RED ROOF INNS INC, 10-K405/A, 1998-05-19

RED ROOF INNS INC
10-K405/A, 1998-05-19
HOTELS & MOTELS

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<PAGE> 1
================================================================================

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------

FORM 10-K/A
(AMENDMENT NO. 1)

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED JANUARY 3, 1998
OR
[ ] TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO
---------------- ---------------

COMMISSION FILE NUMBER: 1-14058
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 (Zip Code)
executive office)

Registrant's telephone number, including area code: (614) 876-3200

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Name of each exchange on
Title of each class which registered
------------------- ----------------

COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
NONE

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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------------ ---------------

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Registration S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]

NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
WAS 27,658,560 AT FEBRUARY 27, 1998.

BASED ON THE CLOSING SALES PRICE OF FEBRUARY 27, 1998, THE AGGREGATE MARKET
VALUE OF THE STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $166,080,049

================================================================================

<PAGE> 2
The Company hereby amends its Annual Report on Form 10-K for the fiscal
year ended January 3, 1998, originally filed on March 24, 1998, to include Part
III - Items 10, 11, 12 and 13, which information was omitted from the Form 10-K
with the intent to incorporate such information by reference in the Company's
proxy statement for the 1998 annual meeting of stockholders.

TABLE OF CONTENTS*

PART III

10. Directors and Executive Officers
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management
13. Certain Relationships and Related Transactions

* Items omitted from this Form 10-K/A (Amendment No. 1) are included in the
Company's Annual Report on Form 10-K, as filed on March 24, 1998 (the
"Form 10-K").

<PAGE> 3

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The number of directors currently is fixed at nine. The Board 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 on one class of directors expires each year at the
Annual Meeting of Stockholders and at such time as their successors are duly
elected and qualified. Class I directors consist of Thomas E. Dobrowski, David
N. Chichester and John A. Henry. Class II directors consist of Francis W. Cash,
Edward D. Powers and Owen D. Thomas. Class III directors consist of James M.
Allwin, William M. Lewis, Jr. and Judith A. Rogala.

Two Class III incumbent directors, William M. Lewis, Jr. and Judith A.
Rogala have been nominated for re-election and will stand for re-election at the
Company's 1998 Annual Meeting. Michael E. Foster was nominated for election as a
Class III director at the February 24, 1998 Board meeting based on Mr. Allwin's
decision to decline nomination for re-election as a Class III director. Mr.
Foster will stand for re-election at the Company's 1998 Annual Meeting. C.
William Hosler resigned as a director effective February 4, 1998 at the Board
meeting on February 24, 1998. The Board nominated and appointed John A. Henry at
the same meeting to fill the vacancy as a Class I director created by Mr.
Hosler's resignation.

CLASS III DIRECTORS
(NOMINEES FOR ELECTION)

Name of Director Shares
Nominee/Director and Principal Occupation(s) of the Beneficially % of
Position(s) Age During Past Five (5) Years Company Owned Class
with Company Since (1) (2) (3)
- ---------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Michael E. Foster 49 Joined Morgan Stanley & Co., Nominee for 0 0
- ----------------- Incorporated in August, 1994 as Director election
Nominee of Morgan Stanley Real Estate Funds and
became Principal of Morgan Stanley &
Co., Incorporated in December, 1995.
Vice President of Goldman Sachs & Co.'s
Whitehall Fund's Asset Management Group
June, 1987 to December, 1993. Served as
a Consultant to American Multi Family
Trust from January, 1994 to August,
1994. Member of NAREIT, the Urban Land
Institute, ICSC, and the Real Estate
Board of New York.

William M. Lewis, Jr. 42 Joined Morgan Stanley & Co. Incorporated 1995 0 0
- --------------------- in 1978 and is currently a Managing
Director 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 56 President Aramark Uniform Services since 1997 3,000 (4) *
- ---------------- October 1997. Consultant to Office
Director Depot, Inc. from February 1997 to
October 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. Director of
Butler Manufacturing Co. in Kansas City,
Missouri, since April 1989.
</TABLE>

2
<PAGE> 4

CLASS I DIRECTORS
(TERMS EXPIRE 1999)
<TABLE>
<CAPTION>

<S> <C> <C> <C> <C> <C>
David N. Chichester 52 Executive Vice President and Chief 1996 68,250 (5) *
- ------------------- Financial Officer of the Company since
Executive Vice February 1996. Senior Vice President,
President, Chief Finance and then Executive Vice
Financial Officer, President, Finance for Integrated Health
and Director Services, Inc. from 1992 to 1996.

