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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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 JUNE 30, 1995.
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
____________
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 / /
____________
Number of shares of Common Stock, $.10 par value outstanding at June 30, 1995:
46,993,291
____________
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LA QUINTA INNS, INC.
COMBINED CONDENSED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................$ 6,694 $ 2,589
Receivables (net of allowance of $222 and $441):
Trade.................................................... 12,510 10,185
Other.................................................... 2,527 2,363
Supplies................................................... 6,753 7,474
Prepaid expenses........................................... 2,862 1,202
Deferred income taxes...................................... 7,223 7,223
----------- -----------
Total current assets.................................. 38,569 31,036
----------- -----------
Notes receivable, excluding current installments
(net of allowance of $2,549 and $3,351)...................... 6,206 7,320
----------- -----------
Investments................................................... 2,637 2,647
----------- -----------
Properties held for sale, at estimated net realizable value... 2,664 2,664
----------- -----------
Land held for development, at cost............................ 2,716 1,324
----------- -----------
Property and equipment, at cost, substantially all pledged:
Buildings.................................................. 799,415 767,665
Furniture, fixtures and equipment.......................... 130,139 124,336
Land and leasehold improvements............................ 162,115 150,311
----------- -----------
Total property and equipment........................... 1,091,669 1,042,312
Less accumulated depreciation and amortization............. 270,139 252,372
----------- -----------
Net property and equipment............................. 821,530 789,940
----------- -----------
Deferred charges and other assets, at cost less
applicable amortization...................................... 10,760 10,850
----------- -----------
Total assets.......................................... $ 885,082 $ 845,781
----------- -----------
----------- -----------
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)
JUNE 30, 1995 DECEMBER 31, 1994
------------- -----------------
(unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (note 3)............. $ 15,242 $ 39,976
Accounts payable:
Trade..................................................... 12,737 10,292
Other..................................................... 3,387 6,386
Income taxes.............................................. 9,178 3,641
Accrued expenses:
Payroll and employee benefits............................. 21,259 21,238
Interest.................................................. 3,045 3,023
Property taxes............................................ 8,986 8,387
Other..................................................... 1,224 1,125
---------- ---------
Total current liabilities............................. 75,058 94,068
---------- ---------
Long-term debt, excluding current installments (note 3)....... 465,997 448,258
---------- ---------
Deferred income taxes, pension and other...................... 21,339 22,125
---------- ---------
Partners' capital............................................. 100,105 92,099
---------- ---------
Shareholders' equity:
Common stock ($.10 par value; 100,000,000 shares
authorized, 49,358,612 and 48,758,528 shares issued)....... 4,936 4,876
Additional paid-in capital.................................. 76,744 68,759
Retained earnings........................................... 159,826 134,409
Minimum pension liability................................... (1,474) (1,474)
---------- ---------
240,032 206,570
Less treasury stock, at cost (2,365,321 and
2,361,366 shares).......................................... 17,449 17,339
---------- ---------
Total shareholders' equity............................ 222,583 189,231
---------- ---------
Total liabilities and shareholders' equity............ $885,082 $845,781
---------- ---------
---------- ---------
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 SIX MONTHS ENDED
June 30 June 30
----------------- ----------------
1995 1994 1995 1994
---- ---- ---- ----
Revenues:
Inn.........................................................$107,938 $89,965 $202,661 $166,003
Restaurant rental and other................................. 2,052 1,977 4,017 3,796
Management services......................................... 53 621 100 1,007
-------- ------- -------- --------
Total revenues............................................ 110,043 92,563 206,778 170,806
-------- ------- -------- --------
Operating costs and expenses:
Direct...................................................... 53,776 48,484 103,128 93,149
Corporate................................................... 4,894 4,428 9,392 9,256
Depreciation, amortization and fixed asset retirements...... 10,437 9,299 20,630 17,772
-------- ------- -------- --------
Total operating costs and expenses........................ 69,107 62,211 133,150 120,177
-------- ------- -------- --------
Operating income.......................................... 40,936 30,352 73,628 50,629
-------- ------- -------- --------
Other (income) expense:
Interest income............................................. (299) (632) (579) (1,069)
Interest on long-term debt.................................. 9,839 9,447 20,383 18,599
Partners' equity in earnings and losses..................... 4,548 3,045 8,976 5,522
-------- ------- -------- --------
Earnings before income taxes.............................. 26,848 18,492 44,848 27,577
Income taxes................................................ 10,157 7,212 17,087 10,755
-------- ------- -------- --------
Net earnings..............................................$ 16,691 $11,280 $ 27,761 $ 16,822
-------- ------- -------- --------
-------- ------- -------- --------
Net earnings per common and common equivalent
share....................................................$ .34 $ .23 $ .56 $ .35
-------- ------- -------- --------
-------- ------- -------- --------
Weighted average number of common and
common equivalent shares outstanding (note 2)................ 49,426 48,603 49,256 48,415
-------- ------- -------- --------
-------- ------- -------- --------
See accompanying notes to combined condensed financial statements.
