RED ROOF INNS INC, DEF 14A, 1999-04-16

RED ROOF INNS INC
DEF 14A, 1999-04-16
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 sec.240.14a-11(c) or sec.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: ...........................................................

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<PAGE> 2

RED ROOF INNS, INC.

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON MAY 20, 1999
[RED ROOF INNS LOGO]

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 Red Roof Inn, 111 Nationwide
Boulevard, Columbus, Ohio 43215, on Thursday, May 20, 1999, at 10:00 a.m., local
time, for the following purposes:

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

2. To consider and vote upon a proposal to ratify the appointment of
Deloitte & Touche LLP as the Company's independent accountants and
auditors for fiscal year 1999; and

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

The close of business on March 26, 1999 has been fixed as the record date
for the determination of the stockholders entitled to notice of and to vote at
the meeting and any adjournment thereof. A complete list of stockholders
entitled to vote at the meeting will be available for examination by any
stockholder at the executive offices of the Company for any purpose germane to
the meeting, during ordinary business hours, for a period of at least ten days
prior to the meeting.

In order that your shares may be represented at the 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,

ALAN L. TALLIS
Secretary

Dated: April 16, 1999
<PAGE> 3

[RED ROOF INNS LOGO]

RED ROOF INNS, INC.
4355 Davidson Road, Hilliard, Ohio 43026-2491

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

PROXY STATEMENT
-----------------------------

GENERAL

This Proxy Statement is being furnished to the holders of shares of common
stock, $.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
1999 Annual Meeting of Stockholders (the "Annual Meeting") to be held at the Red
Roof Inn, 111 Nationwide Boulevard, Columbus, Ohio 43215, on Thursday, May 20,
1999, at 10:00 a.m., local time, for the purposes set forth on the accompanying
Notice of Annual Meeting. The Annual Report of the Company for the fiscal year
ended January 2, 1999, including financial statements, is being mailed to all
stockholders together with this Proxy Statement.

The approximate date on which the 1998 Annual Report, Proxy Statement,
Notice of Meeting and the form of proxy will be first sent to stockholders is
April 16, 1999.

The close of business on March 26, 1999 has been fixed as the record date
(the "Record Date") for the determination of the 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 26,950,188 Shares. In
addition, the Company owns 1,681,484 Shares in treasury.

On any matter submitted to a stockholder vote, each stockholder will be
entitled to one vote, in person or by properly executed proxy, for each Share
registered in the stockholder's name on the books of the Company as of the
Record Date. Unless contrary instructions are given in the form of proxy, the
persons designated as proxy holders in the form of proxy will vote for the slate
of nominees proposed by the Board; for the ratification of Deloitte & Touche LLP
as the Company's independent accountants and auditors for fiscal year 1999; and
as recommended by the Board with respect to all other matters or, if no such
recommendation is given, in their own discretion. Under Delaware General
Corporation Law and the Company's By-Laws, (a) a plurality of the votes of the
outstanding Shares entitled to vote and present, in person or by properly
executed proxy, will be required to elect a nominated director; and (b) the
affirmative vote of the holders of at least a majority of the Shares entitled to
vote and present, in person or by properly executed proxy, will be required to
ratify the appointment of Deloitte & Touche LLP as the Company's independent
accountants and auditors for fiscal year 1999.

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.
<PAGE> 4

PROPOSAL NO. 1

ELECTION OF DIRECTORS

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 of 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 and John A. Henry,
IV. David N. Chichester resigned as a Class I director effective October 6,
1998. As of the date hereof, the Board has not filled the Class I director
vacancy created by Mr. Chichester's resignation. Class II directors consist of
Francis W. Cash, Edward D. Powers and Owen D. Thomas. Class III directors
consist of Michael E. Foster, William M. Lewis, Jr. and Judith A. Rogala.
Information concerning the nominees and the other members of the Board, as of
the Record Date, is set forth below.

The Board has nominated the two Class I incumbent directors, Thomas E.
Dobrowski and John A. Henry, IV, for re-election. There is no cumulative voting
in the election of directors. The two 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.

Unless otherwise specified in the accompanying proxy, the Shares voted
pursuant thereto will be voted FOR each of the persons named below as nominees
for election as directors.

YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE PERSONS NAMED
BELOW AS NOMINEES FOR ELECTION AS DIRECTORS.

