<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<C> <S>
(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 2, 1999
OR
[ ] TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER 1-14058
RED ROOF INNS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 31-1393666
- --------------------------------------------- ---------------------------------------------
(State incorporation) (I.R.S. Employer Identification No.)
4355 DAVIDSON ROAD 43026-2491
HILLIARD, OHIO
- --------------------------------------------- ---------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (614) 876-3200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
Name of each exchange
Title of each class on which registered
- --------------------------------------------- ---------------------------------------------
<S> <C>
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
</TABLE>
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 26,960,188 AT FEBRUARY 26,
1999.
BASED ON THE CLOSING SALES PRICE OF FEBRUARY 26, 1999, THE AGGREGATE MARKET
VALUE
OF THE STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT WAS $116,097,550
Portions of the following documents are incorporated by reference into the
designated parts of this Form 10-K: definitive Proxy Statement, dated on or
about April 16, 1999 relating to Registrant's 1999 Annual Meeting of
Stockholders (in Part III), which Registrant intends to file not later than 120
days after the end of the fiscal year covered by this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
Unless the context otherwise requires, the "Company," "Red Roof" or "Red Roof
Inns" refers to Red Roof Inns, Inc., a Delaware corporation and any subsidiaries
of Red Roof Inns, Inc. from time to time.
Unless otherwise indicated, Inn data presented in this report is based on 238
Inns (the "Comparable Inns") that the Company owned and operated at the
beginning of and throughout the 1998 fiscal year following four successive
quarters as open, operating, fully renovated or constructed properties based on
a 52 week comparison. Management believes that the remaining company operated
Inns acquired or constructed (the "Inns in Stabilization") have not been
operated by the Company for a sufficient period to provide meaningful
period-to-period comparisons. Included in the Inns in Stabilization are acquired
Inns that underwent renovation causing rooms to be out of service. Therefore,
the average daily room rates and occupancies for these Inns are not comparable
to stabilized Red Roof Inns. Both acquired and newly constructed Inns
historically begin with lower occupancy and average daily room rates, which
should improve over time as these Inns implement the Company's operating
policies and procedures and become integrated into the Company's central
reservation system.
Red Roof Inns operates in the economy chain scale segment ("economy chain
segment") of the lodging industry as defined by Smith Travel Research ("STR"), a
leading industry research firm. STR categorizes lodging properties into the
following chain scale segments based upon average daily rates: upper upscale,
upscale, mid-scale with food and beverage, mid-scale without food and beverage,
economy and independents. Economy chain segment statistics presented herein
exclude Red Roof and extended stay properties.
PART 1
ITEM 1. BUSINESS
GENERAL
Red Roof Inns is a franchisor of and the largest owner/operator of economy chain
segment hotels in the United States, with 295 Inns (including 39 franchised
Inns) containing more than 34,100 rooms (including 4,600 franchised rooms) in 36
states, located primarily throughout the Midwest, East, South and Gulf Coast
regions. Red Roof Inns are designed to attract both the business and leisure
traveler seeking quality rooms and Inn locations that are generally comparable
to those of mid-price hotels, but at lower average room rates. By not providing
full-service, management-intensive facilities and services, such as in-house
restaurants or cocktail lounges, banquet centers, conference rooms, room
service, recreational facilities or other services and facilities that the
Company's targeted customers do not typically value, Red Roof is able to deliver
a product that addresses its customers' needs and price expectations. In
general, Red Roof's guests are evenly divided between business and leisure
travelers.
The following table sets forth total number of Inns and total number of rooms
open at the end of the years indicated:
<TABLE>
<CAPTION>
NUMBER OF INNS NUMBER OF ROOMS
-------------------------- ----------------------------
FISCAL YEAR OWNED FRANCHISED TOTAL OWNED FRANCHISED TOTAL
<S> <C> <C> <C> <C> <C> <C>
1994 220 220 24,658 24,658
1995 231 231 26,134 26,134
1996 248 248 28,167 28,167
1997 254 5 259 29,120 541 29,661
1998 256 39 295 29,562 4,619 34,181
</TABLE>
According to STR, Red Roof has one of the highest occupancy rates in the economy
chain segment of the lodging industry. The Company's Comparable Inns had an
average occupancy percentage of 73.0% and an average daily room rate ("ADR") of
$46.80 for 1998. Comparable Inn revenue per available room ("RevPAR") over the
past four years has grown at a compound annual rate of 2.2% to $34.16 for 1998.
In 1998, the Company's Comparable Inns occupancy exceeded the economy chain
segment average occupancy of 56.4% by 16.6 percentage points and Comparable Inn
RevPAR was 33% higher than the economy chain segment average of $25.78.
2
Red Roof Inns Inc. and Subsidiaries
<PAGE> 3
The following table sets forth certain data for the Company's Comparable Inns
for the years indicated:
<TABLE>
<CAPTION>
NUMBER AVERAGE
FISCAL YEAR OF INNS OCCUPANCY(1) ADR(2) REVPAR(3)
<S> <C> <C> <C> <C>
1994 210 79.1% $39.63 $31.35
1995 210 77.3 42.11 32.55
1996 223 74.2 44.36 32.92
1997 238 70.4 47.10 33.16
1998 238 73.0 46.80 34.16
1994-98 Compound Annual
Growth Rate (2.0)% 4.2% 2.2%
</TABLE>
(1) Average occupancy percentage represents total rooms occupied divided by
total available rooms. Total available rooms represents the number of rooms
available multiplied by the number of days in the reporting period.
(2) ADR represents total room revenues (net of allowances) divided by the total
number of rooms occupied.
(3) RevPAR represents the average occupancy percentage multiplied by the average
daily room rate for the reporting period.
In 1998, the Company's Comparable Inns RevPAR increased by 3.0% over 1997 due to
a .6% decrease in ADR and a 2.6 percentage point increase in the average
occupancy percentage. The Company attributes the decrease in ADR to planned
price decreases early in the year coupled with discount programs targeted toward
senior citizens and members of the American Automobile Association (AAA). The
decrease in ADR was more than offset by demand generated by these programs which
contributed to the occupancy and RevPAR increases. In addition, the Company
increased operating income for the four year period from 1994 through 1998 at a
compound annual growth rate of 6.4% (8.0%, excluding certain charges). These
increases in operating income were achieved by increasing RevPAR and controlling
costs.
Red Roof Inns is a price-value leader in the economy chain segment and operates
under the philosophy of offering Inn locations and quality rooms comparable to
many mid-priced hotels but at substantially lower room rates. Management
believes that the customers' perception of value is dependent on three
components: price, location and consistent quality. Guests who travel in the
economy chain segment do so to save money. Red Roof Inns is able to maintain its
low prices as a result of a consistent company-wide emphasis on cost control.
Red Roof Inns are generally located near interstate highways, major traffic
arteries or major destination areas such as airports, business districts,
universities, hospitals or convention centers. All locations are well
constructed and maintained and are attractively landscaped to enhance their
appearance. In addition, the Company strives to deliver a consistent guest
experience throughout the chain by following a chainwide set of operating,
marketing and hospitality standards. The Company's success in providing customer
value is demonstrated by its consistently high occupancy levels compared to the
average for the economy chain segment.
The Company believes that it has achieved significant brand awareness as a
result of its ability to provide high-quality, well located accommodations and
superior value, together with its national advertising campaign featuring
actor/comedian Martin Mull. This brand awareness and reputation for price,
quality and value have consistently placed Red Roof Inns among the leaders in
the economy chain segment in terms of occupancy and RevPAR, according to STR. In
addition, the brand name has earned the Company a strong following of loyal
guests. Management believes that the Company's brand identity provides it with a
significant advantage over independent hotel operators and other economy segment
chains. Together with its operational expertise, this enhances the performance
of existing and newly constructed and acquired properties. Management is
expanding the chain on a national basis through franchising and selective hotel
development.
The Company promotes and operates its own reservation centers and toll-free
number (1-800-THE-ROOF) to accept reservations. During 1998, the Company handled
approximately 2.9 million calls through the toll-free number, of which
approximately 40% were converted to reservations, contributing to the Company's
high level of occupancy. During the second quarter of 1998, the Company opened a
second reservation center in Springfield, Ohio. This second center provides
additional capacity, along with back-up capabilities, to handle the increased
call volume as a result of the growth in the franchise program. Calls are routed
to the first available agent at either center to ensure that all calls are
answered as quickly as possible.
3
Red Roof Inns Inc. and Subsidiaries
<PAGE> 4
The Company has operated Inns since its first Inn opened in 1973. Red Roof's
management has substantial experience in the lodging industry. On average,
senior management has approximately 18 years experience in the lodging industry
and is supported by operational and administrative vice presidents with an
average of 16 years experience and on-site general managers with an average of 7
years experience. Each company-owned Red Roof Inn is operated as an individual
profit center by a general manager who oversees all day-to-day guest relations
and other operating activities and implements rate, occupancy and cost
containment strategies. Management believes this structure reduces operating
costs while creating incentives to maximize RevPAR, guest satisfaction and
enhance operating margins by adapting room rates to prevailing market conditions
at individual Inns.
STRATEGY
The Company's strategy is to increase cash flow and earnings per share by
increasing Company-owned Inn profits, becoming more fee intensive through
franchising and partner programs, pursuing selective development opportunities
through joint ventures and using the Company's free cash flow to take advantage
of market opportunities.
INCREASE COMPANY-OWNED INN PROFITS. The Company intends to increase cash flow
and earnings per share through increases in profit contributions from company-
owned Inns, primarily by moderate increases in ADR, by maintaining or increasing
the Company's strong occupancy levels and by controlling costs. The Company
believes that it will be able to increase RevPAR by stimulating room demand
through effective advertising, promotion and discount programs targeted toward
senior citizens and members of the AAA and through the implementation of an
automated revenue management system. The Company also believes that increases in
RevPAR will be achieved as a result of its chainwide Inn renewal program
("Project BIG RED"), which was completed in 1998. In addition to increasing
revenues at company-owned Inns, the Company has always focused on controlling
costs while not reducing customer service levels.
- Discount Programs -- During the first quarter of 1998, the Company
introduced programs for two key market segments -- senior citizens and members
of AAA. The senior market is the fastest growing population segment in the
United States today and is expected to remain so for years to come as the baby
boomer generation matures. Generally, the senior market has discretionary funds
available and the propensity to travel. AAA membership amounts to over 41
million people who generate significant travel and leisure business. In
addition, Red Roof was made a preferred partner of AAA in mid-1998. Management
believes that by providing appropriate discounts to the members of these two
groups, the Company will build demand for its service.
- Revenue Management System -- In the second quarter of 1998, the
Company implemented a fully automated revenue management system in conjunction
with the completion of the Company's Inn renewal program. The system is linked
to both the central reservation system and the individual property management
systems, providing real-time information. The system is essentially an inventory
control system that enables the Company to better manage both occupancy and rate
by analyzing historical data, trends and current reservation activity to
forecast future trends. Inn managers use the system to foresee peak occupancy
days and predict cancellations, no-shows, stay-overs and walk-in traffic which
enables them to adjust room rates and better manage both lengths of stay and
discount business.
- Project BIG RED -- In the fourth quarter of 1996, the Company
commenced Project BIG RED, a chainwide property renewal program that refurbished
and enhanced both the interior decor and exterior appearance of the majority of
company-owned Inns as well as provided additional room amenities and services
for guests. The property renewal program was completed in 1998 for a total cost
of approximately $68 million (including approximately $4 million for the revenue
management system). Project BIG RED gave the rooms a more modern, residential
feel with new carpet, wallcovering, furniture, bedspreads and drapes. A brighter
paint shade, new signs, improved lighting and additional landscaping enhanced
the exterior appeal of the Inns and highlighted the properties for approaching
travelers. The program added features to the Company's business king rooms that
better address the needs of the business traveler, as well
4
Red Roof Inns Inc. and Subsidiaries
<PAGE> 5
as additional amenities to all rooms, which management believes will reinforce
Red Roof Inns' position as a price-value leader in the economy chain segment and
enhances revenues by allowing the Company to increase ADR and RevPAR.
- Controlling Costs -- The Company is constantly reevaluating its cost
structure with the emphasis on reducing costs through new technology and by
improving operating efficiencies. Also, the managers at the Inns have incentive
plans to keep costs down and improve efficiency. During 1998, the Company
reduced the amount of labor minutes per room sold by one minute. In addition,
during 1998, the Company installed energy efficient lighting at its Inns which
reduced electric costs. The Company is also investing in technology such as a
voice mail system which allows front desk personnel to better serve their guests
while reducing operating costs.
GROW FEE-BASED INCOME. The Company intends to increase cash flow and earnings
per share through the development of fee-based income. By becoming more fee
intensive, the Company expects to decrease its capital needs, increase the
return on assets, increase the stability of its revenue and income streams and
become less vulnerable to changing conditions in the lodging industry or changes
in factors which directly influence the operation of its Inns. The Company
believes that it will generate fee income from both its franchising program and
its partner marketing program.
- Franchising -- The franchising program is focused on developing
relationships with experienced, high quality hotel owners who will develop and
operate new Inns using the "Red Roof Inn" or "Red Roof Inn & Suites" marks or
convert existing hotels to one of the "Red Roof Inn" or "Red Roof Inn & Suites"
marks. The Company believes that this strategy will allow it to continue to
expand the Red Roof brand nationally without requiring significant capital
investment and will increase revenues and cash flow while maintaining consistent
quality across the entire chain. Franchise applicants are evaluated on hotel
operating expertise and financial stability. Franchise conversion properties and
developed hotel construction plans are reviewed for adherence to Company quality
standards. Approved applicants are granted the right to operate under the Red
Roof Inn brand name, obtain reservations through the Company's central
reservation system and use the Company's Inn designs, operating systems and
procedures. In return for this right, the franchisees pay to the Company an
initial franchise fee and ongoing royalty, marketing and reservation fees. These
ongoing fees are based on a percentage of gross room revenues (as defined in the
franchise agreement) at the franchised properties. In addition, franchisees pay
to the Company license fees for computer software that the Company provides to
the franchisees. The total amount of fees collected by the Company will vary
depending on the total revenues generated by all of its franchisees. The
Company's franchise fee structure contains a unique provision that allows a
franchisee to earn a discount to the royalty fee by achieving high levels of
customer satisfaction, as measured by an independent survey conducted by a
market research firm. The Company believes that this provision not only provides
it with a competitive advantage in attracting high quality franchisees, but also
promotes strict adherence to chain quality standards and operating consistency.
The Company also believes that its franchises are attractive because of the
Company's high occupancy, RevPAR and attractive operating margins.
The Company believes that it has a strong corporate infrastructure to
accommodate significant Inn expansion through franchising, including an
experienced development, acquisition and finance team, an effective central
reservation system, advertising and marketing programs, an experienced
operations group, a well-developed property management system and an extensive
management training program. In addition, the Company's newly designed buildings
with interior corridors and a high percentage of rentable space, significant
open territories in the Red Roof Inns system, consistency of the Company's
product and service, and the support provided by the Company's experience as an
owner/operator provide competitive advantages for the Company in the sale of its
franchises.
As of January 2, 1999, the Company had 39 franchised Inns open, 18 franchised
Inns under construction or conversion and projected to open in 1999 and 30
additional executed franchise agreements. The Company's goal is to open 50
franchised Inns in 1999.
5
Red Roof Inns Inc. and Subsidiaries
<PAGE> 6
- Partnership Marketing -- The Company has a partnership marketing
program through which the Company forms alliances with other well-known consumer
product and service companies in order to offer its guests additional
value-added services. The Company actively promotes its partners' products or
services either at the Inns or through the central reservation centers in
exchange for fees from the partner companies. The Company believes that its
strong following of loyal guests (which represents over 8 million room nights
sold in 1998) and reputation for value, quality and service make it an
attractive partner and allow it to create alliances with high quality companies
that will further enhance the attractiveness of Red Roof Inns to its guests.
Management believes that this strategy generates increased revenue and cash flow
while providing additional value-added services to the Company's guests.
PURSUE SELECTIVE INN DEVELOPMENT. At the end of 1997, the Company made the
decision to reduce its company-owned Inn development program and focus on
growing fee-based income through franchising. Therefore, the Company's current
development and acquisition strategy is focused on locating a select number of
high visibility properties in key strategic locations, such as in central
business districts of major cities or near major airports. The Company currently
intends to use joint ventures or pre-sale structures for these projects. This
new approach to development should allow the Company to reduce the level of
development risk and the overall levels of its capital requirements.
During the last three years, the Company purchased 20 development sites (one
under a long-term lease agreement) located in Arizona, Florida, Georgia,
Indiana, Massachusetts, North Carolina, Ohio, Tennessee and Texas. One of these
sites, located in Georgia, was subsequently sold to a franchisee and two of
these sites, located in Indiana and Tennessee, are being held for sale to
prospective franchisees. The Company is in the process of completing the
construction of a total of 2,361 rooms on the 17 remaining development sites of
which 13 developed Inns consisting of 1,759 rooms were open as of January 2,
1999.
During the last three years, the Company acquired eight Inns consisting of 1,184
rooms (after conversion and room additions) located in Alabama, Florida,
Maryland, North Carolina, South Carolina, Virginia and Washington, D.C. A total
of eight acquired Inns with 1,135 rooms were open as of January 2, 1999.
Certain of the acquired Inns differ from the Company's existing Inns in terms of
construction, number of rooms, room size, building configuration, signage, decor
and other respects. See "Item 2. Properties." Each acquired Inn receives Red
Roof signage, installation of computer hardware to accommodate electronic
processing of reservations and the transmission of financial and other data to
the corporate offices in suburban Columbus, Ohio, as well as lobby modifications
designed to support operational practices and procedures. In addition, the
Company makes capital improvements, where needed, to guest rooms and
guest-sensitive areas to ensure that each acquired property adheres to Red
Roof's stringent operating standards. See "Item 7. Management's Discussion and
Analysis of Results of Operations and Financial Condition -- Capital Resources
and Liquidity -- Capital Expenditures." Although acquired properties, after
conversion, differ in certain respects from existing Inns, the renovated
properties offer quality accommodations and service consistent with Red Roof's
brand identity.
In evaluating expansion opportunities for company-owned Inns, the Company
generally reviews the competitive environment of the market, including room
supply, room demand, average daily room rates and local market wages. The
Company also evaluates demand generators such as area businesses, conference
centers, airports, universities, hospitals, theme parks, and other business and
leisure attractions. Each potential development site and Inn acquisition is
evaluated for accessibility, visibility and restrictive local ordinances. In
addition, the Company's evaluation of a potential Inn acquisition includes an
extensive review of its historical operating and financial results and the
estimated cost of converting the facility to Red Roof's standards of quality.
Each anticipated development site and Inn acquisition also must have the
potential to meet a stipulated minimum return based on the Company's investment
criteria.
6
Red Roof Inns Inc. and Subsidiaries
<PAGE> 7
USE FREE CASH FLOW. Historically, the Company's growth strategies have focused
on increasing revenues and earnings before interest, taxes, depreciation and
amortization ("'EBITDA") through the development or acquisition of new Inns that
are owned and operated by the Company. The capital requirements of this strategy
generally exceeded the cash flows from operations, which required the Company to
issue additional debt and equity to finance this growth. At the end of 1997, the
Company made the decision to reduce its new Inn development program and focus on
expanding the chain through franchising and growing its fee-based income
streams. As a result, reduced capital outlays for the development and
acquisition of new company-owned Inns combined with the completion of the Inn
renewal program has significantly reduced the total capital requirements of the
Company. As part of the continuing capital expenditure program, the Company
expects to reinvest in its company-owned Inns through on-going renovation and
maintenance programs as well as make additional investments in systems related
technology.
As a result of this revised growth strategy, the Company's on-going capital
requirements are generally expected to be less than the cash flows from
operations. In addition, the Company has and will likely continue to generate
additional cash proceeds from the selective sale of existing company-owned Inns
to franchisees. Cash flows from operations combined with proceeds from asset
sales should exceed capital expenditures and therefore generate free cash flow
available for general corporate purposes. In 1998, the Company generated free
cash flow totaling approximately $26 million as compared to being a net user of
cash of approximately $52 million in 1997. In 1998, the Company used it's free
cash flow to repurchase shares of Company stock and reduce debt.
The Company expects that this free cash flow should provide the financial
flexibility to react to and take advantage of changes in the lodging industry
and the capital markets. The Company may use its free cash flow to: repurchase
additional shares of Company stock, reduce or restructure debt, and/or pursue
acquisition opportunities of additional brands and/or lodging owner-operators.
The Company believes that the combination of a growing fee-based revenue stream
along with the use of free cash flow to take advantage of changing market
opportunities will allow the Company to increase its earnings and cash flow per
share.
LODGING INDUSTRY
The lodging industry as a whole is continuing to experience positive operating
conditions. Though the rate of growth in supply of hotel rooms is currently
exceeding the rate of demand growth, ADR and RevPAR have continued to increase.
The economy chain segment, where the Company operates, has experienced a greater
rate of supply growth than the industry as a whole. As a result, occupancy
levels for the segment have been declining. However, the segment has continued
to increase ADR and has achieved moderate increases in RevPAR. Red Roof Inns has
one of the highest occupancy levels in the economy chain segment and has
consistently outperformed the segment in RevPAR.
COMPETITION
Small chains and independent hotels represent approximately one third of the
supply of rooms in the hotel industry. Direct competitors of Red Roof include
national chains which operate in the economy chain segment, as defined by STR,
such as Super 8 Motels, Motel 6, and Days Inns and regional chains such as Susse
Chalet. In certain locations, the Company's Inns also compete with mid-scale
properties, such as Baymont Inns, Comfort Inns, Fairfield Inns, Holiday Inn
Express, LaQuinta Inns and Hampton Inns. There is no single competitor or group
of competitors of Red Roof that is dominant in the lodging industry. However,
some of Red Roof's competitors have a larger network of locations and greater
resources than Red Roof.
Each Red Roof Inn competes in its market area on the basis of price, location
and quality with major national lodging chains, regional brands and privately
owned hotels. The Company is firmly established in most of its markets and the
Company believes many of its Inns are in locations superior to those available
for development today. The Inns are consistently well maintained, attractively
landscaped and competitively priced to appeal to both business and leisure
travelers.
7
Red Roof Inns Inc. and Subsidiaries
<PAGE> 8
FRANCHISING
The rights and franchises under which the franchised Inns are operated are set
forth in the Company's Franchise Agreement. The Franchise Agreement gives the
franchisee the right to develop a site or convert a property, own and operate an
Inn accepted by the Company and to use the Company's systems in connection with
the operation of an Inn. A prospective franchisee is required to pay the Company
a refundable application fee of $5,000 when an application is made for a Red
Roof Inns franchise. The initial franchise fee for a Red Roof Inn franchise is
generally the greater of $400 per guest room in the Inn to be developed or
converted or $40,000, less the amount of the application fee. However, in very
limited specific situations the application and/or the initial franchise fee has
been negotiated depending upon such factors as the total number of rooms, the
total number of new or conversion properties, future development or conversion
commitments, market conditions, market penetration and other relevant factors.
The Company does not make a practice of negotiating any fees, except in limited
circumstances. The franchisee must also pay the Company approximately $5,300 in
owner, management and computer training tuition fees as well as approximately
$20,000 for the purchase of a property management system and other related
systems. In addition, the franchisee must pay travel, lodging and meal expenses
for Company computer trainers and the shipping expenses for the training
equipment for the front office system and training that the Company provides at
the Inn. The franchisee also is required to reimburse the Company for travel
agency commissions and other fees that the Company may pay to third parties for
electronic bookings at franchised Inns.
The Company has no formal Company-funded financial assistance program for
franchisees. However, the Company may, at its sole discretion, offer to
franchisees financing with terms that vary depending upon a number of factors
such as the number of inns involved, the number of rooms involved, market
conditions, market penetration and other such factors that may warrant and
justify the financial assistance. This financing typically must be repaid in
three years and requires appropriate collateral. In addition, the Company has a
contractual agreement with a financial institution to act as a placement agent
for franchisees who desire access to potential sources of third-party financing.
Generally, a franchisee is required to pay a royalty fee of 4% of gross room
revenue (as defined in the Franchise Agreement) during the first two years after
the opening of an Inn and 4.5% of gross room revenues for all periods hereafter.
A franchisee can receive a rebate of .5% of gross room revenues if, in any
calendar year, the franchised Inn achieves superior results in guest
satisfaction as measured by an independent guest survey conducted by a market
research firm. In addition to the royalty fees, a franchisee must pay, as a
percentage of gross room revenues, a marketing fund fee of 2.5% for national
advertising and a reservation fee of 2% to support the cost of reservation
services provided to the Inns.
Before a franchised Inn opens, the Company inspects and approves the Inn to
confirm that the Company's quality specifications have been met. Once a
franchised Inn opens, the Company provides continued sales support, assistance
and visitation by franchise operations directors to assist in day-to-day
operation of an Inn and provides optional training at various locations. The
Company currently employs 10 franchise sales personnel located throughout the U.
S. who market the Company's franchisees to qualified applicants. The Company
also employs six franchise operations directors, who are former Red Roof Inns
general managers, to assist franchisees with pre-opening and ongoing operations
issues.
OPERATIONS
The Company's Inns are managed from its corporate office in suburban Columbus,
Ohio. Centralized corporate functions include marketing, sales, reservations,
treasury, accounting, financial reporting, information systems, purchasing,
repairs and maintenance, legal, human resources and managerial training. The
corporate staff monitors Inn-level consistency with standards for guest service
through a guest satisfaction survey program, which is conducted by an
independent market research company, and its corporate office customer service
department. The corporate staff also monitors standards for maintenance and
appearance through an experienced design and maintenance staff.
8
Red Roof Inns Inc. and Subsidiaries
<PAGE> 9
Each company-owned Inn is operated as an individual profit center, with a
general manager who oversees all day-to-day operating activities. Red Roof's
managers devote their attention to assuring friendly guest service and clean,
well maintained rooms, consistent with chainwide standards. Their
responsibilities also include recruiting, training and supervising the Inn's
staff. A typical Inn has approximately 20 employees, including the general
manager, housekeepers, laundry attendants, skilled and general maintenance
persons and front desk guest services representatives, including a night
auditor. Each general manager reports to one of 14 district operations vice
presidents, who in turn report to senior management.
Red Roof's general managers receive a three-week training program that
emphasizes operations, hospitality, rate management, legal issues, interviewing,
employee relations, training and budgeting prior to assuming responsibility at
an Inn. The Company has managers who assist the general managers at certain
Inns, providing a pool of experienced candidates to fill its needs for general
managers.
The Company uses target-driven operational budgets prepared by the general
managers that are implemented after review with senior management. Rates charged
by Red Roof are continually reviewed by the Inn managers, rate analysts and
operations vice presidents so that they can be appropriately adapted to the
prevailing market conditions at each Inn. In addition, implementation of the
fully automated revenue management system enables Inn managers to monitor rates
in relation to peak demand periods. Each general manager can earn financial
incentives based upon achieving favorable results in comparison to the revenue
and profit budgets along with guest satisfaction surveys for their respective
property. Management believes this incentive program increases the general
managers' focus on operating efficient, well maintained, profitable Inns.
Each Inn has property management software and hardware which is used for the
exchange of daily reservations, room rate changes, occupancy, payroll, credit
card authorizations and other financial data with the corporate office.
Management believes that this system has enhanced its ability to monitor and
maximize revenues and profitability of the Inns. Data is transmitted to and from
the corporate office using the Company's computer network, which allows for high
capacity data communications volume and real-time information.
SALES AND MARKETING
In general, Red Roof's guests are evenly divided between leisure and business
travelers. Leisure travelers served by the Company are typically en route by car
to another destination or attending a nearby special event or attraction. The
Company also serves business travelers, many of whom travel on a per diem or pay
their own expenses. Leisure demand is highest on Friday and Saturday nights with
business demand highest on Monday through Thursday nights.
Red Roof's national advertising campaigns, featuring actor/comedian Martin Mull,
emphasize the consistency and value associated with its Inns. The Company
markets through national and local cable and network television, newspapers,
other print media and its own Web site. The Company focuses its television
advertising on specific programs during certain months of the year and times of
the day for maximum impact. In addition, the Company utilizes billboard
advertisements located along interstate highways near many of its Inns.
The Company utilizes its own central reservation centers and toll-free number
(1-800-THE-ROOF) to accept reservations. During 1998, the reservation centers
handled approximately 2.9 million calls through the toll-free number, of which
approximately 40% were converted to reservations. During the second quarter of
1998, the Company opened a second reservation center in Springfield, Ohio. This
second center provides additional capacity, along with back-up capabilities, to
handle the increased call volume as a result of the growth in the franchise
program. Calls are routed to the first available agent at either center to
ensure that all calls are answered as quickly as possible. The reservation
system provides reservation agents with information about Inn locations,
available rooms and prices in order to assist customers in reserving rooms. The
agents are trained in telephone sales and cross-selling techniques. Through its
computer network, the Company continually updates the number of rooms sold at a
property, permitting the sale of all available
9
Red Roof Inns Inc. and Subsidiaries
<PAGE> 10
rooms through either the Inn or the reservation centers. The Company has special
reservation agents for large group sales, motor coach sales and special event
bookings. Management estimates that approximately three-fourths of room sales
are to customers who have made a reservation through the central reservation
centers or by calling an Inn directly.
The Company offers a number of marketing programs aimed at creating customer
loyalty. The Company promotes a "RediCard" program which provides its members
with express reservation and check-in. Additional amenities include a USAToday
newspaper delivered to the member's room, personal check cashing, pay-by-check
privileges and a newsletter offering various discounts and coupons. The RediCard
program improves the administrative efficiency of the reservation agents and
front desk staff by providing a personal profile of the member. This includes
information such as room type preference, smoking or non-smoking rooms and
preferred method of payment. The Company currently has more than 445,000 active
RediCard members. In addition, the Company has formed and continues to seek
alliances with national travel and consumer organizations, such as AAA, to offer
special rates or promotions to the organizations customers, including discounted
rates to senior citizens.
The Company's corporate sales group increases room sales through the inclusion
of Red Roof Inns in approved or preferred lodging lists of corporate travel
managers and travel agencies on a national basis. The Company has five national
sales representatives, two tour and travel sales representatives and increased
the number of regional sales representatives from eight in 1996 to 16 in 1998.
The regional sales representatives conduct sales programs to develop local
corporate contacts and encourage local companies to utilize the Inns. These
sales efforts include developing brand loyalty through programs such as RediCard
and Volume Plan Plus, a plan which provides for negotiated rates based on the
volume of room nights per year that a company can offer Red Roof.
The Company developed a database management system to track its guests' spending
habits and travel patterns. This system, coupled with other corporate programs,
will enable the Company to effectively market its product toward its frequent
guests as well as potential new guests. The system will identify potential
guests for under-utilized markets and hotels, frequent guests by market area for
new Inns and franchisees and enhance its guest loyalty program. Management
believes the system, which was fully implemented in the fourth quarter of 1998,
will increase guest loyalty, retention and repeat business resulting in
increased market share and ultimately increase RevPAR.
ENVIRONMENTAL CONSIDERATIONS
A limited number of the Company's properties contained underground storage tanks
that were used to store petroleum products prior to the purchase of such
properties by the Company. The Company removed those tanks prior to construction
of its Inns on those properties. In addition, five Red Roof properties currently
contain underground or above-ground storage tanks that are used to store propane
for use at those properties. A substantial number of the Red Roof properties are
also adjacent to or near properties (mostly service stations, but including some
landfills and industrial operations) that contain or have contained storage
tanks or that have engaged or may in the future engage in activities that may
release petroleum products or other hazardous or toxic substances into the soil
or groundwater.
Most of the Company's properties have not been tested for the presence of
hazardous substances. The Company is aware of three Red Roof properties that
were developed with the use of landfill that has been found to contain hazardous
substances. With respect to two of these properties, the Company has determined
that no notification or remediation is required under current laws and
regulations. With respect to the third of these properties, state regulatory
authorities have issued a "No Further Action" approval letter based upon the
Company's execution and recording of a "Declaration of Environmental
Restrictions" limiting the property owner's right to disturb affected areas of
the property.
Based on its present knowledge and currently applicable laws and regulations,
the Company does not believe that environmental matters are likely to have a
material adverse effect on the Company's business, assets, financial condition
or results of operations. However, due to the absence of complete information,
possible future changes
10
Red Roof Inns Inc. and Subsidiaries
<PAGE> 11
in laws and regulations, and other factors, no assurance can be given that
environmental matters will not ultimately have a material adverse impact on the
Company's business, assets, financial condition or results of operations.
EMPLOYEES
As of January 2, 1999, Red Roof employed approximately 5,900 persons, of whom
approximately 90% were compensated on an hourly basis. Approximately 480 of
these employees work at the corporate headquarters, of which approximately 150
are employed at the Company's reservation centers. The Company's employees are
not currently represented by labor unions and the Company has never experienced
any organized work stoppage. Management believes that its ongoing labor
relations are good.
SERVICEMARKS
"Red Roof Inn", "Red Roof Inn & Suites", "Red Roof", "RediCard", "Hit the Roof",
"Sleep Cheap" and various other marks are registered servicemarks of the
Company, which the Company considers important to its business. The Company
monitors use of similar names and takes appropriate action when possible
infringements occur.
