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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994.
OR
/ / TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ___________
COMMISSION FILE NUMBER:1-7790
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LA QUINTA INNS, INC.
(Exact name of registrant as specified in its charter)
TEXAS #74-1724417
(State of Incorporation) (I.R.S. Employer Identification No.)
WESTON CENTRE
112 E. PECAN STREET
P.O. BOX 2636
SAN ANTONIO, TEXAS 78299-2636
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:(210) 302-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------ -------
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Number of shares of Common Stock, $.10 par value outstanding at September 30,
1994, giving effect for the three-for-two stock split in October 1994:
46,016,566
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LA QUINTA INNS, INC.
COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, 1994 DECEMBER 31, 1993
------------------ -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 4,619 $ 23,848
Receivables:
Trade (net allowance of $377
and $264) 12,580 6,744
Other (net of allowance of $141
and $157) 2,563 3,191
Supplies 7,132 5,921
Prepaid expenses 394 581
--------- --------
Total current assets 27,288 40,285
--------- --------
Notes receivable, excluding current
installments (net of allowance of
$3,369 and $3,167) 7,366 7,683
--------- --------
Investments, including joint ventures
accounted for on the equity method
(note 4) 2,965 6,583
--------- --------
Properties held for sale, at estimated
net realizable value 4,117 3,401
--------- --------
Land held for future development,
at cost 1,316 1,452
--------- --------
Property and equipment, at cost,
substantially all pledged:
Buildings 758,635 660,278
Furniture, fixtures and equipment 123,481 114,113
Land and leasehold improvements 149,048 129,862
--------- --------
Total property and equipment 1,031,164 904,253
Less accumulated depreciation and
amortization 245,649 230,917
--------- --------
Net property and equipment 785,515 673,336
--------- --------
Deferred charges and other assets,
at cost less applicable amortization 11,392 11,501
--------- --------
Total assets $ 839,959 $744,241
--------- --------
--------- --------
See accompanying notes to combined condensed financial statements.
2
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, 1994 DECEMBER 31, 1993
------------------ -----------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term
debt (note 3) $ 37,106 $ 22,491
Accounts payable:
Trade 13,414 14,282
Other 3,746 9,584
Income taxes 6,026 1,830
Accrued expenses:
Payroll and employee benefits 20,952 17,620
Interest 6,310 3,379
Property taxes 10,412 7,994
Other 1,120 1,870
-------- --------
Total current liabilities 99,086 79,050
-------- --------
Long-term debt, excluding current
installments (note 3) 454,930 414,004
-------- --------
Deferred income taxes, pension and
other 15,239 16,154
-------- --------
Partners' capital 89,875 85,976
-------- --------
Shareholders' equity:
Common stock ($.10 par value;
100,000,000 and 40,000,000 shares
authorized, 48,167,046 and 32,111,364
shares issued) 4,817 3,211
Additional paid-in capital 61,700 60,573
Retained earnings 128,592 100,059
Minimum pension liability adjustment (1,458) (1,458)
-------- --------
193,651 162,385
Less treasury stock, at cost
(2,150,480 and 1,732,867 shares,
respectively) 12,822 13,328
-------- --------
Total shareholders' equity 180,829 149,057
-------- --------
Total liabilities and shareholders'
equity $839,959 $744,241
-------- --------
-------- --------
See accompanying notes to combined condensed financial statements.