CLASS I DIRECTORS
(NOMINEES FOR ELECTION)

2
<PAGE> 5

CLASS II DIRECTORS
(TERMS EXPIRE 2000)

Edward D. Powers 67 Chairman and Chief Executive Officer of Powers Holdings, 1996
Director Inc. since 1988. 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 Joined Morgan Stanley & Co. Incorporated in 1987 and 1996
Director became Managing Director of Morgan Stanley & Co.
Incorporated in December 1995. President of Morgan
Stanley Real Estate Funds since 1997.
</TABLE>

CLASS III DIRECTORS
(TERMS EXPIRE 2001)

<TABLE>
<CAPTION>
NAME OF DIRECTOR
NOMINEE/DIRECTOR AND OF THE
POSITION(S) PRINCIPAL OCCUPATION(S) COMPANY
WITH THE COMPANY AGE DURING PAST FIVE (5) YEARS SINCE
- -------------------- --- -------------------------------------------------------- --------
<S> <C> <C> <C>
Michael E. Foster 50 Joined Morgan Stanley & Co. Incorporated in August 1994 1998
Director as Director of Morgan Stanley Real Estate Funds and
became Principal of Morgan Stanley & Co. Incorporated in
December 1995. Served as a Consultant to American Multi
Family Trust from January 1994 to August 1994. Vice
President of Goldman Sachs & Co.'s Whitehall Fund's
Asset Management Group from June 1987 to December 1993.
Member of the National Association of Real Estate
Investment Trusts, the Urban Land Institute, the
International Council of Shopping Centers and the Real
Estate Board of New York.
William M. Lewis, Jr. 42 Joined Morgan Stanley & Co. Incorporated in 1978. 1995
Director Co-Head of Worldwide Mergers, Acquisitions and
Restructuring Department and Co-Head of Worldwide Real
Estate Investment Banking Department of Morgan Stanley
Dean Witter & Co. since 1997. Member of Investment
Banking Division Operating Committee and Chairman of
Morgan Stanley Real Estate Funds' Investment Committee
since 1997. Head of Worldwide Real Estate Investment
Banking of Morgan Stanley Realty from 1993 to 1997.
Member of the Urban Land Institute, the National
Association of Real Estate Investment Trusts and the
International Council of Shopping Centers.
Judith A. Rogala 57 President of Aramark Uniform Services since July 1997. 1997
Director 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.
since April 1989.
</TABLE>

3
<PAGE> 6

NOMINATION OF DIRECTORS

Nominations of persons for election to the Board may be made at a meeting
of stockholders (a) by or at the direction of the Board or (b) by any
stockholder of the Company who is a stockholder of record at the time of giving
of notice, who shall be entitled to vote for the election of directors at the
meeting and who complies with the notice procedures. Such nominations, other
than those made by or at the direction of the Board, shall be made pursuant to
timely notice in writing to the Secretary of the Company. To be timely, a
stockholder's notice shall be delivered to, or mailed and received at, the
principal executive offices of the Company not less than 60 days nor more than
90 days prior to the meeting; provided, however, that in the event that less
than 70 days' notice or prior public disclosure of the date of the meeting is
given or made to stockholders, notice by a stockholder to be timely must be so
received not later than the close of business on the tenth day following the day
on which such notice of the date of the meeting or such public disclosure was
made. Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (including such person's written consent to
being named in the proxy statement as a nominee and to serve as a director if
elected); and (b) as to the stockholder giving the notice (i) the name and
address, as they appear on the Company's books, of such stockholder and (ii) the
class and number of Shares which are beneficially owned by such stockholder. At
the request of the Board, any person nominated by the Board for election as a
director shall furnish to the Secretary of the Company that information required
to be set forth in a stockholder's notice of nomination which pertains to the
nominee. No person shall be eligible to serve as a director of the Company
unless nominated in accordance with the procedures set forth in the Company's
By-Laws. The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by the Company's By-Laws and, if the chairman should so
determine, he shall declare to the meeting that the nomination is defective and
shall be disregarded.

BOARD AND COMMITTEE MEETINGS

The Board held four meetings during 1998 and took action by unanimous
written consent three times. During 1998, all members of the Board attended at
least 75% of all meetings of the Board and of the committees on which they
served. The Board does not have a nominating committee. The full Board selects
the nominees for directors.

The Board has an Audit Committee whose members are Edward D. Powers and
Judith A. Rogala. 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 internal
audit department and reviewing the adequacy of the Company's internal controls.
The Audit Committee met four times during 1998.

The Board has a Compensation Committee whose members are Owen D. Thomas and
William M. Lewis, Jr. The Compensation Committee oversees all aspects of the
Company's executive compensation policies and practices, including administering
the Company's annual cash bonus plan, stock option plan and stock purchase plan,
determining the compensation for the president and chief executive officer and
reviewing the recommendations of the president and chief executive officer
concerning annual compensation adjustments for the senior executives reporting
to the president and chief executive officer. The Compensation Committee did not
meet during 1998, but took action by unanimous written consent 14 times.

4
<PAGE> 7

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 Dean Witter & Co. and its affiliates or General Motors
Investment Management Corporation ("Outside Directors") receive an annual
retainer of $10,000 paid in quarterly installments of $2,500. The Outside
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 at an exercise
price equal to the closing price of the 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.