ITEM 2. PROPERTIES
The Company believes that it has frequently benefited from identification and
development of attractive locations in local markets prior to many of its
competitors. In addition, since Red Roof was one of the first economy segment
chains, the Company is firmly established in many of its markets.
Red Roof adheres to rigorous standards in building and maintaining each Inn.
Management believes that its high-quality construction standards are superior to
those of many of its competitors.
A typical company-owned Red Roof Inn contains, on average, approximately 114
rooms. In addition to standard rooms, each Inn has rooms equipped for the
handicapped and has "business king" rooms containing a king-sized bed, a
recliner, a desk and computer tie-in services. Each Inn features a choice of
rooms for non-smokers and smokers, free unlimited local telephone calls, remote-
control television with CNN, ESPN and Showtime, pay-per-view movies and video
games, free coffee and USAToday newspapers in the lobby, 24-hour front desk and
message service, direct corporate billing and free parking. Many of the
Company's Inns are adjacent to free-standing restaurants affiliated with
restaurant chains such as Bob Evans, Shoney's and Cracker Barrel that provide
food service to Red Roof's guests.
A typical franchised property consists of approximately 110 rooms. As of January
2, 1999, there were a total of four newly-constructed franchised Inns and 35
franchised Inns that were converted properties. Each franchised Inn must adhere
to the same rigorous quality standards of construction and maintenance as a
company-owned Inn. Each franchised Inn is inspected by a franchise operations
director, at least annually, to assure that the franchised Inn adheres to the
Company's quality standards. The Company has the ability to terminate the
franchisee's agreement for failure to meet these quality standards as well as
for a franchisee's failure to fulfill other contractual obligations.
To maintain the overall quality of the Company's existing Inns, each Inn
undergoes periodic renovations and capital improvements as required. These
renovations are completed in accordance with established maintenance programs
that list specific tasks to be completed, including such items as seasonal
landscaping and inspection of the condition of sidewalks, parking areas and
signage. In 1996, 1997 and 1998, the Company spent approximately $17.1 million,
$6.9 million and $19.0 million (exclusive of BIG RED expenditures),
respectively, on capital improvements to existing Inns.
In the fourth quarter of 1996, the Company commenced Project BIG RED, a
chainwide property renewal program that refurbished and enhanced both the
interior decor and exterior appearance of the majority of company-owned Inns as
well as provided additional room amenities and services for guests. The property
renewal program was completed in 1998. Project BIG RED gave the rooms a more
modern, residential feel with new carpet, wallcovering, furniture, bedspreads
and drapes. A brighter paint shade, new signs, improved lighting and additional
landscaping enhanced the exterior appeal of the Inns and highlighted the
properties for approaching travelers. The program added features to the
Company's business king
11
Red Roof Inns Inc. and Subsidiaries
<PAGE> 12
rooms that better address the needs of the business traveler, as well as
additional amenities to all rooms, which management believes will reinforce Red
Roof Inns' position as a price-value leader in the economy chain segment and
enhances revenues by allowing the Company to increase ADR and RevPAR.
The total cost for Project BIG RED was approximately $68 million (including
approximately $4 million for the revenue management system). The Company
recognized total charges to earnings of $24.5 million related to early asset
retirements and other charges associated with Project BIG RED. The Company
recognized $10.4 million of the charges ($7.8 million related to early asset
retirements) during the fourth quarter of 1996 and $14.1 million ($2.4 million
related to early asset retirements) throughout 1997. The Company did not incur
any charges to earnings related to BIG RED in 1998. See "Item 8. Financial
Statements and Supplementary Data -- Note 10 to the Consolidated Financial
Statements."
During 1998, the Company sold four of its California properties and a property
under construction in Atlanta, Georgia to franchisees. These properties were
sold, substantially at cost, for net cash proceeds of approximately $22 million
and the proceeds were used to repay borrowings on the Company's bank facility
("the Bank Facility") and mortgage notes. A sixth property located in California
was leased to a franchisee with an option to purchase.
At five company-owned Red Roof properties, the Company leases both the land and
the buildings. At two of these five properties (the Harrisburg-North,
Pennsylvania and Parkersburg, West Virginia Inns), the landlord in each case is
a partnership in which the Company owns or controls a substantial majority of
the partnership interests. At the Parkersburg, West Virginia property, the lease
will expire in 2001 and the Company does not have an option to extend the lease
or purchase the property. At the Harrisburg-North property, the Company
subleases the property from the partnership, which leases the property from the
Dauphin County Industrial Development Authority. The Harrisburg-North lease
expires in 2004 and the partnership has the option to purchase the property at
any time during or within 90 days after the expiration of the term of the lease,
for an amount equal to $100,000 above the balance then due on the industrial
revenue bonds issued to finance development of the property. The Company does
not have an option to extend the sublease or lease, or to purchase the
Harrisburg-North property. At the third property, located in Charleston, West
Virginia, the lease expires in 2016 (assuming the exercise of all renewals) and
the Company does not have an option to extend the lease or purchase the
property. At the fourth property, located in Colorado Springs, Colorado, the
lease expires in 2015 (including the exercise of all renewals) and the Company
has an option to purchase the property at fair market value. At the fifth
property, located in Columbus, Ohio, the lease expires in 2027 (assuming the
exercise of all renewals) and the Company does not have an option to purchase
the property.
Eleven company-owned Red Roof properties are subject to ground leases. All
ground leases have remaining terms, including renewal options, aggregating
longer than 24 years.
The remainder of the Company's Inns are 100% owned in fee simple by the Company.
As of January 2, 1999, 87 Inns were encumbered by mortgage loans or industrial
revenue bonds maturing in various years from 1999 to 2009. In addition, the
Company has a $250 million Bank Facility which is secured by 80 other Inns. See
"Item 8. Financial Statements and Supplementary Data -- Note 4 to the
Consolidated Financial Statements."
The Company owns its corporate office building located in suburban Columbus,
Ohio. It is encumbered by a mortgage loan that will mature in 2009.
The Company believes that it maintains adequate aggregate insurance coverage on
its properties, subject to appropriate deductibles. The Company used a
self-insurance plan for general liability and workers compensation insurance for
claims arising before May 1998. Subsequent to May 1998, the Company entered into
a three-year fixed premium agreement with a national insurance carrier for its
general liability and workers compensation insurance. The premium is subject to
adjustment on the annual anniversary date of the policy if actual insured losses
exceed 60% of the annual premium amount. See "Item 8. Financial Statements and
Supplementary Data -- Note 1 to the Consolidated Financial Statements."
12
Red Roof Inns Inc. and Subsidiaries
<PAGE> 13
The following represents the distribution of company-owned Inns and
franchised Inns as of January 2, 1999:
<TABLE>
<CAPTION>
COMPANY-OWNED FRANCHISED TOTAL
---------------------------------------------------------------------------------
STATE # OF INNS # OF ROOMS # OF INNS # OF ROOMS # OF INNS # OF ROOMS
<S> <C> <C> <C> <C> <C> <C>
Alabama 4 417 4 417
Arkansas 1 108 1 108
Arizona 5 640 2 260 7 900
California 1 200 10 1,216 11 1,416
Colorado 1 117 1 117
Connecticut 4 441 4 441
Washington, DC 1 197 1 197
Delaware 1 119 1 119
Florida 15 1,797 3 662 18 2,459
Georgia 9 1,092 4 381 13 1,473
Iowa 1 108 1 108
Illinois 13 1,522 13 1,522
Indiana 8 749 2 184 10 933
Kansas 1 107 1 30 2 137
Kentucky 5 553 2 157 7 710
Louisiana 4 422 4 422
Massachusetts 4 548 4 548
Maryland 10 1,239 10 1,239
Michigan 20 2,096 20 2,096
Minnesota 3 311 3 311
Missouri 9 1,029 1 105 10 1,134
Mississippi 3 324 3 324
North Carolina 16 1,857 1 147 17 2,004
North Dakota 1 99 1 99
New Hampshire 2 223 2 223
New Jersey 7 908 7 908
New Mexico 1 87 1 87
New York 8 882 8 882
Ohio 29 3,184 4 490 33 3,674
Oklahoma 1 93 1 93
Pennsylvania 15 1,731 15 1,731
South Carolina 8 933 8 933
Tennessee 10 1,076 2 192 12 1,268
Texas 22 2,894 4 516 26 3,410
Virginia 8 876 8 876
Wisconsin 2 216 2 216
West Virginia 6 646 6 646
--- ------ -- ----- --- ------
TOTAL 256 29,562 39 4,619 295 34,181
=== ====== == ===== === ======
</TABLE>
13
Red Roof Inns Inc. and Subsidiaries
<PAGE> 14
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various lawsuits arising in the normal course of
business. The Company believes that the ultimate outcome of these lawsuits will
not have a material adverse effect on the Company's business, assets, financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Stockholders was held on December 17, 1998, where the
following matters were voted upon by the Company's security holders through the
solicitation of proxies or otherwise:
<TABLE>
<CAPTION>
NUMBER OF VOTING SHARES
-------------------------------
FOR AGAINST ABSTAINED
<S> <C> <C> <C>
1. To elect three Class III
directors, each to hold
office for a three-year
term and until a successor
is duly elected and
qualified:
Michael E. Foster 23,737,733 0 116,255
William M. Lewis 23,737,733 0 116,255
Judith A. Rogala 23,298,955 0 554,993
2. To consider and vote upon 22,402,585 83,415 5,400
a proposal to amend the
1996 Employee Stock
Purchase Plan to increase
the number of shares of
common stock available for
issuance thereunder.
3. To consider and vote upon 22,214,459 270,341 6,600
a proposal to amend the
Amended and Restated 1994
Management Equity
Incentive Plan to increase
the number of shares of
common stock available for
issuance thereunder.
4. To consider and vote upon 23,849,052 1,650 3,286
a proposal to ratify the
appointment of Deloitte &
Touche LLP as the
Company's independent
accountants and auditors
for the 1998 fiscal year.
</TABLE>
14
Red Roof Inns Inc. and Subsidiaries
<PAGE> 15
PART II
MARKET FOR THE COMPANY'S
COMMON STOCK AND RELATED
ITEM 5. SECURITY HOLDER MATTERS
On January 31, 1996, the Company issued 10,000,000 shares of common stock, $.01
par value, in an initial public offering (the "Offering") at a price of $16 per
share. See "Item 8. Financial Statements and Supplementary Data -- Note 6 to the
Consolidated Financial Statements." The Company's common stock began trading on
the New York Stock Exchange (the "NYSE") on February 1, 1996. As of February 26,
1999, there were approximately 185 holders of record of the Company's common
stock, including the Morgan Stanley Real Estate Fund, L.P. ("MSREF") and its
affiliates, which collectively owned 18,400,000 shares as of that date. On
February 26, 1999, the closing sales price per share as reported by the NYSE was
$13 9/16. The following table presents the quarterly high and low sales prices
of the Company's common stock during 1998 and 1997 as reported by the NYSE.
<TABLE>
<S> <C> <C>
1998 HIGH LOW
First quarter 18 15/16 15 13/16
Second quarter 18 5/8 16 1/2
Third quarter 17 1/2 13 1/4
Fourth quarter 21 1/8 15
1997 HIGH LOW
First quarter 18 3/4 14 1/4
Second quarter 17 3/4 14 7/8
Third quarter 19 1/2 16 3/8
Fourth quarter 19 1/4 14 11/16
</TABLE>
The Company has not paid any dividends on its common stock. It is the general
policy of the Company to retain its earnings to support the growth of its
business. Any dividends declared will be at the discretion of the Board of
Directors and will depend upon the Company's financial condition, earnings and
other factors. The Company's 9 5/8% Senior Unsecured Notes due 2003 ("the
Notes"), the Company's Bank Facility and an agreement relating to certain of the
Company's mortgage indebtedness contain restrictions or limitations upon the
payment of dividends by the Company. See "Item 8. Financial Statements and
Supplementary Data -- Notes 4 and 5 to the Consolidated Financial Statements."
15
Red Roof Inns Inc. and Subsidiaries
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data (excluding Comparable Inn statistics)
relating to the Company have been taken or derived from the historical financial
statements of the Company and are qualified in their entirety by reference to
such financial statements and notes. Certain amounts in the prior years'
selected financial data have been reclassed to conform with the 1998
presentation. See "Item 8. Financial Statements and Supplementary Data." The
financial data as of December 31, 1994, December 30, 1995, December 28, 1996 and
for the fiscal years 1994 and 1995 have been derived from audited financial
statements of the Company which are not included in this report.
<TABLE>
<CAPTION>
FISCAL YEARS (1)
-----------------------------------------------------------------------
(53 weeks)
1994 1995 1996 1997 1998
---------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA AND COMPARABLE INNS STATISTICS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $275,606 $298,353 $ 325,470 $ 360,805 $375,336
Direct room, corporate and marketing expenses 172,479 189,894 208,355 236,107 234,843
Depreciation and amortization 23,874 26,892 36,527 36,386 38,787
-------- -------- --------- --------- --------
Operating income 79,253 81,567(2) 80,588(3) 88,312(4) 101,706(5)
Interest expense 52,174 51,260 41,777 46,205 46,358
Income before income taxes and extraordinary
item 28,100 30,838(2) 39,676(3) 42,723(4) 56,125(5)
Income taxes 11,240 12,516 15,612 16,619 21,832
Income before extraordinary item 16,860 18,322(2) 24,064(3) 26,104(4) 34,293(5)
Net income 16,860 18,322(2) 24,064(3) 25,358(4) 34,061(5)
Income per share before extraordinary item:
Basic 0.92(6) 1.00(2)(6) 0.88(3) 0.93(4) 1.24(5)
Diluted 0.92(6) 0.99(2)(6) 0.87(3) 0.93(4) 1.24(5)
Net income per share:
Basic 0.92(6) 1.00(2)(6) 0.88(3) 0.91(4) 1.23(5)
Diluted 0.92(6) 0.99(2)(6) 0.87(3) 0.90(4) 1.23(5)
Shares used in per share calculation:
Basic 18,400 18,400 27,362 27,982 27,566
Diluted 18,400 18,521 27,549 28,167 27,732
BALANCE SHEET DATA
Total assets $687,023 $755,348 $ 867,627 $ 954,758 $969,371
Current maturities of debt 15,996 11,951 12,020 11,998 15,048
Long-term debt, excluding current maturities 510,646 544,871 484,158 539,207 512,890
Stockholders' equity (7) 116,389 152,711 319,099 338,736 369,176
OTHER DATA
Cash flow from operations $ 44,824 $ 47,785 $ 60,548 $ 79,176 $ 79,103
Net cash used by investing activities (49,571) (87,414) (126,558) (131,265) (55,809)
Net cash provided (used) by financing
activities (8,286) 42,018 81,242 45,584 (33,719)
EBITDA(8) 104,148 108,990(2) 117,980(3) 125,314(4) 141,270(5)
EBITDA as a percentage of revenues(8) 37.8% 36.5%(2) 36.2%(3) 34.7%(4) 37.6%(5)
Ratio of earnings to fixed charges(9) 1.5x 1.5x 1.8x 1.8x 2.0x
Capital expenditures:
Development, acquisitions and related
improvements(10) $ 31,677 $ 74,193 $ 101,494 $ 85,631 $ 44,243
Other 13,399 15,194 26,076 45,604 30,445
COMPARABLE INN STATISTICS
Inns open (at end of period) 210 210 223 238 238
Available rooms (at end of period) 23,417 23,397 24,958 27,060 27,052
Room nights occupied (in thousands) 6,740 6,587 6,732 6,939 7,193
Average occupancy percentage(11) 79.1% 77.3% 74.2% 70.4% 73.0%
ADR(12) $ 39.63 $ 42.11 $ 44.36 $ 47.10 $ 46.80
RevPAR(13) $ 31.35 $ 32.55 $ 32.92 $ 33.16 $ 34.16
</TABLE>
<CN>
16
Red Roof Inns Inc. and Subsidiaries
<PAGE> 17
(1) The Company operates on a 52-53 week fiscal year which ends on the Saturday
nearest to December 31. The 1994, 1995, 1996 and 1998 fiscal years each
consisted of 52 weeks while the 1997 fiscal year consisted of 53 weeks. The
actual year end for each fiscal year was as follows: December 31, 1994, December
30, 1995, December 28, 1996, January 3, 1998 and January 2, 1999.
(2) Included in direct room, corporate and marketing expenses for 1995 was a
charge of $3,142 relating to a change in management. Had such charge not been
incurred, operating income, income before income taxes and EBITDA would have
been $84,709, $33,980 and $112,132, respectively, with EBITDA as a percentage of
revenues being 37.6%. Net income for 1995 was reduced by $1,873 ($.10 per
share -- basic and diluted) due to such charge. Excluding this charge, net
income would have been $20,195 ($1.10 per share -- basic and $1.09 per
share -- diluted).
(3) Included in direct room, corporate and marketing expenses for 1996 was a
charge of $2,551 relating to the Inn renewal program. In addition, included in
depreciation and amortization are charges of $7,847 related to early asset
retirements associated with the Inn renewal program and $450 relating to an
adjustment to recognize impairments of certain long-lived assets. Had these
charges not been incurred, operating income and income before income taxes would
have been $91,436 and $50,524, respectively. EBITDA was reduced by $2,551
relating to these charges. EBITDA would have been $120,531 with EBITDA as a
percentage of revenues being 37.0%. Net income for 1996 was reduced by $6,481
($.24 per share -- basic and diluted) due to these charges. Excluding these
charges, net income would have been $30,545 ($1.12 per share -- basic and $1.11
per share -- diluted). See "Item 8. Financial Statements and Supplementary
Data -- Note 10 to the Consolidated Financial Statements."
(4) Included in direct room, corporate and marketing expenses for 1997 were
charges of $1,421 for severance compensation relating to re-engineering and
$11,679 relating to the Inn renewal program. In addition, included in
depreciation and amortization was a charge of $2,387 related to early asset
retirements associated with the Inn renewal program. Had such charges not been
incurred, operating income and income before income taxes and extraordinary item
would have been $103,799 and $58,210 respectively. EBITDA was reduced by $13,100
relating to these charges. EBITDA would have been $138,414 with EBITDA as a
percentage of revenues being 38.4%. Income before extraordinary item for 1997
was reduced by $9,462 ($.34 per share -- basic and $.33 per share -- diluted).
Net income was reduced by an extraordinary charge of $746, net of tax ($.02 per
share -- basic and $.03 per share -- diluted) related to the write-off of
unamortized loan costs of $1,228 related to the Company's refinancing of its
bank credit facility. Excluding these charges, net income would have been
$35,566 ($1.27 per share -- basic and $1.26 per share -diluted). See "Item 8.
Financial Statements and Supplementary Data -- Notes 1 and 10 to the
Consolidated Financial Statements."
(5) Included in direct room, corporate and marketing expenses for 1998 were
charges of $1,659 for severance compensation, $1,246 for conversion of the
Company's accounting system to be year 2000 compliant, $1,944 for write-offs of
preliminary site acquisition costs and $415 for termination of a pension plan.
In addition, included in depreciation and amortization is a charge of $914
related to impairments of certain long-lived assets. Had such charges not been
incurred, operating income and income before income taxes and extraordinary item
would have been $107,884 and $62,303, respectively. EBITDA was reduced by $5,264
relating to these charges. EBITDA would have been $146,534 with EBITDA as a
percentage of revenues being 39.0%. Income before extraordinary item for 1998
was reduced by $3,775 ($.14 per share-basic and $.13 per share-diluted) due to
these charges. Net income was reduced by an extraordinary charge of $232, net of
tax ($.01 per share -- basic and diluted) related to the write-off of
unamortized loan costs, net of purchase discount, associated with the Company's
partial repurchase of senior unsecured notes due in 2003. Excluding these
charges, net income would have been $38,068 ($1.38 per share -- basic and $1.37
per share -- diluted). See "Item 8. Financial Statements and Supplementary
Date -- Notes 5 and 10 to the Consolidated Financial Statements."
(6) Adjusted to give effect solely to the issuance of an additional 10,000
shares in the Offering, 1994 and 1995 net income per share would have been
$.59 -- basic and diluted in 1994 and $.65 -- basic and $.64 -- diluted in 1995.
(7) The Company has not paid any dividends on its common stock.
(8) EBITDA is operating income plus the sum of interest income, other income,
depreciation, amortization and loss on fixed asset retirements. EBITDA is not
intended to represent cash flow from operations as defined by generally accepted
accounting principles, and such information should not be considered as an
alternative to net income, cash flow from operations or any other measure of
performance prescribed by generally accepted accounting principles. EBITDA is
included herein because management believes that certain investors find it to be
a useful tool for measuring the ability to service debt.
(9) For purposes of calculating the ratio of earnings to fixed charges, earnings
include income before income taxes plus fixed charges, excluding capitalized
interest. Fixed charges consist of interest expense, including capitalized
interest, and the portion of rental expense representative of an interest
factor.
(10) In 1994, the Company purchased 10 Inns and one development site for an
aggregate cost, including renovation expenditures, of $31,677. In 1995, the
Company purchased 10 Inns, nine development sites and land previously under
lease for an aggregate cost, including renovation and construction costs, of
$63,217 and also spent $10,976 related to renovations and improvements to the 10
Inns and one development site acquired during the second half of 1994. In 1996,
the Company purchased seven Inns and eight development sites for an aggregate
cost, including renovation and construction costs, of $62,581 and also spent
$38,913 related to renovations and improvements to the 20 Inns and 10
development sites purchased in 1994 and 1995. In 1997, the Company purchased one
inn and 11 development sites for an aggregate cost, including renovation and
construction costs, of $36,993 and also spent $48,638 related to renovations and
improvements to 27 Inns and 18 development sites acquired prior to 1997. In
1998, the Company purchased two development sites for an aggregate cost,
including renovation and construction costs, of $4,123 and also spent $40,120
related to renovations and improvements to five Inns and 14 development sites
acquired in 1996 and 1997. A development site purchased in 1997, with a cost of
$506, is being held for sale to a prospective franchisee. One of the development
sites purchased in 1998, at a cost of $627, is being held for sale to a
prospective franchisee.
(11) Average occupancy percentage represents total rooms occupied divided by
total available rooms. Total available rooms represents the number of rooms
available multiplied by the number of days in the reported period.
(12) ADR represents total room revenues (net of allowances) divided by the total
number of rooms occupied.
(13) RevPAR represents the average occupancy percentage multiplied by the
average daily room rate for the reported period.
17
Red Roof Inns Inc. and Subsidiaries
<PAGE> 18
MANAGEMENT'S DISCUSSION AND
ITEM 7. ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
The following table sets forth certain operating data for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS(1)
------------------------------
1996 1997 1998
<S> <C> <C> <C>
Company-owned Inns open
(at end of year) 248 254 256
Franchised Inns open
(at end of year) 5 39
Comparable Inn Statistics
Inns open (at end of year) 223 238 238
Available rooms
(at end of year) 24,958 27,060 27,052
Room nights occupied
(in thousands) 6,732 6,939 7,193
Average occupancy percentage 74.2% 70.4% 73.0%
ADR $ 44.36 $ 47.10 $ 46.80
RevPAR 32.92 33.16 34.16
Revenues (in thousands) 325,470 360,805 375,336
Operating income
(in thousands) (2) 80,588 88,312 101,706
Operating income (as
percentage of revenues) (2) 24.8% 24.5% 27.1%
</TABLE>
(1) The Company operates on a 52-53 week fiscal year which ends on the Saturday
nearest to December 31. The 1996 and 1998 fiscal years each consisted of 52
weeks and the 1997 fiscal year consisted of 53 weeks. The actual year end for
each fiscal year was as follows: December 28, 1996, January 3, 1998 and January
2, 1999.
(2) Operating income for 1996 was reduced by charges of $10,398 and $450
relating to the Inn renewal program and an adjustment to recognize impairments
of certain long-lived assets, respectively. Had such charges not been incurred,
operating income for 1996 would have been $91,436 and operating income as a
percentage of revenues would have been 28.1%. See "Item 8. Financial Statements
and Supplementary Data -- Note 10 to the Consolidated Financial Statements."
Operating income for 1997 was reduced by charges of $1,421 for severance
compensation relating to re-engineering and $14,066 relating to the Inn renewal
program. Had such charges not been incurred, operating income for 1997 would
have been $103,799 and operating income as a percentage of revenues would have
been 28.8%. See "Item 8. Financial Statements and Supplementary Data -- Note 10
to the Consolidated Financial Statements."
Operating income for 1998 was reduced by charges of $1,659 for severance
compensation, $1,246 for conversion of the Company's accounting system to be
year 2000 compliant, $1,944 for write-offs of preliminary site acquisition
costs, $415 for termination of a pension plan and $914 related to impairments of
certain long-lived assets. Had such charges not been incurred, operating income
for 1998 would have been $107,884 and operating income as a percentage of
revenues would have been 28.7%. See "Item 8. Financial Statements and
Supplementary Data -- Note 10 to the Consolidated Financial Statements."
RESULTS OF OPERATIONS
1998 Compared To 1997
The Company's revenues are principally derived from room rentals and fee-based
income. Revenues increased $14.5 million, or 4.0%, from $360.8 million in 1997
to $375.3 million in 1998. Fiscal year 1997 consisted of 53 weeks while 1998
consisted of 52 weeks. The extra week in 1997 accounted for approximately $5
million of revenue. RevPAR for the 238 Comparable Inns increased $1.00, or 3.0%,
from $33.16 in 1997 to $34.16 in 1998. The revenue increase for the Comparable
Inns was $3.0 million, primarily as a result of an increase in the average
occupancy from 70.4% in 1997 to 73.0% in 1998, which was partially offset by a
decrease in ADR of $.30, or .6%, from $47.10 in 1997 to $46.80 in 1998. The
Company attributes the decrease in ADR to planned price decreases early in the
year coupled with discount programs implemented during 1998 which targeted
senior citizens and members of the American Automobile Association (AAA). The
decrease in ADR was more than offset by demand generated by these programs which
contributed to the occupancy and RevPAR increases. The Company also attributes
the occupancy and RevPAR increase to the positive effects of its revenue
management system and the completion of its Inn renewal program. In addition,
$8.7 million of the increase in revenues was attributable to an increase in the
operating performance of 18 Inns in Stabilization. Management expects newly
developed or acquired Inns to operate initially below historical Company
averages of occupancy and ADR and to experience an occupancy stabilization
period after construction or renovation. Revenues in 1998 were reduced by
approximately $4 million as a result of the sale of four properties and the
lease of one property located in California to a franchisee early in the second
quarter of 1998. Also, room revenues were impacted by a decline in telephone
revenues in 1998 of approximately $3 million as more guests are using
alternative long distance services than those provided by the Company.
Management expects to see further declines in telephone revenues.
The Company increased fee-based revenues $2.8 million from $1.2 million in 1997
to $4.0 million in 1998 due to programs implemented during 1997 to franchise the
brand and from the formation of alliances with well-known
18
Red Roof Inns Inc. and Subsidiaries
<PAGE> 19
consumer products and service companies to promote their products and services.
The Company had 39 franchised Inns open at the end of 1998 compared to five
franchised Inns open at the end of 1997.
Direct room expenses include salaries, wages, utilities, repairs and
maintenance, property taxes, local advertising, room supplies, security, general
and administrative expenses. Direct room expenses increased $1.8 million, or
1.0%, from $179.8 million in 1997 to $181.6 million in 1998. As a percentage of
room revenues, direct room expenses decreased from 50.0% in 1997 to 48.9% in
1998. Direct room expenses in 1997 include $7.5 million related to Inn renewal
program expenses and 1998 includes $.4 million related to the termination of a
pension plan. Excluding these charges, direct room expenses, as a percentage of
room revenues, would have been 47.9% in 1997 and 48.8% in 1998. Direct room
expenses, excluding charges related to the Inn renewal program and termination
of the pension plan, increased primarily because of the addition of new Inns,
generally higher salary, wage and incentive expenses and an increase in planned
repairs and maintenance expenditures.
Depreciation and amortization increased $2.4 million, or 6.6%, from $36.4
million in 1997 to $38.8 million in 1998. The increase primarily reflects
depreciation on Inns opened in 1997 and 1998. Included in depreciation and
amortization for 1997 are asset impairment charges of $2.4 million related to
the Inn renewal program and 1998 includes asset impairment charges, primarily
related to land held for sale, of $.9 million.
Corporate expenses include the cost of general management, training and field
supervision of Inn managers, development, reservations, franchise, information
systems and administrative expenses. Corporate expenses increased $3.2 million
or 10.1%, from $31.8 million in 1997 to $35.0 million in 1998. Corporate
expenses for 1997 include charges of $.5 million related to the Inn renewal
program and $1.4 million for severance compensation related to the
re-engineering. 1998 includes charges of $1.7 million related to severance
compensation for certain officers and employees, $1.2 million for the conversion
of the Company's accounting system to be year 2000 compliant and $1.9 million
related to the write-off of preliminary site acquisition costs. As a percentage
of revenue, corporate expenses were 8.8% and 9.3% in 1997 and 1998,
respectively. Excluding previously mentioned charges, corporate expenses
increased primarily as a result of an increase in franchise expenses due to
increased staffing and increased reservation costs attributed to the increase in
occupancy. Management expects corporate expenses to increase in the future as
the Company adds new franchised Inns to the chain with increased reservation
expenses partially offset by the collection of franchise reservation fees.
Marketing expenses include the cost of media advertising and related production
costs, billboard expenses and expenses associated with the Company's corporate
sales group. Marketing expenses decreased $6.3 million, or 25.7%, from $24.5
million in 1997 to $18.2 million in 1998. As a percentage of revenue, marketing
expenses were 6.8% and 4.9% in 1997 and 1998, respectively. The decrease is
primarily related to a less expensive spring advertising campaign and a
reduction in billboard expenses. In addition, included in 1997 were promotional
costs of $3.7 million related to the Inn renewal program. These decreases were
partially offset by increases in payroll costs and expenses associated with
additional corporate sales staff. Management expects on-going marketing expenses
to remain at about the same percentage of revenues as in 1998 and will partially
fund on-going marketing expenses through the collection of franchise marketing
fees.
Had the Company not incurred charges of $15.5 million in 1997 related to the Inn
renewal program and severance compensation, operating expenses and operating
income for 1997 would have been $257.0 million and $103.8 million, respectively.
Had the Company not incurred charges of $6.2 million in 1998 related to the
termination of a pension plan, asset impairment charges, severance compensation,
conversion of the Company's accounting system and the write-off of preliminary
site acquisition costs, operating expenses and operating income for 1998 would
have been $267.4 million and $107.9 million, respectively. See "Item 8.
Financial Statements and Supplementary Data -- Note 10 to the Consolidated
Financial Statements."
19
Red Roof Inns Inc. and Subsidiaries
<PAGE> 20
Interest expense increased $.2 million, or .4%, from $46.2 million in 1997 to
$46.4 million in 1998 because of increased borrowings under the Company's $250
million Bank Facility primarily related to development and acquisitions. At
January 2, 1999, approximately $198 million of the Company's debt bore interest
at variable rates.
1997 Compared To 1996
Revenues increased $35.3 million, or 10.8%, from $325.5 million in 1996 to
$360.8 million in 1997. Fiscal year 1997 consisted of 53 weeks while 1996
consisted of 52 weeks. The extra week accounted for approximately $5 million of
the increase in revenues for 1997. RevPAR for the 223 Comparable Inns increased
$.33, or 1.0%, from $32.92 in 1996 to $33.25 in 1997. The revenue increase for
the Comparable Inns was primarily caused by an increase in ADR of $2.47, or
5.6%, from $44.36 in 1996 to $46.83 in 1997. The average occupancy percentage
for the Comparable Inns decreased from 74.2% in 1996 to 71.0% in 1997. The
Company attributes the decline in occupancy and nominal RevPAR growth to the
increased supply of competitive hotel rooms, aggressive price increases early in
the first quarter, low occupancies due to the New Year's holiday falling on a
Wednesday, and a significant reduction in demand for hotel rooms in the Atlanta
and Texas markets where approximately 10% of the Company's properties are
located. The Company believes that the decrease in the Atlanta market is due to
the high demand generated in 1996 related to the Summer Olympic Games while the
decrease in the Texas market is due to an increase in room supply. Approximately
$25 million ($1 million attributed to the extra week) of the increase in
revenues was attributable to an increase in the operating performance of 31 Inns
in Stabilization. Management expects newly developed or acquired Inns to
initially operate below historical company averages of occupancy and ADR and to
experience an occupancy stabilization period after construction or renovation.
In addition, $1.2 million of the revenue increase was from fee-based programs
implemented during 1997. The Company had five franchised Inns open at the end of
1997. No franchised Inns were open in 1996.
Direct room expenses increased $15.9 million, or 9.7%, from $163.9 million in
1996 to $179.8 million in 1997. The expenses increased primarily because of the
addition of new Inns and generally higher salary, wage and incentive expenses
that were partially offset by the need for fewer repairs and maintenance
expenditures as a result of the Inn renewal program. Inn renewal program
expenses, included in direct room expenses, were $2.3 million in 1996 and $7.5
million in 1997. As a percentage of room revenues, direct room expenses
decreased from 50.4% in 1996 to 50.0% in 1997. Excluding Inn renewal program
expenses, direct room expenses as a percentage of revenue decreased from 49.7%
in 1996 to 47.9% in 1997.
