net of the retirement of debt.
EBITDA
EBITDA is operating income plus the sum of interest income, other
income, depreciation and amortization. EBITDA for the twenty-six weeks decreased
$3.4 million from $53.0 million in 1996 to $49.6 million in 1997. EBITDA in 1997
includes a non-recurring expense of $9.5 million related to the inn renewal
program. Had such non-recurring expense not been incurred, EBITDA would have
been $59.1 million in 1997. EBITDA is not intended to represent cash flow from
operations as defined by generally accepted accounting principles, and such
information should not be considered as an alternative to net income, cash flow
from operations or any other measure of performance prescribed by generally
accepted accounting principles. EBITDA is included herein because management
believes that certain investors find it to be a useful tool for measuring the
ability to service debt.
FORWARD - LOOKING STATEMENTS
This Form 10-Q includes certain forward looking statements, including
without limitation statements concerning the expected time of completion of the
inn renewal program, financing of the Company's working capital needs and
expected capital expenditures in connections with the inn renewal program,
improvements to existing properties, renovations and improvements of newly
acquired properties and construction sites and the purchase of and construction
on sites under contract to purchase. Any forward-looking statements contained in
this Form 10-Q or any other reports or documents prepared by the Company or made
by management 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 the Company's actual
financial performance: economic conditions, both national and regional;
oversupply of hotel rooms, competition; expansion into new markets; pricing and
availability of construction materials; changes in interest rates; availability
of financing; and changes in federal, state and local government regulations
pertaining to building requirements and environmental matters. For a more
detailed discussion of these factors, please refer to the section entitled
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- Forward-Looking Statements; Certain Factors Affecting Future
Results" in the Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996.
13
<PAGE> 14
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Ex - 27 Financial Data Schedule
(b) Reports on Form 8-K.
On June 30, 1997, the Company filed a report disclosing that on May 21,
1997 it refinanced its $150 million bank credit facility with a $250 million
bank credit facility due May 21, 2002.
14
<PAGE> 15
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 08/12/97 /s/ David N. Chichester
-------- ----------------------------------
David N. Chichester
Executive Vice President and
Chief Financial Officer
15
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