PROPOSAL NO. 2

INDEPENDENT PUBLIC ACCOUNTANTS

The Board has selected Deloitte & Touche LLP as the Company's independent
accountants and auditors for the fiscal year ending January 1, 2000. Deloitte &
Touche LLP has served as the Company's independent accountants and auditors
since the formation of the Company in 1993. Services provided to the Company by
Deloitte & Touche LLP with respect to fiscal year 1998 included the examination
of the Company's consolidated financial statements, limited reviews of quarterly
reports and assistance with filings services matters. A Representative of
Deloitte & Touche LLP will be present at the Annual Meeting, will have an
opportunity to make a statement, if he or she desires, and will be available to
respond to appropriate questions.

Ratification of the appointment of Deloitte & Touche LLP as the Company's
independent accountants and auditors for fiscal year 1999 will require the
affirmative vote of the holders of at least a majority of the Shares entitled to
vote and present, in person or by properly executed proxy, at the Annual
Meeting. If the stockholders do not ratify the appointment of Deloitte & Touche
LLP as the Company's independent accountants and auditors for fiscal year 1999,
such appointment will be reconsidered by the Audit Committee and the Board.

Unless otherwise specified in the accompanying proxy, the Shares voted
pursuant thereto will be voted FOR the ratification of the appointment of
Deloitte & Touche LLP as the Company's independent accountants and auditors for
fiscal year 1999.

YOUR BOARD UNANIMOUSLY RECOMMENDS A VOTE FOR RATIFICATION OF THE
APPOINTMENT OF DELOITTE & TOUCHE LLP AS THE COMPANY'S INDEPENDENT ACCOUNTANTS
AND AUDITORS FOR FISCAL YEAR 1999.

5
<PAGE> 8

PRINCIPAL HOLDERS OF VOTING SECURITIES

The following table sets forth, as of the March 26, 1999 record date, the
number and percentage of the outstanding Shares held by each person who, to the
knowledge of the Company, beneficially owns more than five percent of the
outstanding Shares, by each of the Company's directors, nominees and Named
Executive Officers (as defined below) and by all of the directors, nominees and
Named Executive Officers of the Company as a group. Except as set forth in the
footnotes to the table, the stockholders have sole voting and investment power
over such Shares. The address of each of the directors and the Named Executive
Officers is c/o Red Roof Inns, Inc., 4355 Davidson Road, Hilliard, Ohio
43026-2491.

<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER OWNED OF CLASS
------------------------ ---------------- --------
<S> <C> <C>
Francis W. Cash............................................. 314,400(1) 1.15%
David N. Chichester(2)...................................... 55,425(3) *
Thomas E. Dobrowski(4)...................................... 0 *
Michael E. Foster(4)........................................ 0 *
John A. Henry, IV(4)........................................ 0 *
William M. Lewis, Jr.(4).................................... 0 *
Edward D. Powers............................................ 17,000(5) *
David L. Rea................................................ 28,467(6) *
Judith A. Rogala............................................ 6,000(7) *
Alan L. Tallis.............................................. 92,754(8) *
Owen D. Thomas(4)........................................... 0 *
All directors, nominees and Named Executive Officers as a
group (11 persons)........................................ 514,046(9) 1.87%
Morgan Stanley Real Estate Fund, Inc.(10)................... 12,872,640(11) 47.76%
1585 Broadway
New York, New York 10036
Morgan Stanley Real Estate Investment Management,
Inc.(10).................................................. 5,527,360(12) 20.51%
1585 Broadway
New York, New York 10036
Longleaf Partners Realty Fund, a series of Longleaf Partners
Funds Trust(13)........................................... 2,153,400 7.99%
6410 Poplar Avenue, Suite 900
Memphis, Tennessee 38119
</TABLE>

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* Less than one percent of the outstanding Shares.

(1) Includes 313,300 Shares underlying options currently exercisable or
exercisable within 60 days of March 26, 1999.

(2) David N. Chichester resigned as a Director and as Executive Vice President
and Chief Financial Officer effective October 6, 1998.

(3) Includes 53,425 Shares underlying options currently exercisable or
exercisable within 60 days of March 26, 1999.

(4) Thomas E. Dobrowski, Michael E. Foster, John A. Henry, IV, William M.
Lewis, Jr. and Owen D. Thomas, disclaim beneficial ownership of Shares
beneficially owned by Morgan Stanley Real Estate Fund, Inc. and Morgan
Stanley Real Estate Investment Management, Inc.

(5) Includes 8,000 Shares underlying options currently exercisable or
exercisable within 60 days of March 26, 1999.

(6) Includes 26,250 Shares underlying options currently exercisable or
exercisable within 60 days of March 26, 1999.

6
<PAGE> 9

(7) Includes 6,000 Shares underlying options currently exercisable or
exercisable within 60 days of March 26, 1999.

(8) Includes 92,000 Shares underlying options currently exercisable or
exercisable within 60 days of March 26, 1999.

(9) Includes 498,975 Shares underlying options currently exercisable or
exercisable within 60 days of March 26, 1999 held by all of the directors,
nominees and Named Executive Officers as a group.

(10) Michael E. Foster, John A. Henry, IV, William M. Lewis, Jr. and Owen D.
Thomas, directors of the Company, are employed in various capacities by
Morgan Stanley Dean Witter & Co., 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 beneficially owned by these directors.