Depreciation and amortization decreased $.1 million, or .3%, from $36.5 million
in 1996 to $36.4 million in 1997. Included in depreciation and amortization
expense for 1996 and 1997 are asset impairment charges of $8.3 million and $2.4
million, respectively, related primarily to the Inn renewal program. Excluding
the asset impairment charges, depreciation and amortization increased $5.8
million which primarily reflects depreciation on Inns opened in 1996 and 1997.
Corporate expenses increased $3.6 million or 12.8%, from $28.2 million in 1996
to $31.8 million in 1997. The increase is attributed to the increased staffing
costs and related expenses associated with the Company's implementation of the
franchising program in the last quarter of 1996. In addition, 1997 includes a
charge of $1.4 million for severance compensation relating to re-engineering and
an increase in incentive compensation. As a percentage of revenue, corporate
expenses were 8.7% and 8.8% in 1996 and 1997, respectively. Corporate expense in
1996 and 1997 included charges of $.1 million and $.5 million, respectively,
related to the Inn renewal program.
Marketing expenses increased $8.3 million, or 51.2%, from $16.2 million in 1996
to $24.5 million in 1997. The increase in marketing is attributed to the
Company's expansion of the corporate sales group and to increased media expenses
related to additional advertising associated with the Company's first ever
summer advertising campaign to further enhance the Company's brand awareness. In
addition, the Company incurred promotion costs of $3.7 million in 1997 related
to the Inn renewal program. As a percentage of revenue, marketing expenses were
5.0% and 6.8% in 1996 and 1997, respectively. Excluding
20
Red Roof Inns Inc. and Subsidiaries
<PAGE> 21
the promotion costs for the Inn renewal program, marketing expenses as a
percentage of revenues in 1997 were 5.8%.
Had the Company not incurred charges of $10.9 million in 1996 related to the inn
renewal program and the fixed asset impairments, operating expenses and
operating income for 1996 would have been $234.0 million and $91.4 million,
respectively. Had the Company not incurred charges of $15.5 million in 1997
related to the Inn renewal program and severance compensation, operating
expenses and operating income for 1997 would have been $257.0 million and $103.8
million, respectively. See "Item 8. Financial Statements and Supplementary Date
- -Note 10 to the Consolidated Financial Statements."
Interest expense increased $4.4 million, or 10.5%, from $41.8 million in 1996 to
$46.2 million in 1997 because of increased borrowings under the Company's $250
million Bank Facility related to development, acquisitions and capital
expenditures associated with the Inn renewal program. At January 3, 1998,
approximately $178 million of the Company's debt bore interest at variable
rates.
SUPPLEMENTAL INFORMATION
Management believes the following supplemental information presents meaningful
comparisons to on-going operations and summarizes the results of operations of
the Company, adjusted to reflect (a) the effect of the Offering, as if the
Offering had occurred at the beginning of the fiscal year for 1996, (b) the
elimination of extraordinary losses in 1997 and 1998 and (c) the elimination of
certain charges in the year presented to arrive at adjusted operating income,
net income and earnings per share amounts. These amounts do not represent
operating income, net income, and earnings per share as defined by generally
accepted accounting principles. See "Item 8. Financial Statements and
Supplementary Data -- Notes 1, 5, 6 and 10 to the Consolidated Financial
Statements."
<TABLE>
<CAPTION>
1996 1997 1998
(52 weeks) (53 weeks) (52 weeks)
----------------------------------------------------------------------------------
OPERATING NET OPERATING NET OPERATING NET
INCOME INCOME INCOME INCOME INCOME INCOME
<S> <C> <C> <C> <C> <C> <C>
As reported $80,588 $24,064 $ 88,312 $25,358 $101,706 $34,061
Interest expense adjustment for the
Offering 790
Extraordinary loss 746 232
------- ------- -------- ------- -------- -------
Pro-forma before other charges 80,588 24,854 88,312 26,104 101,706 34,293
Adjustments for other charges:
Inn renewal program expenses 10,398 6,212 14,066 8,594
Severance expenses 1,421 868 1,659 1,014
Asset impairment charges 450 269 914 558
Termination of pension plan 415 254
Costs of converting accounting system 1,246 761
Write-off of preliminary site acquisition
costs 1,944 1,188
------- ------- -------- ------- -------- -------
Total other charges 10,848 6,481 15,487 9,462 6,178 3,775
------- ------- -------- ------- -------- -------
Comparative results $91,436 $31,335 $103,799 $35,566 $107,884 $38,068
======= ======= ======== ======= ======== =======
Comparative earnings per share:
Basic $ 1.11 $ 1.27 $ 1.38
Diluted 1.10 1.26 1.37
</TABLE>
21
Red Roof Inns Inc. and Subsidiaries
<PAGE> 22
CAPITAL RESOURCES AND LIQUIDITY
General
The following table sets forth certain capital resource and liquidity
information for the years indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEARS
--------------------------------------
1996 1997 1998
(52 weeks) (53 weeks) (52 WEEKS)
<S> <C> <C> <C>
Cash flow from
operations $ 60,548 $ 79,176 $ 79,103
Net cash used by
investing activities (126,558) (131,265) (55,809)
Net cash provided
(used) by financing
activities 81,242 45,584 (33,719)
Gross operating
profit (4) 161,500 179,811 189,778
Gross operating
profit as a
percentage of
revenues (4) 49.6% 50.0% 51.1%
EBITDA (5) $117,980(1) $125,314(2) $141,270(3)
EBITDA as percentage
of revenues (5) 36.2%(1) 34.7%(2) 37.6%(3)
Ratio of earnings to
fixed charges (6) 1.8x 1.8x 2.0x
</TABLE>
(1) EBITDA for 1996 was reduced by a charge of $2,551 relating to the Inn
renewal program. Had such charge not been incurred, EBITDA would have been
$120,531 and EBITDA as a percentage of revenues would have been 37.0%. See "Item
8. Financial Statements and Supplementary Data -- Note 10 to the Consolidated
Financial Statements."
(2) EBITDA for 1997 was reduced by total charges of $13,100 of which $1,421 was
for severance compensation related to reengineering and $11,679 related to the
Inn renewal program. Had such charges not been incurred, EBITDA would have been
$138,414 and EBITDA as a percentage of revenues would have been 38.4%. See "Item
8. Financial Statements and Supplementary Data -- Note 10 to the Consolidated
Financial Statements."
(3) EBITDA for 1998 was reduced by total charges of $5,264 of which $1,659 was
for severance compensation, $1,246 was for conversion of the Company's
accounting system, $1,944 was for write-offs of preliminary site acquisition
costs and $415 was for termination of a pension plan. Had such charges not been
incurred, EBITDA would have been $146,534 and EBITDA as a percentage of revenues
would have been 39.0%. See "Item 8. Financial Statements and Supplementary
Data -- Note 10 to the Consolidated Financial Statements."
(4) Gross operating profit is room revenues less direct room expenses.
(5) EBITDA is operating income plus the sum of interest income, other income,
depreciation, amortization and loss on fixed asset retirements. EBITDA is not
intended to represent cash flow from operations as defined by generally accepted
accounting principles, and such information should not be considered as an
alternative to net income, cash flow from operations or any other measure of
performance prescribed by generally accepted accounting principles. EBITDA is
included herein because management believes that certain investors find it to be
a useful tool for measuring the ability to service debt.
(6) For purposes of calculating the ratio of earnings to fixed charges, earnings
include income before income taxes plus fixed charges, excluding capitalized
interest. Fixed charges consist of interest expense, including capitalized
interest and the portion of rental expense representative of an interest factor.
In general, the Company has historically financed its development through
internal cash flow and secured debt. As of January 2, 1999, 167 of the Company's
256 Inns, in addition to the Company's corporate facilities, were pledged to
secure its long-term debt and its Bank Facility.
Cash and cash equivalents decreased $10.5 million from $13.2 million at January
3, 1998 to $2.7 million at January 2, 1999.
The Company has historically operated with current liabilities in excess of
current assets as a result of partially financing its expansion through
internally generated cash. The Company believes that cash flow from operations
will be sufficient to satisfy its working capital needs in 1999. At January 2,
1999, the Company had current liabilities of $56.1 million, including current
maturities of long-term debt of $15.0 million, and current assets of $34.9
million.
Current maturities of long-term debt increased $3.0 million from $12.0 million
at January 3, 1998 to $15.0 million at January 2, 1999 due to normal
amortization of mortgage notes and obligations under capital leases.
As of January 2, 1999, $63.5 million was available for borrowing under the
Company's $250 million Bank Facility. Borrowings under the Bank Facility bear
interest at either the administrative agent's prime rate or LIBOR plus tiered
spreads based upon the Company's leverage ratios. The Bank Facility contains
various covenants typical of senior secured bank facilities, and currently
requires the Company to maintain a tangible net worth of not less than $218
million and to maintain the following financial ratios: funded debt to EBITDA of
not more than 4.5 to 1.0, EBITDA to fixed charges and restricted payments
(including payment of dividends on the Company's Common Stock) of not less than
1.5 to 1.0 and senior debt to senior EBITDA of not more than 4.0 to 1.0. The
Bank Facility contains events of default for breach of these covenants
22
Red Roof Inns Inc. and Subsidiaries
<PAGE> 23
as well as other events of default customary for financings of similar size and
nature, including a change in control of the Company.
As of January 2, 1999, the Company's total long-term indebtedness (including
current maturities) was approximately $528 million. Approximately $352 million
of such indebtedness is mortgage indebtedness and approximately $198 million of
such indebtedness bears interest at variable rates. A one percentage point
increase or decrease in interest rates will increase or decrease the Company's
pre-tax income by approximately $2 million. For a further description of the
Company's mortgage indebtedness, see "Item 8. Financial Statements and
Supplementary Data -- Notes 3, 4 and 5 to the Consolidated Financial
Statements."
During 1998, the Company was authorized to purchase up to $50 million of senior
unsecured notes on the open market and in privately negotiated transactions and,
as of January 2, 1999, had repurchased $27.6 million of senior unsecured notes.
In addition, the Company was authorized to purchase up to 1 million shares of
its outstanding common stock and, as of January 2, 1999, had purchased
approximately .4 million shares for an aggregate cost of a $5.5 million.
Subsequent to January 2, 1999, the Company has purchased an additional .4
million shares for an aggregate cost of $6.7 million.
CAPITAL EXPENDITURES
The following table sets forth certain information regarding the Company's cash
flow from operations and capital expenditures, excluding software, development,
acquisitions and related improvements, for 1996, 1997 and 1998.
<TABLE>
<CAPTION>
FISCAL YEARS
---------------------------------
1996 1997 1998
<S> <C> <C> <C>
Cash flow from
operations $60,548 $79,176 $79,103
Capital expenditures (1) 26,076(2) 45,604(2) 30,445(2)
</TABLE>
(1) Includes furniture, fixtures, equipment, lobby conversions, room
renovations, exterior renovations such as roofing, paving and concrete walks and
general corporate expenditures.
(2) 1996, 1997 and 1998 capital expenditures include $6.4 million, $37.4 million
and $7.4 million, respectively, in improvements related to the Company's Inn
renewal program. Included in the Inn renewal program expenditures for 1997 and
1998 are $1.2 million and $.3 million, respectively, for hardware related to the
revenue management system. In addition, during 1996 and 1997, the Company spent
$1.7 million and $.7 million, respectively, on software related to the revenue
management system associated with the Company's Inn renewal program.
The Company has substantially completed improvements on 16 development sites (of
which 13 Inns are open) and has completed the renovation of eight Inns acquired
and opened during the last three years. In connection with the improvements and
renovations of these Inns, the Company spent $42.9 million in 1998, and expects
to spend approximately $9 million in 1999 to complete these improvements and
renovations. In 1998, the Company acquired one development site, for an
aggregate cost, including construction costs, of $3.5 million and expects to
spend approximately $15 million for improvements to this property over the next
18 months.
Currently, the Company has one development site under a long-term lease that can
be terminated by the Company before March 31, 1999.
Management expects to fund the Company's 1999 capital expenditures associated
with improvements for its Comparable Inns from cash flow from operations and
from available cash. Estimated 1999 expenditures associated with the developed
properties and acquired Inns will be financed from these sources together with
borrowing under the Bank Facility. The Company may issue additional equity or
debt, or expand its Bank Facility to fund future expansion activities.
HISTORICAL CASH FLOWS
1998 Compared To 1997
Cash provided by operations decreased $.1 million, or .1%, from $79.2 million in
1997 to $79.1 million in 1998, generally as the result of increases in net
income of $8.7 million and non-cash charges to income of $1.5 million, which
were offset by a net decrease from the prior year of $10.3 million in various
working capital components.
Net cash used by investing activities decreased $75.5 million from $131.3
million in 1997 to $55.8 million in 1998, primarily resulting from reduced
expenditures for acquisition, construction and renovation activities associated
with the Company's expansion program. In addition, 1997 included $38.1 million
for expenditures related to the Inn
23
Red Roof Inns Inc. and Subsidiaries
<PAGE> 24
renewal program. Expenditures for property and equipment in 1998 include the
acquisition of two development sites (including one site held for sale to a
prospective franchisee) for a total cost, including improvements of $4.1 million
and $42.9 million related to improvements and renovations to 16 development
sites and eight properties acquired prior to 1998. During 1998, the Company sold
four of its California properties and a property under construction in Atlanta,
Georgia to franchisees. In addition, during 1998, the Company sold residual
ground at certain of its properties. Proceeds from these sales totaling
approximately $24 million were used to repay borrowings on the Bank Facility and
mortgage notes.
Net cash provided by financing activities decreased $79.3 million from a source
of $45.6 million in 1997 to a use of $33.7 million in 1998. 1998 includes net
borrowings under the Bank Facility of $21.2 million which were primarily used to
purchase $27.6 million of senior unsecured notes and purchase common stock for
treasury of $5.5 million. 1997 includes net borrowings under the Bank Facility
of $89.2 million, which were offset by principal payments of long term debt of
$37.9 million and the net purchase of common stock for treasury of $5.7 million.
1997 Compared To 1996
Cash provided by operations increased $18.7 million, or 30.9%, from $60.5
million in 1996 to $79.2 million in 1997, generally as the result of increases
in net income of $1.3 million, non-cash charges to income of $3.8 million and
$13.6 million in various working capital components.
Net cash used by investing activities increased $4.7 million from $126.6 million
in 1996 to $131.3 million in 1997, primarily resulting from expenditures for
acquisitions, construction and renovation activities associated with the
Company's expansion program and $38.1 million for expenditures related to the
Inn renewal program. Expenditures for property and equipment in 1997 include the
acquisition of nine development sites and one Inn for a total cost, including
improvements of $37.9 million and $48.6 million related to improvements and
renovations to 18 development sites and 27 properties acquired prior to 1997.
Net cash provided by financing activities decreased $35.6 million from $81.2
million in 1996 to $45.6 million in 1997. Cash provided by financing activities
in 1996 included $62.6 million in net proceeds from the Offering after principal
payments of long-term debt. 1997 includes net borrowings under the Bank Facility
of $89.2 million, which were offset by principal payments of long term debt of
$37.9 million and the net purchase of common stock for treasury of $5.7 million.
EBITDA
EBITDA increased $16.0 million, or 12.8%, from $125.3 million in 1997 to $141.3
million in 1998. EBITDA increased $7.3 million, or 6.2%, from $118.0 million in
1996 to $125.3 million in 1997. EBITDA in 1996 and 1997 includes charges of $2.5
million and $11.7 million, respectively, related to the Inn renewal program. In
addition, 1997 includes $1.4 million of severance compensation related to
re-engineering. 1998 includes charges of $1.7 million for severance
compensation, $1.2 million for conversion of the Company's accounting system,
$1.9 million for write-offs of preliminary site acquisition costs and $.4
million related to the termination of a pension plan. Had such charges not been
incurred, EBITDA would have been $120.5 million, $138.4 million and $146.5
million in 1996, 1997 and 1998, respectively. EBITDA is not intended to
represent cash flow from operations as defined by generally accepted accounting
principles, and such information should not be considered as an alternative to
net income, cash flow from operations or any other measure of performance
prescribed by generally accepted accounting principles. EBITDA is included
herein because management believes that certain investors find it to be a useful
tool for measuring the ability to service debt.
INFLATION
The rate of inflation as measured by changes in the average consumer price index
has not had a material effect on the revenues or net earnings of the Company in
the three most recent years.
YEAR 2000 REMEDIATION
The Company uses computer technologies throughout its business. Computer
technologies include both information technology in the form of hardware and
software, as
24
Red Roof Inns Inc. and Subsidiaries
<PAGE> 25
well as embedded technology in the Company's facilities and equipment. Similar
to most businesses, the Company must determine whether its computer systems are
capable of recognizing and processing date-sensitive information properly as the
year 2000 approaches. The Company has assembled a task force of Company
personnel to assess the potential impact of the year 2000 on the Company's
operations and to develop solutions and contingency plans to assure that the
Company's ability to meet the needs of its employees, suppliers and customers
will not be impaired.
The Company has substantially completed its assessment of all date-sensitive
hardware and software and has identified four critical areas requiring
remediation: property management systems at the Inns; reservations system;
accounting systems; and telephone switching equipment. The Company has taken the
following actions to address year 2000 issues for these critical areas:
- Property management systems at the Inns -- All modifications
necessary to make the software year 2000 compliant have been completed. These
modifications have been tested and were implemented by the end of the fourth
quarter of 1998.
- Reservations system -- New software that is year 2000 compliant was
developed by Company personnel and was implemented during January of 1999.
- Accounting systems -- The Company has purchased accounting systems
software and hardware from outside vendors that are year 2000 compliant and is
currently installing and testing these systems and related sub-systems. The
Company expects implementation of the accounting systems to be completed during
the second quarter of 1999.
- Telephone switching equipment -- The Company has identified all
telephone switching equipment that is not year 2000 compliant. Equipment that
will not function properly as a result of non-compliance will be replaced during
1999.
In addition to the four critical areas identified above, the Company is actively
testing and correcting or replacing non-critical systems that are not year 2000
compliant. The Company currently believes it will be able to modify, replace, or
mitigate all affected systems in time to avoid any material detrimental impact
on its operations. The Company will verify the accuracy of this belief by
further testing significant critical and non-critical systems during the third
quarter of 1999 and then remediating any remaining non-compliance that may be
revealed during these tests. If the Company determines that it may be unable to
complete timely remediation and testing of an affected system, the Company
intends to develop appropriate contingency plans (to the extent reasonable
alternatives are available) for any non-compliant system that the Company may
determine would have a potential material detrimental impact upon Company
operations.
The Company is not currently aware of any significant possibility that its
systems will not be properly remediated on a timely basis. However, there can be
no assurance that all year 2000 remediation processes will be completed and
properly tested before the year 2000, or that contingency plans will
sufficiently mitigate the risk of a year 2000 readiness problem. An interruption
of the Company's ability to conduct its business due to a year 2000 readiness
problem could have a material adverse effect on the Company.
In addition to its internal systems, the Company is heavily dependent on public
utility services for its Inns and for its corporate operations, as well as a
national carrier for its telephone services both at Inn level and for its
reservations system and a national processing service for its credit card
transactions. The inability of these vendors to provide services to the Company
due to year 2000 issues could have a material adverse effect on the Company.
The Company has initiated formal communications with its significant suppliers
and critical partners to determine the extent to which the Company might be
vulnerable if any of those parties fails to remediate its own year 2000 issues.
The Company has taken steps to monitor the progress made by those parties and
intends to test critical system interfaces during 1999. The Company will develop
appropriate contingency plans (including the potential to convert to other
vendors or service providers if reasonable alternatives are available) to be
implemented if significant exposure is identified relative to the Company's
dependency on a non-compliant third-party sys-
25
Red Roof Inns Inc. and Subsidiaries
<PAGE> 26
tem. While the Company is not currently aware that any critical third-party
system on which the Company relies is likely to be non-compliant at the
beginning of the year 2000, there can be no guarantee that the systems of
third-parties on which the Company relies will be converted in a timely manner,
or that a failure to properly convert by another vendor or service provider
would not have a material adverse effect on the Company.
The Company estimates that the aggregate costs (exclusive of internal salaries
and wages) for remediation of year 2000 issues will be approximately $7 million,
including $4.5 million of costs already incurred. The total estimated aggregate
costs include $5.5 million of capitalized costs associated with the replacement
of the Company's accounting system and phone switches at certain of its
locations. In addition, the Company estimates it will incur charges to earnings
of $1.6 million, the majority of which were incurred in 1998. The anticipated
impact and costs of the year 2000 remediation project, as well as the date on
which the Company expects to complete the project, are based on management's
best estimates using information currently available. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
materially from those plans. Based on current estimates and information
currently available, the Company does not anticipate that the costs associated
with this project will have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows in future
periods.
FORWARD LOOKING STATEMENTS; CERTAIN FACTORS AFFECTING FUTURE RESULTS
This Form 10-K includes forward-looking statements, including, without
limitation, statements relating to expected openings of company-owned or
franchised Inns; expected performance of stabilized Inns; future fee-based
revenues; anticipated growth in company-owned Inn profitability; anticipated
financial flexibility; anticipated levels of franchising, marketing, and other
corporate expenses; timing and cost of year 2000 remediation; impact of the Inn
renewal program and the Company's new revenue management system; effectiveness
of discounts and other marketing programs; and expected increases in RevPAR,
earnings per share, cash flow per share and free cash flow. These and other
statements containing words or phrases such as "believes", "anticipates",
"estimates", "expects", "intends", and "the Company will" should be considered
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
The Company wishes to caution readers that these forward-looking statements
involve known and unknown risks and uncertainties, and are subject to change
based on various important risk factors that could cause actual Company plans,
goals, objectives, policies, operations, results and performance to differ
materially from those expressed or implied by the forward-looking statements.
The following factors, among others, in some cases have affected and in the
future could affect the plans, goals, objectives, policies, operations, results
and performance of the Company:
Company Expansion Risks. The Company's ability to expand depends on a number of
factors, including the selection and availability of suitable locations at
acceptable prices; hiring and training of sufficiently skilled management and
personnel; and availability of joint venture partners and financing. There can
be no assurance that financing or desirable locations for acquisition or new
development will be available on terms acceptable to the Company. Furthermore,
provisions in the indenture governing the Notes, in the Bank Facility and in
certain mortgage indebtedness agreements may restrict the Company's ability to
meet its expansion objectives. See " Capital Resources and Liquidity." There can
be no assurance that the Company's current plans for development will be
completed successfully or that the nature of such expansion will not be modified
to reflect future events or economic conditions. There can be no assurance that
newly acquired Inns will conform to the Company's previous standards of
construction and design or will perform in-line with Company expectations.
Although the Company believes that it has the infrastructure in place to
accommodate company-owned Inn expansion, the Company's corporate management
expenses will increase as the number of Inns grows. Any increase in expenses
could adversely affect the Company's financial performance. The Company's
inability to implement its expansion plans successfully would limit the
Company's ability to grow its revenue base.
26
Red Roof Inns Inc. and Subsidiaries
<PAGE> 27
Lodging Industry Risks. The lodging industry in general, including the Company,
may be affected adversely by such factors as changes in national and regional
economic conditions (particularly if such changes were to occur in geographic
areas where the Company has a high concentration of Inns); changes in local
market conditions; oversupply of hotel space or a reduction in local demand for
rooms and related services; competition within the hotel industry; and other
factors relating to the operation of economy hotels.
Operating factors affecting the lodging industry generally, including the
Company, include (i) direct competition from operators of other hotels, motels
and recreational properties; (ii) competition with other hotel franchisors;
(iii) demographic changes; (iv) the recurring need for renovations,
refurbishment and improvements of Inns and increased expenses related to Inn
security; (v) restrictive changes in zoning and similar land use laws and
regulations that influence or determine wages, prices or construction costs;
(vi) changes in the characteristics of Inn locations; (vii) difficulty obtaining
property and liability insurance to fully protect against all losses or to
obtain such insurance at reasonable costs; (viii) increases in real estate tax
rates and other operating costs; (ix) changes in or cancellations of local
tourist, athletic or cultural events; (x) changes in travel patterns that may be
affected by increases in transportation costs or gasoline prices, changes in
airline schedules and fares, strikes, weather patterns or relocation or
construction of highways; (xi) increases in operating expenses and litigation as
a result of on-premise assaults of guests by third parties; and (xii) changes in
brand identity and reputation. Unexpected or adverse changes in these and
similar factors could have a material adverse effect on the Company's business,
assets, financial condition or results of operations.
Financial Market Risks. Changes in interest rates could affect the Company's
variable-rate debt. Changes in availability or cost of financing could affect
the Company's ability to expand, or affect the ability of Company franchisees to
develop or operate franchised inns, with or without Company financing and could
affect the ability of the Company to refinance debt as it matures. A reduction
in available financing sources for franchisees or for the Company could have a
material adverse effect on the Company's ability to grow its revenue base or on
the financial condition of the Company.
Cyclicality. The hotel industry is subject to periods of cyclical growth and
downturn. From 1990 through 1992, for example, the U. S. hotel industry
experienced a cyclical downturn that resulted from, among other things,
over-building in the industry and sluggish general economic conditions in the
United States. According to STR, in 1998, increases in room supply were greater
than increases in demand for both the industry as a whole and the economy chain
segment. There can be no assurance that downturns or prolonged adverse
conditions in the hotel industry, in real estate or capital markets or in
national or local economies will not have a material adverse impact on the
Company.
Seasonality. Demand, and thus room occupancy, is affected by normally recurring
seasonal patterns and, in most locations, is higher in the summer and early fall
months (May through October) than the balance of the year. Historically,
revenues in the first quarter have been lower than in other quarters and the
Company may incur net losses in the first quarter.
Competition. The Company operates in a single segment of the hotel industry,
which is the highly competitive economy segment. The Company competes with other
owner-operators as well as with other franchisors of economy lodging. The
Company's Inns generally operate in areas that contain numerous competitors.
Demographic, geographic, or other changes in one or more of the Company's
markets could impact the convenience or desirability of the sites of certain
Inns, which would adversely affect the operations of those Inns. There can be no
assurance that new or existing competitors will not significantly lower rates or
offer greater convenience, services or amenities or significantly expand or
improve facilities in a market in which the Company's Inns compete, thereby
adversely affecting the Company's operations. See "Item 2. Business
- -Competition." In addition, some of the Company's competitors have a larger
network of locations and greater resources than the Company and are less
leveraged than the Company. Competition may generally reduce the number of
suitable Inn development
27
Red Roof Inns Inc. and Subsidiaries
<PAGE> 28
or acquisition opportunities offered to the Company or may increase the
bargaining power of property owners seeking to sell, which could adversely
affect the Company's financial performance.
Year 2000 Issues. The Company is heavily dependent on computer technologies, a
national carrier for its telephone services, a national processing service for
its credit card transactions, and regional public utility systems. There can be
no assurance that the Company has identified and modified all systems requiring
remediation or that systems of third-parties on which the Company depends will
be converted in a timely manner. Failure of the Company or third party systems
to function properly as year 2000 approaches could adversely affect the
Company's performance.
Regulatory Risks. The lodging industry is subject to numerous federal, state and
local government regulations, including building and zoning requirements. Also,
the Company is subject to laws governing its relationships with employees,
including minimum wage requirements, overtime, working conditions and safety
standards, and work permit and immigration requirements. An increase in the
minimum wage rate, employee benefits costs or other costs associated with
employees, could adversely affect the Company. In addition, under the Americans
with Disabilities Act of 1990 (the "ADA"), all public accommodations, including
hotels, are required to meet certain federal requirements related to access and
use by disabled persons. The operation of the Company's franchise system also is
subject to regulations enacted by various states and is subject to rules
promulgated by the Federal Trade Commission. The Company cannot predict the
effect on its operations or franchising efforts of changes to existing laws or
regulations or of additional legislation that might be enacted in the future.
These existing laws and regulations, as well as other initiatives that may be
enacted in the future, could adversely affect the Company, as well as the
lodging industry in general.
Environmental Matters. Various federal, state and local laws, ordinances and
regulations impose liability on present and former real property owners and
operators for the cost of cleaning up or removing contamination caused by
hazardous or toxic materials. Such liability may be imposed without regard to
fault or legality of the original actions, and may be joint and several with
other responsible parties. If the liability is joint and several, the Company
could be responsible for payment of the full amount of the liability, whether or
not any other responsible party is also liable. The presence of contamination
at, or even adjacent to or near, a property also can affect the valuation of
that property or the ability of the owner to sell, lease or obtain financing for
the property and may in certain circumstances form the basis of liability to
third persons for personal injury or other damages. See "Item 2.
Business-Environmental Considerations."
Franchising Risks. The Company expects that its franchising business will face
competition from other hotel franchisors, which could impair the Company's
ability to attract franchisees. In addition, any or a combination of the
following risks could have a material adverse impact on the Company's
franchising results: franchisees may fail to uphold the Company's standards of
quality and service or may fail to fulfill their financial and other obligations
to the Company; franchisee operating and financial results may be materially
below franchisee expectations or the results generated by Company-owned Inns;
and franchisees may not be able to obtain suitable sites or financing. Other
franchising risks include, but are not limited to, the Company's ability to
obtain or maintain appropriate regulatory approvals; occurrence of one or more
contract disputes between the Company and a franchisee, or ultimate resolution
of such a contract dispute in favor of the franchisee; the Company's inability
to collect royalties or other fees due from franchisees; and the Company's
inability to collect amounts due from franchisees for repayment of Company
loans. Changes in any of these factors could have a material adverse effect on
the Company's growth from franchising as well as the Company's revenues from or
expenses of franchising or the financial condition of the Company.
Control by Existing Stockholders. MSREF and its affiliates collectively own
68.25% of the outstanding shares of the Company's common stock. Accordingly,
MSREF is in a position to control the election of the Company's directors and
thereby to control the plans, goals, objectives, policies, and operations of the
Company and to influence the Company's results and performance and the outcome
of
28
Red Roof Inns Inc. and Subsidiaries
<PAGE> 29
corporate transactions or other matters submitted for stockholder approval.
These matters include mergers, consolidations, the sale of all or substantially
all of the Company's assets, and other changes in control of the Company.
Readers are cautioned not to place undue reliance on forward-looking statements,
which speak only as of the date thereof. The Company expressly disclaims any
obligation or undertaking to update or revise any forward-looking statements
contained in this document to reflect any changes in the Company's expectations
or results, or to reflect changes in events or factors that could cause material
deviations in results.
29
Red Roof Inns Inc. and Subsidiaries
<PAGE> 30
FINANCIAL STATEMENTS AND
ITEM 8. SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report on the
Company 31
Consolidated Balance Sheets of the
Company as of January 3, 1998 and
January 2, 1999 32
Consolidated Statements of Income of
the Company for the years ended
December 28, 1996, January 3, 1998
and January 2, 1999 34
Consolidated Statements of
Stockholders' Equity of the Company
for the years ended December 28,
1996, January 3, 1998 and January
2, 1999 35
Consolidated Statements of Cash Flows
of the Company for the years ended
December 28, 1996, January 3, 1998
and January 2, 1999 36
Notes to Consolidated Financial
Statements of the Company 37
</TABLE>
30
Red Roof Inns Inc. and Subsidiaries
<PAGE> 31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Red Roof Inns, Inc.