4
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
SIX MONTHS ENDED
JUNE 30
---------------------
1995 1994
---- ----
Cash flows from operating activities:
Net earnings..................................................$ 27,761 $ 16,822
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization of property and equipment and
fixed asset retirements.................................... 20,630 17,772
Partners' equity in earnings and losses..................... 8,976 5,522
Changes in operating assets and liabilities:
Receivables............................................... (2,832) (4,957)
Income taxes.............................................. 9,648 5,985
Supplies and prepaid expenses............................. (1,457) (1,368)
Accounts payable and accrued expenses..................... 2,123 1,425
Deferred charges and other assets......................... 266 424
Deferred credits and other................................ 1,451 (225)
--------- --------
Net cash provided by operating activities............... 66,566 41,400
--------- --------
Cash flows from investing activities:
Capital expenditures other than acquisitions.................. (16,417) (55,435)
Purchase and conversion of inns............................... (40,292) (20,989)
Purchase of partners' equity interests........................ -- (9,622)
Decrease in notes receivable and other investments............ 1,476 3,274
--------- --------
Net cash used by investing activities....................... (55,233) (82,772)
--------- --------
Cash flows from financing activities:
Proceeds from secured line of credit and long-term borrowings. 187,260 266,352
Principal payments on secured line of credit and long-term
borrowings................................................... (195,001) (245,025)
Capital distributions to partners............................. (967) (429)
Dividends to shareholders..................................... (2,344) (1,533)
Purchases of treasury stock................................... (102) (1,736)
Net proceeds from stock transactions.......................... 3,926 1,369
--------- --------
Net cash (used) provided by financing activities............ (7,228) 18,998
--------- --------
Increase (decrease) in cash and cash equivalents................ 4,105 (22,374)
Cash and cash equivalents at beginning of period................ 2,589 23,848
--------- --------
Cash and cash equivalents at end of period...................... $ 6,694 $ 1,474
--------- --------
--------- --------
Supplemental disclosure of cash flow information:
Interest paid................................................... $ 20,749 $ 19,307
--------- --------
--------- --------
Income tax paid................................................. $ 6,582 $ 1,120
--------- --------
--------- --------
Income tax refunds.............................................. $ (51) $ (12)
--------- --------
--------- --------
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)
SIX MONTHS ENDED
JUNE 30
---------------------
1995 1994
---- ----
Supplemental schedule of non-cash investing
and financing activities --
Tax benefit from stock options exercised........................ $4,111 $1,768
------ ------
------ ------
See accompanying notes to combined condensed financial statements.
6
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.
The combined condensed financial statements should be read in conjunction
with the combined financial statements and notes thereto included in the
December 31, 1994 Annual Report on Form 10-K.
(2) Earnings per Common and Common Equivalent Share
The Board of Directors authorized three-for-two stock splits effective
in March 1994 and October 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.
Primary and fully diluted earnings per share are not materially different.
The weighted average number of common and common equivalent shares used
in the computation of earnings per share are as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
1995 1994 1995 1994
---------- ---------- ---------- ----------
Weighted average common shares issued......49,316,525 48,167,046 49,194,094 48,167,046
Effect of treasury stock...................(2,364,303) (2,377,625) (2,363,153) (2,178,161)
Dilutive effect of stock options........... 2,473,451 2,813,747 2,424,772 2,426,108
---------- ---------- ---------- ----------
Weighted average number of common and
common equivalent shares................49,425,673 48,603,168 49,255,713 48,414,993
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
(3) Long-Term Debt
On April 21, 1995, the Company completed negotiations to amend its
existing credit facilities. The amended credit facilities provide the
Company with a $75,000,000 Secured Line of Credit and a $141,500,000 Secured
Term Credit Facility. Borrowings under the Secured Line of Credit will
mature May 31, 1999. Borrowings under the Secured Term Credit Facility
require semi-annual principal payments commencing May 30, 1997 through May
30, 2002. Borrowings under each of these credit facilities bear interest at
either LIBOR, the prime rate or certificate of deposit rate, plus an
applicable margin, as defined in the related credit agreements. Currently,
borrowings bear interest at either LIBOR plus 3/4%, the prime rate or the
certificate of deposit rate plus 7/8%. The applicable margin is determined
quarterly based upon predetermined levels of indebtedness to cash flows as
defined in the related credit agreements.