(11) 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 Dean Witter & Co.

(12) 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, 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 Dean Witter & Co.

(13) Based on information set forth in a Schedule 13G dated February 9, 1999,
which was filed by Southeastern Asset Management, Inc., investment advisor
to 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. Longleaf Partners Realty Fund and
Southeastern Asset Management, Inc. have shared voting and investment power
with respect to the 2,153,400 Shares shown above. Southeastern Asset
Management, Inc. and O. Mason Hawkins (Chairman and Chief Executive Officer
of Southeastern Asset Management, Inc.) disclaim beneficial ownership of
the Shares beneficially owned by Longleaf Partners Realty Fund.

7
<PAGE> 10

EXECUTIVE OFFICERS

<TABLE>
<CAPTION>
YEAR STARTED
NAME AGE TITLE WITH THE COMPANY
---- --- ----- ----------------
<S> <C> <C> <C>
Francis W. Cash 57 Chairman, President and Chief Executive Officer 1995
Alan L. Tallis 53 Executive Vice President-Development, General 1994
Counsel and Secretary
David L. Rea 38 Executive Vice President, Chief Financial Officer 1996
and Treasurer
</TABLE>

BUSINESS EXPERIENCE

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. From 1973 to 1992, Mr. Cash
held various executive positions at Marriott Corporation.

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, legal and franchising 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.

David L. Rea joined the Company as Vice President and Treasurer in
September 1996. In November 1997, Mr. Rea was promoted to Senior Vice President
and Treasurer. In October 1998, Mr. Rea became Executive Vice President, Chief
Financial Officer and Treasurer. Mr. Rea is responsible for all of the financial
functions of the Company. From April 1995 to August 1996, Mr. Rea was Vice
President, Finance at DeBartolo Properties Management, Inc. From 1986 to 1995,
Mr. Rea served in various management positions with T. Rowe Price Associates
serving most recently as Vice President responsible for public real estate and
private equity investments.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Section 16(a) of the Exchange Act requires the Company's executive officers
and directors and persons who own more than ten percent of the Shares to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission (the "Commission"). Officers, directors and persons who own more than
ten percent of the Shares are required by regulations issued by the 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 fiscal year 1998 its executive officers and directors and
persons who own more than ten percent of the Shares complied with all applicable
filing requirements of Section 16(a).

8
<PAGE> 11

EXECUTIVE COMPENSATION

The following table sets forth certain information with respect to the
compensation of the Company's chief executive officer and each other executive
officer of the Company (the "Named Executive Officers") for the last three full
fiscal years.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
------------------------------------- UNDERLYING
SALARY BONUS OTHER OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($) (#) COMPENSATION($)
--------------------------- ---- ------- ------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Francis W. Cash 1998 447,831 335,761 -- 125,000 206,895(2)
Chairman of the Board, 1997 426,500 362,525 1,671 100,000 53,317(2)
President and Chief 1996 408,000 408,000 370,060(3) 193,800(4) 50,061(2)
Executive Officer
Alan L. Tallis 1998 238,000 118,758 -- 30,000 4,856(5)
Executive Vice President- 1997 199,654 146,300 6,500 20,000 4,285(5)
Development, General 1996 189,000 164,430 -- 22,000 --
Counsel and Secretary
David L. Rea(6) 1998 165,985 84,899 -- 60,000 4,248(7)
Executive Vice President, 1997 -- -- -- -- --
Chief Financial Officer 1996 -- -- -- -- --
and Treasurer
David N. Chichester(8) 1998 341,250 -- -- 50,000 626,958(9)(10)
Former Executive Vice 1997 325,000 207,188 24,199(3) 25,000 4,487(9)
President and Chief 1996 284,167 355,000(11) 219,404(3) 120,000 --
Financial Officer
</TABLE>

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

(1) The amount included in the "Bonus" column for each year includes amounts
earned during that year, whether or not such amount was paid in that year
or a subsequent year. The annual bonus plan was based upon the Company's
attaining certain specific (a) predetermined levels of earnings per share
and individual goals and objectives in 1998 and 1997; and (b) predetermined
levels of earnings per share in 1996. Attainment of such goals resulted in
payment of a percentage of each executive's base salary in the given year.
Francis W. Cash, who was eligible to receive a bonus payment, participated
in the determination of awards under the bonus plan. For 1998, the Company
paid on average, 72% of the maximum bonus available to each Named Executive
Officer (excluding David N. Chichester). For 1997, the Company paid, on
average, 85% of the maximum bonus available to each Named Executive
Officer. For 1996, the Company exceeded its pre-tax net income and earnings
per share targets, respectively, and accordingly paid the maximum bonus
available to each Named Executive Officer.

(2) The Company and Francis W. Cash are parties to a non-qualified defined
benefit pension agreement for the benefit of Mr. Cash. The Company
recognized $198,443, $45,892 and $43,753 of expenses in 1998, 1997 and
1996, respectively, related to such pension agreement. The Company
recognized $8,452, $7,425 and $6,308 of expenses in 1998, 1997 and 1996,
respectively, for the benefit of Mr. Cash for term life insurance.