Thomas E. Dobrowski 54 Managing Director, Real Estate and 1994 0 0
- ------------------- Alternative Investments at General
Director Motors Investment Management Corporation
since December 1994. Director, Real
Estate Natural Resource Investments of
General Motors Investment Management
Corporation from March 1992 to November
1994. Serves on the partnership
committee of Taubman Realty Group
Limited Partnership, the operating
partnership of Taubman Centers, Inc.
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.

John A. Henry 32 Joined Morgan Stanley & Co, Incorporated 1998 0 0
- ------------- in 1988 and in December, 1996 became
Director Vice President of Morgan Stanley & Co.,
Incorporated and Morgan Stanley Realty,
Incorporated. He has also held positions at
Morgan Stanley & Co., Incorporated in
corporate finance, real estate investment
banking, and real estate principal investing.
</TABLE>

3
<PAGE> 5

CLASS II DIRECTORS
(TERMS EXPIRE 2000)
<TABLE>
<CAPTION>

<S> <C> <C> <C> <C> <C>
Francis W. Cash 56 Chairman of the Board since June 1996. 1995 196,950 (6) *
- --------------- President, Chief Executive Officer, and
Chairman of the Director of the Company since July
Board, President, 1995. President, Chief Operating
and Chief Officer, and Director of NovaCare, Inc.
Executive Officer from October 1992 to June 1995. Held
various executive positions at Marriott
Corporation from December 1973 to September
1992.

Edward D. Powers 65 Chairman and Chief Executive Officer of 1996 14,000 (7) *
- ---------------- Powers Holdings, Inc. since 1988.
Director Powers Holdings, Inc. has two divisions,
Curtis Electronics and Firebrick
Engineers, Inc. Director of ARM
Financial Group, Inc., a holding company
for National Integrity Insurance
Company, since 1993.

Owen D. Thomas 37 Managing Director of Morgan Stanley & 1996 0 0
- -------------- Co. Incorporated since December 1995.
Director Director of Acquisitions for The Morgan
Stanley Real Estate Fund, L.P. since May
1994. Member of the Urban Land
Institute and the National Multi-Housing
Council.
</TABLE>

* Indicates ownership of less than 1%.

(1) Beneficial ownership as of February 27, 1998. 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.

(2) Morgan Stanley Real Estate Fund, Inc. and Morgan Stanley Real Estate
Investment Management, Inc. are principal stockholders of the Company.
See "Principal Holders of Voting Securities." Thomas E. Dobrowski,
Michael E. Foster, John A. Henry, Owen D. Thomas and William M. 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 including underlying options currently
exercisable or exercisable within 60 days by all directors and Named
Executive Officers as a group (12 persons) as of February 27, 1998 was
365,944 (1.31%). Francis W. Cash owns 196,950 Shares; David N.
Chichester owns 68,250 Shares; Edward D. Powers owns 14,000 Shares;
Judith A. Rogala owns 3,000 Shares; Alan L. Tallis owns 66,504 Shares,
Stephen T. Parker owns 6,250 Shares and David L. Rea owns 10,990
Shares.

(4) Consists solely of underlying options currently exercisable or
exercisable within 60 days of February 27, 1998.

(5) Includes 66,250 Shares underlying options currently exercisable or
exercisable within 60 days of February 27, 1998.

(6) Includes 195,850 Shares underlying options currently exercisable or
exercisable within 60 days of February 27, 1998.

(7) Includes 5,000 Shares underlying options currently exercisable or
exercisable within 60 days of February 27, 1998.

<PAGE> 6

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 market price on the date of the
grant.