We have audited the accompanying consolidated balance sheets of Red Roof Inns,
Inc. and its subsidiaries as of January 3, 1998 and January 2, 1999 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended January 2, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Red Roof Inns, Inc. and its
subsidiaries at January 3, 1998 and January 2, 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
January 2, 1999 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 17, 1999
31
Red Roof Inns Inc. and Subsidiaries
<PAGE> 32
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 3, 1998 and January 2, 1999
(in thousands)
<TABLE>
<CAPTION>
JANUARY 3, 1998 JANUARY 2, 1999
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13,154 $ 2,729
Receivables:
Trade (net of allowance for bad debts, 1997 -- $651;
1998 -- $1,332) 9,006 9,772
Income taxes 1,847
Supplies 10,002 12,177
Prepaid insurance 278 2,978
Other prepaid expenses 573 845
Deferred income taxes 3,569 4,581
-------- --------
Total current assets 36,582 34,929
Property and Equipment:
Land 155,456 153,596
Buildings and improvements 608,323 654,564
Furniture, fixtures and equipment 108,564 135,861
Construction in progress 49,326 19,541
-------- --------
Total property and equipment 921,669 963,562
Less accumulated depreciation and amortization 89,287 117,473
-------- --------
Property and equipment -- net 832,382 846,089
Other Assets:
Goodwill, net of accumulated amortization 70,181 67,915
Deferred loan fees and costs, net of accumulated
amortization 8,103 6,080
Software, net of accumulated amortization 4,043 6,769
Other 3,467 7,589
-------- --------
Total other assets 85,794 88,353
-------- --------
Total $954,758 $969,371
======== ========
</TABLE>
see notes to consolidated financial statements
32
Red Roof Inns Inc. and Subsidiaries
<PAGE> 33
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
January 3, 1998 and January 2, 1999
(in thousands, except par values)
<TABLE>
<CAPTION>
JANUARY 3, 1998 JANUARY 2, 1999
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 15,128 $ 12,943
Accrued expenses:
Insurance 4,157 3,554
Compensation 7,534 8,693
Property taxes 3,769 5,003
Sales and use taxes 3,772 4,244
Income taxes 313
Other 5,072 6,637
-------- --------
Total accrued expenses 24,617 28,131
Current maturities of long-term debt:
Mortgage notes 10,472 13,491
Obligations under capital leases 1,526 1,557
-------- --------
Total current liabilities 51,743 56,122
Long-Term Debt (Less Current Maturities):
Mortgage notes 171,885 152,337
Bank facility 165,365 186,545
Senior unsecured notes 200,000 172,385
Obligations under capital leases 1,957 1,623
-------- --------
Total long-term debt 539,207 512,890
Other Long-Term Liabilities (Less Current Maturities):
Pension obligation 590 451
Insurance 7,298 6,030
Deferred income taxes 17,184 24,702
-------- --------
Total long-term liabilities 25,072 31,183
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000 shares authorized,
no shares outstanding
Common stock, $.01 par value; 100,000 shares authorized,
shares issued: 1997 -- 28,531, 1998 -- 28,592 285 286
Additional paid-in capital 268,140 269,264
Less treasury stock, at cost: 1997 -- 951 shares,
1998 -- 1,251 shares (13,822) (18,568)
Retained earnings 84,133 118,194
-------- --------
Total stockholders' equity 338,736 369,176
-------- --------
Total $954,758 $969,371
======== ========
</TABLE>
see notes to consolidated financial statements
33
Red Roof Inns Inc. and Subsidiaries
<PAGE> 34
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 28, 1996, January 3, 1998 and January 2, 1999
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999
(52 weeks) (53 weeks) (52 WEEKS)
<S> <C> <C> <C>
Revenues:
Room $325,407 $359,605 $371,374
Fee-based 63 1,200 3,962
-------- -------- --------
Total revenues 325,470 360,805 375,336
Operating Expenses:
Direct room 163,907 179,794 181,596
Depreciation and amortization 36,527 36,386 38,787
Corporate 28,208 31,775 35,011
Marketing 16,240 24,538 18,236
-------- -------- --------
Total operating expenses 244,882 272,493 273,630
-------- -------- --------
Operating Income 80,588 88,312 101,706
Interest Income 394 183 273
Interest Expense (41,777) (46,205) (46,358)
Other Income 471 433 504
-------- -------- --------
Income Before Income Taxes and Extraordinary
Item 39,676 42,723 56,125
Income Taxes (15,612) (16,619) (21,832)
-------- -------- --------
Income Before Extraordinary Item 24,064 26,104 34,293
Extraordinary Loss (746) (232)
-------- --------
Net Income $ 24,064 $ 25,358 $ 34,061
======== ======== ========
Income Per Share Before Extraordinary Item:
Basic $ 0.88 $ 0.93 $ 1.24
======== ======== ========
Diluted $ 0.87 $ 0.93 $ 1.24
======== ======== ========
Extraordinary Loss Per Share:
Basic $ (0.02) $ (0.01)
======== ========
Diluted $ (0.03) $ (0.01)
======== ========
Net Income Per Share:
Basic $ 0.88 $ 0.91 $ 1.23
======== ======== ========
Diluted $ 0.87 $ 0.90 $ 1.23
======== ======== ========
Weighted Average Shares Outstanding:
Basic 27,362 27,982 27,566
======== ======== ========
Diluted 27,549 28,167 27,732
======== ======== ========
</TABLE>
see notes to consolidated financial statements
34
Red Roof Inns Inc. and Subsidiaries
<PAGE> 35
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 28, 1996, January 3, 1998 and January 2, 1999
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL
-------------------------------------- PAID-IN RETAINED
Shares Amount Shares AMOUNT CAPITAL EARNINGS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 30, 1995 18,400 $184 $117,816 $ 34,711 $152,711
Public stock offering (net of
$11,368 of expenses) 10,000 100 148,532 148,632
Stock options exercised 12 168 168
Purchase of treasury stock (500) $ (6,476) (6,476)
Net income 24,064 24,064
------ ---- ------ -------- -------- -------- --------
BALANCES AT DECEMBER 28, 1996 28,412 284 (500) (6,476) 266,516 58,775 319,099
Stock options exercised 119 1 1,639 1,640
Sale of treasury stock 49 630 (15) 615
Purchase of treasury stock (500) (7,976) (7,976)
Net income 25,358 25,358
------ ---- ------ -------- -------- -------- --------
BALANCES AT JANUARY 3, 1998 28,531 285 (951) (13,822) 268,140 84,133 338,736
Stock options exercised
(including a 61 1 15 226 1,101 1,328
related tax benefit of $261)
Sale of treasury stock 35 508 23 531
Purchase of treasury stock (350) (5,480) (5,480)
Net income 34,061 34,061
------ ---- ------ -------- -------- -------- --------
BALANCES AT JANUARY 2, 1999 28,592 $286 (1,251) $(18,568) $269,264 $118,194 $369,176
====== ==== ====== ======== ======== ======== ========
</TABLE>
see notes to consolidated financial statements
35
Red Roof Inns Inc. and Subsidiaries
<PAGE> 36
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 28, 1996, January 3, 1998 and January 2, 1999
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 28, JANUARY 3, JANUARY 2,
1996 1998 1999
(52 weeks) (53 weeks) (52 WEEKS)
<S> <C> <C> <C>
Cash Flows From Operations:
Net income $ 24,064 $ 25,358 $ 34,061
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 25,477 30,891 33,663
Amortization of goodwill 2,266 2,265 2,266
Loss from asset disposals and impairments 8,297 2,627 2,033
Amortization of other assets 2,010 2,046 2,353
Write-off of loan fees and costs 1,228 498
Deferred income taxes 4,088 6,708 6,506
Change in assets and liabilities:
Receivables (2,987) 1,971 (2,613)
Supplies (950) (192) (2,434)
Prepaid expenses 42 161 (218)
Accounts payable (2,479) 2,026 619
Accrued expenses 720 4,087 2,369
-------- -------- --------
Net cash provided by operations 60,548 79,176 79,103
-------- -------- --------
Cash Flows From Investing Activities:
Proceeds from sale of assets 1,357 24,243
Expenditures for property and equipment (122,201) (132,117) (77,492)
Change in other assets (4,357) (505) (2,560)
-------- -------- --------
Net cash used by investing activities (126,558) (131,265) (55,809)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from mortgage notes and bank facility 160,706 359,578 220,246
Principal reduction in mortgage notes and bank
facility (220,962) (307,994) (222,164)
Redemption of senior unsecured notes (27,615)
Principal reduction in obligations under capital
leases (826) (279) (303)
Issuance of common stock 148,800 2,255 1,597
Purchase of treasury stock (6,476) (7,976) (5,480)
-------- -------- --------
Net cash provided (used) by financing
activities 81,242 45,584 (33,719)
-------- -------- --------
Net Increase (Decrease) In Cash and Cash
Equivalents 15,232 (6,505) (10,425)
Cash and Cash Equivalents at Beginning of Year 4,427 19,659 13,154
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 19,659 $ 13,154 $ 2,729
======== ======== ========
Interest Paid $ 43,229 $ 47,115 $ 47,198
======== ======== ========
Interest Capitalized $ 2,841 $ 2,846 $ 2,541
======== ======== ========
Income Taxes Paid $ 14,399 $ 4,937 $ 16,827
======== ======== ========
Non-Cash Transactions:
Capital expenditures included in accounts
payable $ 7,181 $ 6,299 $ 3,495
======== ======== ========
Prepaid insurance premiums financed by note
payable $ 6,569
========
Note received from sale of property $ 1,439
========
</TABLE>
see notes to consolidated financial statements
36
Red Roof Inns Inc. and Subsidiaries
<PAGE> 37
RED ROOF INNS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 28, 1996, January 3, 1998 and January 2, 1999
SUMMARY OF SIGNIFICANT
NOTE 1. ACCOUNTING POLICIES
GENERAL - The Company was formed in November 1993 and is a subsidiary of The
Morgan Stanley Real Estate Fund, L.P. (MSREF). The Company operates on a 52-53
week fiscal year which ends on the Saturday nearest to December 31. At December
28, 1996 (1996), January 3, 1998 (1997), and January 2, 1999 (1998) the Company
operated 248, 254 and 256 Inns, respectively. The 1996 and 1998 years consist of
52 weeks each and the 1997 year consists of 53 weeks.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements
include the accounts of Red Roof Inns, Inc. and its wholly owned subsidiaries,
RRI Investment Co. and RRI Financial Inc. All material intercompany transactions
and balances have been eliminated in consolidation.
NATURE OF OPERATIONS - The Company, whose revenues are primarily derived from
room rentals, is an owner/operator and franchisor of economy Inns. The Company's
properties are primarily located throughout the Midwest, East, South and Gulf
Coast regions of the United States. The Company began franchising economy Inns
in 1997 and at January 3, 1998 and January 2, 1999 five franchised Inns and 39
franchised Inns, respectively, were in operation.
FRANCHISE REVENUE - Franchise revenue consists of royalty fees, which are based
on a percentage of franchised Inns gross room sales (as defined in the franchise
agreement), and initial franchise fees which are recorded as revenue when an Inn
opens as a franchised unit. Total franchise revenue, included in fee-based
revenues, for 1997 and 1998 was $225,000 and $1,753,000, respectively.
Reservation fees and marketing fees charged by the Company to its franchised
Inns (total of approximately $12,000 and $15,000, respectively for 1997 and
$331,000 and $498,000, respectively for 1998) are recorded as a reduction of
corporate and marketing expenses.
PARTNER PROGRAM REVENUE - The Company has a partnership marketing program
through which the Company forms alliances with other well-known consumer product
and service companies in order to offer its guests additional value-added
services. The Company actively promotes its partners' products or services
either at the Inns or through the central reservation centers in exchange for
fees from the partner companies. Revenues are recognized by the Company when the
partners' products are sold or the services have been rendered. The total
partner program revenue, included in fee-based revenues, for 1996, 1997 and 1998
was $63,000, $975,000 and $2,209,000, respectively.
USE OF ESTIMATES - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from these estimates, but it is management's opinion that any changes in
estimates would not have a material effect on the consolidated financial
statements.
SUPPLIES - Supplies inventory is stated at cost, which represents the cost to
supply the Inns with their respective initial operating inventories.
Replacements needed to maintain the original operating inventory are charged to
expense in the period such replacement occurs.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
and amortization of property and equipment is based on the straight-line method
over estimated composite useful lives that range from 3 to 15 years for
furniture, fixtures and equipment and 12 to 40 years for buildings and
improvements.
CAPITALIZATION OF DEVELOPMENT EXPENSES - Costs incurred by the Company related
to site development and acquisitions are capitalized and allocated to the
properties developed or acquired. Costs capitalized during 1996, 1997 and 1998
totaled $2,162,000, $2,385,000 and $567,000, respectively.
GOODWILL - The excess of the purchase price over the fair values of net assets
acquired (goodwill) is being amortized on a straight-line basis over 35 years.
Goodwill at January 3, 1998 and January 2, 1999 is net of accumulated
amortization of $9,187,000 and $11,453,000, respectively.
37
Red Roof Inns Inc. and Subsidiaries
<PAGE> 38
DEFERRED LOAN FEES AND COSTS - Deferred Loan Fees and Costs -- Deferred loan
fees and costs are amortized using the straight-line method over the terms of
the loans ranging from 5 to 15 years. Deferred loan fees and costs at January 3,
1998 and January 2, 1999 are net of accumulated amortization of $3,571,000 and
$4,632,000, respectively.
In May 1997, the Company refinanced its $150 million bank credit facility with a
$250 million bank credit facility. In connection with the refinancing, the
Company recognized an extraordinary charge against income of $746,000, net of
tax, ($.02 per share -- basic and $.03 per share -- diluted) related to the
write off of unamortized loan costs of $1,228,000.
During the fourth quarter of 1998, the Company repurchased $27,615,000 of senior
unsecured notes on the open market and in privately negotiated transactions. In
connection with this repurchase, the Company recognized an extraordinary charge
against income of $232,000, net of tax ($.01 per share -- basic and diluted)
related to the write-off of unamortized debt fees of $379,000, net of purchase
discount.
OTHER ASSETS - Other assets principally include software costs, net of
accumulated amortization using the straight-line method over a useful life of
five years, preliminary site acquisition costs, deferred franchise expenses,
escrow deposits for furniture replacements and investments in affiliates.
ASSET IMPAIRMENTS - Annually, or more frequently if events or circumstances
change, a determination is made by management, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121, to ascertain whether property and
equipment, goodwill, and other intangible assets have been impaired based on the
sum of estimated future undiscounted cash flows from operating activities. If
the estimated net cash flows are less than the carrying amount of such assets,
the Company recognizes an impairment loss in an amount necessary to write down
such assets to a fair value as determined from expected discounted cash flows.
(See Note 10).
Based upon its most recent analysis, the Company believes that property,
goodwill and other intangibles at January 2, 1999 are realizable and the
depreciation and amortization periods are appropriate.
INCOME TAXES - The Company is subject to federal, state and local income taxes.
Income taxes are provided for all taxable items included in the statements of
income in accordance with SFAS No. 109.
SELF-INSURANCE PROGRAMS - Prior to May 1998, the Company used a retrospective
self-insurance plan for general liability and workers' compensation. Subsequent
to May 1998, the Company entered into a three-year fixed premium agreement with
a national insurance carrier for its general liability and workers compensation
insurance. The premium is subject to adjustment on the annual anniversary date
of the policy if actual losses exceed 60% of the annual premium amount. A
liability has been recorded in the financial statements for estimated claims
prior to May 1998 based on information currently available as to the estimated
ultimate cost for incidents incurred prior to the balance sheet dates. Losses in
excess of certain limits are insured with third-party insurance companies.
Estimated payments against the insurance liability for each of the next five
years are: 1999 -- $3,554,000; 2000 -- $2,531,000; 2001 -- $1,567,000;
2002 -- $760,000 and 2003 -- $455,000.
ADVERTISING - The Company expenses the costs of advertising (including
production costs) the first time advertising takes place. Advertising expenses
consist of local advertising which is included in direct room expenses and
billboard and national media advertising which is included in marketing
expenses. Advertising expense was $16,847,000, $24,242,000 and $16,390,000 for
1996, 1997 and 1998, respectively.
EARNINGS PER SHARE - Basic income per share amounts are based on the weighted
average number of shares of common stock outstanding during the years presented.
Diluted income per share amounts are based on the weighted average number of
shares of common stock and stock options outstanding during the years presented.
CASH EQUIVALENTS - Cash in excess of daily requirements is invested in money
market and government securities with maturities of three months or less. Such
38
Red Roof Inns Inc. and Subsidiaries
<PAGE> 39
investments are considered to be cash equivalents. The majority of such funds
are held by the Company's bank. The Company has not experienced any losses on
these investments.
SEGMENT - The Company presently operates in one segment as determined under SFAS
No. 131 "Disclosures About Segments of an Enterprise and Related Information."
RECLASSIFICATIONS - Certain amounts in the prior years' financial statements
have been reclassed to conform with the 1998 presentation.
TRANSACTIONS WITH
NOTE 2. AFFILIATES
The Company operates two hotels under long-term capital lease agreements with
affiliated partnerships that own the hotels. Such affiliation exists because the
Company is a partner in the partnerships. The Company's ownership interests in
the operating profits and losses of such partnerships are 3% and 29%,
respectively, and ownership in the residual values of such partnerships is 73%
and 80%, respectively. The partnerships are consolidated as capital leases and
are immaterial to the consolidated financial statements.
The Company was provided certain underwriting services through an affiliate of
MSREF in connection with the Company's 1996 initial public stock offering and
obtains certain shared administrative services with unrelated parties through
master contracts available through MSREF.
39
Red Roof Inns Inc. and Subsidiaries
<PAGE> 40
NOTE 3. LEASES
The Company leases certain assets used in its operations under long-term capital
leases, principally three hotels (including one with an unrelated party) and
land. These leases typically contain renewal and purchase options and expire at
various dates through 2006. The leases generally require payment of property
taxes, insurance and maintenance costs. The Company leases land, hotels, a
warehouse and billboard advertising space under noncancelable operating leases.
Land leases expire at various dates through 2034 and other leases expire at
various dates through 2019. Total operating rent expense for 1996, 1997 and 1998
was $12,622,000, $12,248,000 and $9,926,000, respectively.
Future minimum lease payments under non-cancelable leases January 2, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
<S> <C> <C>
1999 $1,730 $ 6,244
2000 497 3,462
2001 359 2,238
2002 359 1,303
2003 359 1,301
Thereafter 493 17,127
------ -------
Total minimum lease payments 3,797 $31,675
=======
Less amount representing interest 617
------
Present value of minimum lease payments 3,180
Less current maturities 1,557
------
Total non-current $1,623
======
</TABLE>
The following is a summary of property and equipment under capital leases (in
thousands):
<TABLE>
<CAPTION>
JANUARY 3, JANUARY 2,
1998 1999
<S> <C> <C>
Land $1,220 $1,220
Buildings 3,251 3,251
------ ------
Total 4,471 4,471
Less accumulated depreciation and amortization 1,328 1,657
------ ------
Property and equipment under capital leases -- net $3,143 $2,814
====== ======
</TABLE>
40
Red Roof Inns Inc. and Subsidiaries
<PAGE> 41
MORTGAGE NOTES AND
NOTE 4. BANK FACILITY
<TABLE>
<CAPTION>
JANUARY 3, JANUARY 2,
1998 1999
------------------------
(IN THOUSANDS)
- ------------------------------------------------------------------
<S> <C> <C>
Mortgage notes, weighted average fixed
interest rates of 10.1% at January 3,
1998 and 10.0% at January 2, 1999,
monthly payments of principal and
interest due through January 2009 $170,057 $154,600
Mortgage notes, weighted average
variable interest rates of 6.9% at
January 3, 1998 and 6.5% at January
2, 1999, interest adjustable at
intervals from one month to six
years, varying monthly payments of
principal and interest due through
January 2000. 12,300 11,228
Bank facility, weighted average
variable interest rates of 7.7% at
January 3, 1998 and 7.2% at January
2, 1999 due May 2002 165,365 186,545
-------- --------
Total 347,722 352,373
Less current maturities 10,472 13,491
-------- --------
Total mortgage notes and bank
facility (less current
maturities) $337,250 $338,882
======== ========
</TABLE>
Principal payments due (including normal amortization) for each of the next five
years are: 1999 -- $13,491,000; 2000 -- $25,542,000; 2001 -- $27,923,000;
2002 -- $207,901,000 and 2003 -- $27,581,000.
In May 1997, the Company refinanced its $150 million bank facility with a $250
million bank facility. The available borrowing commitment declines to $245
million in March 2000 and periodically declines thereafter to $150 million at
the May 2002 maturity date. Borrowings under the bank facility bear interest at
either LIBOR plus tiered spreads based upon the Company's leverage ratios or the
administrative agent's prime rate. The bank facility also contains various
covenants that include restrictions on the incurrence of additional debt, stock
repurchases and the payment of dividends which are similar to the covenants
related to the senior unsecured notes. The bank facility contains events of
default. Both the convenants and events of default, including provisions
relating to the effect of a change in control of the Company, are customary for
financing of similar size and nature.
Notes payable and the bank facility are collateralized by certain property and
equipment with a net book value totaling $470,000,000 and $457,000,000 at
January 3, 1998 and January 2, 1999, respectively.
As of January 2, 1999, the Company has $2,743,000 in standby letters of credit
from banks, expiring at various dates through December 2009.
NOTE 5. SENIOR UNSECURED NOTES
In December 1993, the Company issued $200,000,000 of senior unsecured notes (the
"Notes") due 2003. The Notes bear interest at 9 5/8% payable semi-annually. The
Notes contain covenants that include restrictions on the incurrence of
additional debt, stock repurchases and the payment of dividends. At January 2,
1999, $199,092,000 is available for restricted payments under the terms of the
Notes of which $66,598,000 is available from retained earnings.
The Notes were not redeemable by the Company until December 15, 1998 at which
time they became redeemable at 104.813% of their principal amount, declining
ratably to par, plus accrued interest, on and after December 15, 2000.
During the fourth quarter of 1998, the Company was authorized to purchase up to
$50,000,000 of senior unsecured notes on the open market and in privately
negotiated transactions and has repurchased $27,615,000 of senior unsecured
notes at an average cost of 99.6% of the face amount.
NOTE 6. STOCKHOLDERS' EQUITY
On January 31, 1996, the Company issued 10,000,000 shares of common stock in an
initial public offering (the "Offering") at a price of $16.00 per share. Net
proceeds of the Offering were approximately $149 million which were used to
repay approximately $128 million of mortgage indebtedness. Approximately $21
million was retained for inn acquisitions, conversions, new development and for
general corporate purposes.
41
Red Roof Inns Inc. and Subsidiaries
<PAGE> 42
In connection with the Offering, $9.6 million in underwriting discounts and
commissions were paid to certain underwriters, including an affiliate of MSREF.
In August 1996, the Company repurchased 500,000 shares of its common stock in
the open market for an aggregate purchase price of $6,476,000, or $12.95 per
share. During the fourth quarter of 1997, the Company purchased 500,000 shares
of its common stock in the open market for an aggregate purchase price of
$7,976,000, or $15.95 per share. During the fourth quarter of 1998, the Company
was authorized to repurchase up to 1,000,000 shares of its outstanding common
stock and has purchased approximately 350,000 shares of common stock in the open
market for an aggregate purchase price of $5,480,000, or $15.68 per share. In
addition, subsequent to January 2, 1999, the Company has purchased an additional
426,000 shares for an aggregate purchase price of $6,700,000, or $15.73 per
share. The shares were placed in treasury and will be used to fulfill the
Company's requirements for its stock option and stock purchase plans.
EMPLOYEE AND DIRECTOR
NOTE 7. STOCK PLANS
In March 1995, the Company adopted a non-qualified Management Stock Option Plan
for certain officers and employees effective as of December 29, 1994. In
December 1995, the Company's Board of Directors adopted the Amended and Restated
1994 Management Equity Incentive Plan (the "Plan"). The Plan is overseen by the
Compensation Committee appointed by the Board of Directors, which is comprised
of not less than two directors who are not officers or employees of the Company.
Under the terms of the Plan, awards may be granted in the form of: (i) incentive
stock options, which are intended to qualify under Sec. 422 of the Internal
Revenue Code of 1986, as amended; (ii) stock options which are not intended to
so qualify; (iii) shares of the Company's common stock which will be subject to
certain conditions and restrictions ("restricted shares"); or (iv) performance
units ("performance units"), which represent the right to receive an amount
equal to the value related to the performance units awarded, such as the fair
market value of a share of common stock. Awards may be granted by the committee
at its discretion to key employees (including officers and directors who are
employees) of the Company. The Plan generally provides that the number of shares
of common stock with respect to which options, restricted shares and performance
units may be granted to any individual employee may not exceed 400,000 during
any single fiscal year. The aggregate number of shares of common stock which may
be issued under the Plan is 4,000,000 provided that in no event shall more than
10% of the shares of common stock authorized for issuance under the Plan be
granted in the form of awards other than options.
Generally, each option will have a term ending 10 years from the date of grant.
Each option will vest and become exercisable on such date or dates and on the
basis of other criteria, including without limitation the performance of the
Company, as the committee may determine at its discretion and as shall be
specified in the option agreement evidencing the grant of such options. The
option price is determined by the committee at the time of the grant and may not
be less than the fair market value of the shares of common stock on the date of
grant (exclusive of the options granted in 1994, which were issued at less than
fair market value at the time of the grant.) Options granted in 1996, 1997 and
1998 vest at the rate of 25% per year.
In October 1995, the Company adopted the 1995 Director Stock Option Plan for
directors who are not officers or employees of the Company. The plan is
administered by a committee of not less than two directors appointed by the
Board of Directors. Any eligible director is automatically granted an initial
option to purchase 10,000 shares. Subsequently, following each annual meeting of
the stockholders of the Company, each eligible director shall be granted an
option to purchase 1,000 shares. The initial option to purchase 10,000 shares
vests in equal amounts over a five-year period and future grants vest
immediately. The exercise price of the options is based on the fair market value
of the common stock on the last trading day prior to the date on which the
option is granted. All options expire 10 years after the date of grant. The
42
Red Roof Inns Inc. and Subsidiaries
<PAGE> 43
Company has reserved 60,000 shares under the Plan and has granted options to
purchase 24,000 shares through January 2, 1999.
The following table summarizes option activity for the years presented:
<TABLE>
<CAPTION>
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
- ----------------------------------------------------------------
<S> <C> <C>
Outstanding December 30, 1995 642,700 $ 9.52
Granted 760,900 14.74
Exercised (14,175) 6.12
Cancelled (117,925) 5.92
--------- ------
Outstanding December 28, 1996 1,271,500 13.02
Granted 521,000 15.73
Exercised (152,275) 8.88
Canceled (191,525) 14.71
--------- ------
Outstanding January 3, 1998 1,448,700 14.21
Granted 777,250 18.35
Exercised (83,650) 8.48
Canceled (227,800) 16.97
--------- ------
Outstanding January 2, 1999 1,914,500 $15.81
========= ======
</TABLE>
At December 28, 1996, January 3, 1998 and January 2, 1999, options exercisable
under the Company's stock option plans totaled 518,149, 734,640 and 798,375
shares, respectively, and had a weighted average option price per share of
$11.51, $13.01 and $13.76, respectively. For options outstanding at January 2,
1999, 335,800, 267,675 and 194,900 shares are exercisable at a weighted average
exercise price of $11.82, $14.44 and $16.16, respectively. The weighted average
remaining contractual life of these options is 6.5, 7.7 and 8.5 years,
respectively.
At January 2, 1999, 1,895,400 shares are available for future grants of stock
options.
During 1996 and 1997, the Company recognized compensation expense in corporate
expenses of $339,000 and $281,000, respectively, related to the granting of
options in 1994 at less than fair market value at the date of grant. Grants
after 1994 were issued at fair market value.
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair value
method of accounting for stock options and similar equity instruments. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. Companies are encouraged, but not required, to adopt
the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued
to Employees," but are required to disclose in a note to the financial
statements pro forma net income and earnings per share as if the company had
applied the new method of accounting. The Company applies APB No. 25 in
accounting for its stock-based compensation plans. Had compensation cost been
determined on the basis of fair value pursuant to SFAS No. 123, for options
granted in 1996, 1997 and 1998, net income and earnings per share would have
been as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
- ---------------------------------------------------
<S> <C> <C> <C>
NET INCOME
As reported $24,064 $25,358 $34,061
======= ======= =======
Pro forma $22,710 $23,940 $32,229
------- ------- -------
BASIC EARNINGS PER SHARE
As reported $ .88 $ .91 $ 1.23
======= ======= =======
Pro forma $ .83 $ .86 $ 1.17
------- ------- -------
DILUTED EARNINGS PER SHARE
As reported $ .87 $ .90 $ 1.23
======= ======= =======
Pro forma $ .82 $ .85 $ 1.16
------- ------- -------
</TABLE>
The following weighted average assumptions were used in the option pricing
model: a risk free interest rate of 6.7%, 6.8% and 5.5% for 1996, 1997 and 1998,
respectively; an expected life of the options of 7.5 years for 1996 and 1997 and
5.4 years for 1998; no expected dividend yield and a volatility factor of .25
for 1996, a volatility factor of .26 for 1997 and a volatility factor of .29 for
1998. The weighted average per share fair value of the options granted in 1996,
1997 and 1998 was $6.59, $7.40 and $6.90, respectively.
Due to the inclusion of only 1995 through 1998 option grants, the effects of
applying SFAS No. 123 in 1996, 1997 and 1998 may not be representative of the
pro forma impact in future years.
43
Red Roof Inns Inc. and Subsidiaries
<PAGE> 44
EMPLOYEE STOCK
NOTE 8. PURCHASE PLAN
In February 1998, the Company's Board of Directors adopted the Company's Amended
and Restated 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan"),
which is intended to qualify under Sec. 423 of the Internal Revenue Code. The
purpose of the Stock Purchase Plan is to provide employees of the Company with
an opportunity to acquire or increase a proprietary interest in the Company by
purchasing shares of the Company's common stock at a discounted price. All
employees of the Company are eligible to participate in the Stock Purchase Plan.
The stock purchase price is 85% of the fair market value of the Company's common
stock at the beginning of the contribution period, which begins on the last
Sunday of January of each year and ends on the last Saturday of the following
January or, if less, 85% of such fair market value on the last day of the
contribution period. The Stock Purchase Plan allows employees to purchase shares
through contribution or payroll deductions of up to 10% of base pay, and
provides that no employee may purchase in any calendar year shares having a
value (determined at the time the right to purchase is granted) in excess of
$25,000. The aggregate number of shares of common stock reserved for purchase
under the stock purchase plan is 300,000. Such shares may be either authorized
but unissued shares or issued shares reacquired by the Company and held as
treasury shares.
In January 1997, the Company sold 48,647 shares of common stock out of treasury
to employees at $12.64 per share for the 1996 plan year. In January 1998, the
Company sold 34,916 shares of common stock out of treasury to employees at
$15.19 per share for the 1997 plan year. In January 1999, the Company sold
35,103 shares of common stock out of treasury to employees at $13.33 per share
for the 1998 plan year. The weighted average per share fair value of the shares
issued in 1997, 1998 and 1999 was $3.26, $3.87 and $3.52, respectively.
NOTE 9. RETIREMENT PLANS
At the time of the Offering, the Company had a defined benefit pension plan (the
"Pension Plan") that covered all employees except seasonal employees. The
benefits were based on years of service, final average compensation and final
average compensation in excess of average social security covered compensation
at retirement. The Company's funding policy was to contribute annually at least
the minimum amount required under the funding standards of ERISA. Pension Plan
assets were held by a bank trust company and were invested primarily in cash
equivalents and fixed income investments.
On December 28, 1996, the Company froze the Pension Plan, which decreased the
Company's projected benefit obligations by $2,500,000 and resulted in a
curtailment gain of $286,000. During 1997, the Company terminated the Pension
Plan and in 1998 received appropriate regulatory approvals to distribute plan
assets. Earned benefits totaling $10,410,000, through the date the Pension Plan
was frozen, were paid to employees during 1998, at which time a final settlement
expense of $415,000 was recognized by the Company and included in direct room
expenses. (See Note 10). During 1996, the Company recognized an expense of
$547,000 and in 1997 recognized a credit of $94,000 related to the Pension Plan.
In addition to the Pension Plan described above, the Board of Directors
established a supplementary pension plan for its President and Chief Executive
Officer. Accordingly, the Company has an accrued liability of $131,000 and
$330,000 as of January 3, 1998 and January 2, 1999, respectively, related to
such supplementary pension plan.
In July 1997, the Board of Directors adopted the Company's 401(k) Savings Plan
(the "Savings Plan") which qualifies under Section 401(a) of the Internal
Revenue Code. The purpose of the Savings Plan is to encourage current employees
to save funds for retirement, to attract new employees and to retain current
employees. All Company employees who meet certain minimum age requirements are
eligible to participate in the Savings Plan on the first day of the month
following six months of employment by the Company. The Savings Plan allows
employees to deduct up to 15% of their base and bonus
44
Red Roof Inns Inc. and Subsidiaries
<PAGE> 45
pay, subject to various limitations required by the I.R.S. The Company matched
25% of employee contributions up to 6% of base and bonus pay in 1997 and 1998
and has sole discretion to elect whether to match these or other amounts in the
future.
The Company adopted a Deferred Compensation Plan and Executive Deferred
Compensation Plan (the "Compensation Plans") effective February 1, 1998 to
provide a tax deferred accumulation opportunity to a select group of management
employees through deferrals of cash compensation and company related
contributions. Participants in the Deferred Compensation Plan may contribute 1%
to 15% of their base annual salary which, when added to their Savings Plan
deferral, does not exceed the dollar limitation in effect under Internal Revenue
Service Code Section 402(g). Participants in the Executive Deferred Compensation
portion of the Compensation Plans may contribute up to 50% and 100% of their
base salary and bonus, respectively. During 1998, the Company matched 10% of
qualified employee contributions under the Compensation Plans.
The 1997 and 1998 expense related to the Savings and Compensation Plans was
approximately $171,000 and $391,000, respectively.
INN RENEWAL
NOTE 10. PROGRAM AND OTHER CHARGES
The following charges were incurred by the Company during the years presented
(in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
- ---------------------------------------------------
<S> <C> <C> <C>
Severance compensation (1) $ 1,421 $ 1,659
Asset impairment charges (2) $ 450 914
Inn renewal program expenses
(3) 10,398 14,066
Accounting system conversion
(1) 1,246
Write-off of preliminary site
acquisition costs (1) 1,944
Pension plan termination (4) 415
-------
Total charges $10,848 $15,487 $ 6,178
======= ======= =======
</TABLE>
(1) Included in corporate expenses
(2) Included in depreciation and amortization
(3) Inn renewal program expenses:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C> <C>
Direct room expenses $ 2,297 $ 7,504
Depreciation and
amortization 7,847 2,387
Corporate expense 148 490
Marketing expenses 106 3,685
------- -------
Total Inn renewal
program expenses $10,398 $14,066
======= =======
</TABLE>
(4) Included in direct room expenses
During 1996, the Company commenced Project BIG RED, a chainwide property renewal
program that refurbished and enhanced both the interior decor and exterior of
the majority of company-owned Inns and provided additional room amenities and
services for guests. Included in the program were expenditures to update guest
rooms with new carpet, wallcovering, furniture, bedspreads and drapes.