(3) The Company reimbursed Francis W. Cash and David N. Chichester for certain
of their relocation expenses in accordance with their respective employment
agreements. The expenses reimbursed in 1997 for Mr. Chichester were
$23,699. Messrs. Cash and Chichester were reimbursed $361,306 and $208,128,
respectively, in 1996, related to their respective relocations.

(4) In August 1996, the Company offered participants in its 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,
Francis W. Cash elected to exchange an option to purchase 51,000 Shares at
an exercise price of $5.43 for an option to purchase 142,800 Shares at an
exercise price of $13.50 per Share.

9
<PAGE> 12

(5) The Company recognized $2,456 and $2,740 in 1998 and 1997, respectively,
for the benefit of Alan L. Tallis for term life insurance. Mr. Tallis
participated in the Company's 401(k) plan in 1998 and 1997 for which the
Company contributed $2,400 and $1,545, respectively, for the benefit of Mr.
Tallis. Mr. Tallis contributed $9,600 in 1998 and $6,180 in 1997, included
in salary as annual compensation, for his benefit under the 401(k) plan.

(6) David L. Rea was promoted to Executive Vice President, Chief Financial
Officer and Treasurer in October 1998. Prior to such promotion, Mr. Rea was
not an executive officer of the Company.

(7) The Company recognized $462 of expense in 1998 for the benefit of David L.
Rea for term life insurance. Mr. Rea participated in the Company's 401(k)
plan and the Company's deferred compensation plan in 1998 for which the
Company contributed $2,313 and $1,473, respectively, for the benefit of Mr.
Rea. Mr. Rea contributed $9,252 and $9,508, included in salary as annual
compensation, for his benefit under the 401(k) and deferred compensation
plan, respectively.

(8) David N. Chichester resigned as a Director and as Executive Vice President
and Chief Financial Officer effective October 6, 1998.

(9) The Company recognized $2,350 and $2,112 of expenses in 1998 and 1997,
respectively, for the benefit of David N. Chichester for term life
insurance. Mr. Chichester participated in the Company's 401(k) plan in 1998
and 1997 for which the Company contributed $2,388 and $2,375, respectively,
for the benefit of Mr. Chichester. Mr. Chichester contributed $9,550 in
1998 and $9,500 in 1997, included in salary as annual compensation, for his
benefit under the 401(k) plan.

(10) This amount includes $622,220 payable to, or on behalf of, David N.
Chichester pursuant to the terms of the severance agreement dated October
6, 1998 between the Company and Mr. Chichester. This severance agreement
expressly supersedes the severance benefit provisions of the employment
agreement dated February 5, 1995 between the Company and Mr. Chichester.
Under the severance agreement, the Company paid Mr. Chichester a lump sum
of $517,220 in satisfaction of all amounts owed or to be owed to Mr.
Chichester under the severance benefit provisions of Mr. Chichester's
employment agreement, including, without limitation, all salary, bonus,
accrued vacation time, relocation expense, travel expenses associated with
outplacement services, entitlements under any Company sponsored benefit
plan, including medical insurance, life insurance, disability insurance,
and dental insurance, and other incidental expenses which may be due and
owing under the employment agreement. In addition, under the severance
agreement, the Company agreed to pay on behalf of Mr. Chichester up to
$105,000 for outplacement services.

(11) David N. Chichester received a bonus of $150,000 upon joining the Company
in 1996.

10
<PAGE> 13

STOCK OPTIONS GRANTED IN FISCAL YEAR 1998

The following table sets forth the stock options granted by the Company
during fiscal year 1998 to the Named Executive Officers.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
PERCENTAGE AT ASSUMED ANNUAL
NUMBER OF OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR
UNDERLYING GRANTED EXERCISE OR OPTION TERM ($)
OPTIONS TO EMPLOYEES BASE PRICE EXPIRATION ---------------------------
NAME GRANTED(1) IN FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ----------- -------------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Francis W. Cash........... 125,000 16.1% 18.50 1/28/08 1,454,319 3,685,529
Alan L. Tallis............ 30,000 3.9% 18.50 1/28/08 349,037 884,527
David L. Rea.............. 25,000 3.2% 18.50 1/28/08 290,864 737,106
35,000 4.5% 15.56 10/8/08 342,580 868,137
David N. Chichester(2).... 50,000 6.4% 18.50 1/28/08 581,728 1,474,212
</TABLE>

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

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

(2) David N. Chichester resigned as a Director and as Executive Vice President
and Chief Financial Officer effective October 6, 1998. The options to
purchase 50,000 Shares granted to Mr. Chichester in 1998 were cancelled
effective with his resignation on October 6, 1998.