EXECUTIVE OFFICERS
<TABLE>
<CAPTION>

Name Title Age
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Francis W. Cash Chairman of the Board, President, and Chief Executive Officer 56
David N. Chichester Executive Vice President, Chief Financial Officer, and Director 52
Alan L. Tallis Executive Vice President, Development, General Counsel, and Secretary 51
Stephen T. Parker Senior Vice President, Sales and Marketing 52
David L. Rea Senior Vice President, Treasurer 37
</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. Mr. Cash is responsible for the Company's day-to-day operations. 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. Mr. Chichester is
responsible for treasury, investor relations, accounting and control, strategic
planning, acquisitions, tax, insurance, information systems and internal audit
for the Company. 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. From 1985 to 1982, Mr. Chichester served in
various financial positions with Marriott Corporation, including Vice President,
Corporate Finance and Assistant Treasurer.

Alan L. Tallis joined the Company as Executive Vice President,
Corporate Development in March 1994 and became Executive Vice President,
Development, General Counsel, and Secretary of the Company in October, 1997. Mr.
Tallis is responsible for the Company's development, franchising, and legal
activities. From 1992 to 1994, Mr. Tallis was a Managing Director of 22 Nelson
Place Associates. From 1980 to 1992, Mr. Tallis served in various management
positions with LaQuinta Inns, the last of which was Executive Vice
President-Chief Development Officer.

Stephen T. Parker joined the Company as Senior Vice President, Sales
and Marketing in March 1997. From 1986 to February 1997, Mr. Parker was Vice
President, Marketing, USA for Choice Hotels International. Mr. Parker also held
numerous sales, marketing and management positions from 1969 to 1986 with
Aircoa, Inc., Direction Incorporated, Hilton Hotels of New England and Flagship
Hotels.

David L. Rea joined the Company as Vice President, Treasurer in
September 1996 and was promoted to Senior Vice President, Treasurer in November
1997. From April 1995 to August 1996, Mr. Rea was Vice President, Finance at
DeBartolo Properties Management, Inc. Prior to that, Mr. Rea held various
investment management positions with T. Rowe Price Associates in Baltimore,
Maryland for nine years.

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 the copies
of such forms, the Company believes that during 1997 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).

5
<PAGE> 7
ITEM 11. EXECUTIVE COMPENSATION

The Following table sets forth certain information concerning the
compensation of the persons who were the Company's chief executive officer and
its four most highly compensated executive officers of the Company (the "Named
Executive Officers") for the last three fiscal years.
<TABLE>
<CAPTION>

Long-Term
Compensation
Awards
Annual Compensation Securities All
----------------------------------------- Underlying Other
Name and Principal Position Year Salary Bonus (1) Other Options Compensation
- --------------------------- ---- ------ --------- ----- -------- ------------

<S> <C> <C> <C> <C> <C> <C>
Francis W. Cash (2) 1997 $426,500 $362,525 $ 1,671 100,000 $ 53,317(3)
- -------------------
Chairman of the Board,
President and 1996 408,000 408,000 370,060(4) 193,800(5) 50,061(3)
Executive Officer 1995 200,000 200,000 - 51,000(5) 41,687(3)

David N. Chichester (6) 1997 325,000 207,188 24,199(4) 25,000 4,487(7)
- -----------------------
Executive Vice President, Chief 1996 284,167 355,000 219,404(4) 120,000 -
Financial Officer 1995 - - - - -

Alan L. Tallis 1997 199,654 146,300 6,500 20,000 4,285(8)
- --------------
Executive Vice President, Development 1996 189,000 164,430 - 22,000 -
General Counsel and Secretary 1995 182,000 158,340 - 33,000 -

Stephen T. Parker (9) 1997 180,000 158,000 25,642(4) 25,000 1,287(10)
- ---------------------
Senior Vice President, Sales and 1996 - - - - -
Marketing 1995 - - - - -

David L. Rea (6) 1997 150,000 105,462 99,977(4) 15,000 450(11)
- -----------------
Senior Vice President, Treasurer 1996 43,500 55,096 7,681(4) 25,000 -
1995 - - - - -