3
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ -----------------
1994 1993 1994 1993
------- ------- ------- -------
Revenues:
Inn $102,271 $73,245 $268,274 $197,736
Restaurant rental and other 2,001 1,630 5,797 4,825
Management services 92 2,048 1,099 5,602
-------- ------- -------- --------
Total revenues 104,364 76,923 275,170 208,163
-------- ------- -------- --------
Operating costs and expenses:
Direct 53,638 39,299 146,787 109,395
Corporate 4,543 4,787 13,846 14,469
Performance stock options - - - 4,407
Depreciation, amortization
and fixed asset retirements 10,251 5,950 27,976 17,068
-------- ------- -------- --------
Total operating costs and
expenses 68,432 50,036 188,609 145,339
-------- ------- -------- --------
Operating income 35,932 26,887 86,561 62,824
-------- ------- -------- --------
Other (income) deductions:
Interest income (299) (1,560) (1,368) (4,158)
Interest on long-term debt 10,060 7,940 28,659 22,874
Partners' equity in earnings
and losses 3,249 3,417 8,765 11,619
Net (gain) loss on property
transactions (47) 2 (41) 4,375
-------- ------- -------- --------
Earnings before income
taxes, extraordinary
items and cumulative
effect of accounting
change 22,969 17,088 50,546 28,114
Income taxes 8,958 6,664 19,713 10,855
Effect of change in income
tax law - 412 - 412
-------- ------- -------- --------
Earnings before
extraordinary items and
cumulative effect of
accounting change 14,011 10,012 30,833 16,847
Extraordinary items, net of
income taxes - (301) - 642
-------- ------- -------- --------
Earnings before cumulative
effect of accounting
change 14,011 9,711 30,833 17,489
Cumulative effect of accounting
change - - - 1,500
-------- ------- -------- --------
Net earnings $ 14,011 $ 9,711 $ 30,833 $ 18,989
-------- ------- -------- --------
-------- ------- -------- --------
Earnings per common and common
equivalent share:
Earnings before
extraordinary items and
cumulative effect of
accounting change $ .29 $ .21 $ .64 $ .36
Extraordinary items, net
of income taxes - (.01) - .01
Cumulative effect of
accounting change - - - .03
-------- ------- -------- --------
Net earnings $ .29 $ .20 $ .64 $ .40
-------- ------- -------- --------
-------- ------- -------- --------
Weighted average number of
common and common equivalent
shares outstanding (note 2) 48,600 47,374 48,477 47,056
-------- ------- -------- --------
-------- ------- -------- --------
See accompanying notes to combined condensed financial statements.
4
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
MINIMUM
COMMON STOCK TREASURY STOCK ADDITIONAL PENSION
-------------- --------------- PAID-IN RETAINED LIABILITY
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT TOTAL
------ ------ ------ ------ ------- -------- ---------- -----
Balances at December 31, 1992 14,668 $1,467 (1,273) $(14,668) $56,749 $ 80,773 $ - $124,321
Effect of stock split at
October 1, 1993 6,740 674 - - (674) - - -
Effect of stock split at
March 15, 1994 10,703 1,070 (578) - (1,070) - - -
Stock options - - 118 1,340 5,568 - - 6,908
Dividends - - - - - (1,015) - (1,015)
Net earnings - - - - - 20,301 - 20,301
Minimum pension liability
adjustment - - - - - - (1,458) (1,458)
------ ------ ------ -------- ------- -------- ------- --------
Balances at December 31, 1993 32,111 3,211 (1,733) (13,328) 60,573 100,059 (1,458) 149,057
Effect of stock split at
October 25, 1994 16,056 1,606 (717) - (1,606) - - -
Stock options - - 401 3,132 2,733 - - 5,865
Purchases of treasury stock - - (101) (2,626) - - - (2,626)
Dividends - - - - - (2,300) - (2,300)
Net earnings - - - - - 30,833 - 30,833
------ ------ ------ -------- ------- -------- ------- --------
Balances at September 30, 1994 48,167 $4,817 (2,150) $(12,822) $61,700 $128,592 $(1,458) $180,829
------ ------ ------ -------- ------- -------- ------- --------
------ ------ ------ -------- ------- -------- ------- --------
See accompanying notes to combined condensed financial statements.