Improvements to the exterior of the properties included painting, new signs,
improved lighting and additional landscaping. The program was completed during
1998 at a total cost of approximately $68 million (including approximately $4
million related to the Company's revenue management system). In 1996, 1997 and
1998, the Company incurred expenditures of $10,646,000, $49,813,000 and
$7,422,000, respectively, related to this program of which $8,095,000,
$38,134,000 and $7,422,000 was capitalized, respectively. In addition, the
Company recognized charges of $7,847,000 and $2,387,000 in 1996 and 1997,
respectively, related to early asset retirements in connection with the program.
During 1996 and 1998, the Company recorded impairment charges of $450,000 and
$914,000, respectively, in accordance with SFAS No. 121, primarily related to
land held for sale.
In the second half of 1997, the Company commissioned a task force to perform a
thorough examination of its corporate structure and processes to increase
productivity and reduce costs in relation to its strategic growth plans
("re-engineering program"). Accordingly, the Company took a fourth quarter
charge to income in 1997 of $1,421,000 related to severance expenses associated
with the re-engineering program. In the fourth quarter of 1998, the Executive
Vice President and Chief Financial Officer and certain other officers and
employees terminated their employment with the Company. Accordingly, the Company
45
Red Roof Inns Inc. and Subsidiaries
<PAGE> 46
recognized a fourth quarter charge to earnings of $1,659,000 related to
severance expenses associated with these terminations. At January 2, 1999,
$1,425,000 is included in accrued compensation related to such terminations
($1,065,000 at January 3, 1998). Totals of 25 and 14 corporate employees were
terminated in 1997 and 1998, respectively. Total termination benefits paid in
1997 and 1998 were $356,000 and $1,298,000, respectively.
The Company is currently converting its financial accounting and human resources
systems to be year 2000 compliant. During 1998, the Company recorded charges to
earnings of $1,246,000 related to the conversion of these systems and associated
training costs.
As a result of the Company's decision to reduce its Inn development and focus on
fee-based income, the Company recognized a charge to earnings of $1,944,000
related to the write-off of preliminary site acquisitions costs.
The Company recognized charges to earnings in 1998 of $415,000 related to the
termination of a defined pension benefit plan. (See Note 9).
NOTE 11. INCOME TAXES
The components of the provision for income taxes consist of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Federal:
Current $ 9,304 $ 9,326 $13,027
Deferred 3,660 4,903 5,633
------- ------- -------
Total federal 12,964 14,229 18,660
------- ------- -------
State and local:
Current 2,220 585 2,299
Deferred 428 1,805 873
------- ------- -------
Total state and local 2,648 2,390 3,172
------- ------- -------
Total $15,612 $16,619 $21,832
======= ======= =======
Effective tax rate 39.4% 38.9% 38.9%
======= ======= =======
</TABLE>
The effective tax rate differs from the statutory rate as follows:
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
State and local taxes, net of federal tax 4.3 3.6 3.6
effect
Other 0.1 .3 .3
---- ---- ----
Total 39.4% 38.9% 38.9%
==== ==== ====
</TABLE>
The tax effects of significant items comprising the Company's net deferred tax
balances are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 3, JANUARY 2,
1998 1999
<S> <C> <C>
Deferred tax assets:
Self-insured expenses $ 4,444 $ 4,143
Capital lease obligations 897 768
Other expense accruals 2,341 2,304
------- -------
Total deferred tax assets 7,682 7,215
------- -------
Deferred tax liabilities:
Goodwill and basis of assets acquired 11,504 11,957
Excess tax over book depreciation and
amortization 9,793 15,379
------- -------
Total deferred tax liabilities 21,297 27,336
------- -------
Net deferred tax liability $13,615 $20,121
======= =======
</TABLE>
COMMITMENTS AND
NOTE 12. CONTINGENCIES
The Company is involved in various claims and legal proceedings arising from the
normal course of business. While the ultimate liability, if any, from these
proceedings currently is indeterminable, in the opinion of management, these
matters should not have a material adverse effect on the consolidated financial
statements of the Company.
The Internal Revenue Service ("IRS") is currently undergoing an examination of
the Company's federal income tax returns for the years 1993 through 1996. The
Company has estimated this examination could result in proposed adjustments of
approximately $10 million in additional current federal income taxes for the
years 1993 through 1997, plus interest. The proposed adjustments relate
46
Red Roof Inns Inc. and Subsidiaries
<PAGE> 47
primarily to the allocation of the purchase price of the assets acquired as a
result of the acquisition of the Company by MSREF in December 1993 and the tax
accounting treatment for removal costs for assets replaced. These adjustments do
not affect the overall tax liability recognized by the Company but impact the
classification between current and deferred tax accounts. The Company has filed
a response vigorously contesting the majority of the proposed adjustments. While
it is not possible to determine the final disposition, the Company is of the
opinion that the ultimate resolution of this matter should not have a material
adverse effect on the consolidated financial statements of the Company.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments disclosed below as of January
3, 1998 and January 2, 1999 were determined using available market information
and appropriate valuation methodologies. However, considerable judgment is
required to interpret market data to develop the estimates of fair value.
Accordingly, the estimates presented may not be indicative of the amounts the
Company could realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies could have a significant effect on
the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value of
financial instruments; (i) mortgage notes -- the estimated fair value is based
on current rates and payment terms offered to the Company and (ii) senior
unsecured notes -- the estimated fair value is based upon a quoted published
market price (in thousands):
<TABLE>
<CAPTION>
CARRYING VALUE ESTIMATED FAIR VALUE
----------------------- -----------------------
JANUARY 3, JANUARY 2, JANUARY 3, JANUARY 2,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Mortgage notes and
bank facility $347,722 $352,373 $361,000 $369,000
Senior unsecured
notes 200,000 172,385 208,000 175,000
</TABLE>
47
Red Roof Inns Inc. and Subsidiaries
<PAGE> 48
SELECTED QUARTERLY
NOTE 14. FINANCIAL DATE (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH FULL
QUARTER QUARTER QUARTER QUARTER YEAR
------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
1997
Revenues $74,544 $ 94,959 $102,317 $88,985 $360,805
Operating income 5,350(1) 27,400(1) 36,028(1) 19,534(1) 88,312(1)
Income (loss) before extraordinary item (3,562)(1) 9,713(1) 14,952(1) 5,001(1) 26,104(1)
Extraordinary loss (746)(2) (746)(2)
Net income (loss) (3,562)(1) 8,967(1)(2) 14,952(1) 5,001(1) 25,358(1)(2)
Income (loss) per share before extraordinary item:
Basic (0.13)(1) 0.35(1) 0.53(1) 0.18(1) 0.93(1)
Diluted (0.13)(1) 0.35(1) 0.53(1) 0.18(1) 0.93(1)
Extraordinary loss per share:
Basic (0.03)(2) (0.02)(2)
Diluted (0.03)(2) (0.03)(2)
Net income (loss) per share:
Basic (0.13)(1) 0.32(1)(2) 0.53(1) 0.18(1) 0.91(1)(2)
Diluted (0.13)(1) 0.32(1)(2) 0.53(1) 0.18(1) 0.90(1)(2)
1998
Revenues $85,066 $101,295 $104,688 $84,287 $375,336
Operating income 12,866 34,624 38,386(3) 15,830(3) 101,706(3)
Income before extraordinary item 540 14,131 16,641(3) 2,981(3) 34,293(3)
Extraordinary loss (232)(4) (232)(4)
Net income 540 14,131 16,641(3) 2,749(3)(4) 34,061(3)(4)
Income per share before extraordinary item:
Basic 0.02 0.51 0.60(3) 0.11(3) 1.24(3)
Diluted 0.02 0.51 0.60(3) 0.11(3) 1.24(3)
Extraordinary loss per share:
Basic (0.01)(4) (0.01)(4)
Diluted (0.01)(4) (0.01)(4)
Net income per share:
Basic 0.02 0.51 0.60(3) 0.10(3)(4) 1.23(3)(4)
Diluted 0.02 0.51 0.60(3) 0.10(3)(4) 1.23(3)(4)
</TABLE>
(1) Operating income, income before extraordinary item and net income were
reduced by charges related to the Inn renewal program as follows: first
quarter -- $4,771 and $2,899 ($.10 per share -- basic and diluted); second
quarter -- $4,770 and $2,897 ($.10 per share -basic and diluted); third
quarter -- $2,333 and $1,417 ($.05 per share -- basic and diluted); fourth
quarter -- $2,192 and $1,381 ($.05 per share -- basic and diluted), and full
year -- $14,066 and $8,594 ($.31 per share -- basic and $.30 per
share -- diluted), respectively. In addition, operating income, income before
extraordinary item and net income were reduced by a charge in the fourth quarter
for severance compensation of $1,421 and $868 ($.03 per share -- basic and
diluted), respectively.
(2) Net income was reduced by an extraordinary charge of $746, net of tax, ($.02
per share basic and $.03 per share -- diluted) related to the write-off of
unamortized loan costs on the refinancing of the Company's bank credit facility.
(3) Operating income, income before extraordinary item and net income were
reduced by pre-tax charges in the third quarter of $461 and $282, respectively,
($.01 per share -- basic and diluted), primarily for termination of a pension
plan and by pre-tax charges in the fourth quarter of $5,717 and $3,493,
respectively, ($.13 per share -- basic and diluted), related to severance
compensation of $1,659, asset impairment charges of $914, accounting system
conversion charges of $1,156, write-offs of preliminary site acquisition costs
of $1,944 and costs related to termination of a pension plan of $44. Operating
income, income before extraordinary item and net income for the full year were
reduced by the aforementioned charges of $6,178 and $3,775 ($.14 per
share -- basic and $.13 per share -- diluted), respectively.
(4) Net income was reduced by an extraordinary charge of $232, net of tax ($.01
per share -- basic and diluted) related to the write-off of unamortized loan
costs, net of discount, associated with the partial repurchase of senior
unsecured notes.
CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS AND
ITEM 9. FINANCIAL DISCLOSURE
None.
48
Red Roof Inns Inc. and Subsidiaries
<PAGE> 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information in the proxy statement for the Company's 1999 annual meeting of
stockholders under the headings "Election of Directors", "Compensation of
Directors", "Executive Officers" and "Compliance With Section 16 (a) of The
Exchange Act" is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information in the proxy statement for the Company's 1999 annual meeting of
stockholders under the heading "Executive Compensation" is incorporated herein
by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
ITEM 12. MANAGEMENT
The information in the proxy statement for the Company's 1999 annual meeting of
stockholders under the heading "Voting Securities and Principal Holders Thereof"
is incorporated herein by reference.
CERTAIN RELATIONSHIPS AND
ITEM 13. RELATED TRANSACTIONS
The information in the proxy statement for the Company's 1999 annual meeting of
stockholders under the headings "Election of Directors," "Compensation Committee
Interlocks and Insider Participation" and "Certain Relationships and Related
Transactions" is incorporated herein by reference.
EXHIBITS AND FINANCIAL
ITEM 14. STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
(1) Financial Statements
- Independent Auditors' Report on the Company.
- Consolidated Balance Sheets of the Company as of January 3, 1998 and
January 2, 1999.
- Consolidated Statements of Income of the Company for the years ended
December 28, 1996, January 3, 1998 and January 2, 1999.
- Consolidated Statements of Stockholders' Equity of the Company for
the years ended December 28, 1996, January 3, 1998 and January 2, 1999.
- Consolidated Statements of Cash Flows of the Company for the years
ended December 28, 1996, January 3, 1998 and January 2, 1999.
- Notes to Consolidated Financial Statements of the Company.
(2) Financial Statement Schedules
The financial statement schedules listed below are included in the
pages following.
- Financial Statement Schedule II, Valuation and Qualifying Accounts,
for the years ended December 28, 1996, January 3, 1998 and January 2, 1999.
Schedules other than those mentioned above are omitted because the conditions
requiring their inclusion in this document do not exist or because the
information is given in the financial statements or notes thereto.
(3) The following exhibits are filed as a part of this report:
<TABLE>
<C> <S>
2.1 The Merger Agreement dated as of August
12, 1993, as amended, among the Company,
MSREF and the Trueman Trust
(incorporated by reference to Exhibit
2.01 to the Company's Registration
Statement on Form S-1, File No.
33-76848).
3.01 Amended and Restated Certificate of
Incorporation of the Company
(incorporated by reference to Exhibit
3.01 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 30, 1995).
</TABLE>
49
Red Roof Inns Inc. and Subsidiaries
<PAGE> 50
<TABLE>
<C> <S>
3.02 Form of Amended and Restated Bylaws of
the Company (incorporated by reference
to Exhibit 3.02 to the Company's
Registration Statement on Form S-1, File
No. 33-97914).
4.01 Form of certificate representing shares
of Common stock, par value $.01 per
share (incorporated by reference to
Exhibit 4.01 to the Company's
Registration Statement on Form S-1, File
No.33-97914).
10.01 Indenture, dated as of December 17,
1993, from the Company to The Bank of
New York, as Trustee (incorporated by
reference to Exhibit 4.02 to the
Company's Annual Report on Form 10-K for
the fiscal year ended December 31,
1994).
*10.02 Employment Agreements between the
Company and Messrs. Campbell and Tallis
(incorporated by reference to Exhibit
10.02 to the Company's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1994).
*10.03 Employment Agreement between the Company
and Mr. Cash (incorporated by reference
to Exhibit 10 to the Company's Quarterly
Report on Form 10-Q for the 26 weeks
ended July 1, 1995).
10.04 Loan Agreement, dated as of November 9,
1995, between the Company and Huntington
National Bank and a bank group
(incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report
on Form 10-Q for the 39 weeks ended
September 30, 1995).
10.05 First, Second and Third Amendments dated
November 21, 1995, December 12, 1995 and
April 6, 1996, respectively, to Loan
Agreement, dated as of November 9, 1995,
between the Company and Huntington
National Bank and a bank group
(incorporated by reference to Exhibits
10.01, 10.02 and 10.03 to the Company's
Quarterly Report on Form 10-Q for the 13
weeks ended March 30, 1996).
10.06 Fourth Amendment dated June 27, 1996 to
Loan Agreement, dated as of November 9,
1995, between the Company and Huntington
National Bank and a bank group
(incorporated by reference to Exhibit
10.01 to the Company's Quarterly Report
of Form 10-Q for the 26 weeks ended June
29, 1996).
*10.07 1995 Director Stock Option Plan
(incorporated by reference to Exhibit
10.02 to the Company's Quarterly Report
on Form 10-Q for the 39 weeks ended
September 30, 1995).
10.08 Shareholders Agreement among the Company
and all its shareholders, dated as of
April 6, 1994 (incorporated by reference
to Exhibit 10.07 to the Company's
Registration Statement on Form S-1, File
No. 33-97914).
10.09 Amendment No. 1 to Shareholders
Agreement among the Company and all its
shareholders (incorporated by reference
to Exhibit 10.07 to the Company's Annual
Report on Form 10-K for the fiscal year
ended December 30, 1995).
*10.10 Form of 1996 Employee Stock Purchase
Plan (incorporated by reference to
Exhibit 10.09 to the Company's
Registration Statement on Form S-1, File
No. 33-97914).
*10.11 Form of Amended and Restated 1994
Management Equity Incentive Plan
(incorporated by reference to Exhibit
10.10 to the Company's Registration
Statement on Form S-1, File No.
33-97914).
*10.12 Employment Agreement between the Company
and Mr. Chichester (incorporated by
reference to Exhibit 10.11 to the
Company's Annual Report on Form 10-K for
the fiscal year ended December 30,
1995).
</TABLE>
50
Red Roof Inns Inc. and Subsidiaries
<PAGE> 51
<TABLE>
<C> <S>
*10.13 1996 Management Incentive Compensation Plan
(incorporated by reference to Exhibit 10.04
to the Company's Quarterly Report of Form
10-Q for the 13 weeks ended March 30, 1996).
*10.14 Amended and Restated Credit Agreement, dated
May 21, 1997, between the Company and The
Huntington National Bank and a bank group
(incorporated by reference to Form 8-K dated
June 30, 1997).
10.15 First Amendment to Credit Agreement, dated
December 14, 1998, between the Company and
Huntington National Bank, CIBC Oppenheimer
Corp. and a bank group included herein.
*10.16 Amended and Restated Executive Severance
Agreement between the Company and Mr. Rea
included herein.
*10.17 Executive Severance Agreement between the
Company and Mr. Cash included herein.
*10.18 Executive Severance Agreement between the
Company and Mr. Tallis included herein.
*10.19 Employment Agreement between the Company and
Mr. Rea included herein.
11.01 Statement re computation of per share
earnings.
12.01 Statement re computation of ratios.
21.00 Subsidiaries of the Registrant
23.00 Consent of Deloitte & Touche LLP.
24.00 - Directors and Officers Powers of
24.07 Attorney
27.00 Financial Data Schedule
</TABLE>
* Executive plans and arrangements required to be filed pursuant to Item 601 (b)
(10) of Regulation S-K.
(b) Reports on Form 8-K:
Red Roof Inns, Inc. appoints David L. Rea to the position of Executive Vice
President, Chief Financial Officer, and Treasurer effective October 6, 1998.
On October 6, 1998, David N. Chichester, Executive Vice President and Chief
Financial Officer terminated his employment as Executive Vice President and
Chief Financial Officer and resigned from the Board of Directors of Red Roof
Inns, Inc. to pursue other interests. He received severance benefits provided
under his employment agreement of approximately $.8 million which was recognized
in the fourth quarter ended January 2, 1999. The Board vacancy is not being
filled at this time.
(c) Exhibits:
The exhibits are submitted following the signatures.
(d) Financial Statement Schedules:
The financial statement schedules and the independent auditor's report
thereon are submitted following the signatures.
51
Red Roof Inns Inc. and Subsidiaries
<PAGE> 52
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 25th day of March
1999.
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
--------- ----- ----
<C> <S> <C>
/s/ FRANCIS W. CASH Chairman of the Board, President, Chief March 25, 1999
- --------------------------------------------- Executive Officer and Director
Francis W. Cash
/s/ DAVID L. REA Executive Vice President, Chief Financial March 25, 1999
- --------------------------------------------- Officer and Treasurer
David L. Rea
/s/ ROBERT M. HARSHBARGER Senior Vice President, Controller and Chief March 25, 1999
- --------------------------------------------- Accounting Officer
Robert M. Harshbarger
* Director March 25, 1999
- ---------------------------------------------
Thomas E. Dobrowski
* Director March 25, 1999
- ---------------------------------------------
Michael E. Foster
* Director March 25, 1999
- ---------------------------------------------
John A. Henry
* Director March 25, 1999
- ---------------------------------------------
William M. Lewis, Jr.
* Director March 25, 1999
- ---------------------------------------------
Edward D. Powers
* Director March 25, 1999
- ---------------------------------------------
Judith A. Rogala
* Director March 25, 1999
- ---------------------------------------------
Owen D. Thomas
*By /s/ David L. Rea
----------------------------------------
David L. Rea
Attorney-in-Fact
</TABLE>
52
Red Roof Inns Inc. and Subsidiaries
<PAGE> 53
SCHEDULE II
RED ROOF INNS, INC. AND SUBSIDIARIES
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS
BEGINNING OF COSTS AND OTHER FROM
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVES
<S> <C> <C> <C> <C>
YEAR ENDED JANUARY 2, 1999
Allowance for doubtful accounts $651 $903 $ $(222)(1)
==== ==== ==== =====
YEAR ENDED JANUARY 3, 1998
Allowance for doubtful accounts $420 $477 $ $(246) (1)
==== ==== ==== =====
YEAR ENDED DECEMBER 28, 1996
Allowance for doubtful accounts $490 $368 $ $(438) (1)
==== ==== ==== =====
<CAPTION>
BALANCE
AT END
OF
DESCRIPTION PERIOD
<S> <C>
YEAR ENDED JANUARY 2, 1999
Allowance for doubtful accounts $ 1,332
========
YEAR ENDED JANUARY 3, 1998
Allowance for doubtful accounts $ 651
========
YEAR ENDED DECEMBER 28, 1996
Allowance for doubtful accounts $ 420
========
</TABLE>
-------------------
(1) Uncollectible accounts written off, net of amounts recovered.
53
Red Roof Inns Inc. and Subsidiaries
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
ON FINANCIAL STATEMENT SCHEDULES
The Board of Directors and Stockholders of
Red Roof Inns, Inc.
We have audited the consolidated financial statements of Red Roof Inns, Inc. and
its subsidiaries as of January 3, 1998 and January 2, 1999, and for each of the
three years in the period ended January 2, 1999, and have issued our report
thereon dated February 17, 1999; such report is included elsewhere in this Form
10-K. Our audits also included the consolidated financial statement schedules of
Red Roof Inns, Inc. and its subsidiaries, listed in Item 14. These consolidated
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
February 17, 1999
54
Red Roof Inns Inc. and Subsidiaries
<PAGE> 55
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- ------- -----------
<S> <C>
10.15 First Amendment to Credit Agreement, dated December 14, 1998, between the Company and
Huntington National Bank, CIBC Oppenheimer and a bank group.
10.16 Amended and Restated Executive Severance Agreement between the Company and Mr. Rea.
10.17 Executive Severance Agreement between the Company and Mr. Cash.
10.18 Executive Severance Agreement between the Company and Mr. Tallis.
10.19 Employment Agreement between the Company and Mr. Rea.
11.01 Statement re computation of per share amounts.
12.01 Statement re computation of ratio of earnings to fixed charges.
21.00 Subsidiaries of the Registrant
23.00 Consent of Deloitte & Touche LLP.
24.00-24.07 Directors and Officers Powers of Attorney.
27.00 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 10.15
FIRST AMENDMENT TO
CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is made and
dated as of the 14th day of December, 1998, by and among RED ROOF INNS, INC., a
Delaware corporation (the "Borrower"), the commercial lending institutions
listed on the signature pages hereof (collectively, the "Lenders"), CIBC
Oppenheimer Corp. (formerly known as CIBC Wood Gundy Securities Corp.) ("CIBC
Oppenheimer") and The Huntington National Bank ("HNB"), as arrangers (herein, in
such capacity, the "Arrangers"), HNB, as administrative and collateral agent
(herein, in such capacity, the "Administrative Agent" or "Collateral Agent") and
CIBC Oppenheimer, as syndication and documentation agent (herein, in such
capacity, the "Syndication and Documentation Agent"; the Syndication and
Documentation Agent and the Administrative Agent are herein collectively called
the "Agents").
RECITALS
--------
A. The Borrower and the Lenders entered into that certain $250,000,000
Amended and Restated Credit Agreement dated as of May 21, 1997 (the "Credit
Agreement"), pursuant to which the Lenders agreed to extend credit to the
Borrower on the terms and subject to the conditions set forth therein.
B. The Borrower, the Lenders and the Agents desire to amend certain
terms and conditions of the Credit Agreement pursuant to this Amendment.
NOW, THEREFORE, in consideration of the above Recitals and for other
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree to amend the Credit Agreement as
follows:
AGREEMENT
---------
1. The Credit Agreement is hereby amended as follows:
(a) There shall be added to Section 1.1 of the Credit Agreement, in
appropriate alphabetical sequence, the following definitions:
"Completion Guaranty" means a guaranty given by the Borrower or any
Guarantor to the holder of Indebtedness of, or an obligee of, an owner,
operator or licensee of a Red Roof Inn hotel which obligates the
Borrower or such Guarantor (a) to cause the completion of construction
of a Red Roof Inn hotel or (b) to provide
<PAGE> 2
funding for all or a portion of any construction cost
overruns with respect thereto.
"Joint Venture" means a single-purpose corporation, partnership,
limited liability company, joint venture or other similar legal
arrangement (whether created by contract or conducted through a
separate legal entity) in which the Borrower or any of its Subsidiaries
owns 50% or less of the equity interests entitled to vote in the
election of directors, managers or trustees thereof and in which the
Borrower or any of its Subsidiaries participates with another Person in
order to conduct a common venture or enterprise.
(b) The definition of the term "Contingent Liability" in Section 1.1 of
the Credit Agreement is hereby amended by adding the following proviso
immediately prior to the end thereof:
"provided, however, the amount of any Person's obligation under any
Completion Guaranty shall be deemed to be zero unless and until the
Borrower or any Guarantor shall have recorded the existence of such
Completion Guaranty as a liability on its financial statement in
accordance with GAAP."
(c) The definition of the term "Expansion Capital Expenditure" in
Section 1.1 of the Credit Agreement is hereby amended and restated to read in
its entirety as follows:
"Expansion Capital Expenditure" means any Capital Expenditure
of the Borrower or any of its Subsidiaries which does not relate to the
Big Red Project (a) made in connection with the Acquisition or
construction of any Inn that is, or after giving effect to such
expenditure will be, wholly-owned by the Borrower or a Guarantor or (b)
which substantially alters, improves or expands any existing Inn, or
(c) incurred in the ordinary course of business for property used in
corporate overhead functions, or (d) consisting of land to be leased to
franchisees, or (e) consisting of a contribution to, or Investment in,
a Joint Venture, and which in any of the foregoing instances is not
properly characterized as a Maintenance Capital Expenditure.
(d) The definition of the term "Inn" in Section 1.1 of the Credit
Agreement is hereby amended and restated to read in its entirety as follows:
"Inn" means (i) a Red Roof Inn hotel that is owned by the
Borrower or a Guarantor or a Joint Venture in which Borrower has made
an Investment permitted pursuant to Section 7.2.5, or is leased and
operated by the Borrower or a Guarantor, (ii) the Trueman Club in
Columbus, Ohio and (iii) a hotel other than a Red Roof Inn that is
owned by the
-2-
<PAGE> 3
Borrower or a Guarantor or leased and operated by the Borrower or a
Guarantor, provided that the total number of Inns described in this
clause (iii) shall not exceed (except, in the case of acquired hotels,
for a transitional period not to exceed six months) at any time more
than 10% of all Inns.
(e) The definition of the term "Property" in Section 1.1 of the Credit
Agreement is hereby amended and restated to read in its entirety as follows:
"Property" means an Inn that is owned in fee or ground-leased
by the Borrower or a Guarantor or a Joint Venture in which Borrower has
made an Investment permitted pursuant to Section 7.2.5.
(f) The definition of the term "Senior EBITDA" in Section 1.1 of the
Credit Agreement is hereby amended and restated to read in its entirety as
follows:
"Senior EBITDA" means, for any period, operating income
(before royalty expenses) from those Properties owned by the Borrower
or a Guarantor that are not subject to any Liens securing borrowed
money (other than the Mortgages) or the subject of a sale-leaseback
transaction (each a "Specified Property") plus (without duplication)
that portion of any management fees and franchise fees attributable to
royalty payments, marketing fees, reservation fees, technical fees and
other similar payments (other than initial franchise fees) received by
the Borrower or any Subsidiary during such period plus (without
duplication) rent received by the Borrower or any of its Subsidiaries
pursuant to the lease of any Specified Property or portion thereof plus
(without duplication) for any such Inn that shall have been acquired by
the Borrower during such period, the New Property EBITDA from such Inn
during such period plus (without duplication) the amount of cash
distributions received by the Borrower or any Subsidiary from any Joint
Ventures during such period.
(g) The definition of the term "Total Debt" in Section 1.1 of the
Credit Agreement is hereby amended and restated to read in its entirety as
follows:
"Total Debt" means, as of the last day of any Fiscal Quarter,
(i) the consolidated Indebtedness (without duplication) of the Borrower
and its Subsidiaries of the nature referred to in clauses (a)
(exclusive of unsecured Indebtedness of the Borrower owed to an
insurance underwriter or related entity to finance payment, and to
limit the amount, of certain insurance premiums); (b) (exclusive of (I)
letters of credit issued for the account of the Borrower or any of its
Subsidiaries in the ordinary course of business to support workers
compensation and
-3-
<PAGE> 4
insurance obligations of the Borrower and its Subsidiaries and (II)
letters of credit (which are not Letters of Credit) issued for the
account of the Borrower or any of its Subsidiaries); (c); (e); and (f)
(but only to the extent that the underlying obligations of the type
referred to above) of the definition of "Indebtedness" plus (ii) seven
times the Leaseback Rental Payments for such Fiscal Quarter minus (iii)
cash and cash equivalents of the Borrower and the Guarantors in excess
of $5,000,000.
(h) Clause (c) of Section 7.2.2 of the Credit Agreement is hereby
amended by deleting the proviso at the end thereof.
(i) Clause (f) of Section 7.2.2 of the Credit Agreement is hereby
amended by and restated to read in its entirety as follows:
"up to $7,000,000 of unsecured Indebtedness of the Borrower or its
Subsidiaries owed to an insurance underwriter or related entity to
finance payment and to limit the amount of certain insurance premiums,
and other unsecured Indebtedness of the Borrower and its Subsidiaries
(including, without limitation, guarantees by the Borrower of
Indebtedness of franchisees) in an aggregate amount not to exceed
$20,000,000 at any time;"
(j) Clause (d) of Section 7.2.5 of the Credit Agreement is hereby
amended and restated to read in its entirety as follows:
"(d) without duplication, Investments permitted as
Capital Expenditures or Investments in Joint Ventures
pursuant to Section 7.2.7;"
(k) Clause (h) of Section 7.2.5 of the Credit Agreement is hereby
amended and restated to read in its entirety as follows:
"(h) guarantees of debt incurred by Red Roof Inns franchisees
as permitted in Section 7.2.2(f); plus other Investments in an
aggregate amount at any one time not to exceed $30,000,000; provided
that the aggregate Investments in any franchisee entity, other than
Investments pursuant to Section 7.2.5(g) and guarantees pursuant to
Section 7.2.2(f), shall not exceed $2,000,000."
(l) The proviso at the end of clause (a) of Section 7.2.6 of the Credit
Agreement is hereby amended and restated to read in its entirety as follows:
"provided, however, that so long as no Specified Default has occurred
and is continuing or would occur after giving effect thereto, the
Borrower may (i) pay dividends or distributions on its capital stock
and
-4-
<PAGE> 5
warrants or options to purchase its capital stock so long as the
aggregate amount of dividends and distributions paid in any Fiscal Year
does not exceed $10,000,000 (provided, however, that up to $2,000,000
of the unused portion of such allowance for any Fiscal Year may be
carried forward by the Borrower for one year and provided, further that
any such amount so carried forward shall be deemed utilized after the
allowance specifically designated for such Fiscal Year has been
utilized), (ii) pay current dividends on any Preferred Stock in an
amount required to be paid under the terms of such Preferred Stock and
(iii) redeem, purchase or retire shares of its capital stock and
warrants or options to purchase its capital stock so long as the
aggregate consideration therefore does not exceed $75,000,000 during
the remaining term of this Agreement or $50,000,000 from the effective
date of that certain First Amendment to Credit Agreement dated as of
December 14, 1998 among the parties hereto through December 31, 1999."
(m) Clause (b) of Section 7.2.7 of the Credit Agreement is hereby
amended and restated in its entirety to read as follows:
"(b) Expansion Capital Expenditures for the Borrower, the
Guarantors, and, prior to becoming a Guarantor, Carousel shall not
exceed $120,000,000 in any Fiscal Year; Expansion Capital Expenditures
consisting of contributions to, or Investments in Joint Ventures shall
not exceed $20,000,000 in any Fiscal Year; no Expansion Capital
Expenditure made in respect of any Acquisition shall exceed
$50,000,000; and no Expansion Capital Expenditure of the type described
in clause (d) of the definition thereof shall exceed $30,000,000 in any
Fiscal Year; provided, however, that up to $25,000,000 of the unused
portion of the scheduled allowance for Expansion Capital Expenditures
in any Fiscal Year may be carried forward for one year (but no unused
portion of the allowance for contributions to, or Investments in, Joint
Ventures may be carried forward); provided, further that any such
amount so carried forward shall be deemed to be utilized after the
allowance specifically designated for such Fiscal Year has been fully
utilized; and provided, however that any acquisitions that are funded
solely with shares of the Borrower's capital stock shall be excluded
from such calculations."
(n) Clause (c) of Section 7.2.10 of the Credit Agreement is hereby
amended by deleting the figure "$50,000,000" and replacing it with the figure
"$100,000,000".
-5-
<PAGE> 6
2. Effective Date. This Amendment shall be effective on the date this
Amendment shall have been executed by the Borrower and the Required Lenders.
3. Representations and Warranties. The Borrower hereby represents and
warrants to the Agent and the Lenders as follows:
(a) The Borrower has the power and authority and the legal
right to execute, deliver and perform this Amendment and has taken all necessary
action to authorize the execution, delivery and performance of this Amendment.
This Amendment has been duly executed and delivered by the Borrower. The Credit
Agreement (as amended by this Amendment) and the other Loan Documents constitute
legal, valid, and binding obligations of the Borrower, enforceable against the
Borrower in accordance with their terms, subject to applicable bankruptcy,
insolvency, reorganization, moratorium and other similar laws now or hereafter
in effect relating to creditors' rights generally, and general principles of
equity.
(b) At and as of the date of execution hereof and at and as of
the effective date of this Amendment and after giving effect to this Amendment:
(1) the representations and warranties of the Borrower contained in the Credit
Agreement are true and correct in all material respects provided, however, that
with respect to the representations and warranties set forth in Section 6.14 of
the Agreement, the Borrower and the Lenders acknowledge that the Borrower, in
good faith, is in the process of diligently contesting certain proposed income
tax liabilities, as more fully described on Attachment 1, attached to this
Amendment and incorporated herein by this reference; and (2) no Default or Event
of Default has occurred and is continuing under the Credit Agreement.