</TABLE>

(1) The amounts included in bonuses for the year are based upon amounts
earned in the year, whether or not it is paid in that year or a
subsequent year. The annual bonus plan is based upon the Company
attaining certain specific, predetermined levels of earnings per share
and individual goals and objectives in 1997, predetermined levels of
earnings per share in 1996, and pre-tax net income in 1995 which result
in payment of a percentage of each executive's base salary. Mr. Cash,
who was eligible to receive a bonus payment, also participated in the
determination under the plan. For 1997, the Company paid on average,
excluding signing bonus, 71% of the maximum percentage of base salary
to each named executive. Mr. Parker received a $50,000 bonus upon
joining the Company in 1997. For 1995 and 1996, the Company exceeded
its pre-tax net income and earnings per share targets, respectively,
and, accordingly, paid the maximum percentage of base salary to each
named executive for 1995 and 1996. Messrs. Chichester and Rea received
bonuses of $150,000 and $30,000, respectively, upon joining the Company
in 1996.

(2) Mr. Cash joined the Company in 1995.

(3) The Company established a non-qualified defined benefit pension
agreement for Mr. Cash in 1997 in accordance with his employment
agreement. The Company recognized $45,892, $43,763 and $41,687 of
expense in 1997, 1996 and 1995, respectively, related to the pension
agreement. The Company recognized $7,425 of expense in 1997 and $6,308
in 1996 for the benefit of Mr. Cash for term life insurance.

(4) The Company reimbursed Messrs. Cash, Chichester, Parker and Rea certain
relocation expenses in accordance with their respective agreements. The
expenses reimbursed in 1997 for Messrs. Chichester, Parker and Rea were
$23,699, $21,142, and $93,977, respectively. Messrs. Cash, Chichester
and Rea were reimbursed $361,306, $208,128 and $5,681, in 1996,
respectively, related to their respective relocations.

(5) 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 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 elected to exchange options to purchase 51,000
Shares at an exercise price of $5.43 for options to purchase 142,800
Shares at an exercise price of $13.50 per Share.

<PAGE> 8

(6) Messrs. Chichester and Rea joined the Company in 1996.

(7) The Company recognized $2,112 of expense for the benefit of Mr.
Chichester for term life insurance in 1997. Mr. Chichester participated
in the Company's 401(k) plan for which the Company contributed $2,375
for the benefit of Mr. Chichester. Mr. Chichester contributed $9,500,
included in salary as annual compensation, for his benefit under the
401(k) plan.

(8) The Company recognized $2,740 of expense for the benefit of Mr. Tallis
for term life insurance in 1997. Mr. Tallis participated in the
Company's 401(k) plan for which the Company contributed $1,545 for the
benefit of Mr. Tallis. Mr. Tallis contributed $6,180, included in
salary as annual compensation, for his benefit under the 401(k) plan.

(9) Mr. Parker joined the Company in 1997.

(10) The Company recognized $1,287 of expense for the benefit of Mr. Parker
for term life insurance in 1997.

(11) Mr. Rea participated in the Company's 401(k) plan for which the Company
contributed $450 for the benefit of Mr. Rea. Mr. Rea. contributed
$1,800, included in salary as annual compensation, for his benefit
under the 401(k) plan.

STOCK OPTIONS GRANTED IN FISCAL YEAR 1997

The following table sets forth information concerning stock options
that were granted by the Company during fiscal year 1997 to the Named Executive
Officers.
<TABLE>
<CAPTION>

Percentage Potential Realizable Value
Number of of Total at Assumed Annual
Securities Options Rates of Stock Price
Underlying Granted Exercise or Appreciation for
Options to Employees Base Price Expiration Option Term
Name Granted (1) in Fiscal Year ($/Share) Date 5% 10%
---- ----------- -------------- --------- ---- -- ---

<S> <C> <C> <C> <C> <C> <C>
Francis W. Cash 50,000 9.8% 15.125 04/24/07 $475,602 $1,205,268
50,000 9.8% 17.000 04/24/07 381,852 1,111,518
David N. Chichester 12,500 2.5% 15.125 04/24/07 118,900 301,317
12,500 2.5% 17.000 04/24/07 95,463 277,879
Alan L. Tallis 10,000 2.0% 15.125 04/24/07 95,120 241,054
10,000 2.0% 17.000 04/24/07 76,370 222,304
Stephen T. Parker 25,000 4.9% 15.875 03/31/07 249,593 632,517
David L. Rea 15,000 2.9% 15.125 04/24/07 142,680 361,580
</TABLE>

(1) Options for Shares vest equal amounts over a four-year period, unless
otherwise noted. The vesting period will accelerate in the event of a
change in control of the Company.