5
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
-------------------
1994 1993
------ ------
Cash flows from operating activities:
Net earnings $ 30,833 $ 18,989
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization of property
and equipment and fixed asset retirements 27,976 17,068
Partners' equity in earnings and losses 8,765 11,619
(Gain) loss on property transactions (41) 4,375
Cumulative effect of change in accounting
for income taxes - (1,500)
Other non-cash items - (532)
Changes in operating assets and liabilities:
Receivables (4,530) (1,494)
Income taxes 4,196 7,001
Supplies and prepaid expenses (1,226) (484)
Accounts payable and accrued expenses 5,988 8,237
Deferred charges and other assets 1,322 (1,177)
Deferred credits and other 2,358 690
--------- ---------
Net cash provided by operating
activities 75,641 62,792
--------- ---------
Cash flows from investing activities:
Capital expenditures (69,198) (19,531)
Proceeds from property transactions 494 705
Purchase and conversion of inns (29,321) (25,386)
Purchase of partners' equity interests (53,255) (25,786)
Decrease (increase) in notes receivable
and other investments 3,690 (403)
--------- ---------
Net cash used by investing activities (147,590) (70,401)
--------- ---------
Cash flows from financing activities:
Proceeds from secured line of credit
and long-term borrowings 354,352 151,357
Principal payments on secured line of
credit and long-term borrowings (301,845) (148,296)
Capital contributions by partners - 16,671
Distributions to partners (726) (1,923)
Dividends to shareholders (2,300) -
Purchases of treasury stock (2,626) -
Net proceeds from stock transactions 5,865 2,640
--------- ---------
Net cash provided by financing
activities 52,720 20,449
--------- ---------
(Decrease) increase in cash and cash
equivalents (19,229) 12,840
Cash and cash equivalents at beginning of
period 23,848 12,861
--------- ---------
Cash and cash equivalents at end of period $ 4,619 $ 25,701
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information
Interest paid $ 26,539 $ 17,984
--------- ---------
--------- ---------
Income tax paid $ 6,583 $ 4,162
--------- ---------
--------- ---------
Income tax refunds $ (26) $ (61)
--------- ---------
--------- ---------
See accompanying notes to combined condensed financial statements.
6
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------
1994 1993
--------- ---------
Supplemental Schedule of Non-Cash Investing and Financing Activities
Liabilities assumed in connection with acquisition of unincorporated
partnerships and joint ventures $ -- $ 29,878
--------- ---------
--------- ---------
Conveyence of title of property to mortgagor $ -- $ 10,117
--------- ---------
--------- ---------
Effect of stock splits $ 1,606 $ 674
--------- ---------
--------- ---------
See accompanying notes to combined condensed financial statements.
7
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The accompanying unaudited combined condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, which are necessary for a fair presentation of financial
position and results of operations have been made. It is suggested that the
combined condensed financial statements be read in conjunction with the combined
financial statements and notes thereto included in the December 31, 1993 Annual
Report on Form 10-K. Pursuant to discussions with the Securities and Exchange
Commission the Company amended its December 31, 1993 Form 10-K. There
were no changes to the financial data, including results of operations or
financial conditions. The changes consisted primarily of clarifications with
respect to certain disclosure items. Copies of the amended Form 10-K are
available from the Company upon request.
(2) Earnings per Common and Common Equivalent Share
The Board of Directors authorized three-for-two stock splits effective in
October 1993, March 1994 and October 1994. The October 1994 stock split was paid
on October 25, 1994, to shareholders of record on October 4, 1994. Earnings per
share, the weighted average number of shares outstanding, shareholders' equity
and the following information have been adjusted to give effect to each of these
distributions. Fully diluted earnings per share is not materially different than
primary earnings per share.
The weighted average number of common and common equivalent shares used in
the computation of earnings per share are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ----------------------------
1994 1993 1994 1993
------------- ------------- ------------- -------------
Weighted average common shares issued 48,167,046 48,167,046 48,167,046 48,167,046
Effect of treasury stock (2,250,123) (2,704,950) (2,391,468) (2,762,468)
Dilutive effect of stock options 2,683,554 1,912,196 2,701,243 1,651,832
------------- ------------- ------------- -------------
Weighted average number of common and common
equivalent shares 48,600,477 47,374,292 48,476,821 47,056,410
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
During June 1994, the Company repurchased 101,000 shares of its common stock
for approximately $2,600,000 under a plan approved by the Board of Directors to
repurchase up to $10,000,000 of its common stock. Additional purchases will be
made from time to time in the open market as deemed appropriate by the Company.