AGGREGATE STOCK OPTION EXERCISES IN FISCAL YEAR 1998 AND STOCK OPTION VALUES AT
END OF FISCAL YEAR 1998

The following table sets forth information with respect to the exercise of
stock options during fiscal year 1998 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 2, 1999, the last day of fiscal year 1998.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
ACQUIRED VALUE OPTIONS AT FISCAL YEAR END (#) AT FISCAL YEAR END ($)(1)
ON REALIZED ------------------------------ -------------------------
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ------------ -------- ------------------------------ -------------------------
<S> <C> <C> <C> <C>
Francis W. Cash......... -- -- 244,300/225,500 666,133/ 87,938
Alan L. Tallis.......... 30,000 393,975 74,000/ 56,000 390,710/ 22,750
David L. Rea............ -- -- 16,250/ 83,750 59,688/118,733
David N.
Chichester(2)......... 12,825 29,186 53,425/ 0 44,013/ 0
</TABLE>

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

(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
as of December 31, 1998 ($16.88), which was the last trading day prior to
the end of the Company's 1998 fiscal year. The Company operates on a 52-53
week fiscal year, which ends on the Saturday nearest to December 31.

(2) David N. Chichester resigned as a Director and as Executive Vice President
and Chief Financial Officer effective October 6, 1998. Pursuant to the terms
of Mr. Chichester's severance agreement with the Company, all options held
by Mr. Chichester that were not exercisable on October 6, 1998 were
cancelled and all exercisable options expire on October 6, 2000.

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 and which is renewed
automatically thereafter for successive one-year terms. 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

11
<PAGE> 14

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 David L. Rea entered into an employment agreement dated
October 15, 1998. Under his employment agreement, Mr. Rea is entitled to receive
an annual salary of $200,000 and a maximum bonus of up to 75% of his annual
salary. In addition, if Mr. Rea's employment is terminated without cause, he
will be entitled to severance benefits. The severance benefits include the
payment of Mr. Rea's base salary for a maximum period of 12 months, a prorated
portion of any bonus Mr. Rea earned, group health insurance, life insurance and
long-term disability coverage.

In January 1997, the Company and Francis W. Cash and Alan L. Tallis entered
into executive severance agreements, and in October 1998, the Company and David
L. Rea entered into an executive severance agreement. Each of these agreements
is substantially identical to the others. The agreements are for a term of three
years each. Under these agreements, the Company must pay severance benefits to
Mr. Cash, Mr. Tallis or Mr. Rea, as the case may be, if his employment is
terminated as a result of a change in control of the Company, as defined in the
agreements, and the termination otherwise falls within the scope of the
agreements. The benefits to which Mr. Cash, Mr. Tallis or Mr. Rea, as the case
may be, will be entitled if such an event occurs include a lump-sum payment
equal to three times his respective annual base salary then in effect. In
addition, Mr. Cash, Mr. Tallis or Mr. Rea, as the case may be, will be entitled
to a lump-sum payment equal to three 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 three times the amount 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 Owen D. Thomas and William M.
Lewis, Jr., both outside directors employed by Morgan Stanley Dean Witter & Co.
Morgan Stanley Real Estate Fund, Inc. and Morgan Stanley Real Estate Investment
Management, Inc. are the beneficial owners of more than 5% of the 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 Related
Party 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

Notwithstanding anything to the contrary set forth in the Company's
previous filings under the Securities Act of 1933, as amended, or the Exchange
Act that might incorporate future filings, including this Proxy Statement, in
whole or in part, this Report and the graph set forth below under "--
Performance Graph" shall not be incorporated by reference into any such filings.

General. The Compensation Committee oversees all aspects of the Company's
executive compensation policies and practices, including administering the
Company's annual cash bonus plan, stock option plan and stock purchase plan,
determining the compensation for the president and chief executive officer and
reviewing the recommendations of the president and chief executive officer
concerning annual compensation adjustments for the senior executives reporting
to the president and chief executive officer. The Compensation Committee's goal
is to establish and administer executive compensation policies that are aligned
with the Company's values and strategic business objectives.

The president and chief executive officer annually determines the salaries
and bonuses for the senior executives of the Company and then recommends such
salaries and bonuses to the Compensation Committee for final approval. In making
such determinations, the president and chief executive officer adheres to the
same executive compensation policies as the Compensation Committee considers
when determining the president's and chief executive officer's compensation.

12
<PAGE> 15

Compensation Philosophy. The Company's executive compensation policies are
intended to serve four primary objectives: (a) to attract and retain qualified
and competent executives to manage the Company's business; (b) to provide
executives with appropriate incentives to accomplish the Company's business
objectives and strategy; (c) to encourage stock ownership by executives in order
to enhance mutuality of interest with the Company's stockholders; and (d) to
maximize long-term stockholder value. The Compensation Committee believes that
its executive compensation policies operate in support of each of these
objectives. Additionally, the Compensation Committee believes that its executive
compensation policies foster long-term growth and success, accountability for
performance and management development.