On April 21, 1995, the $35,000,000 Unsecured Line of Credit among La
Quinta Development Partners, L.P. ("LQDP") and participating banks was
amended. LQDP also completed negotiations for a $30,000,000, 364-day
Unsecured Line of Credit with participating banks. The Unsecured Line of
Credit and 364-day Unsecured Line of Credit bear interest at either LIBOR,
the prime rate or certificate of deposit rate, plus LQDP's applicable margin,
as defined in the related credit agreements. As of June 30, 1995, borrowings
under both Unsecured Lines of Credit bear interest at either LIBOR plus 5/8%,
the prime rate or the certificate of deposit rate plus 3/4%. LQDP's
applicable margin is determined quarterly based upon predetermined levels of
the Partnership's indebtedness to cash flows, as defined in the related
credit agreements. The Unsecured Line of Credit and 364-day Unsecured Line
of Credit mature May 31, 1997 and April 20, 1996, respectively. Both the
Unsecured Line of Credit and the 364-day Unsecured Line of Credit will remain
in existence following the AEW Partners, L.P. ("AEW") Transaction discussed
in note 5.
At June 30, 1995, the Company had $74,650,000 available on its existing
credit facilities, including the Unsecured Line of Credit in LQDP. This
amount was reduced to $26,450,000 on July 3, 1995 following the drawings to
finance the AEW Transaction discussed in note 5.
7
(4) 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
"La Quinta Defendants"). 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. Compensatory damages of $2,500,000 and exemplary
damages of $5,000,000 are sought in the action. The Court has pending before
it the La Quinta Defendants' motion for summary judgment. The parties
subsequently filed a required, joint Pre-Trial Order, in which the plaintiff
has conceded a number of his claims. Currently, no trial date has been set
for this action. 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.
(5) Subsequent Event - Acquisition of Partner's Interest
On June 15, 1995, AEW notified the Company that it would exercise its
option, subject to certain conditions, to convert two-thirds of its ownership
interest in LQDP into 5,299,821 shares of the Company's Common Stock and also
agreed to sell its remaining ownership interest in LQDP to the Company for a
negotiated price of $48.2 million in cash (collectively, the "AEW
Transaction"). Under the terms of the LQDP Partnership Agreement, AEW paid
$3,000,000 in 1990 for an option, subject to certain vesting and other
conditions, to convert two-thirds of its ownership interest in LQDP into a
specified number of shares (adjusted for stock splits, cash dividends and
distributions from LQDP to AEW) of the Company's Common Stock. The AEW
Transaction was consummated on July 3, 1995. The Company financed the cash
portion of the AEW Transaction through borrowings under its and LQDP's bank
credit facilities.
Upon conversion of the partnership interest into La Quinta Common Stock,
the Company issued 5,299,821 shares of Common Stock having a fair market
value of $142.8 million based on the July 3, 1995 New York Stock Exchange
closing price. During the third quarter of 1995, the Company will record net
assets acquired at their fair market value of $96.4 million and a non-cash,
non-recurring item of $46.4 million as a deduction presented below net
earnings in the Statement of Operations (Conversion of Partner's Interest
into Common Stock) in arriving at net earnings available to common
shareholders. This non-recurring, non-cash item is directly attributable to
the AEW Transaction.
The sale to La Quinta of AEW's remaining one-third interest in LQDP will
be accounted for as an acquisition of a minority interest and purchase
accounting will be applied.
As permitted under the Partnership Agreement, AEW has requested that the
Common Stock be registered with the Securities and Exchange Commission for
sale in an underwritten secondary public offering. Pursuant to this request,
the Company has filed a registration statement with the Securities and
Exchange Commission with respect to such sale.
The following unaudited pro forma information reflects the combined
results of operations of the Company as if the AEW Transaction had occurred
on January 1, 1995 and January 1, 1994. The pro forma information gives
effect to certain adjustments, including additional depreciation expense on
property and equipment based on their fair values, increased interest expense
on additional debt incurred, elimination of AEW's Partners' equity in
earnings and losses and the related income tax effect of those adjustments.
The pro forma information does not reflect the non-cash, non-recurring item
described above.