(3) Long-term Debt
On July 1, 1994, the Company completed negotiations to amend its existing
$40,000,000 Secured Line of Credit to $45,000,000 and its $145,000,000 Secured
Term Credit Facility to $184,000,000. At September 30, 1994, the Company had a
total of $33,300,000 available on its amended Secured Term and Line of Credit
facilities. Borrowings under the $45,000,000 Secured Line of Credit, which will
mature on May 30, 1997, bear interest at the prime rate, LIBOR plus 1 1/2%, or
certificate of deposit rate, plus 1 5/8%. Borrowings under the $184,000,000
Secured Term Credit Facility, which could be made through October 31, 1994, have
a final maturity of May 31, 2000 and bear interest at the prime rate, LIBOR rate
plus 1 3/4%, or certificate of deposit rate plus 1 7/8%. Amounts borrowed under
the Secured Term Credit Facility require semi-annual principal payments
commencing November 30, 1994 through May 31, 2000. The Company pays a commitment
fee of .375% per annum on the daily average unused portion of the Secured Line
of Credit and Term Credit Facility.
On June 1, 1994, a credit agreement for a $35,000,000 Unsecured Line of
Credit among La Quinta Development Partners, L.P. (the "Development
Partnership") and participating banks was completed. Borrowings under the
$35,000,000 Unsecured Line of Credit, which matures January 31, 1997, bear
interest at the prime rate, LIBOR rate plus 1%, or certificate of deposit rate
plus 1 1/8%. At September 30, 1994, $21,725,000 was available on the Unsecured
Line of Credit. The commitment fee is .375% per annum on the daily average
unused portion of the Unsecured Line of Credit. The Company is the general
partner and owns a 40% ownership interest in the Development Partnership.
8
(4) Acquisition of Partners' Interests
As of December 1, 1993, the Company owned 82% of the Units of La Quinta
Motor Inns Limited Partnership ("LQP") acquired through a tender offer (which
expired November 30, 1993) and other Units acquired by the Company prior to the
tender offer. The acquisition has been accounted for as a purchase and the
results of LQP's operations have been included in the Company's combined results
of operations since December 1, 1993. The remaining 18% of the Units were
acquired on January 24, 1994 for approximately $9.3 million. The Company
obtained funds to acquire the Units by borrowing $45.9 million under its
existing credit facilities.
On July 1, 1994, the Company purchased nine La Quinta inns previously held
by two unincorporated joint ventures in which the Company held a 1% interest
and also managed. This transaction was financed through the Company's amended
Secured Line of Credit and Secured Term Credit Facility. (See note 3.)
(5) Franchise Agreement
During February 1994, the Company opened a franchised inn in Mexico. Initial
franchise fees related to development were recorded as revenue when the related
property opened as a franchised inn. Monthly franchise fees are based on gross
room sales and are accrued as earned.
(6) Development and Management Agreements
During the third quarter of 1994, the Company entered into development and
management agreements with four Mexican investor groups for the purpose of
developing 22 La Quinta inns in 15 cities in Mexico. Each of the inns developed
will be owned by the Mexican investor groups and managed by the Company under
long-term management agreements.
(7) Contingencies
In September 1993, a former officer of the Company filed suit against the
Company and certain of its directors and their affiliate companies. The suit
alleges breach of an employment agreement, misrepresentation, wrongful
termination, self-dealing, breach of fiduciary duty, usurpation of corporate
opportunity and tortious interference with contractual relations. The suits
seeks compensatory damages of $2,500,000 and exemplary damages of $5,000,000.
The Company intends to vigorously defend itself against this suit.
The Company is also party to various lawsuits and claims generally
incidental to its business. The ultimate disposition of these and the above
discussed matter are not expected to have a material adverse effect on the
Company's financial position or results of operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
On January 24, 1994, La Quinta Inns, Inc. ("La Quinta" or the "Company")
concluded the acquisition of LQP which owned 31 inns in 15 states managed by La
Quinta. The operations of LQP were accounted for under the equity method until
December 1, 1993 and were included in the combined financial statements of the
Company thereafter.
In addition, during 1993, the Company purchased, in separately negotiated
transactions, the limited partners' interests in 14 of the Company's combined
unincorporated partnerships and joint ventures which owned 44 inns. During the
second quarter of 1994, the Company purchased the limited partners' interests in
one of the Company's combined unincorporated joint ventures which owned one inn.