4. Reaffirmation of Credit Agreement. This Amendment shall be deemed to
be an amendment to the Credit Agreement, and the Credit Agreement, as amended
hereby, is hereby ratified, approved and confirmed in each and every respect.
All references to the Credit Agreement in any other document, instrument,
agreement or writing shall hereafter be deemed to refer to the Credit Agreement
as amended hereby.
5. Reaffirmation of Loan Documents. The Borrower hereby further affirms
and agrees that (a) the execution and delivery by the Borrower of and the
performance of its obligations under the Credit Agreement, as amended by this
Amendment, shall not in any way amend, impair, invalidate or otherwise affect
any of the obligations of the Borrower or the rights of the Agent or the Lenders
under any of the Loan Documents or any other document or instrument made or
given by the Borrower in connection therewith, and (b) the term "Obligations" as
used in the Loan Documents includes, without limitation, the Obligations of the
Borrower under the Credit Agreement as amended by this Amendment.
-6-
<PAGE> 7
6. Miscellaneous Provisions.
(a) Survival. The provisions of this Amendment shall survive
any termination of the Credit Agreement, the payment in full of all Obligations
and the termination of all Commitments.
(b) Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF NEW YORK.
(c) Counterparts. This Amendment may be executed in any number
of counterparts, all of which together shall constitute one agreement.
(d) No Other Amendment. Except as expressly amended herein,
the Credit Agreement, the other Loan Documents and all documents, instruments
and agreements relating thereto or executed in connection therewith shall remain
in full force and effect as currently written.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the day
and year first above written.
RED ROOF INNS, INC.
By: /s/ David L. Rea
--------------------------------
Title: Executive Vice President,
Chief Financial Officer and
Treasurer
CIBC OPPENHEIMER CORP.,
as Syndication and Documentation
Agent, and Arranger
By: /s/ Paul J. Chakmak
--------------------------------
Title: Managing Director
THE HUNTINGTON NATIONAL BANK,
as Collateral Agent,
Administrative Agent and Arranger
By: /s/ Robert H. Friend
--------------------------------
Title: Vice President
-7-
<PAGE> 8
LENDERS
-------
CIBC INC.
By: /s/ Paul J. Chakmak
--------------------------------
Title: Managing Director
CIBC Oppenheimer Corp.,
AS AGENT
THE HUNTINGTON NATIONAL BANK
By: /s/ Robert H. Friend
--------------------------------
Title: Vice President
BANK ONE, NA
By: /s/ Rebecca McCloskey
--------------------------------
Title: First Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Wayne Robertson
--------------------------------
Title: Vice President
BANQUE NATIONALE DE PARIS
By: /s/ Arnaud Collin du Bocage
--------------------------------
Title: Executive Vice President
& General Manager
NBD BANK, A MICHIGAN BANKING
CORPORATION
By: /s/ Rebecca McCloskey
--------------------------------
Title: First Vice President
HARRIS TRUST AND SAVINGS BANK
By: /s/ W.A. McDonnell
--------------------------------
Title: Vice President
<PAGE> 9
BANK OF SCOTLAND
By: /s/ Annie Chin Tat
--------------------------------
Title: Senior Vice President
THE FIFTH THIRD BANK OF COLUMBUS
By: /s/ Mark Ransom
--------------------------------
Title: Vice President
NORWEST BANK MINNESOTA, N.A.
By: /s/ R. Duncan Sinclair
--------------------------------
Title: Vice President
STAR BANK, NA
By: /s/ Bonnie Birath
--------------------------------
Title: Assistant Vice President
SUNTRUST BANK, CENTRAL FLORIDA,
NATIONAL ASSOCIATION
By: /s/ Stephen L. Leister
--------------------------------
Title: Vice President
<PAGE> 10
Attachment 1
------------
The Internal Revenue Service ("IRS") is currently undergoing an examination of
the Company's federal income tax returns for the years 1993 through 1996. The
IRS has proposed adjustments involving approximately $10 million in current
federal income taxes for the years 1993 through 1997, plus interest. The
proposed adjustments relate primarily to the allocation of the purchase price of
the assets acquired as a result of the merger of the Company in December 1993
and the tax accounting treatment for removal costs for assets replaced. These
adjustments do not affect the overall tax liability recognized by the Company
but only impact the classification between current and deferred tax accounts.
The Company has filed a response vigorously contesting the majority of the
proposed adjustments. While it is not possible to determine the final
disposition, the Company is of the opinion that the ultimate resolution of this
matter should not have a Material Adverse Effect on the financial position or
results of operations of the Company.
<PAGE> 1
Exhibit 10.16
AMENDED AND RESTATED
AGREEMENT
This Amended and Restated Agreement is entered into this 7th day of
October, 1998, by and between RED ROOF INNS, INC., a Delaware corporation, with
principal offices located at 4355 Davidson Road, Hilliard, Ohio (the "Company")
and DAVID L. REA, (the "Executive").
RECITALS
A. Company and Executive have entered into an Agreement as of March 3,
1998 to provide Executive certain severance benefits associated with a change in
control of ownership in the Company. The Company has promoted Executive, and as
a result of such promotion, desires to make certain changes and modification to
the Agreement.
B. Executive is a senior executive of Company who is expected to make
major contributions to the profitability, growth, and financial strength of the
Company.
C. The Company recognizes that upon a threatened change in control
Executive may have concerns about Executive's employment status and
responsibilities, and the Company desires to provide Executive some assurances
as to the continuation of Executive's employment status and responsibilities in
the event of a change in control.
D. The Company desires to assure itself of both present and future
continuity of management in the event of a change in control and desires to
establish certain minimum compensation rights of its key senior executive
officers, including the Executive, applicable in the event of a change in
control.
E. The Company desires to assure that, should it receive an offer
involving a possible change in control, Executive would be in a secure position
to consider such offer and negotiate on behalf of the Company and its
shareholders as objectively as possible, and to this end, the Company desires to
protect Executive from any direct or implied threat to Executive's financial
well-being under such circumstances.
Page 1 of 13
<PAGE> 2
COVENANTS
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
(a) Change in Control. "Change in Control" shall mean
(i) any transaction, or series of transactions,
including, but not limited to any merger, consolidation, or
reorganization, which results when any "person" as defined in
Section 3(a)(9) of the Exchange Act and as used in Sections
13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d) of the Exchange Act, but excluding the Company,
any subsidiary of the Company, and any employee benefit plan
sponsored or maintained by the Company or any subsidiary of
the Company (including any trustee of such plan acting as
trustee), and excluding the Morgan Stanley Real Estate Fund,
L.P. and its affiliates (as defined in Rule 12b-2 under the
Exchange Act), directly or indirectly, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of
securities of the Company representing 20% or more of the
combined voting power of the Company's then outstanding
securities;
(ii) when, during any period of 24 consecutive months
the individuals who, at the beginning of such period,
constitute the Board (the "Incumbent Directors") cease for any
reason other than death to constitute at least a majority of
the Board; provided, however, that a director who was not a
director at the beginning of such 24-month period shall be
deemed to have satisfied such 24-month requirement (and be an
Incumbent Director) if such director was elected by, or on the
recommendation of or with the approval of; at least two-thirds
of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning
of such 24-month period) or by prior operation of this
Section; or
(iii) when the stockholders of the Company approve a
plan of complete liquidation of the Company; or an agreement
for the sale or disposition of substantially all the Company's
assets; or a merger, consolidation, or reorganization of the
Company in which stockholders of the Company immediately prior
to the transaction own less than 65% of the combined voting
power of the surviving entity.
Page 2 of 13
<PAGE> 3
(b) "Annual Base Salary" shall mean the Executive's current
base annual salary plus any future increases to Executive's base annual
compensation, but in no event less than the Executive's annual base
salary in effect on the date of this Agreement.
(c) "Termination Date" shall mean the date on which
Executive's employment with the Company is terminated.
2. TERMINATION BY COMPANY. Following a Change in Control, the
Executive's employment may be terminated by Company ("Company Termination
Event") and the Executive shall not be entitled to the severance benefits
provided under Section 4, provided that Executive's termination occurs as a
result of one or more of the following events:
(a) The Executive's death;
(b) The Executive's disability, provided Executive actually
begins to receive disability benefits pursuant to the long-term
disability plan in effect for senior executives of the Company
immediately prior to the Change in Control; or
(c) For "Cause," which for purposes of this Agreement shall
mean that, prior to any termination pursuant to Section 3(b) hereof,
the Executive shall have committed: (i) an act of fraud, embezzlement,
theft, or any other act constituting a felony, involving moral
turpitude or causing material harm, financial or otherwise, to the
Company; or (ii) a demonstrably intentional and deliberate act or
failure to act (other than as a result of incapacity due to physical or
mental illness) which is committed in bad faith by the Executive, which
causes or can be expected to cause material financial injury to the
Company.
For purposes of this Agreement, no act, or failure to act, on the part
of the Executive shall be deemed "intentional" if it was due primarily to an
error in judgment or negligence, but shall be deemed "intentional" only if done,
or omitted to be done, by the Executive not in good faith and without reasonable
belief that Executive's action or omission was in, or not opposed to, the best
interest of the Company. Notwithstanding the foregoing, the Executive shall not
be deemed to have been terminated for "Cause" hereunder unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of not less than three-quarters of the Board then in
office at a meeting of the Board of Directors called and held for such purpose
(after reasonable notice to the Executive and an opportunity for the Executive,
together with Executive's counsel, to be heard before the Board), finding that,
in the good faith opinion of the Board, the Executive had committed an act set
forth above in this Section 2(c) and specifying the particulars thereof in
detail. Nothing herein shall limit the right of the Executive or Executive's
beneficiaries to contest the validity or propriety of any such determination.
Page 3 of 13
<PAGE> 4
3. EXECUTIVE TERMINATION EVENT. If at any time during the two-year
period commencing on the date of a Change in Control, the Company or Executive
terminates Executive's employment following the occurrence of one or more of the
following events ("Executive Termination Event"), Executive shall be entitled to
the severance benefits provided in Section 4 below:
(a) Any termination by the Company of Executive's employment
during such two-year period for any reason other than for Cause, as a
result of Executive's death, or by reason of the Executive's disability
and the actual receipt of disability benefits in accordance with
Section 2(b) hereof; or
(b) Termination by the Executive of Executive's employment
with the Company at any time within two years after the Change in
Control upon the occurrence of any of the following events:
(i) The Company's failure to elect, re-elect, or
otherwise maintain the Executive in the office or position in
the Company which the Executive held immediately prior to a
Change in Control, or the removal of the Executive as a
Director of the Company (or any successor thereto) if the
Executive was a Director of the Company immediately prior to
the Change in Control;
(ii) A significant, adverse change (increase or
decrease) in the nature or scope of the authorities, powers,
functions, responsibilities, or duties attached to the
position with the Company which the Executive held immediately
prior to the Change in Control, or a reduction in the
aggregate of the Executive's base pay or annual incentive
bonus opportunity (and relative level of goal achievement) in
which the Executive participated immediately prior to the
Change in Control, or the termination of the Executive's right
to any employee benefits to which Executive was entitled
immediately prior to the Change in Control, or a reduction in
scope or value of such benefits, without prior written consent
of the Executive, any of which is not remedied within 10
calendar days after receipt by the Company of a written notice
from the Executive of such change, reduction, or termination,
as the case may be;
(iii) A determination by the Executive made in good
faith that, as a result of a Change in Control, there has been
a significant change in the scope of the business or other
activities for which the Executive was responsible immediately
prior to the Change in Control, or that Executive has been
rendered substantially unable to carry out, has been
substantially hindered in the performance of, or has suffered
a substantial increase or reduction in, any of the
authorities, powers, functions, responsibilities, or duties
attached to the position held by the Executive immediately
prior to the Change in Control, which situation is not
remedied within 10 calendar days after receipt by the Company
of a written notice from the Executive of such good faith
determination;
Page 4 of 13
<PAGE> 5
(iv) The liquidation, dissolution, merger,
consolidation, or reorganization of the Company or transfer of
all or a significant portion of its business and/or assets;
(v) The Company shall relocate its principal
executive offices, or require the Executive to have
Executive's principal location of work changed, to any
location which is in excess of 50 miles from the location
thereof immediately prior to the Change in Control, or the
Company shall require the Executive to travel away from
Executive's office in the course of discharging Executive's
responsibilities or duties hereunder significantly more (in
terms of either consecutive days or aggregate days in any
calendar year) than was required of him prior to the Change in
Control without, in either case, Executive's prior written
consent; or
(vi) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the
Company or any successor thereto.
4. SEVERANCE BENEFITS. In the event Executive's employment is
terminated within two years of the date of a Change in Control as a result of an
Executive Termination Event, Executive shall be entitled to the benefits set
forth below. All amounts payable under this Section 4(a), (b), and (c) shall be
paid to Executive in one lump sum within 10 days after Executive's termination
of employment.
(a) The Company shall pay to Executive an amount equal to
three times Executive's Annual Base Salary in effect for the year in
which Executive's termination of employment occurs. Executive shall
also be entitled to receive three times the highest bonus or short-term
incentive compensation paid to Executive during the fiscal year
preceding the Change in Control or, if higher, three times the maximum
amount for which Executive has an opportunity to earn in the fiscal
year of Executive's termination (excluding any amounts paid to
Executive under the Company's equity-based, long-term incentive plan or
any other phantom stock or stock rights plan subsequently established
by the Company).
(b) The Company shall pay Executive Executive's full base
salary through Executive's Termination Date. The Company shall also pay
Executive an amount equal to the pro rata amount of the maximum target
bonus award available to Executive under the bonus plan during the year
of termination, based on the number of days of the year elapsed prior
to the Termination Date:
(c) For the 36 months following Executive's termination of
employment, the Company shall arrange to provide the Executive with
health benefits (medical, dental, disability and life) substantially
similar to those which the Executive was receiving or entitled to
receive immediately prior to the Termination Date. If and to the extent
that such benefits shall not or cannot be paid or provided under any
policy, plan, program, or arrangement of the Company solely due to the
fact that the Executive is no longer an officer or employee of the
Company, then the Company shall itself pay or provide
Page 5 of 13
<PAGE> 6
reimbursement to the Executive, Executive's dependents and
beneficiaries, the cost of such health benefits. Such health benefits
shall be discontinued prior to the end of the specified continuation
period if the Executive receives comparable coverage from a subsequent
employer.
(d) The Company will provide out-placement assistance from a
service selected by Executive for a period of one year from the
Termination Date. All associated costs will be paid by the Company, up
to a maximum of 30% of Executive's annual rate of base pay in effect at
the time of Executive's termination.
(e) If Executive has relocated to work with the Company during
the three years immediately preceding the date of this Agreement,
Executive may elect, within 120 days following the Termination Date, to
have the Company purchase Executive's house at its then current market
value (which shall be established by taking the average of three
appraisals from real estate firms, one selected by the Executive, one
selected by the Company, and one selected by the two selected firms
with the Company paying the costs of the appraisals). Such purchase
shall occur on a date specified by Executive, but in any event within
six months following Executives' election to have the house purchased
by the Company.
5. OTHER RIGHTS. A termination of the Executive's employment by the
Company pursuant to Section 2 or 3(a) hereof, or by the Executive pursuant to
Section 3(b) hereof, shall not affect adversely any rights which the Executive
may have pursuant to any agreement, employment contract, policy, plan, program,
or arrangement of the Company providing employee benefits, which rights shall be
governed by the terms of such employee benefit plan.
6. LONG-TERM INCENTIVES. Upon the occurrence of a Change in Control,
Executive shall become immediately and automatically vested (with no director
discretion exercised) in all equity-based, long-term incentives (including stock
options and restricted stock) and all accrued pension benefits held as of the
date of the Change in Control. To the extent legally necessary the Company can
provide these benefits on a tax non-qualified basis. For any cash-based,
long-term incentive vehicles, Executive shall become immediately vested and
receive an immediate cashout of the vehicles upon the occurrence of a Change of
Control, equal to a pro rata target award thereunder (or, if greater, the actual
award earned to date) based upon the number of days actually employed during the
performance period. Such provisions will be included in all future long-term
incentive award agreements.
7. NO SET-OFF. There shall be no set-off or counterclaim against, or
delay in, any payment of severance benefits by the Company to Executive provided
for in this Agreement with respect to any claim against or debt or obligation of
Executive, whether arising hereunder or otherwise except for health benefits as
provided in Section 4(c).
8. NO MITIGATION OBLIGATION. Executive's benefits hereunder shall be
payable to Executive as severance pay in consideration of Executive's past
services and of Executive's continued services from the date hereof. The Company
hereby acknowledges that it will be difficult, and may be impossible, for the
Executive to find reasonably comparable employment
Page 6 of 13
<PAGE> 7
following the Termination Date. Accordingly, the parties hereto expressly agree
that the payment of the severance benefits by the Company to the Executive in
accordance with the terms of this Agreement will be liquidated damages, and that
the Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise, nor
shall any profits, income, earnings, or other benefits from any source whatever
create any mitigation, offset, reduction, or any other obligation on the part of
the Executive hereunder or otherwise except for health benefits as provided in
Section 4 (c).
9. TAX CONSIDERATIONS. Notwithstanding anything herein to the contrary,
in the event any payments to Executive hereunder are determined by the Company
to be subject to the tax imposed by Section 4999 of the Code or any similar
federal or state excise tax, FICA tax, or any interest or penalties are incurred
by the Executive with respect to such excise tax (such excise tax, together with
any such interest or penalties art hereinafter collectively referred to as the
"Excise Tax"), Company shall pay to Executive at the time specified in Section 4
(a) above, an additional amount (the "Gross-Up Payment") such that after the
payment by Executive of all federal, state, or local income taxes, Excise Taxes,
FICA taxes, or other taxes (including any interest or penalties imposed with
respect thereto) imposed upon the receipt of the Gross-Up Payment, Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the
severance payments provided herein.
(a) For purposes of determining whether any payments to
Executive hereunder will be subject to the Excise Tax and the amount of
such Excise Tax:
(i) any other payments or benefits received or to be
received by Executive in connection with a Change in Control
or the termination of employment (whether pursuant to the
terms of this Agreement or of any other plan, arrangement, or
agreement with Company) shall be treated as "parachute
payments" within the meaning of Section 280G(b)(2) of the
Code, and all "excess parachute payments" within the meaning
of Section 280G(b)(l) shall be treated as subject to the
Excise Tax, unless in the opinion of tax counsel selected by
Company and acceptable to Executive, other payments or
benefits (in whole or in part) do not constitute parachute
payments under Section 280G of the Code, or such excess
parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning
of Section 280G(b)(4) of the Code;
(ii) the amount of the severance payments which shall
be treated as subject to the Excise Tax shall be equal to the
amount of excess parachute payments within the meaning of
Sections 280G(b)(l) and (4) (after applying clause (a),
above); and
(iii) the parachute value of any non-cash benefits or
any deferred payment or benefit shall be determined by Company
in accordance with the principles of Sections 280G(d)(3) and
(4) of the Code.
Page 7 of 13
<PAGE> 8
(b) If the Excise Tax is subsequently determined to be less
than the amount taken into account hereunder at the time of termination
of employment, Executive shall repay to Company, at the time the
reduction in Excise Tax is finally determined, the portion of the
Gross-Up Payment attributable to such reduction. If the Excise Tax is
determined to exceed the amount taken into account hereunder at the
time of termination of employment, Company shall make an additional
Gross-Up Payment to Executive in respect of such excess at the time the
amount of such excess is finally determined. The Executive shall notify
the Company in writing of any claim by the Internal Revenue Service
that, if successful, would require the payment by the Company of the
Gross-Up Payment. Such notification shall be given as soon as
practicable but no later that ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to
be paid. The Executive shall not pay such claim prior to the expiration
of the 30 calendar day period following the date on which it gives such
notice to the Company (or such shorter period ending on the date that
any payment of taxes with respect to such claim is due). If the Company
notifies the Executive in writing prior to the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give the Company any information reasonably
requested by the Company relating to such claim;
(ii) take such action in connection with contesting
such claim as the Company shall reasonably request in writing
from time to time, including, without limitation, accepting
legal representation with respect to such claim by an attorney
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in
order to effectively contest such claim; and
(iv) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including legal and accounting fees and additional
interest and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an after-tax basis,
for any Excise Tax, FICA tax, or income tax (including interest and
penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on
the foregoing provisions of this Section, the Company shall control all
proceedings taken in connection with such contest and, at its sole
option, may pursue or forgo any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the
Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction, and in one or more appellate courts,
as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue
Page 8 of 13
<PAGE> 9
for a refund, the Company shall advance the amount of such payment to
the Executive, on an interest-free basis, and shall indemnify and hold
the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto)
imposed with respect to such advance or with respect to any imputed
income with respect to such advance; and further provided that any
extension of the statute of limitations relating to payment of taxes
for the taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of the contest
shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to
settle or contest as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
If any such claim referred to in this Section is made by the
Internal Revenue Service and the Company does not request the Executive
to contest the claim within the 30 calendar day period following notice
of the claim, the Company shall pay to the Executive the amount of any
Gross-Up Payment owed to the Executive, but not previously paid
pursuant to Section 9(b), immediately upon the expiration of such 30
calendar day period. If any such claim is made by the Internal Revenue
Service and the Company requests the Executive to contest such claim,
but does not advance the amount of such claim to the Executive for
purposes of such contest, the Company shall pay to the Executive the
amount of any Gross-Up Payment owed to the Executive, but not
previously paid under the provisions of Section 9(b), within 5 business
days of a Final Determination of the liability of the Executive for
such Excise Tax. For purposes of this Agreement, a "Final
Determination" shall be deemed to occur with respect to a claim when
(i) there is a decision, judgment, decree, or other order by any court
of competent jurisdiction, which decision, judgment, decree, or other
order has become final, i.e., all allowable appeals pursuant to this
Section have been exhausted by either party to the action, (ii) there
is a closing agreement made under Section 7121 of the Code, or (iii)
the time for instituting a claim for refund has expired, or if a claim
was filed, the time for instituting suit with respect thereto has
expired.
If, after the receipt by the Executive of an amount advanced
by the Company pursuant to this Section, the Executive becomes entitled
to receive any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of this
Section) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to this Section, a
determination is made by the Internal Revenue Service that the
Executive is not entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 calendar
days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required
to be paid.
Page 9 of 13
<PAGE> 10
10. ENFORCEMENT COSTS. Company is aware that, upon the occurrence of a
Change in Control, the Board of Directors or a shareholder of the Company, or
the Company's successor in interest, may then cause or attempt to cause Company
to refuse to comply with its obligations under this Agreement, or may cause or
attempt to cause Company to institute, or may institute litigation seeking to
have this Agreement declared unenforceable, or may take, or attempt to take,
other action to deny Executive the benefits intended under this Agreement. In
these circumstances, the purpose of this Agreement could be frustrated. It is
the intent of Company that Executive not be required to incur the expenses
associated with the enforcement of Executive's rights under this Agreement by
litigation or other legal action, nor be bound to negotiate any settlement of
Executive's rights hereunder under threat of incurring such expenses because the
cost and expense thereof would substantially detract from the benefits intended
to be extended to Executive hereunder. Accordingly, if following a Change in
Control it should appear to Executive that Company has failed to comply with any
of its obligations under this Agreement or in the event that Company or any
other person takes any action to declare this Agreement void or unenforceable,
or institutes any litigation or other legal action designed to deny, diminish,
or to recover from Executive the benefits intended to be provided to Executive
hereunder, Company irrevocably authorizes Executive from time to time to retain
legal counsel of Executive's choice at the expense of Company to represent
Executive in connection with the initiation or defense of any litigation or
other legal action, whether by or against Company or any director, officer,
stockholder, or other person affiliated with Company. The reasonable fees and
expenses of counsel selected from time to time by Executive as provided herein
shall be paid or reimbursed to Executive by Company on a regular, periodic basis
upon presentation by Executive of a statement or statements prepared by
Executive's counsel in accordance with its customary practices. In any action
involving this Agreement, Executive shall be entitled to prejudgment interest on
any amounts found to be due Executive as of the date such amounts would have
been payable to Executive pursuant to this Agreement at an annual rate of
interest equal to the lesser of 10% or the prime commercial rate in effect at
The Huntington National Bank in Columbus, Ohio from time to time during the
pre-judgment period.
11. ARBITRATION. Without limiting the application of Section 10 above,
the Company and Executive hereby agree that certain issues and/or disagreements
arising in connection with this Agreement shall be settled by arbitration.
Accordingly, in the event the Company or Executive believes that the other party
has violated any provision of this Agreement, including but not limited to any
action by the Company which Executive believes would entitle Executive to
terminate Executive's employment with severance benefits in accordance with
Section 3(b) hereof, the party alleging such violation shall notify the other
party in writing of such alleged violation. In the event the party receiving
such violation notice disagrees with the position taken by the other party in
such written notice, the recipient of the violation notice may, within 20 days
of receipt of such written notice, notify the other party, in writing, that it
has elected to submit such disagreement to arbitration. Arbitration of such
dispute shall be settled in Columbus, Ohio, in accordance with the then
applicable rules of the American Arbitration Association. The Company shall bear
all costs associated with such arbitration. In the event the party receiving a
violation notice does not elect to submit any issue or disagreement to
arbitration within 10 days of its receipt of the written violation notice, such
party will be deemed to have accepted the position taken in such written notice.
Notwithstanding anything herein to the contrary, neither
Page 10 of 13
<PAGE> 11
the Company nor the Executive shall be required to arbitrate the basis of any
involuntary termination of Executive's employment with the Company by the
Company or its successor.
12. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement
shall create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company prior to any Change
in Control, provided, however, that any termination of employment or the removal
of the Executive from the office or position in the Company that such Executive
presently holds following the commencement of active negotiations with a third
party (which negotiations are evidenced by the delivery of evaluation material)
that ultimately results in a Change in Control shall be deemed to be a
termination or removal of the Executive after a Change in Control for purposes
of this Agreement. Notwithstanding the foregoing, a termination of employment or
removal of the Executive following the termination of active negotiations with
any third party shall not be deemed a termination after a Change in Control for
purposes of this Agreement.
13. TERM. This Agreement shall terminate on October 7, 2001, unless a
Change in Control shall have occurred prior to such date; provided, however,
upon the passage of one year from the date hereof and each year thereafter this
Agreement shall automatically be renewed for an additional year unless the
Company or the Executive has notified in writing the other sixty calendar days
prior to the passage of the year that the Agreement is not to be automatically
renewed. Upon such notice, this Agreement will not be renewed for the additional
year and will expire at the end of the three-year term then in process.
Regardless of the term remaining on this Agreement determined as provided above,
upon the occurrence of a Change of Control of the Company this Agreement shall
not terminate or expire until two years from the date of such Change of Control.
14. WITHHOLDING OF TAXES. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling.
15. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets of
the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required to
perform if no such succession had taken place. This Agreement shall be
binding upon and inure to the benefit of the Company and any successor
to the Company, including without limitation any persons acquiring
directly or indirectly all or substantially all of the business and/or
assets of the Company whether by purchase, merger, consolidation,
reorganization, or otherwise (and such successor shall thereafter be
deemed the "Company" for the purposes of this Agreement), but shall not
otherwise be assignable, transferable, or delegable by the Company.
Page 11 of 13
<PAGE> 12
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, or
legatees.
(c) This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign,
transfer, or delegate this Agreement or any rights or obligations
hereunder except as expressly provided in Section 13(a) hereof. Without
limiting the generality of the foregoing, the Executive's right to
receive payments hereunder shall not be assignable, transferable, or
delegable, whether by pledge, creation of a security interest, or
otherwise, other than by a transfer by Executive's will or by the laws
of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 12(c), the Company
shall have no liability to pay any amount so attempted to be assigned,
transferred, or delegated.
(d) The Company and the Executive recognize that each party
will have no adequate remedy at law for breach by the other of any of
the agreements contained herein and, in the event of any such breach,
the Company and the Executive hereby agree and consent that the other
shall be entitled to a decree of specific performance, mandamus or
other appropriate remedy to enforce performance of this Agreement.
16. NOTICE. For all purposes of this Agreement, all communications
including without limitation notices, consents, requests, or approvals, provided
for herein, shall be in writing and shall be deemed to have been duly given when
delivered or five business days after having been mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed to the Company (to the attention of the President of the Company) at
its principal executive office and to the Executive at Executive's principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
17. GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Ohio, without giving effect to the principles of conflict of laws of such State.
18. VALIDITY. If any provision of this Agreement or the application of
any provision hereof to any person or circumstances is held invalid,
unenforceable, or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances shall not be
affected, and the provision so held to be invalid, unenforceable, or otherwise
illegal shall be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid, and legal.
19. MISCELLANEOUS. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral
Page 12 of 13
<PAGE> 13
or otherwise, expressed or implied with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. In the event the terms and conditions of this Agreement conflict with
those of any other agreement, this Agreement shall prevail.
To the extend that Executive receives payment under this Agreement
relating to the termination of Executive's employment, the Executive will not
receive payment under any other agreement with the Company regarding such
termination.
THIS AGREEMENT IS AN AMENDED AND RESTATED AGREEMENT OF THE ORIGINAL
AGREEMENT AND SUPERSEDES THE ORIGINAL AGREEMENT IN ITS ENTIRETY.
IN WITNESS WHEREOF, the Executive and Company have executed this
Agreement on the day and year first above written.
EXECUTIVE RED ROOF INNS, INC.
By: /s/ DAVID L. REA By: /s/ FRANCIS W. CASH
------------------------------- -------------------------------
DAVID L. REA FRANCIS W. CASH
Executive Vice President, Chairman, President, and
Chief Financial Officer, and Chief Executive Officer
Treasurer
Page 13 of 13
<PAGE> 1
Exhibit 10.17
AGREEMENT
This Amended and Restated Agreement is entered into this 30th day of
January, 1997, by and between RED ROOF INNS, INC., a Delaware corporation, with
principal offices located at 4355 Davidson Road, Hilliard, Ohio (the "Company")
and FRANCIS W. CASH, (the "Executive").
RECITALS
A. Executive is a senior executive of Company who is expected to make
major contributions to the profitability, growth, and financial strength of the
Company.
B. The Company recognizes that upon a threatened change in control
Executive may have concerns about Executive's employment status and
responsibilities, and the Company desires to provide Executive some assurances
as to the continuation of Executive's employment status and responsibilities in
the event of a change in control.
C. The Company desires to assure itself of both present and future
continuity of management in the event of a change in control and desires to
establish certain minimum compensation rights of its key senior executive
officers, including the Executive, applicable in the event of a change in
control.
D. The Company desires to assure that, should it receive an offer
involving a possible change in control, Executive would be in a secure position
to consider such offer and negotiate on behalf of the Company and its
shareholders as objectively as possible, and to this end, the Company desires to
protect Executive from any direct or implied threat to Executive's financial
well-being under such circumstances.
COVENANTS
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
(a) Change in Control. "Change in Control" shall mean
(i) any transaction, or series of transactions, including,
but not limited to any merger, consolidation, or reorganization,
which results when any "person" as defined in Section 3(a)(9) of
the Exchange Act and as used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange
Act, but excluding the Company, any subsidiary of the Company,
and any employee benefit plan sponsored or maintained by the
Company or any subsidiary of the
Page 1 of 12
<PAGE> 2
Company (including any trustee of such plan acting as trustee),
and excluding the Morgan Stanley Real Estate Fund, L.P. and its
affiliates (as defined in Rule 12b-2 under the Exchange Act),
directly or indirectly, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of securities of
the Company representing 20% or more of the combined voting power
of the Company's then outstanding securities;
(ii) when, during any period of 24 consecutive months the
individuals who, at the beginning of such period, constitute the
Board (the "Incumbent Directors") cease for any reason other than
death to constitute at least a majority of the Board; provided,
however, that a director who was not a director at the beginning
of such 24-month period shall be deemed to have satisfied such
24-month requirement (and be an Incumbent Director) if such
director was elected by, or on the recommendation of or with the
approval of; at least two-thirds of the directors who then
qualified as Incumbent Directors either actually (because they
were directors at the beginning of such 24-month period) or by
prior operation of this Section; or
(iii) when the stockholders of the Company approve a plan of
complete liquidation of the Company; or an agreement for the sale
or disposition of substantially all the Company's assets; or a
merger, consolidation, or reorganization of the Company in which
stockholders of the Company immediately prior to the transaction
own less than 65% of the combined voting power of the surviving
entity.
(b) "Annual Base Salary" shall mean the Executive's current base
annual salary plus any future increases to Executive's base annual
compensation, but in no event less than the Executive's annual base
salary in effect on the date of this Agreement.
(c) "Termination Date" shall mean the date on which Executive's
employment with the Company is terminated.
2. TERMINATION BY COMPANY. Following a Change in Control, the
Executive's employment may be terminated by Company ("Company Termination
Event") and the Executive shall not be entitled to the severance benefits
provided under Section 4, provided that Executive's termination occurs as a
result of one or more of the following events:
(a) The Executive's death;
(b) The Executive's disability, provided Executive actually
begins to receive disability benefits pursuant to the long-term
disability plan in effect for senior executives of the Company
immediately prior to the Change in Control; or
Page 2 of 12
<PAGE> 3
(c) For "Cause, " which for purposes of this Agreement shall mean
that, prior to any termination pursuant to Section 3(b) hereof, the
Executive shall have committed: (i) an act of fraud, embezzlement,
theft, or any other act constituting a felony, involving moral
turpitude or causing material harm, financial or otherwise, to the
Company; or (ii) a demonstrably intentional and deliberate act or
failure to act (other than as a result of incapacity due to physical
or mental illness) which is committed in bad faith by the Executive,
which causes or can be expected to cause material financial injury to
the Company.