Elements of Compensation. The Company's president and chief executive
officer and those senior executives directly reporting to him receive
compensation in the form of: (a) a base salary; (b) an annual performance-based
percentage bonus; and (c) stock options. In an effort to ensure that the
Company's compensation programs are competitive with other publicly traded
lodging companies, when determining or approving the amount of each element of
compensation for a given executive, the Compensation Committee considers median
compensation levels paid to executives within the Company's competitive market.
The competitive market data used by the Compensation Committee compare the
Company's compensation practices to comparable publicly traded lodging companies
that have similar sales volume, market capitalizations, employment levels and
lines of business. The Compensation Committee annually reviews and approves the
companies selected for compensation comparison purposes.

Base Salaries. Base salaries for the Company's president and chief
executive officer and those senior executives directly reporting to him are
initially determined by evaluating the executive's level of responsibility,
prior experience and breadth of knowledge as well as considering internal equity
issues and external pay practices.

Increases to base salaries are primarily the product of the individual's
performance. Individual performance is evaluated based on sustained levels of
individual contribution to the Company. When evaluating individual performance,
the Compensation Committee considers the president's and chief executive
officer's efforts and those of his direct reports in promoting the Company's
values, continuing educational and management training, improving product
quality, developing relationships with franchisees, customers, suppliers and
employees, and demonstrating leadership abilities among co-workers. In 1998, the
base salaries paid to the president and chief executive officer and those senior
executives directly reporting to him were commensurate with the base salaries
paid to executives within the Company's competitive market.

Annual Performance-Based Percentage Bonus. The Compensation Committee's
philosophy is to provide incentives for short-term performance through an annual
cash bonus program. At the beginning of each fiscal year, the Compensation
Committee approves the Company's Management Incentive Compensation Plan, which
identifies quantifiable goals for the Company and individual participants to
achieve in that fiscal year. The Compensation Committee also establishes a
target bonus percentage for each participant. For 1998, each bonus plan
participant had a target bonus ranging from 1.25% to 100% of his or her base
salary. The amount of a participant's bonus in 1998 was based upon the Company's
attainment of targeted levels of earnings per share, and the participant's
attainment of individual pre-determined goals. Bonus payments for participants
in 1998 ranged from 37.5% to 87.5% of the pre-determined applicable targets.

Stock Options. The Company's Amended and Restated 1994 Management Equity
Incentive Plan is intended to promote executive stock ownership and thereby
align the executives' interests with those of the Company's stockholders. The
Compensation Committee believes that the Company's Amended and Restated 1994
Management Equity Incentive Plan advances the interests of the Company and its
stockholders by providing a means of attracting and retaining executives and
other key employees and providing such executives and key employees with a
proprietary interest in the long-term performance of the Company. Under the
Amended and Restated 1994 Management Equity Incentive Plan, the Compensation
Committee annually awards options to purchase Shares to executive officers and
key employees. The president and chief executive officer determines and
recommends to the Compensation Committee the specific number of Shares
underlying the options granted to all plan participants other than himself. The
Compensation Committee determines the number of shares underlying the options
granted to the president and chief executive officer. The number of options
granted to an

13
<PAGE> 16

eligible individual is determined based upon the relative contribution or
anticipated contribution of such individual to the Company's overall
performance. The Compensation Committee also considers the total number of
Shares underlying options already held by these individuals at the time of the
award. During fiscal year 1998, the Compensation Committee approved the award of
nonqualified stock options for 230,000 Shares at $18.50 per Share and 35,000
Shares at $15.56 per Share to the Named Executive Officers (see " -- Stock
Options Granted in Fiscal Year 1998"). The nonqualified stock options vest at a
rate of 25% per year over four years and lapse after ten years unless sooner
exercised or forfeited.

President's and Chief Executive Officer's Compensation. In 1998, the
president and chief executive officer received a base salary of $447,831, which
represented a five percent increase from his 1997 base salary. The Compensation
Committee believes this increase recognizes the president's and chief executive
officer's continued leadership role in the financial performance of the Company.
In 1998, the president and chief executive officer also received a
performance-based bonus of $335,761, which represented 75% of his base salary.
Under the Company's Management Incentive Compensation Plan, the president and
chief executive officer had a target bonus of 100% of his base salary. The
Compensation Committee believes that the president's and chief executive
officer's bonus is consistent with the Company's increased revenues, net income
and earnings per share in fiscal year 1998. In addition, the president and chief
executive officer received options to purchase 125,000 Shares at an exercise
price of $18.50 per share in 1998. The grant of these options is intended to
reward the president and chief executive officer for the Company's financial
performance in 1998 and to provide him with additional incentive to maximize
stockholder value in the future.

Conclusion. The Compensation Committee believes its executive compensation
policies effectively serve the interests of the stockholders and the Company. In
addition, the Compensation Committee believes that the various elements of
compensation are appropriately balanced to provide increased incentive and
motivation for the executive officers and senior management to contribute to the
Company's long-term success, and thereby enhance the value of the Company for
the stockholders' benefit.

Respectfully Submitted by
the Compensation Committee,

Owen D. Thomas
William M. Lewis, Jr.