On July 1, 1994, the Company purchased nine inns managed by the Company which
were previously held in the two unincorporated joint ventures ("UJVs"). The
Company continues to operate these properties as La Quinta inns. Also during
1993, the Company completed the acquisition of 11 inns and began renovating and
converting them to the La Quinta brand. Conversion of these properties was
completed during the second quarter of 1994. Also during the second and third
quarters of 1994, the Company acquired four additional inns.
In February 1994, the Company opened a franchise property in Mexico which is
operated under a La Quinta franchise agreement. The Company does not anticipate
entering any future franchise agreements in Mexico. Further expansion in Mexico
is planned through development and management agreements whereby the inn
developed will be owned by Mexican investor groups and managed by the Company
under long-term management agreements. During the third quarter of 1994, the
Company entered into four separate development and management agreements with
four separate Mexican investor groups for the purpose of developing 22 La Quinta
inns in 15 cities in Mexico. The Company anticipates the development of
additional La Quinta inns in Mexico through similar arrangements with Mexican
investors.
9
The following table describes the composition of inns in the La Quinta chain
at:
SEPTEMBER 30, 1994 DECEMBER 31, 1993 (2)
--------------------------------- ---------------------------------
LA QUINTA LA QUINTA
EQUIVALENT EQUIVALENT
INNS ROOMS ROOMS(1) INNS ROOMS ROOMS(1)
--------- --------- ----------- --------- --------- -----------
Owned 100% 178 22,320 22,320 166 21,001 21,001
Owned 40 - 80% 46 6,583 2,769 45 6,077 2,588
--- --------- ----------- --- --------- -----------
Total Company owned and operated 224 28,903 25,089 211 27,078 23,589
Managed Inns 1 148 -- 9 1,176 12
Licensed Inns 1 120 -- 1 120 --
--- --------- ----------- --- --------- -----------
226 29,171 25,089 221 28,374 23,601
--- --------- ----------- --- --------- -----------
--- --------- ----------- --- --------- -----------
<FN>
- - - ------------------------
(1) Represents the Company's proportionate ownership in system rooms.
(2) Includes 100% of the rooms owned by LQP as though the acquisition were
completed on December 31, 1993.
In 1993, the Company began a system wide inn image enhancement program
designed to increase revenue through the generation of new guest trial. The
program was completed during the second quarter. The program gave the reimaged
inns a new, fresh, crisp appearance while preserving their unique character. It
features new signage displaying a new logo as well as exterior and lobby
upgrades including brighter colors, additional landscaping, enhanced guest entry
and full lobby renovation with contemporary residential furnishings and seating
area for continental breakfast.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 1994
The improvement in inn revenues was related to an increase in the percentage
of occupancy and average room rate along with the revenues associated with the
acquisition of inns, including the LQP and the UJVs, as more fully described
above. The occupancy percentage increased to 76.2% in the third quarter of 1994
from 71.9% in the 1993 comparable period. The average daily rate increased to
$48.97 in the third quarter of 1994 from $47.26 in the third quarter of 1993.
Additionally, completion of the reimaging process has resulted in improvements
in both rate and occupancy.
Management services revenue decreased primarily as a result of the
acquisition of LQP and the UJVs and the elimination of related management fees
charged by the Company. This decrease was partially offset by an increase in
restaurant rental and other income caused by an increase in the number of
restaurants owned and leased by the Company due to the acquisition of LQP.
Direct expenses increased to $53,638,000, an increase of $14,339,000. The
$.30 increase in direct expenses per occupied room from $26.34 during the third
quarter of 1993 to $26.64 during the third quarter of 1994 is primarily
attributable to increases in property taxes and insurance and is partially
offset by decreases in salaries and related benefits.
Corporate expenses decreased to $1.72 per available room in the third
quarter of 1994 from $1.89 per available room (including Managed Inns) in the
third quarter of 1993, a decrease of $.17 per available room.
Depreciation, amortization and fixed asset retirements increased primarily
due to the acquisition of LQP and the UJVs and the Company's reimaging program.