(Unaudited)
PRO FORMA PRO FORMA
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 DECEMBER 31, 1994
---------------- -----------------
(in thousands, except per share data)
Total revenues...................$206,778 $362,242
-------- --------
-------- --------
Net earnings.....................$ 31,085 $ 41,050
-------- --------
-------- --------
Earnings per share...............$ .57 $ .76
-------- --------
-------- --------
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis addresses the results of
operations for the three month periods ended June 30, 1995 (the "1995 Three
Months") and June 30, 1994 (the "1994 Three Months") and the six month
periods ended June 30, 1995 (the "1995 Six Months") and June 30, 1994 (the
"1994 Six Months").
The Company's financial statements include the accounts of the Company's
wholly-owned subsidiaries and unincorporated partnerships and joint ventures
in which the Company has at least a 40% ownership interest and over which it
exercises substantial legal, financial and operational control. References
to "Managed Inns" are to those inns in which the Company owns less than a
40% interest and which are managed by the Company under long-term management
contracts.
On June 15, 1995, AEW Partners, L.P. ("AEW") notified the Company that
it would exercise, subject to certain conditions, its option to convert
two-thirds of its ownership interest in La Quinta Development Partners, L.P.
("LQDP") into 5,299,821 shares of the Company's Common Stock. AEW also
agreed to sell the remaining one-third of its ownership interest in LQDP to
the Company for a negotiated price of $48.2 million in cash (collectively,
the "AEW Transaction"). The AEW Transaction was consummated on July 3,
1995. Upon conversion of the partnership interest into La Quinta Common
Stock, the Company issued 5,299,821 shares of the Company's Common Stock
having a fair market value of $142.8 million based on the July 3, 1995 New
York Stock Exchange closing price. During the third quarter of 1995, the
Company will record net assets acquired at their fair market value of $96.4
million and a non-cash, non-recurring item of $46.4 million associated with
the exercise of AEW's conversion option as a deduction presented below net
earnings in the Statement of Operations (Conversion of Partner's Interest
into Common Stock) in arriving at net earnings available to common
shareholders. This non-recurring, non-cash item is directly attributable to
the AEW Transaction.
During the second quarter of 1994, the Company purchased the limited
partner's interest in one of its combined unincorporated joint ventures which
owned one inn. On July 1, 1994, the Company purchased nine inns which it
managed and which were previously held in two unincorporated joint ventures
with CIGNA Investments, Inc. (the "CIGNA partnerships"). The Company has
continued to operate these properties as La Quinta inns. Also during 1995
and 1994, La Quinta acquired nine and six additional inns, respectively, for
conversion to the La Quinta -Registered Trademark- brand.
During 1994, the Company entered into agreements with four Mexican
investor groups (the "Development Accord") for the purpose of developing 22
La Quinta inns in 15 cities in Mexico. Each of the inns will be developed
and 100% owned by a Mexican investor group and managed by the Company under
long-term management agreements (pursuant to which the Company will receive
management and licensing fees). On December 20, 1994, the Mexican government
allowed the peso to trade freely against the U.S. dollar. As a result, the
peso suffered a significant, immediate devaluation against the U.S. dollar.
This resulted in economic conditions that have delayed commencement of
construction of La Quinta inns under the Development Accord. The
construction of the first La Quinta inn under the Development Accord is
anticipated to begin when economic conditions in Mexico stabilize.
The following chart shows certain historical operating statistics and
revenue data. References to occupancy percentages and average daily rate
("ADR") refer to Company Inns (inns owned by the Company or by
unincorporated partnerships and joint ventures in which the Company owns at
least a 40% interest). Managed Inns and the La Quinta licensed inn are
excluded from occupancy and ADR statistics for all periods for purposes of
comparability. All financial data is related to Company Inns unless
otherwise specified.
COMPARATIVE OPERATING STATISTICS AND REVENUE DATA
-------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------- ---------------------
1995 1994 1995 1994
-------- ------- -------- --------
(amounts in thousands, except ADR)
Inn revenue.................... $107,938 $89,965 $202,661 $166,003
Restaurant rental and other.... 2,052 1,977 4,017 3,796
Management services............ 53 621 100 1,007
-------- ------- -------- --------
Total revenues............... $110,043 $92,563 $206,778 $170,806
-------- ------- -------- --------
-------- ------- -------- --------
Occupancy percentage........... 75.7% 74.5% 72.3% 70.0%
ADR............................ $ 51.24 $ 46.99 $ 50.87 $ 46.62
Available rooms (1)............ 2,684 2,475 5,305 4,900
_______________________
(1) Available rooms represent the number of rooms available for sale
multiplied by the number of days in the period reported.