AGGREGATED STOCK OPTION EXERCISES IN FISCAL YEAR 1997
AND STOCK OPTION VALUES AT END OF FISCAL YEAR 1997

The following table sets forth information concerning the exercise of
stock options during fiscal year 1997 by the Named Executive Officers and also
sets forth the value of all in-the-money stock options held by such Named
Executive Officers as of January 3, 1998, the last day of fiscal year 1997.
<TABLE>
<CAPTION>

Shares Number of Securities Value of Unexercised
Acquired Value Underlying Unexercised In-the-Money Options
on Realized Options at Fiscal Year End (#) at Fiscal Year End ($)
Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
---- ------------ --- ------------------------- ----------------------------

<S> <C> <C> <C> <C>
Francis W. Cash 0 0 158,100/186,700 $248,434/$95,311
David N. Chichester 0 0 30,000/115,000 $0/$3,125
Alan L. Tallis 0 0 85,250/44,750 $577,789/$12,771
Stephen T. Parker 0 0 0/25,000 $0/$0
David L. Rea 0 0 6,250/33,750 $17,188/$55,313
</TABLE>

7
<PAGE> 9

(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 January 3, 1998 ($15.375). The market value of the
Company's Shares was determined from the closing price of the Shares on
the New York Stock Exchange on January 2, 1998. The Company operates on
a 52-53 week fiscal year, which ends on the Saturday nearest to
December 31.

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 1997
-----------------------------------------------------------
<TABLE>
<CAPTION>

Final Average Earnings Years of Credited Service
---------------------- -------------------------
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
(1) 150,000 26,400 35,200 44,000 52,800 61,600
</TABLE>

(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 except for a supplemental plan for Francis W. Cash. The Company
agreed in its employment agreement with Mr. Cash to establish a
supplementary pension plan for which he would be eligible to receive up
to 30% of base compensation. The Board of Directors approved the
supplementary pension plan for Mr. Cash at its February 24, 1998
meeting. 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. The Board
of Directors, at its October 28, 1996 meeting, froze the Retirement
Plan as of December 31, 1996. During 1997, the Company terminated the
Retirement Plan, subject to receipt of appropriate regulatory
approvals.

The Company has established a 401(k) plan and is no longer making
contributions to the Retirement Plan.

EMPLOYMENT AGREEMENTS AND EXECUTIVE SEVERANCE AGREEMENTS

The Company and Francis W. Cash entered into an employment agreement
dated as of June 26, 1995 for an initial term of two years which is renewed
automatically thereafter for successive one-year terms unless six months advance
notice of non-renewal is given by either party. 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 his
salary and bonus may be increased from time to time by the Board. In addition,
if Mr. Cash's employment is terminated for certain 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 which is renewed
automatically thereafter for successive one-year terms. Under his employment
agreement, Mr. Chichester is entitled to receive an annual salary of $310,000
and a bonus in accordance with the annual cash bonus plan maintained by the
Company. Both his salary and bonus may be increased from time to time by the
Board. In addition, if Mr. Chichester's employment is terminated for certain
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.

<PAGE> 10

In January 1997, the Company and Francis W. Cash, David N. Chichester
and Alan L. Tallis entered into executive severance agreements term of three
years each. Under these agreements, the Company must pay severance benefits to
each of Messrs. Cash, Chichester and Tallis if his employment is terminated as a
result of 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 and Tallis 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 May 1997 and March 1998, the Company and Stephen T. Parker and David
L. Rea, respectively, entered into executive severance agreements for a term of
two years each. Under these agreements, the Company must pay severance benefits
to Messrs. Parker and Rea, respectively, if their employment is terminated as a
result of 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 they will be entitled if such an event occurs include a lump-sum payment
equal to twice their annual base salary then in effect. If such an event occurs,
they will also be entitled to a lump-sum payment equal to twice 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 twice 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.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRINCIPAL HOLDERS OF VOTING SECURITIES