For purposes of this Agreement, no act, or failure to act, on
the part of the Executive shall be deemed "intentional" if it was due
primarily to an error in judgment or negligence, but shall be deemed
"intentional" only if done, or omitted to be done, by the Executive
not in good faith and without reasonable belief that Executive's
action or omission was in, or not opposed to, the best interest of the
Company. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for "Cause" hereunder unless and until
there shall have been delivered to the Executive a copy of a
resolution duly adopted by the affirmative vote of not less than
three-quarters of the Board then in office at a meeting of the Board
of Directors called and held for such purpose (after reasonable notice
to the Executive and an opportunity for the Executive, together with
Executive's counsel, to be heard before the Board), finding that, in
the good faith opinion of the Board, the Executive had committed an
act set forth above in this Section 2(c) and specifying the
particulars thereof in detail. Nothing herein shall limit the right of
the Executive or Executive's beneficiaries to contest the validity or
propriety of any such determination.
3. EXECUTIVE TERMINATION EVENT. If at any time during the
two-year period commencing on the date of a Change in Control, the
Company or Executive terminates Executive's employment following the
occurrence of one or more of the following events ("Executive
Termination Event"), Executive shall be entitled to the severance
benefits provided in Section 4 below:
(a) Any termination by the Company of Executive's employment
during such two-year period for any reason other than for Cause, as a
result of Executive's death, or by reason of the Executive's
disability and the actual receipt of disability benefits in accordance
with Section 2(b) hereof; or
(b) Termination by the Executive of Executive's employment with
the Company at any time within two years after the Change in Control
upon the occurrence of any of the following events:
(i) The Company's failure to elect, re-elect, or otherwise
maintain the Executive in the office or position in the Company
which the Executive held immediately prior to a Change in
Control, or the removal of the Executive as a Director of the
Company (or any successor thereto) if the Executive was a
Director of the Company immediately prior to the Change in
Control;
Page 3 of 12
<PAGE> 4
(ii) A significant, adverse change (increase or decrease) in
the nature or scope of the authorities, powers, functions,
responsibilities, or duties attached to the position with the
Company which the Executive held immediately prior to the Change
in Control, or a reduction in the aggregate of the Executive's
base pay or annual incentive bonus opportunity (and relative
level of goal achievement) in which the Executive participated
immediately prior to the Change in Control, or the termination of
the Executive's right to any employee benefits to which Executive
was entitled immediately prior to the Change in Control, or a
reduction in scope or value of such benefits, without prior
written consent of the Executive, any of which is not remedied
within 10 calendar days after receipt by the Company of a written
notice from the Executive of such change, reduction, or
termination, as the case may be;
(iii) A determination by the Executive made in good faith
that, as a result of a Change in Control, there has been a
significant change in the scope of the business or other
activities for which the Executive was responsible immediately
prior to the Change in Control, or that Executive has been
rendered substantially unable to carry out, has been
substantially hindered in the performance of, or has suffered a
substantial increase or reduction in, any of the authorities,
powers, functions, responsibilities, or duties attached to the
position held by the Executive immediately prior to the Change in
Control, which situation is not remedied within 10 calendar days
after receipt by the Company of a written notice from the
Executive of such good faith determination;
(iv) The liquidation, dissolution, merger, consolidation, or
reorganization of the Company or transfer of all or a significant
portion of its business and/or assets;
(v) The Company shall relocate its principal executive
offices, or require the Executive to have Executive's principal
location of work changed, to any location which is in excess of
50 miles from the location thereof immediately prior to the
Change in Control, or the Company shall require the Executive to
travel away from Executive's office in the course of discharging
Executive's responsibilities or duties hereunder significantly
more (in terms of either consecutive days or aggregate days in
any calendar year) than was required of him prior to the Change
in Control without, in either case, Executive's prior written
consent; or
(vi) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company
or any successor thereto.
4. SEVERANCE BENEFITS. In the event Executive's employment is
terminated within two years of the date of a Change in Control as a
result of an Executive Termination Event, Executive shall be entitled
to the benefits set forth below. All amounts payable under this
Section 4(a), (b), and (c) shall be paid to Executive in one lump sum
within 10 days after Executive's termination of employment.
Page 4 of 12
<PAGE> 5
(a) The Company shall pay to Executive an amount equal to three
times Executive's Annual Base Salary in effect for the year in which
Executive's termination of employment occurs. Executive shall also be
entitled to receive three times the highest bonus or short-term
incentive compensation paid to Executive during the fiscal year
preceding the Change in Control or, if higher, three times the maximum
amount for which Executive has an opportunity to earn in the fiscal
year of Executive's termination (excluding any amounts paid to
Executive under the Company's equity-based, long-term incentive plan
or any other phantom stock or stock rights plan subsequently
established by the Company).
(b) The Company shall pay Executive Executive's full base salary
through Executive's Termination Date. The Company shall also pay
Executive an amount equal to the pro rata amount of the maximum target
bonus award available to Executive under the bonus plan during the
year of termination, based on the number of days of the year elapsed
prior to the Termination Date.
(c) For the 36 months following Executive's termination of
employment, the Company shall arrange to provide the Executive with
health benefits (medical, dental, disability and life) substantially
similar to those which the Executive was receiving or entitled to
receive immediately prior to the Termination Date. If and to the
extent that such benefits shall not or cannot be paid or provided
under any policy, plan, program, or arrangement of the Company solely
due to the fact that the Executive is no longer an officer or employee
of the Company, then the Company shall itself pay or provide
reimbursement to the Executive, Executive's dependents and
beneficiaries, the cost of such health benefits. Such health benefits
shall be discontinued prior to the end of the specified continuation
period if the Executive receives comparable coverage from a subsequent
employer.
(d) The Company will provide out-placement assistance from a
service selected by Executive for a period of one year from the
Termination Date. All associated costs will be paid by the Company, up
to a maximum of 30% of Executive's annual rate of base pay in effect
at the time of Executive's termination.
(e) If Executive has relocated to work with the Company during
the three years immediately preceding the date of this Agreement,
Executive may elect, within 120 days following the Termination Date,
to have the Company purchase Executive's house at its then current
market value (which shall be established by taking the average of
three appraisals from real estate firms, one selected by the
Executive, one selected by the Company, and one selected by the two
selected firms with the Company paying the costs of the appraisals).
Such purchase shall occur on a date specified by Executive, but in any
event within six months following Executives' election to have the
house purchased by the Company.
Page 5 of 12
<PAGE> 6
5. OTHER RIGHTS. A termination of the Executive's employment by the
Company pursuant to Section 2 or 3(a) hereof, or by the Executive pursuant to
Section 3(b) hereof, shall not affect adversely any rights which the Executive
may have pursuant to any agreement, employment contract, policy, plan, program,
or arrangement of the Company providing employee benefits, which rights shall be
governed by the terms of such employee benefit plan.
6. LONG-TERM INCENTIVES. Upon the occurrence of a Change in Control,
Executive shall become immediately and automatically vested (with no director
discretion exercised) in all equity-based, long-term incentives (including stock
options and restricted stock) and all accrued pension benefits held as of the
date of the Change in Control. To the extent legally necessary the Company can
provide these benefits on a tax non-qualified basis. For any cash-based,
long-term incentive vehicles, Executive shall become immediately vested and
receive an immediate cashout of the vehicles upon the occurrence of a Change of
Control, equal to a pro rata target award thereunder (or, if greater, the actual
award earned to date) based upon the number of days actually employed during the
performance period. Such provisions will be included in all future long-term
incentive award agreements.
7. NO SET-OFF. There shall be no set-off or counterclaim against, or
delay in, any payment of severance benefits by the Company to Executive provided
for in this Agreement with respect to any claim against or debt or obligation of
Executive, whether arising hereunder or otherwise except for health benefits as
provided in Section 4(c).
8. NO MITIGATION OBLIGATION. Executive's benefits hereunder shall be
payable to Executive as severance pay in consideration of Executive's past
services and of Executive's continued services from the date hereof. The Company
hereby acknowledges that it will be difficult, and may be impossible, for the
Executive to find reasonably comparable employment following the Termination
Date. Accordingly, the parties hereto expressly agree that the payment of the
severance benefits by the Company to the Executive in accordance with the terms
of this Agreement will be liquidated damages, and that the Executive shall not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor shall any profits, income,
earnings, or other benefits from any source whatever create any mitigation,
offset, reduction, or any other obligation on the part of the Executive
hereunder or otherwise except for health benefits as provided in Section 4 (c).
9. TAX CONSIDERATIONS. Notwithstanding anything herein to the
contrary, in the event any payments to Executive hereunder are determined by the
Company to be subject to the tax imposed by Section 4999 of the Code or any
similar federal or state excise tax, FICA tax, or any interest or penalties are
incurred by the Executive with respect to such excise tax (such excise tax,
together with any such interest or penalties are hereinafter collectively
referred to as the "Excise Tax"), Company shall pay to Executive at the time
specified in Section 4 (a) above, an additional amount (the "Gross-Up Payment")
such that after the payment by Executive of all federal, state, or local income
taxes, Excise Taxes, FICA taxes, or other taxes (including any interest or
penalties imposed with respect thereto) imposed upon the receipt of the Gross-Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed on the severance payments provided herein.
Page 6 of 12
<PAGE> 7
(a) For purposes of determining whether any payments to Executive
hereunder will be subject to the Excise Tax and the amount of such
Excise Tax:
(i) any other payments or benefits received or to be
received by Executive in connection with a Change in Control or
the termination of employment (whether pursuant to the terms of
this Agreement or of any other plan, arrangement, or agreement
with Company) shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess
parachute payments" within the meaning of Section 280G(b)(l)
shall be treated as subject to the Excise Tax, unless in the
opinion of tax counsel selected by Company and acceptable to
Executive, other payments or benefits (in whole or in part) do
not constitute parachute payments under Section 280G of the Code,
or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within the
meaning of Section 280G(b)(4) of the Code;
(ii) the amount of the severance payments which shall be
treated as subject to the Excise Tax shall be equal to the amount
of excess parachute payments within the meaning of Sections
280G(b)(l) and (4) (after applying clause (a), above); and
(iii) the parachute value of any non-cash benefits or any
deferred payment or benefit shall be determined by Company in
accordance with the principles of Sections 280G(d)(3) and (4) of
the Code.
(b) If the Excise Tax is subsequently determined to be less than
the amount taken into account hereunder at the time of termination of
employment, Executive shall repay to Company, at the time the
reduction in Excise Tax is finally determined, the portion of the
Gross-Up Payment attributable to such reduction. If the Excise Tax is
determined to exceed the amount taken into account hereunder at the
time of termination of employment, Company shall make an additional
Gross-Up Payment to Executive in respect of such excess at the time
the amount of such excess is finally determined. The Executive shall
notify the Company in writing of any claim by the Internal Revenue
Service that, if successful, would require the payment by the Company
of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later that ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to
be paid. The Executive shall not pay such claim prior to the
expiration of the 30 calendar day period following the date on which
it gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim;
Page 7 of 12
<PAGE> 8
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including legal and accounting fees and additional
interest and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an after-tax
basis, for any Excise Tax, FICA tax, or income tax (including interest
and penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation
on the foregoing provisions of this Section, the Company shall control
all proceedings taken in connection with such contest and, at its sole
option, may pursue or forego any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the
Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction, and in one or more appellate courts,
as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on
an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the
taxable year of the Executive with respect to which such contested
amount is claimed to be due is limited solely to such contested
amount. Furthermore, the Company's control of the contest shall be
limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or
contest as the case may be, any other issue raised by the Internal
Revenue Service or any other taxing authority.
If any such claim referred to in this Section is made by the
Internal Revenue Service and the Company does not request the
Executive to contest the claim within the 30 calendar day period
following notice of the claim, the Company shall pay to the Executive
the amount of any Gross-Up Payment owed to the Executive, but not
previously paid pursuant to Section 9(b), immediately upon the
expiration of such 30 calendar day period. If any such claim is made
by the Internal Revenue Service and the Company requests the Executive
to contest such claim, but does not advance the amount of such claim
to the Executive for purposes of such contest, the Company shall pay
to the Executive the amount of any Gross-Up Payment owed to the
Executive, but not
Page 8 of 12
<PAGE> 9
previously paid under the provisions of Section 9(b), within 5
business days of a Final Determination of the liability of the
Executive for such Excise Tax. For purposes of this Agreement, a
"Final Determination" shall be deemed to occur with respect to a claim
when (i) there is a decision, judgment, decree, or other order by any
court of competent jurisdiction, which decision, judgment, decree, or
other order has become final, i.e., all allowable appeals pursuant to
this Section have been exhausted by either party to the action, (ii)
there is a closing agreement made under Section 7121 of the Code, or
(iii) the time for instituting a claim for refund has expired, or if a
claim was filed, the time for instituting suit with respect thereto
has expired.
If, after the receipt by the Executive of an amount advanced by
the Company pursuant to this Section, the Executive becomes entitled
to receive any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of this
Section) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to this Section, a
determination is made by the Internal Revenue Service that the
Executive is not entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 calendar
days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment
required to be paid.
10. ENFORCEMENT COSTS. Company is aware that, upon the occurrence of a
Change in Control, the Board of Directors or a shareholder of the Company, or
the Company's successor in interest, may then cause or attempt to cause Company
to refuse to comply with its obligations under this Agreement, or may cause or
attempt to cause Company to institute, or may institute litigation seeking to
have this Agreement declared unenforceable, or may take, or attempt to take,
other action to deny Executive the benefits intended under this Agreement. In
these circumstances, the purpose of this Agreement could be frustrated. It is
the intent of Company that Executive not be required to incur the expenses
associated with the enforcement of Executive's rights under this Agreement by
litigation or other legal action, nor be bound to negotiate any settlement of
Executive's rights hereunder under threat of incurring such expenses because the
cost and expense thereof would substantially detract from the benefits intended
to be extended to Executive hereunder. Accordingly, if following a Change in
Control it should appear to Executive that Company has failed to comply with any
of its obligations under this Agreement or in the event that Company or any
other person takes any action to declare this Agreement void or unenforceable,
or institutes any litigation or other legal action designed to deny, diminish,
or to recover from Executive the benefits intended to be provided to Executive
hereunder, Company irrevocably authorizes Executive from time to time to retain
legal counsel of Executive's choice at the expense of Company to represent
Executive in connection with the initiation or defense of any litigation or
other legal action, whether by or against Company or any director, officer,
stockholder, or other person affiliated with Company. The reasonable fees and
expenses of counsel selected from time to time by Executive as provided herein
shall be paid or reimbursed to Executive by Company on a regular, periodic basis
upon presentation by Executive of a statement or statements prepared by
Executive's counsel in accordance with its customary
Page 9 of 12
<PAGE> 10
practices. In any action involving this Agreement, Executive shall be entitled
to prejudgment interest on any amounts found to be due Executive as of the date
such amounts would have been payable to Executive pursuant to this Agreement at
an annual rate of interest equal to the lesser of 10% or the prime commercial
rate in effect at The Huntington National Bank in Columbus, Ohio from time to
time during the pre-judgment period.
11. ARBITRATION. Without limiting the application of Section 10 above,
the Company and Executive hereby agree that certain issues and/or disagreements
arising in connection with this Agreement shall be settled by arbitration.
Accordingly, in the event the Company or Executive believes that the other party
has violated any provision of this Agreement, including but not limited to any
action by the Company which Executive believes would entitle Executive to
terminate Executive's employment with severance benefits in accordance with
Section 3(b) hereof, the party alleging such violation shall notify the other
party in writing of such alleged violation. In the event the party receiving
such violation notice disagrees with the position taken by the other party in
such written notice, the recipient of the violation notice may, within 20 days
of receipt of such written notice, notify the other party, in writing, that it
has elected to submit such disagreement to arbitration. Arbitration of such
dispute shall be settled in Columbus, Ohio, in accordance with the then
applicable rules of the American Arbitration Association. The Company shall bear
all costs associated with such arbitration. In the event the party receiving a
violation notice does not elect to submit any issue or disagreement to
arbitration within 10 days of its receipt of the written violation notice, such
party will be deemed to have accepted the position taken in such written notice.
Notwithstanding anything herein to the contrary, neither the Company nor the
Executive shall be required to arbitrate the basis of any involuntary
termination of Executive's employment with the Company by the Company or its
successor.
12. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement
shall create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company prior to any Change
in Control, provided, however, that any termination of employment or the removal
of the Executive from the office or position in the Company that such Executive
presently holds following the commencement of active negotiations with a third
party (which negotiations are evidenced by the delivery of evaluation material)
that ultimately results in a Change in Control shall be deemed to be a
termination or removal of the Executive after a Change in Control for purposes
of this Agreement. Notwithstanding the foregoing, a termination of employment or
removal of the Executive following the termination of active negotiations with
any third party shall not be deemed a termination after a Change in Control for
purposes of this Agreement.
13. TERM. This Agreement shall terminate on January 31, 2000, unless a
Change in Control shall have occurred prior to such date; provided, however,
upon the passage of one year from the date hereof and each year thereafter this
Agreement shall automatically be renewed for an additional year unless the
Company or the Executive has notified in writing the other sixty calendar days
prior to the passage of the year that the Agreement is not to be automatically
renewed. Upon such notice, this Agreement will not be renewed for the additional
year and will expire at the end of the three-year term then in process.
Regardless of the term remaining on this Agreement determined as provided above,
upon the occurrence of a Change of Control of the Company this Agreement shall
not terminate or expire until two years from the date of such Change of Control.
Page 10 of 12
<PAGE> 11
14. WITHHOLDING OF TAXES. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling.
15. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets
of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required
to perform if no such succession had taken place. This Agreement shall
be binding upon and inure to the benefit of the Company and any
successor to the Company, including without limitation any persons
acquiring directly or indirectly all or substantially all of the
business and/or assets of the Company whether by purchase, merger,
consolidation, reorganization, or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this
Agreement), but shall not otherwise be assignable, transferable, or
delegable by the Company.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, or
legatees.
(c) This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign,
transfer, or delegate this Agreement or any rights or obligations
hereunder except as expressly provided in Section 13(a) hereof.
Without limiting the generality of the foregoing, the Executive's
right to receive payments hereunder shall not be assignable,
transferable, or delegable, whether by pledge, creation of a security
interest, or otherwise, other than by a transfer by Executive's will
or by the laws of descent and distribution and, in the event of any
attempted assignment or transfer contrary to this Section 12(c), the
Company shall have no liability to pay any amount so attempted to be
assigned, transferred, or delegated.
(d) The Company and the Executive recognize that each party will
have no adequate remedy at law for breach by the other of any of the
agreements contained herein and, in the event of any such breach, the
Company and the Executive hereby agree and consent that the other
shall be entitled to a decree of specific performance, mandamus or
other appropriate remedy to enforce performance of this Agreement.
16. NOTICE. For all purposes of this Agreement, all communications
including without limitation notices, consents, requests, or approvals, provided
for herein, shall be in writing and shall be deemed to have been duly given when
delivered or five business days after having been mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed to the Company (to the attention of the President of the Company) at
its
Page 11 of 12
<PAGE> 12
principal executive office and to the Executive at Executive's principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
17. GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Ohio, without giving effect to the principles of conflict of laws of such State.
18. VALIDITY. If any provision of this Agreement or the application of
any provision hereof to any person or circumstances is held invalid,
unenforceable, or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances shall not be
affected, and the provision so held to be invalid, unenforceable, or otherwise
illegal shall be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid, and legal.
19. MISCELLANEOUS. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, expressed or implied with respect to the subject matter
hereof have been made by either party which are not set forth expressly in this
Agreement. In the event the terms and conditions of this Agreement conflict with
those of any other agreement, this Agreement shall prevail.
To the extend that Executive receives payment under this Agreement
relating to the termination of Executive's employment, the Executive will not
receive payment under any other agreement with the Company regarding such
termination.
IN WITNESS WHEREOF, the Executive and Company have executed this
Agreement on the day and year first above written.
EXECUTIVE RED ROOF INNS, INC.
By: By:
---------------------------- ----------------------------
FRANCIS W. CASH DAVID N. CHICHESTER
Chairman, President, and CEO Executive Vice President and
Chief Financial Officer
<PAGE> 1
Exhibit 10.18
AGREEMENT
This Amended and Restated Agreement is entered into this 30th day of
January, 1997, by and between RED ROOF INNS, INC., a Delaware corporation, with
principal offices located at 4355 Davidson Road, Hilliard, Ohio (the "Company")
and ALAN L. TALLIS, (the "Executive").
RECITALS
A. Executive is a senior executive of Company who is expected to make
major contributions to the profitability, growth, and financial strength of the
Company.
B. The Company recognizes that upon a threatened change in control
Executive may have concerns about Executive's employment status and
responsibilities, and the Company desires to provide Executive some assurances
as to the continuation of Executive's employment status and responsibilities in
the event of a change in control.
C. The Company desires to assure itself of both present and future
continuity of management in the event of a change in control and desires to
establish certain minimum compensation rights of its key senior executive
officers, including the Executive, applicable in the event of a change in
control.
D. The Company desires to assure that, should it receive an offer
involving a possible change in control, Executive would be in a secure position
to consider such offer and negotiate on behalf of the Company and its
shareholders as objectively as possible, and to this end, the Company desires to
protect Executive from any direct or implied threat to Executive's financial
well-being under such circumstances.
COVENANTS
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, the parties agree as follows:
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
(a) Change in Control. "Change in Control" shall mean
(i) any transaction, or series of transactions, including,
but not limited to any merger, consolidation, or reorganization,
which results when any "person" as defined in Section 3(a)(9) of
the Exchange Act and as used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) of the Exchange
Act, but excluding the Company, any subsidiary of the Company,
and any employee benefit plan sponsored or maintained by the
Company or any subsidiary of the
Page 1 of 12
<PAGE> 2
Company (including any trustee of such plan acting as trustee),
and excluding the Morgan Stanley Real Estate Fund, L.P. and its
affiliates (as defined in Rule 12b-2 under the Exchange Act),
directly or indirectly, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of securities of
the Company representing 20% or more of the combined voting power
of the Company's then outstanding securities;
(ii) when, during any period of 24 consecutive months the
individuals who, at the beginning of such period, constitute the
Board (the "Incumbent Directors") cease for any reason other than
death to constitute at least a majority of the Board; provided,
however, that a director who was not a director at the beginning
of such 24-month period shall be deemed to have satisfied such
24-month requirement (and be an Incumbent Director) if such
director was elected by, or on the recommendation of or with the
approval of; at least two-thirds of the directors who then
qualified as Incumbent Directors either actually (because they
were directors at the beginning of such 24-month period) or by
prior operation of this Section; or
(iii) when the stockholders of the Company approve a plan of
complete liquidation of the Company; or an agreement for the sale
or disposition of substantially all the Company's assets; or a
merger, consolidation, or reorganization of the Company in which
stockholders of the Company immediately prior to the transaction
own less than 65% of the combined voting power of the surviving
entity.
(b) "Annual Base Salary" shall mean the Executive's current base
annual salary plus any future increases to Executive's base annual
compensation, but in no event less than the Executive's annual base
salary in effect on the date of this Agreement.
(c) "Termination Date" shall mean the date on which Executive's
employment with the Company is terminated.
2. TERMINATION BY COMPANY. Following a Change in Control, the
Executive's employment may be terminated by Company ("Company Termination
Event") and the Executive shall not be entitled to the severance benefits
provided under Section 4, provided that Executive's termination occurs as a
result of one or more of the following events:
(a) The Executive's death;
(b) The Executive's disability, provided Executive actually
begins to receive disability benefits pursuant to the long-term
disability plan in effect for senior executives of the Company
immediately prior to the Change in Control; or
Page 2 of 12
<PAGE> 3
(c) For "Cause," which for purposes of this Agreement shall mean
that, prior to any termination pursuant to Section 3(b) hereof, the
Executive shall have committed: (i) an act of fraud, embezzlement,
theft, or any other act constituting a felony, involving moral
turpitude or causing material harm, financial or otherwise, to the
Company; or (ii) a demonstrably intentional and deliberate act or
failure to act (other than as a result of incapacity due to physical
or mental illness) which is committed in bad faith by the Executive,
which causes or can be expected to cause material financial injury to
the Company.
For purposes of this Agreement, no act, or failure to act, on the part
of the Executive shall be deemed "intentional" if it was due primarily to an
error in judgment or negligence, but shall be deemed "intentional" only if done,
or omitted to be done, by the Executive not in good faith and without reasonable
belief that Executive's action or omission was in, or not opposed to, the best
interest of the Company. Notwithstanding the foregoing, the Executive shall not
be deemed to have been terminated for "Cause" hereunder unless and until there
shall have been delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of not less than three-quarters of the Board then in
office at a meeting of the Board of Directors called and held for such purpose
(after reasonable notice to the Executive and an opportunity for the Executive,
together with Executive's counsel, to be heard before the Board), finding that,
in the good faith opinion of the Board, the Executive had committed an act set
forth above in this Section 2(c) and specifying the particulars thereof in
detail. Nothing herein shall limit the right of the Executive or Executive's
beneficiaries to contest the validity or propriety of any such determination.
3. EXECUTIVE TERMINATION EVENT. If at any time during the two-year
period commencing on the date of a Change in Control, the Company or Executive
terminates Executive's employment following the occurrence of one or more of the
following events ("Executive Termination Event"), Executive shall be entitled to
the severance benefits provided in Section 4 below:
(a) Any termination by the Company of Executive's employment
during such two-year period for any reason other than for Cause, as a
result of Executive's death, or by reason of the Executive's
disability and the actual receipt of disability benefits in accordance
with Section 2(b) hereof; or
(b) Termination by the Executive of Executive's employment with
the Company at any time within two years after the Change in Control
upon the occurrence of any of the following events:
(i) The Company's failure to elect, re-elect, or otherwise
maintain the Executive in the office or position in the Company
which the Executive held immediately prior to a Change in
Control, or the removal of the Executive as a Director of the
Company (or any successor thereto) if the Executive was a
Director of the Company immediately prior to the Change in
Control;
Page 3 of 12
<PAGE> 4
(ii) A significant, adverse change (increase or decrease) in
the nature or scope of the authorities, powers, functions,
responsibilities, or duties attached to the position with the
Company which the Executive held immediately prior to the Change
in Control, or a reduction in the aggregate of the Executive's
base pay or annual incentive bonus opportunity (and relative
level of goal achievement) in which the Executive participated
immediately prior to the Change in Control, or the termination of
the Executive's right to any employee benefits to which Executive
was entitled immediately prior to the Change in Control, or a
reduction in scope or value of such benefits, without prior
written consent of the Executive, any of which is not remedied
within 10 calendar days after receipt by the Company of a written
notice from the Executive of such change, reduction, or
termination, as the case may be;
(iii) A determination by the Executive made in good faith
that, as a result of a Change in Control, there has been a
significant change in the scope of the business or other
activities for which the Executive was responsible immediately
prior to the Change in Control, or that Executive has been
rendered substantially unable to carry out, has been
substantially hindered in the performance of, or has suffered a
substantial increase or reduction in, any of the authorities,
powers, functions, responsibilities, or duties attached to the
position held by the Executive immediately prior to the Change in
Control, which situation is not remedied within 10 calendar days
after receipt by the Company of a written notice from the
Executive of such good faith determination;
(iv) The liquidation, dissolution, merger, consolidation, or
reorganization of the Company or transfer of all or a significant
portion of its business and/or assets;
(v) The Company shall relocate its principal executive
offices, or require the Executive to have Executive's principal
location of work changed, to any location which is in excess of
50 miles from the location thereof immediately prior to the
Change in Control, or the Company shall require the Executive to
travel away from Executive's office in the course of discharging
Executive's responsibilities or duties hereunder significantly
more (in terms of either consecutive days or aggregate days in
any calendar year) than was required of him prior to the Change
in Control without, in either case, Executive's prior written
consent; or
(vi) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company
or any successor thereto.
4. SEVERANCE BENEFITS. In the event Executive's employment is
terminated within two years of the date of a Change in Control as a result of an
Executive Termination Event, Executive shall be entitled to the benefits set
forth below. All amounts payable under this Section 4(a), (b), and (c) shall be
paid to Executive in one lump sum within 10 days after Executive's termination
of employment.
Page 4 of 12
<PAGE> 5
(a) The Company shall pay to Executive an amount equal to three
times Executive's Annual Base Salary in effect for the year in which
Executive's termination of employment occurs. Executive shall also be
entitled to receive three times the highest bonus or short-term
incentive compensation paid to Executive during the fiscal year
preceding the Change in Control or, if higher, three times the maximum
amount for which Executive has an opportunity to earn in the fiscal
year of Executive's termination (excluding any amounts paid to
Executive under the Company's equity-based, long-term incentive plan
or any other phantom stock or stock rights plan subsequently
established by the Company).
(b) The Company shall pay Executive Executive's full base salary
through Executive's Termination Date. The Company shall also pay
Executive an amount equal to the pro rata amount of the maximum target
bonus award available to Executive under the bonus plan during the
year of termination, based on the number of days of the year elapsed
prior to the Termination Date.
(c) For the 36 months following Executive's termination of
employment, the Company shall arrange to provide the Executive with
health benefits (medical, dental, disability and life) substantially
similar to those which the Executive was receiving or entitled to
receive immediately prior to the Termination Date. If and to the
extent that such benefits shall not or cannot be paid or provided
under any policy, plan, program, or arrangement of the Company solely
due to the fact that the Executive is no longer an officer or employee
of the Company, then the Company shall itself pay or provide
reimbursement to the Executive, Executive's dependents and
beneficiaries, the cost of such health benefits. Such health benefits
shall be discontinued prior to the end of the specified continuation
period if the Executive receives comparable coverage from a subsequent
employer.
(d) The Company will provide out-placement assistance from a
service selected by Executive for a period of one year from the
Termination Date. All associated costs will be paid by the Company, up
to a maximum of 30% of Executive's annual rate of base pay in effect
at the time of Executive's termination.
(e) If Executive has relocated to work with the Company during
the three years immediately preceding the date of this Agreement,
Executive may elect, within 120 days following the Termination Date,
to have the Company purchase Executive's house at its then current
market value (which shall be established by taking the average of
three appraisals from real estate firms, one selected by the
Executive, one selected by the Company, and one selected by the two
selected firms with the Company paying the costs of the appraisals).
Such purchase shall occur on a date specified by Executive, but in any
event within six months following Executives' election to have the
house purchased by the Company.
Page 5 of 12
<PAGE> 6
5. OTHER RIGHTS. A termination of the Executive's employment by the
Company pursuant to Section 2 or 3(a) hereof, or by the Executive pursuant to
Section 3(b) hereof, shall not affect adversely any rights which the Executive
may have pursuant to any agreement, employment contract, policy, plan, program,
or arrangement of the Company providing employee benefits, which rights shall be
governed by the terms of such employee benefit plan.
6. LONG-TERM INCENTIVES. Upon the occurrence of a Change in Control,
Executive shall become immediately and automatically vested (with no director
discretion exercised) in all equity-based, long-term incentives (including stock
options and restricted stock) and all accrued pension benefits held as of the
date of the Change in Control. To the extent legally necessary the Company can
provide these benefits on a tax non-qualified basis. For any cash-based,
long-term incentive vehicles, Executive shall become immediately vested and
receive an immediate cashout of the vehicles upon the occurrence of a Change of
Control, equal to a pro rata target award thereunder (or, if greater, the actual
award earned to date) based upon the number of days actually employed during the
performance period. Such provisions will be included in all future long-term
incentive award agreements.
7. NO SET-OFF. There shall be no set-off or counterclaim against, or
delay in, any payment of severance benefits by the Company to Executive provided
for in this Agreement with respect to any claim against or debt or obligation of
Executive, whether arising hereunder or otherwise except for health benefits as
provided in Section 4(c).
8. NO MITIGATION OBLIGATION. Executive's benefits hereunder shall be
payable to Executive as severance pay in consideration of Executive's past
services and of Executive's continued services from the date hereof. The Company
hereby acknowledges that it will be difficult, and may be impossible, for the
Executive to find reasonably comparable employment following the Termination
Date. Accordingly, the parties hereto expressly agree that the payment of the
severance benefits by the Company to the Executive in accordance with the terms
of this Agreement will be liquidated damages, and that the Executive shall not
be required to mitigate the amount of any payment provided for in this Agreement
by seeking other employment or otherwise, nor shall any profits, income,
earnings, or other benefits from any source whatever create any mitigation,
offset, reduction, or any other obligation on the part of the Executive
hereunder or otherwise except for health benefits as provided in Section 4 (c).
9. TAX CONSIDERATIONS. Notwithstanding anything herein to the
contrary, in the event any payments to Executive hereunder are determined by the
Company to be subject to the tax imposed by Section 4999 of the Code or any
similar federal or state excise tax, FICA tax, or any interest or penalties are
incurred by the Executive with respect to such excise tax (such excise tax,
together with any such interest or penalties are hereinafter collectively
referred to as the "Excise Tax"), Company shall pay to Executive at the time
specified in Section 4 (a) above, an additional amount (the "Gross-Up Payment")
such that after the payment by Executive of all federal, state, or local income
taxes, Excise Taxes, FICA taxes, or other taxes (including any interest or
penalties imposed with respect thereto) imposed upon the receipt of the Gross-Up
Payment, Executive retains an amount of the Gross-Up Payment equal to the Excise
Tax imposed on the severance payments provided herein.