14
<PAGE> 17

PERFORMANCE GRAPH

This chart graphs the Company's performance in the form of cumulative total
return to stockholders from February 1, 1996 (the date the Company completed its
initial public offering) until January 2, 1999 (the last day of fiscal year
1998), in comparison to the S&P 500 Index and the cumulative return on the
common stock of seven publicly traded peer issuers, including several of the
Company's principal competitors (the "Peer Group"). The Peer Group includes the
following lodging companies: Extended Stay America, Lodgian, Hilton Hotels, John
Q. Hammons, Prime Hospitality, Host Marriott and Marriott International. In
1998, LaQuinta Inns and Bristol Hotels, which formerly were included in the Peer
Group, were parties to a merger transaction and a corporate restructuring,
respectively, and are no longer in existence. For this reason, these companies
have been removed from the Peer Group and replaced by Extended Stay America and
Lodgian. The return on the common stock of each member of the Peer Group has
been weighted at the beginning of each period according to the member's stock
market capitalization. This chart assumes an investment of $100 on February 1,
1996 and the reinvestment of dividends. Since the date it completed its initial
public offering, the Company has not paid dividends.

<TABLE>
<CAPTION>
RED ROOF INNS S&P 500 INDEX PEER GROUP INDEX
------------- ------------- ----------------
<S> <C> <C> <C>
2/1/96 100.00 100.00 100.00
12/28/96 96.88 120.98 131.91
1/3/98 96.09 159.31 151.15
1/2/99 105.47 201.84 117.76
</TABLE>

15
<PAGE> 18

CERTAIN RELATIONSHIPS AND RELATED PARTY 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
as of the Record Date approximately 68.27% of the outstanding Shares.

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 in the "Principal Holders of Voting
Securities" table (excluding the directors, nominees, Named Executive Officers
and 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 all of its Shares on the same terms
and conditions. 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. Also, pursuant to the terms of the Stockholders Agreement,
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 Dean
Witter & Co. 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 Dean
Witter & Co. 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.

16
<PAGE> 19

STOCKHOLDER PROPOSALS

Any proposals of stockholders which are intended to be presented at the
2000 Annual Meeting of Stockholders must be received by the Company at its
principal executive offices by December 18, 1999. Such proposals may be included
in next year's proxy statement if they comply with certain rules and regulations
promulgated by the Commission. If a stockholder intends to present a proposal at
the 2000 Annual Meeting of Stockholders, but has not sought the inclusion of
such a proposal in the Company's proxy statement, such proposal must be received
by the Company at its principal executive offices by March 2, 2000 or the
Company's management proxies will be entitled to use their discretionary voting
authority should such proposal then be raised, without any discussion of the
matter in the Company's proxy statement.

OTHER MATTERS

The Company does not know of any other matters that might 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 entire expense of preparing, assembling, printing and mailing the proxy
form and the form of material used in the solicitation of proxies will be paid
by the Company. In addition, proxies may be solicited personally or by
telephone, mail or telegraph. Officers or employees of the Company may assist
with personal or telephone solicitation and will receive no additional
compensation therefor. The Company will also reimburse brokerage houses and
other nominees for their reasonable expenses in forwarding proxy materials to
beneficial owners of the Shares. If there are follow-up requests for proxies,
the Company may employ other persons for such purposes.

By Order of the Board of Directors,

ALAN L. TALLIS
Secretary

17
<PAGE> 20

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 21
PROXY PROXY

RED ROOF INNS, INC.

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY 20, 1999

The undersigned appoints Francis W. Cash, David L. Rea, and Alan L. Tallis,
or any of them, proxies for the undersigned, each with full power of
substitution, to attend the Annual Meeting of Stockholders of Red Roof Inns,
Inc., to be held on May 20, 1999 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 Shares of Common Stock of the Company that 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, and for the
proposal to ratify the appointment of Deloitte & Touche LLP as the independent
accountants and auditors for fiscal year 1999.

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

(Continued and to be signed on reverse side.)

- --------------------------------------------------------------------------------
<PAGE> 22
RED ROOF INNS, INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. [X]

[ ]

1. ELECTION OF CLASS I DIRECTORS: For Withheld For All
Nominees: Thomas E. Dobrowski, All All Except
John A. Henry, IV [ ] [ ] [ ]

- ------------------------------------------------
TO WITHHOLD authority to vote for any individual
nominee, write that nominee's name on the line
above.

2. Ratification of the appointment of Deloitte &
Touche LLP as the Company's independent For Against Abstain
accountants and auditors for the 1999 fiscal [ ] [ ] [ ]
year.

If any other matters are properly brought before the Annual Meeting or any
adjournment thereof, or if a nominee for election as a director named in the
Proxy Statement is unable to serve or for good cause will not serve, the shares
represented by this Proxy will be voted in the discretion of the Proxies in such
matters or for such substitute nominee(s) as the directors may recommend.

Dated: , 1999
--------------------------
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 VOTE, SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY
USING THE ENCLOSED ENVELOPE.