The following table sets forth information as of February 27, 1998,
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
Name and Address of Beneficial Owner Owned (1) Percent
------------------------------------ --------- -------

<S> <C> <C>
Morgan Stanley Real Estate Fund, Inc. (2) (3) 12,872,640 46.54%
1585 Broadway, New York, New York 10036

Morgan Stanley Real Estate Investment Management, Inc. (2) (4) 5,527,360 19.98%
1585 Broadway, New York, New York 10036

Longleaf Partners Realty Fund, 1,999,600 7.23%
a series of Longleaf Partners Funds Trust (5)
6410 Poplar Avenue, Suite 900, Memphis, TN 38119
</TABLE>

(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) James M. Allwin, John A. Henry, William M. Lewis, Jr. and Owen D.
Thomas, directors of the Company, and Michael E. Foster, a director
nominee, 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 individuals.

(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 12,872,640 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 is investment manager with
respect to 901,600 Shares, 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.

9
<PAGE> 11

(5) Based on information set forth in a Schedule 13G dated February 12,
1998, which was filed by Southeastern Asset Management, Inc. on behalf
of Longleaf Partners Realty Fund, a series of Longleaf Partners Funds
Trust, an open-end management investment company registered under the
Investment Company Act of 1940. According to such Schedule 13G,
Longleaf Partners Realty Fund has shared voting and investment power
with respect to the 1,999,600 Shares shown above with Southeastern
Asset Management, Inc. and O. Mason Hawkins (Chairman and Chief
Executive Officer of Southeastern Asset Management, Inc.). Southeastern
Asset Management, Inc. and O. Mason Hawkins disclaim beneficial
ownership of the Shares owned by Longleaf Partners Realty Fund.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee during the 1997 fiscal year
were 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.

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, is an affiliate of The Morgan
Stanley Real Estate Fund, L.P., which directly or indirectly beneficially owns
as of February 27, 1998 approximately 63.27% of the outstanding shares of the
Company.

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. The 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 (a)
transactions approved by a majority of the disinterested members of the Board or
for which the Company obtains a fairness opinion of an investment bank; (b)
transactions between the Company and any of its subsidiaries or between
subsidiaries of the Company; (c) the payment of reasonable and customary,
regular fees to directors of the Company who are not employees of the Company;
(d) 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; (e) payments not prohibited by certain
covenants in an indenture to which the Company is a party; or (f) 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 $2,000,000 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 (excluding Longleaf Partners Realty Fund) (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

10
<PAGE> 12

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.

<PAGE> 13

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934, RED ROOF INNS, INC. HAS DULY CAUSED THIS REPORT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THIS 18TH
DAY OF MAY 1998.

RED ROOF INNS, INC.

By /s/ Francis W.Cash
-------------------------------------
Name: Francis W. Cash
Title: Chairman of the Board, President,
Chief Executive Officer and Director

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS ON BEHALF OF RED ROOF INNS,
INC. AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ Francis W. Cash Chairman of the Board, President, May 18, 1998
- --------------------------------------
Francis W. Cash Chief Executive Officer and Director

/s/ David N. Chichester Executive Vice President, Chief Financial Officer May 18, 1998
- --------------------------------------
David N. Chichester and Director

/s/ Robert M. Harshbarger Senior Vice President, Controller and May 18, 1998
- --------------------------------------
Robert M. Harshbarger Chief Accounting Officer

* Director May 18, 1998
- --------------------------------------
James M. Allwin

* Director May 18, 1998
- --------------------------------------
Thomas E. Dobrowski

* Director May 18, 1998
- --------------------------------------
John A. Henry

* Director May 18, 1998
- --------------------------------------
William M. Lewis, Jr.

* Director May 18, 1998
- --------------------------------------
Edward D. Powers

* Director May 18, 1998
- --------------------------------------
Judith A. Rogala

* Director May 18, 1998
- --------------------------------------
Owen D. Thomas

*By /s/ David N. Chichester
- --------------------------------------
David N. Chichester
Attorney-in-Fact
</TABLE>