Depreciation, amortization and fixed asset retirements also includes asset
retirements associated with the Company's refurbishment program and other
capital improvements.
Operating income improved to $35,932,000 in the third quarter, an increase
of $9,045,000, or 33.6% over the 1993 third quarter, as more fully described
above.
The decrease in interest income is primarily attributable to a decrease in
interest earned on the note receivable from AEW Partners, L.P. to La Quinta
Development Partners, L.P. (the "Development Partnership"), due to the
collection of the entire outstanding principal balance of that note in December
1993 and the corresponding reduction of interest thereon.
Interest expense on the Senior Subordinated notes issued in May 1993 along
with debt assumed with the acquisition of the LQP, and new debt related to the
purchase of certain of the limited partners' interests resulted in the 26.7%
increase in interest expense.
10
The acquisition of various limited partners' interests resulted in a
decrease in partners' equity in earnings and losses for the third quarter of
1994 compared to the third quarter of 1993.
Income taxes for the third quarter of 1994 and 1993 are calculated using an
estimated effective tax rate of 39%. During the third quarter of 1993, the
Company recognized an additional $412,000 net charge related to certain
provisions of the Omnibus Budget Reconciliation Act of 1993.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1994
The improvement in inn revenues was related to an increase in the percentage
of occupancy and average room rate along with the revenues associated with the
acquisition of inns, including the LQP and the UJVs. The average room rate
increased to $47.49 in the 1994 nine month period from $46.72 in the 1993 nine
months. The occupancy percentage increased to 72.1% in the 1994 nine months from
67.8% in the 1993 nine months. Additionally, completion of the reimaging process
has resulted in improvements in both rate and occupancy.
Management services revenue decreased primarily as a result of the
acquisition of LQP and the UJVs and the elimination of related management fees
charged by the Company. This decrease was partially offset by an increase in
restaurant rental and other income caused by an increase in the number of
restaurants owned and leased by the Company due to the acquisition of LQP.
Direct expenses increased to $146,787,000, an increase of $37,392,000.
Direct expenses per occupied room increased to $26.98 in the 1994 nine months
from $26.89 in the 1993 nine months. The increase of $.09 is primarily
attributable to increases in breakfast and coffee supplies and travel agency
commissions and is partially offset by decreases in salaries and related
expenses.
Corporate expenses decreased to $1.78 per available room (including Managed
Inns) in the 1994 nine months from $1.97 per available room (including Managed
Inns) in the 1993 nine months, a decrease of $.19 per available room.
The 1993 performance stock option expense related to the vesting of certain
contingent stock options that became exercisable in May 1993.
Depreciation, amortization and fixed asset retirements increased primarily
due to the acquisition of LQP and the UJVs and the Company's reimaging program.
Depreciation, amortization and fixed asset retirements also includes asset
retirements associated with the Company's refurbishment program and other
capital improvements.
Operating income improved to $86,561,000 in the 1994 nine months, an
increase of $23,737,000, or 37.8% over the 1993 nine months, as more fully
described above.
The decrease in interest income is primarily attributable to a decrease in
interest earned on the note receivable from AEW Partners, L.P. to the
Development Partnership, due to the collection of the entire outstanding
principal balance of that note in December 1993 and the corresponding reduction
of interest thereon.
Interest expense on the Senior Subordinated notes issued in May 1993 along
with debt assumed with the acquisition of the LQP, and new debt related to the
purchase of certain of the limited partners' interests resulted in the 25.3%
increase in interest expense.
The acquisition of various limited partners' interests resulted in a
decrease in partners' equity in earnings and losses for the first nine months of
1994 compared to the first nine months of 1993.
Net gain on property and investment transactions was ($41,000) in the nine
months of 1994 compared to a loss of $4,375,000 in the nine months of 1993. The
loss in 1993 was primarily related to a $4,900,000 loss related to the Company's
conveyance of title to the mortgagor on the property in which the Company's
corporate headquarters was located.
Income taxes for the 1994 and 1993 nine months are calculated using an
estimated effective tax rate of 39%. During the third quarter of 1993, the
Company recognized an additional $412,000 net charge related to certain
provisions of the Omnibus Budget Reconciliation Act of 1993.