Page 6 of 12
<PAGE> 7
(a) For purposes of determining whether any payments to Executive
hereunder will be subject to the Excise Tax and the amount of such
Excise Tax:
(i) any other payments or benefits received or to be
received by Executive in connection with a Change in Control or
the termination of employment (whether pursuant to the terms of
this Agreement or of any other plan, arrangement, or agreement
with Company) shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the Code, and all "excess
parachute payments" within the meaning of Section 280G(b)(l)
shall be treated as subject to the Excise Tax, unless in the
opinion of tax counsel selected by Company and acceptable to
Executive, other payments or benefits (in whole or in part) do
not constitute parachute payments under Section 280G of the Code,
or such excess parachute payments (in whole or in part) represent
reasonable compensation for services actually rendered within the
meaning of Section 280G(b)(4) of the Code;
(ii) the amount of the severance payments which shall be
treated as subject to the Excise Tax shall be equal to the amount
of excess parachute payments within the meaning of Sections
280G(b)(l) and (4) (after applying clause (a), above); and
(iii) the parachute value of any non-cash benefits or any
deferred payment or benefit shall be determined by Company in
accordance with the principles of Sections 280G(d)(3) and (4) of
the Code.
(b) If the Excise Tax is subsequently determined to be less than
the amount taken into account hereunder at the time of termination of
employment, Executive shall repay to Company, at the time the
reduction in Excise Tax is finally determined, the portion of the
Gross-Up Payment attributable to such reduction. If the Excise Tax is
determined to exceed the amount taken into account hereunder at the
time of termination of employment, Company shall make an additional
Gross-Up Payment to Executive in respect of such excess at the time
the amount of such excess is finally determined. The Executive shall
notify the Company in writing of any claim by the Internal Revenue
Service that, if successful, would require the payment by the Company
of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later that ten business days after the Executive is
informed in writing of such claim and shall apprise the Company of the
nature of such claim and the date on which such claim is requested to
be paid. The Executive shall not pay such claim prior to the
expiration of the 30 calendar day period following the date on which
it gives such notice to the Company (or such shorter period ending on
the date that any payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing prior to the
expiration of such period that it desires to contest such claim, the
Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim;
Page 7 of 12
<PAGE> 8
(ii) take such action in connection with contesting such
claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal
representation with respect to such claim by an attorney
reasonably selected by the Company;
(iii) cooperate with the Company in good faith in order to
effectively contest such claim; and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all
costs and expenses (including legal and accounting fees and additional
interest and penalties) incurred in connection with such contest and
shall indemnify and hold the Executive harmless, on an after-tax basis,
for any Excise Tax, FICA tax, or income tax (including interest and
penalties with respect thereto) imposed as a result of such
representation and payment of costs and expenses. Without limitation on
the foregoing provisions of this Section, the Company shall control all
proceedings taken in connection with such contest and, at its sole
option, may pursue or forego any and all administrative appeals,
proceedings, hearings, and conferences with the taxing authority in
respect of such claim and may, at its sole option, either direct the
Executive to pay the tax claimed and sue for a refund or contest the
claim in any permissible manner, and the Executive agrees to prosecute
such contest to a determination before any administrative tribunal, in
a court of initial jurisdiction, and in one or more appellate courts,
as the Company shall determine; provided, however, that if the Company
directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such payment to the Executive, on
an interest-free basis, and shall indemnify and hold the Executive
harmless, on an after-tax basis, from any Excise Tax or income tax
(including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with
respect to such advance; and further provided that any extension of the
statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested amount is
claimed to be due is limited solely to such contested amount.
Furthermore, the Company's control of the contest shall be limited to
issues with respect to which a Gross-Up Payment would be payable
hereunder and the Executive shall be entitled to settle or contest as
the case may be, any other issue raised by the Internal Revenue Service
or any other taxing authority.
If any such claim referred to in this Section is made by the
Internal Revenue Service and the Company does not request the Executive
to contest the claim within the 30 calendar day period following notice
of the claim, the Company shall pay to the Executive the amount of any
Gross-Up Payment owed to the Executive, but not previously paid
pursuant to Section 9(b), immediately upon the expiration of such 30
calendar day period. If any such claim is made by the Internal Revenue
Service and the Company requests the Executive to contest such claim,
but does not advance the amount of such claim to the Executive for
purposes of such contest, the Company shall pay to the Executive the
amount of any Gross-Up Payment owed to the Executive, but not
Page 8 of 12
<PAGE> 9
previously paid under the provisions of Section 9(b), within 5 business
days of a Final Determination of the liability of the Executive for
such Excise Tax. For purposes of this Agreement, a "Final
Determination" shall be deemed to occur with respect to a claim when
(i) there is a decision, judgment, decree, or other order by any court
of competent jurisdiction, which decision, judgment, decree, or other
order has become final, i.e., all allowable appeals pursuant to this
Section have been exhausted by either party to the action, (ii) there
is a closing agreement made under Section 7121 of the Code, or (iii)
the time for instituting a claim for refund has expired, or if a claim
was filed, the time for instituting suit with respect thereto has
expired.
If, after the receipt by the Executive of an amount advanced
by the Company pursuant to this Section, the Executive becomes entitled
to receive any refund with respect to such claim, the Executive shall
(subject to the Company's complying with the requirements of this
Section) promptly pay to the Company the amount of such refund
(together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an
amount advanced by the Company pursuant to this Section, a
determination is made by the Internal Revenue Service that the
Executive is not entitled to any refund with respect to such claim and
the Company does not notify the Executive in writing of its intent to
contest such denial of refund prior to the expiration of 30 calendar
days after such determination, then such advance shall be forgiven and
shall not be required to be repaid and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required
to be paid.
10. ENFORCEMENT COSTS. Company is aware that, upon the occurrence of a
Change in Control, the Board of Directors or a shareholder of the Company, or
the Company's successor in interest, may then cause or attempt to cause Company
to refuse to comply with its obligations under this Agreement, or may cause or
attempt to cause Company to institute, or may institute litigation seeking to
have this Agreement declared unenforceable, or may take, or attempt to take,
other action to deny Executive the benefits intended under this Agreement. In
these circumstances, the purpose of this Agreement could be frustrated. It is
the intent of Company that Executive not be required to incur the expenses
associated with the enforcement of Executive's rights under this Agreement by
litigation or other legal action, nor be bound to negotiate any settlement of
Executive's rights hereunder under threat of incurring such expenses because the
cost and expense thereof would substantially detract from the benefits intended
to be extended to Executive hereunder. Accordingly, if following a Change in
Control it should appear to Executive that Company has failed to comply with any
of its obligations under this Agreement or in the event that Company or any
other person takes any action to declare this Agreement void or unenforceable,
or institutes any litigation or other legal action designed to deny, diminish,
or to recover from Executive the benefits intended to be provided to Executive
hereunder, Company irrevocably authorizes Executive from time to time to retain
legal counsel of Executive's choice at the expense of Company to represent
Executive in connection with the initiation or defense of any litigation or
other legal action, whether by or against Company or any director, officer,
stockholder, or other person affiliated with Company. The reasonable fees and
expenses of counsel selected from time to time by Executive as provided herein
shall be paid or reimbursed to Executive by Company on a regular, periodic basis
upon presentation by Executive of a statement or statements prepared by
Executive's counsel in accordance with its customary
Page 9 of 12
<PAGE> 10
practices. In any action involving this Agreement, Executive shall be entitled
to prejudgment interest on any amounts found to be due Executive as of the date
such amounts would have been payable to Executive pursuant to this Agreement at
an annual rate of interest equal to the lesser of 10% or the prime commercial
rate in effect at The Huntington National Bank in Columbus, Ohio from time to
time during the pre-judgment period.
11. ARBITRATION. Without limiting the application of Section 10 above,
the Company and Executive hereby agree that certain issues and/or disagreements
arising in connection with this Agreement shall be settled by arbitration.
Accordingly, in the event the Company or Executive believes that the other party
has violated any provision of this Agreement, including but not limited to any
action by the Company which Executive believes would entitle Executive to
terminate Executive's employment with severance benefits in accordance with
Section 3(b) hereof, the party alleging such violation shall notify the other
party in writing of such alleged violation. In the event the party receiving
such violation notice disagrees with the position taken by the other party in
such written notice, the recipient of the violation notice may, within 20 days
of receipt of such written notice, notify the other party, in writing, that it
has elected to submit such disagreement to arbitration. Arbitration of such
dispute shall be settled in Columbus, Ohio, in accordance with the then
applicable rules of the American Arbitration Association. The Company shall bear
all costs associated with such arbitration. In the event the party receiving a
violation notice does not elect to submit any issue or disagreement to
arbitration within 10 days of its receipt of the written violation notice, such
party will be deemed to have accepted the position taken in such written notice.
Notwithstanding anything herein to the contrary, neither the Company nor the
Executive shall be required to arbitrate the basis of any involuntary
termination of Executive's employment with the Company by the Company or its
successor.
12. EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement
shall create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company prior to any Change
in Control, provided, however, that any termination of employment or the removal
of the Executive from the office or position in the Company that such Executive
presently holds following the commencement of active negotiations with a third
party (which negotiations are evidenced by the delivery of evaluation material)
that ultimately results in a Change in Control shall be deemed to be a
termination or removal of the Executive after a Change in Control for purposes
of this Agreement. Notwithstanding the foregoing, a termination of employment or
removal of the Executive following the termination of active negotiations with
any third party shall not be deemed a termination after a Change in Control for
purposes of this Agreement.
13. TERM. This Agreement shall terminate on January 31, 2000, unless a
Change in Control shall have occurred prior to such date; provided, however,
upon the passage of one year from the date hereof and each year thereafter this
Agreement shall automatically be renewed for an additional year unless the
Company or the Executive has notified in writing the other sixty calendar days
prior to the passage of the year that the Agreement is not to be automatically
renewed. Upon such notice, this Agreement will not be renewed for the additional
year and will expire at the end of the three-year term then in process.
Regardless of the term remaining on this Agreement determined as provided above,
upon the occurrence of a Change of Control of the Company this Agreement shall
not terminate or expire until two years from the date of such Change of Control.
Page 10 of 12
<PAGE> 11
14. WITHHOLDING OF TAXES. The Company may withhold from any amounts
payable under this Agreement all federal, state, city or other taxes as shall be
required pursuant to any law or government regulation or ruling.
15. SUCCESSORS AND BINDING AGREEMENT.
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation, reorganization, or
otherwise) to all or substantially all of the business and/or assets
of the Company, by agreement in form and substance satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required
to perform if no such succession had taken place. This Agreement shall
be binding upon and inure to the benefit of the Company and any
successor to the Company, including without limitation any persons
acquiring directly or indirectly all or substantially all of the
business and/or assets of the Company whether by purchase, merger,
consolidation, reorganization, or otherwise (and such successor shall
thereafter be deemed the "Company" for the purposes of this
Agreement), but shall not otherwise be assignable, transferable, or
delegable by the Company.
(b) This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, or
legatees.
(c) This Agreement is personal in nature and neither of the
parties hereto shall, without the consent of the other, assign,
transfer, or delegate this Agreement or any rights or obligations
hereunder except as expressly provided in Section 13(a) hereof.
Without limiting the generality of the foregoing, the Executive's
right to receive payments hereunder shall not be assignable,
transferable, or delegable, whether by pledge, creation of a security
interest, or otherwise, other than by a transfer by Executive's will
or by the laws of descent and distribution and, in the event of any
attempted assignment or transfer contrary to this Section 12(c), the
Company shall have no liability to pay any amount so attempted to be
assigned, transferred, or delegated.
(d) The Company and the Executive recognize that each party will
have no adequate remedy at law for breach by the other of any of the
agreements contained herein and, in the event of any such breach, the
Company and the Executive hereby agree and consent that the other
shall be entitled to a decree of specific performance, mandamus or
other appropriate remedy to enforce performance of this Agreement.
16. NOTICE. For all purposes of this Agreement, all communications
including without limitation notices, consents, requests, or approvals, provided
for herein, shall be in writing and shall be deemed to have been duly given when
delivered or five business days after having been mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed to the Company (to the attention of the President of the Company) at
its
Page 11 of 12
<PAGE> 12
principal executive office and to the Executive at Executive's principal
residence, or to such other address as any party may have furnished to the other
in writing and in accordance herewith, except that notices of change of address
shall be effective only upon receipt.
17. GOVERNING LAW. The validity, interpretation, construction, and
performance of this Agreement shall be governed by the laws of the State of
Ohio, without giving effect to the principles of conflict of laws of such State.
18. VALIDITY. If any provision of this Agreement or the application of
any provision hereof to any person or circumstances is held invalid,
unenforceable, or otherwise illegal, the remainder of this Agreement and the
application of such provision to any other person or circumstances shall not be
affected, and the provision so held to be invalid, unenforceable, or otherwise
illegal shall be reformed to the extent (and only to the extent) necessary to
make it enforceable, valid, and legal.
19. MISCELLANEOUS. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or compliance with
any condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, expressed or implied with respect to the subject matter
hereof have been made by either party which are not set forth expressly in this
Agreement. In the event the terms and conditions of this Agreement conflict with
those of any other agreement, this Agreement shall prevail.
To the extend that Executive receives payment under this Agreement
relating to the termination of Executive's employment, the Executive will not
receive payment under any other agreement with the Company regarding such
termination.
IN WITNESS WHEREOF, the Executive and Company have executed this
Agreement on the day and year first above written.
EXECUTIVE RED ROOF INNS, INC.
By: By:
------------------------- ------------------------
ALAN L. TALLIS FRANCIS W. CASH
Executive Vice President, Chairman, President, and
Development Chief Executive Officer
<PAGE> 1
Exhibit 10.19
[RED ROOF INNS LOGO]
October 8, 1998
David L. Rea
6330 Angeles Drive
Dublin, OH 43016
Dear David,
This letter will confirm the terms of our agreement with respect to your
promotion to the position of Executive Vice President, Chief Financial Officer
and Treasurer of Red Roof Inns, Inc. ("RRI").
1. EFFECTIVE DATE. The effective date of this promotion is Tuesday,
October 6, 1998.
2. SALARY. Your new salary will be $200,000 a year.
3. PERFORMANCE APPRAISAL AND SALARY REVIEW. You will receive a
performance appraisal with the potential of a salary adjustment
effective January 1, 1999.
4. MANAGEMENT INCENTIVE COMPENSATION PLAN. In your new position, you will
be eligible for a maximum bonus of 75% of annual salary. Any bonus
earned in 1998 will be prorated (with 75% based on a maximum potential
of 60% of annual salary and 25% based on a maximum potential of 75%).
5. STOCK OPTIONS. You will be granted options to purchase 35,000 shares
of RRI common stock, $.01 par value ("Common Stock"), exercisable at
yesterday's closing price ($15.563).
6. CAR ALLOWANCE. Your car allowance will be increased to $600.00 per
month.
7. EXECUTIVE SEVERANCE AGREEMENT ("PARACHUTE" AGREEMENT). You will
receive a new parachute agreement which will increase severance
benefits to three times annual base salary, three times the highest
bonus, and 36 months of health benefits. Your new parachute also
includes a "Relocation" paragraph which provides for the Company to
purchase your house under specified circumstances (copy attached).
8. SEVERANCE. In the event your employment is terminated without "cause",
you will be entitled to continuous payment of your base salary then in
effect until you secure other employment up to a maximum period of
twelve (12) months from the date of termination. Any termination for
cause shall follow the definition of "cause" and the procedures for
termination as set forth in section (2) of your Executive Severance
Agreement. You will also be entitled to continue to receive (during
the severance period) such company-provided group health insurance,
life insurance and long-term disability coverage as are in effect at
the time of termination; in addition, you will receive a prorated
portion of any bonus you would have earned, and it will be paid when
bonuses for that year are paid to others in the Management Incentive
Compensation Plan. The Company will also provide you with outplacement
services for a period of up to twelve (12) months from the date of
termination.
Red Roof Inns, Inc. * 4355 Davidson Road * Hilliard, Ohio 43026-2491 *
(614) 876-3200
<PAGE> 2
David L. Rea
October 8, 1998
Page 2
9. OTHER RIGHTS AND BENEFITS. This letter agreement shall not affect
adversely any rights which you may have pursuant to any other
agreement, employment contract, policy, plan, program, or arrangement
of the Company, including but not limited to the provisions of your
original August 16, 1996 Employment Letter.
Your promotion is well-deserved, David, and I am looking forward to working with
you in your new, expanded role.
Sincerely,
Francis W. Cash
Chairman, President &
Chief Executive Officer
FWC/dj
Attachment
AGREED AND ACCEPTED: _______________________________________
David L. Rea
DATE: _______________________________________
<PAGE> 1
EXHIBIT 11.01
RED ROOF INNS, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE AMOUNTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net income $ 24,064 $ 25,358 $ 34,061
======== ======== ========
Weighted average number of historical common shares
outstanding during the year - basic 27,362 27,982 27,566
Add - common equivalent shares (determined using the
"treasury stock" method) representing shares issuable
upon exercise of employee stock options 187 185 166
-------- -------- --------
Weighted average number of shares used in calculation
of income per share - diluted 27,549 28,167 27,732
======== ======== ========
Net income per share:
Basic $ .88 $ .91 $ 1.23
======== ======== ========
Diluted $ .87 $ .90 $ 1.23
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 12.01
RED ROOF INNS, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Income before income taxes and extraordinary item $ 39,676 $ 42,723 $ 56,125
Fixed charges, excluding capitalized interest 45,984 50,288 49,667
-------- -------- --------
Earnings before fixed charges $ 85,660 $ 93,011 $105,792
======== ======== ========
Fixed charges:
Rent expense $ 12,622 $ 12,248 $ 9,926
======== ======== ========
Portions of rent representative of an interest factor (1/3) $ 4,207 $ 4,083 $ 3,309
Interest expense 41,777 46,205 46,358
-------- -------- --------
Fixed charges, excluding capitalized interest 45,984 50,288 49,667
Capitalized interest 2,841 2,846 2,541
Total fixed charges $ 48,825 $ 53,134 $ 52,208
======== ======== ========
Ratio of earnings to fixed charges 1.8 x 1.8 x 2.0 x
</TABLE>
<PAGE> 1
EXHIBIT 21.00
RED ROOF INNS, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Subsidiary State of Incorporation Business Name
---------- ---------------------- -------------
<S> <C> <C>
RRI Investment Co. Nevada RRI Investment Co.
RRI Financial, Inc. Nevada RRI Financial, Inc.
</TABLE>
<PAGE> 1
EXHIBIT 23.00
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-97914 of Red Roof Inns, Inc. on Form S-8 of our report dated February 17,
1999, appearing in this Annual Report on Form 10-K of Red Roof Inns, Inc. for
the year ended January 3, 1999.
/s/ Deloitte & Touche, LLP
- --------------------------
DELOITTE & TOUCHE, LLP
Columbus, Ohio
March 25, 1999
<PAGE> 1
EXHIBIT 24.00
RED ROOF INNS, INC.
DIRECTORS AND OFFICERS
POWER OF ATTORNEY
FOR
ANNUAL REPORT ON FORM 10-K AND
FORMS 3, 4, AND 5
The undersigned director and officer of Red Roof Inns, Inc., a Delaware
corporation (the "Company"), hereby: (1) constitutes and appoints David L. Rea,
and Alan L. Tallis, collectively and individually, as his agents and
attorneys-in-fact, with full power of substitution and re-substitution, to (a)
sign and file Form 10-K for Red Roof Inns, Inc. on his behalf and in his name,
place, and stead in any and all capacities with respect to the registration
under the Securities Exchange Act of 1934 (the "Act"), including pursuant to
Section 13 or 15(d) of the Act; (b) sign and file any and all amendments,
including post-effective amendments, and exhibits to Form 10-K; (c) sign and
file any and all applications or other documents to be filed with the Securities
and Exchange Commission (the "Commission") covered by the Form 10-K; (d) sign
and file any or all Forms 3, 4, or 5 required to be filed by him with the
Commission under the Act, including pursuant to Section 16(a) of the Act; (e)
sign and file any and all amendments to Forms 3, 4, or 5; and (f) do and perform
any and all other acts and deeds whatsoever that may be necessary or required;
and (2) ratifies and approves any and all actions that may be taken pursuant
hereto by any of the above-named agents and attorneys-in-fact or their
substitutes.
IN WITNESS WHEREOF, the undersigned director and officer of the Company has
hereunto set his hand as of the 25th day of February, 1999.
/s/ Francis W. Cash
-------------------
Francis W. Cash
<PAGE> 1
EXHIBIT 24.01
RED ROOF INNS, INC.
DIRECTORS AND OFFICERS
POWER OF ATTORNEY
FOR
ANNUAL REPORT ON FORM 10-K AND
FORMS 3, 4, AND 5
The undersigned director of Red Roof Inns, Inc., a Delaware corporation (the
"Company"), hereby: (1) constitutes and appoints Francis W. Cash, David L. Rea,
and Alan L. Tallis, collectively and individually, as his agents and
attorneys-in-fact, with full power of substitution and re-substitution, to (a)
sign and file Form 10-K for Red Roof Inns, Inc. on his behalf and in his name,
place, and stead in any and all capacities with respect to the registration
under the Securities Exchange Act of 1934 (the "Act"), including pursuant to
Section 13 or 15(d) of the Act; (b) sign and file any and all amendments,
including post-effective amendments, and exhibits to Form 10-K; (c) sign and
file any and all applications or other documents to be filed with the Securities
and Exchange Commission (the "Commission") covered by the Form 10-K; (d) sign
and file any or all Forms 3, 4, or 5 required to be filed by him with the
Commission under the Act, including pursuant to Section 16(a) of the Act; (e)
sign and file any and all amendments to Forms 3, 4, or 5; and (f) do and perform
any and all other acts and deeds whatsoever that may be necessary or required;
and (2) ratifies and approves any and all actions that may be taken pursuant
hereto by any of the above-named agents and attorneys-in-fact or their
substitutes.
IN WITNESS WHEREOF, the undersigned director of the Company has hereunto set his
hand as of the 25th day of February, 1999.
/s/ Thomas E. Dobrowski
-----------------------
Thomas E. Dobrowski
<PAGE> 1
EXHIBIT 24.02
RED ROOF INNS, INC.
DIRECTORS AND OFFICERS
POWER OF ATTORNEY
FOR
ANNUAL REPORT ON FORM 10-K AND
FORMS 3, 4, AND 5
The undersigned director of Red Roof Inns, Inc., a Delaware corporation (the
"Company"), hereby: (1) constitutes and appoints Francis W. Cash, David L. Rea,
and Alan L. Tallis, collectively and individually, as his agents and
attorneys-in-fact, with full power of substitution and re-substitution, to (a)
sign and file Form 10-K for Red Roof Inns, Inc. on his behalf and in his name,
place, and stead in any and all capacities with respect to the registration
under the Securities Exchange Act of 1934 (the "Act"), including pursuant to
Section 13 or 15(d) of the Act; (b) sign and file any and all amendments,
including post-effective amendments, and exhibits to Form 10-K; (c) sign and
file any and all applications or other documents to be filed with the Securities
and Exchange Commission (the "Commission") covered by the Form 10-K; (d) sign
and file any or all Forms 3, 4, or 5 required to be filed by him with the
Commission under the Act, including pursuant to Section 16(a) of the Act; (e)
sign and file any and all amendments to Forms 3, 4, or 5; and (f) do and perform
any and all other acts and deeds whatsoever that may be necessary or required;
and (2) ratifies and approves any and all actions that may be taken pursuant
hereto by any of the above-named agents and attorneys-in-fact or their
substitutes.
IN WITNESS WHEREOF, the undersigned director of the Company has hereunto set his
hand as of the 25th day of February, 1999.
/s/ Michael E. Foster
---------------------
Michael E. Foster
<PAGE> 1
EXHIBIT 24.03
RED ROOF INNS, INC.
DIRECTORS AND OFFICERS
POWER OF ATTORNEY
FOR
ANNUAL REPORT ON FORM 10-K AND
FORMS 3, 4, AND 5
The undersigned director of Red Roof Inns, Inc., a Delaware corporation (the
"Company"), hereby: (1) constitutes and appoints Francis W. Cash, David L. Rea,
and Alan L. Tallis, collectively and individually, as his agents and
attorneys-in-fact, with full power of substitution and re-substitution, to (a)
sign and file Form 10-K for Red Roof Inns, Inc. on his behalf and in his name,
place, and stead in any and all capacities with respect to the registration
under the Securities Exchange Act of 1934 (the "Act"), including pursuant to
Section 13 or 15(d) of the Act; (b) sign and file any and all amendments,
including post-effective amendments, and exhibits to Form 10-K; (c) sign and
file any and all applications or other documents to be filed with the Securities
and Exchange Commission (the "Commission") covered by the Form 10-K; (d) sign
and file any or all Forms 3, 4, or 5 required to be filed by him with the
Commission under the Act, including pursuant to Section 16(a) of the Act; (e)
sign and file any and all amendments to Forms 3, 4, or 5; and (f) do and perform
any and all other acts and deeds whatsoever that may be necessary or required;
and (2) ratifies and approves any and all actions that may be taken pursuant
hereto by any of the above-named agents and attorneys-in-fact or their
substitutes.
IN WITNESS WHEREOF, the undersigned director of the Company has hereunto set his
hand as of the 25th day of February, 1999.
/s/ John A. Henry
-----------------
John A. Henry
<PAGE> 1
EXHIBIT 24.04
RED ROOF INNS, INC.
DIRECTORS AND OFFICERS
POWER OF ATTORNEY
FOR
ANNUAL REPORT ON FORM 10-K AND
FORMS 3, 4, AND 5
The undersigned director of Red Roof Inns, Inc., a Delaware corporation (the
"Company"), hereby: (1) constitutes and appoints Francis W. Cash, David L. Rea,
and Alan L. Tallis, collectively and individually, as his agents and
attorneys-in-fact, with full power of substitution and re-substitution, to (a)
sign and file Form 10-K for Red Roof Inns, Inc. on his behalf and in his name,
place, and stead in any and all capacities with respect to the registration
under the Securities Exchange Act of 1934 (the "Act"), including pursuant to
Section 13 or 15(d) of the Act; (b) sign and file any and all amendments,
including post-effective amendments, and exhibits to Form 10-K; (c) sign and
file any and all applications or other documents to be filed with the Securities
and Exchange Commission (the "Commission") covered by the Form 10-K; (d) sign
and file any or all Forms 3, 4, or 5 required to be filed by him with the
Commission under the Act, including pursuant to Section 16(a) of the Act; (e)
sign and file any and all amendments to Forms 3, 4, or 5; and (f) do and perform
any and all other acts and deeds whatsoever that may be necessary or required;
and (2) ratifies and approves any and all actions that may be taken pursuant
hereto by any of the above-named agents and attorneys-in-fact or their
substitutes.
IN WITNESS WHEREOF, the undersigned director of the Company has hereunto set his
hand as of the 25th day of February, 1999.
/s/ William M. Lewis, Jr.
-------------------------
William M. Lewis, Jr.
<PAGE> 1
EXHIBIT 24.05
RED ROOF INNS, INC.
DIRECTORS AND OFFICERS
POWER OF ATTORNEY
FOR
ANNUAL REPORT ON FORM 10-K AND
FORMS 3, 4, AND 5
The undersigned director of Red Roof Inns, Inc., a Delaware corporation (the
"Company"), hereby: (1) constitutes and appoints Francis W. Cash, David L. Rea,
and Alan L. Tallis, collectively and individually, as his agents and
attorneys-in-fact, with full power of substitution and re-substitution, to (a)
sign and file Form 10-K for Red Roof Inns, Inc. on his behalf and in his name,
place, and stead in any and all capacities with respect to the registration
under the Securities Exchange Act of 1934 (the "Act"), including pursuant to
Section 13 or 15(d) of the Act; (b) sign and file any and all amendments,
including post-effective amendments, and exhibits to Form 10-K; (c) sign and
file any and all applications or other documents to be filed with the Securities
and Exchange Commission (the "Commission") covered by the Form 10-K; (d) sign
and file any or all Forms 3, 4, or 5 required to be filed by him with the
Commission under the Act, including pursuant to Section 16(a) of the Act; (e)
sign and file any and all amendments to Forms 3, 4, or 5; and (f) do and perform
any and all other acts and deeds whatsoever that may be necessary or required;
and (2) ratifies and approves any and all actions that may be taken pursuant
hereto by any of the above-named agents and attorneys-in-fact or their
substitutes.
IN WITNESS WHEREOF, the undersigned director of the Company has hereunto set his
hand as of the 25th day of February, 1999.
/s/ Edward D. Powers
--------------------
Edward D. Powers
<PAGE> 1
EXHIBIT 24.06
RED ROOF INNS, INC.
DIRECTORS AND OFFICERS
POWER OF ATTORNEY
FOR
ANNUAL REPORT ON FORM 10-K AND
FORMS 3, 4, AND 5
The undersigned director of Red Roof Inns, Inc., a Delaware corporation (the
"Company"), hereby: (1) constitutes and appoints Francis W. Cash, David L. Rea,
and Alan L. Tallis, collectively and individually, as his agents and
attorneys-in-fact, with full power of substitution and re-substitution, to (a)
sign and file Form 10-K for Red Roof Inns, Inc. on his behalf and in his name,
place, and stead in any and all capacities with respect to the registration
under the Securities Exchange Act of 1934 (the "Act"), including pursuant to
Section 13 or 15(d) of the Act; (b) sign and file any and all amendments,
including post-effective amendments, and exhibits to Form 10-K; (c) sign and
file any and all applications or other documents to be filed with the Securities
and Exchange Commission (the "Commission") covered by the Form 10-K; (d) sign
and file any or all Forms 3, 4, or 5 required to be filed by him with the
Commission under the Act, including pursuant to Section 16(a) of the Act; (e)
sign and file any and all amendments to Forms 3, 4, or 5; and (f) do and perform
any and all other acts and deeds whatsoever that may be necessary or required;
and (2) ratifies and approves any and all actions that may be taken pursuant
hereto by any of the above-named agents and attorneys-in-fact or their
substitutes.
IN WITNESS WHEREOF, the undersigned director of the Company has hereunto set his
hand as of the 25th day of February, 1999.
/s/ Judith A. Rogala
--------------------
Judith A. Rogala
<PAGE> 1
EXHIBIT 24.07
RED ROOF INNS, INC.
DIRECTORS AND OFFICERS
POWER OF ATTORNEY
FOR
ANNUAL REPORT ON FORM 10-K AND
FORMS 3, 4, AND 5
The undersigned director of Red Roof Inns, Inc., a Delaware corporation (the
"Company"), hereby: (1) constitutes and appoints Francis W. Cash, David L. Rea,
and Alan L. Tallis, collectively and individually, as her agents and
attorneys-in-fact, with full power of substitution and re-substitution, to (a)
sign and file Form 10-K for Red Roof Inns, Inc. on her behalf and in her name,
place, and stead in any and all capacities with respect to the registration
under the Securities Exchange Act of 1934 (the "Act"), including pursuant to
Section 13 or 15(d) of the Act; (b) sign and file any and all amendments,
including post-effective amendments, and exhibits to Form 10-K; (c) sign and
file any and all applications or other documents to be filed with the Securities
and Exchange Commission (the "Commission") covered by the Form 10-K; (d) sign
and file any or all Forms 3, 4, or 5 required to be filed by her with the
Commission under the Act, including pursuant to Section 16(a) of the Act; (e)
sign and file any and all amendments to Forms 3, 4, or 5; and (f) do and perform
any and all other acts and deeds whatsoever that may be necessary or required;
and (2) ratifies and approves any and all actions that may be taken pursuant
hereto by any of the above-named agents and attorneys-in-fact or their
substitutes.
IN WITNESS WHEREOF, the undersigned director of the Company has hereunto set her
hand as of the 25th day of February, 1999.
/s/ Owen D. Thomas
------------------
Owen D. Thomas
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000920941
<NAME> RED ROOF INNS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 2,729
<SECURITIES> 0
<RECEIVABLES> 12,951
<ALLOWANCES> 1,332
<INVENTORY> 12,177
<CURRENT-ASSETS> 34,929
<PP&E> 963,562
<DEPRECIATION> 117,473
<TOTAL-ASSETS> 969,371
<CURRENT-LIABILITIES> 56,122
<BONDS> 512,890
0
0
<COMMON> 286
<OTHER-SE> 368,890
<TOTAL-LIABILITY-AND-EQUITY> 969,371
<SALES> 0
<TOTAL-REVENUES> 375,336
<CGS> 0
<TOTAL-COSTS> 181,596
<OTHER-EXPENSES> 91,242
<LOSS-PROVISION> 792
<INTEREST-EXPENSE> 46,358
<INCOME-PRETAX> 56,125
<INCOME-TAX> 21,832
<INCOME-CONTINUING> 34,293
<DISCONTINUED> 0
<EXTRAORDINARY> 232
<CHANGES> 0
<NET-INCOME> 34,061
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