The cumulative effect of accounting change in the 1993 nine months was the
result of implementation of Statement of Financial Standards No. 109 "Accounting
for Income Taxes".
11
FINANCIAL CONDITION
The decrease in the Company's cash and cash equivalents in the first nine
months of 1994 resulted from capital expenditures from the reimaging program,
purchase and conversion of inns, the acquisition of the remaining Units of LQP
during January of 1994 and the acquisition of the UJVs.
The increase in net cash provided by operating activities was the result of
increased revenue and operating margins.
The increase in investing activities in the 1994 nine months over the prior
year's comparable period is primarily a result of capital expenditures related
to the reimaging program, purchase and conversion of inns, the purchase of the
remaining Units of LQP and the purchase of the UJVs.
Proceeds from the secured line of credit and long-term borrowings which are
partially offset by principal payments on the Company's Secured Term Credit
Facility, dividends paid to shareholders and purchases of treasury stock
contributed to the increase in cash provided by financing activities for the
1994 nine months, as compared to cash provided by financing activities for the
1993 nine months.
In June 1994, the Development Partnership entered into a $35,000,000
Unsecured Line of Credit of which $21,725,000 is available at September 30,
1994. The Company anticipates that substantially all of its development activity
in 1994 will occur through the Development Partnership.
During June 1994, the Company repurchased a total of 101,000 shares of its
common stock for approximately $2,600,000 under a plan approved by the Board of
Directors to repurchase up to $10,000,000 of its common stock. There have been
no additional purchases through September 1994.
Funds on hand, anticipated from future cash flows and available on the
Company's credit facilities are expected to be sufficient to fund the Company's
operating expenses, debt service, other capital requirements and its development
program through at least the end of 1994. The Company will evaluate from time to
time the necessity of other financing alternatives.
12
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
La Quinta Inns, Inc.:
We have reviewed the combined condensed balance sheet of La Quinta Inns,
Inc. as of September 30, 1994, and the related combined condensed statements of
operations for the three-month and nine-month periods ended September 30, 1994
and 1993 and cash flows for the nine-month periods ended September 30, 1994 and
1993. These combined condensed financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the combined condensed financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the combined balance sheet of La Quinta Inns, Inc. as of December 31,
1993 and the related combined statements of operations, shareholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated January 31, 1994, except as to the first paragraph of note 5, which is as
of February 9, 1994, we expressed an unqualified opinion on those combined
financial statements. Our report refers to a change in the method of accounting
for income taxes. In our opinion, the information set forth in the accompanying
combined condensed balance sheet as of December 31, 1993, is fairly presented,
in all material respects, in relation to the combined balance sheet from which
it has been derived.
KPMG Peat Marwick LLP
San Antonio, Texas
October 14, 1994
13
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Actions for negligence or other tort claims occur routinely as an ordinary
incident to the Company's business. Several lawsuits are pending against the
Company which have arisen in the ordinary course of the business, but none of
these proceedings involves a claim for damages (in excess of applicable excess
umbrella insurance coverages) involving more than 10% of current assets of the
Company (also see note 7 to combined condensed financial statements). The
Company does not anticipate any amounts which it may be required to pay as a
result of an adverse determination of such legal proceedings, individually or in
the aggregate, or any other relief granted by reason thereof, will have a
material adverse effect on the Company's financial position or results of
operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
A list of all exhibits filed or included as part of this Quarterly Report on
Form 10-Q is as follows:
Exhibits By Reference Descriptions
15 Filed Herewith Letter from KPMG Peat Marwick LLP dated November 11,
1994
27 Filed Herewith Financial Data Schedule
(b) Reports on Form 8-K:
No Current Reports on Form 8-K have been filed during the period for which
this Quarterly Report on Form 10-Q is filed.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LA QUINTA INNS, INC.
(Registrant)
November 14, 1994 By: /S/ William C. Hammett, Jr.
-------------------------------------------------------
William C. Hammett, Jr.
Senior Vice President - Accounting and Administration
November 14, 1994 By: /S/ Irene C. Primera
-------------------------------------------------------
Irene C. Primera
Vice President - Controller
15