9
The following table describes the composition of inns in the La Quinta
chain at:
PRO FORMA
JUNE 30, 1995 (1) JUNE 30, 1994
------------------------- ------------------------
LA QUINTA LA QUINTA
TOTAL EQUIVALENT TOTAL EQUIVALENT
INNS ROOMS ROOMS(2) INNS ROOMS ROOMS(2)
---- ----- -------- ---- ----- --------
Owned 100%........................228 29,352 29,352 167 21,144 21,144
Owned 40-80%...................... 7 836 467 46 6,363 2,681
---- ----- -------- ---- ----- --------
Total Company owned and operated..235 30,188 29,819 213 27,507 23,825
Managed inns...................... -- -- -- 10 1,324 12
Licensed inn...................... 1 120 -- 1 120 --
---- ----- -------- ---- ----- --------
236 30,308 29,819 224 28,951 23,837
---- ----- -------- ---- ----- --------
---- ----- -------- ---- ----- --------
(1) Includes the effect of the AEW Transaction described above as though the
transaction was completed on June 30, 1995.
(2) Represents the Company's proportionate ownership in system rooms.
THE 1995 THREE MONTHS COMPARED TO THE 1994 THREE MONTHS
TOTAL REVENUES increased to $110,043,000 in the 1995 Three Months from
$92,563,000 in the 1994 Three Months, an increase of $17,480,000, or 18.9%.
Of the total revenues reported in the 1995 Three Months, 98.1% were revenues
from inns and 1.9% were revenues from restaurant rentals and other revenues.
INN REVENUES are derived from room rentals and other sources such as
charges to guests for long-distance telephone service, fax machine use,
vending commissions, banquet revenues and laundry services. Inn revenues
improved to $107,938,000 in the 1995 Three Months from $89,965,000 in the
1994 Three Months, an increase of $17,973,000 or 20.0%. The improvement in
inn revenues was related to an increase in occupancy percentage and ADR along
with the revenues associated with the acquisition of nine inns during 1995,
the CIGNA partnerships in July 1994 and six inns since June 1994. Occupancy
percentage increased to 75.7% in the 1995 Three Months from 74.5% in the 1994
Three Months. ADR increased to $51.24 in the 1995 Three Months from $46.99
in the 1994 Three Months. Improvements in both ADR and occupancy percentage
are due, in part, to the substantial completion of the Company's image
enhancement program in mid-1994, as well as general improvements in the hotel
industry.
RESTAURANT RENTAL AND OTHER REVENUES include rental payments from
restaurant buildings owned by La Quinta and leased to and operated by third
parties. Restaurant rental and other revenues increased to $2,052,000 in the
1995 Three Months from $1,977,000 in the 1994 Three Months, an increase of
$75,000, or 3.8%. The increase is primarily the result of the additional
restaurant buildings owned by the Company through the acquisition of the
CIGNA partnerships.
MANAGEMENT SERVICES REVENUE is primarily related to fees earned by the
Company for services rendered in conjunction with Managed Inns. Management
services revenue decreased to $53,000 in the 1995 Three Months from $621,000
in the 1994 Three Months. The decrease is due to the acquisition of the
CIGNA partnerships in July 1994, eliminating the related management fees
earned by the Company.
DIRECT EXPENSES include costs directly associated with the operation of
Company Inns. In the 1995 Three Months approximately 42.0% of direct
expenses were represented by salaries, wages and related costs. Other major
categories of direct expenses include utilities, property taxes, repairs and
maintenance and room supplies. Direct expenses increased to $53,776,000
($26.47 per occupied room) in the 1995 Three Months from $48,484,000 ($26.31
per occupied room) in the 1994 Three Months. The increase in direct expenses
period over period is primarily attributable to the growth in number of inns
and increase in occupancy. The increase is also impacted by rising labor
costs in regions with low unemployment, increased credit card discounts
resulting from a shift to more credit card paying customers and increased
property taxes.
CORPORATE EXPENSES include the costs of general management, office
rent, training and field supervision of inn managers and other marketing and
administrative expenses. The major components of corporate expenses are
salaries, wages and related expenses and information systems. Corporate
expenses increased to $4,894,000 ($1.82 per available room) in the 1995 Three
Months from $4,428,000 ($1.71 per available room, including Managed Inns) in
the 1994 Three Months, an increase of $466,000, or 10.5%. The increase in
corporate expenses on a per available room basis is primarily the result of
increases in inn manager training, transportation expenses from recruiting
efforts and severance related costs for a former officer of the Company.
10
DEPRECIATION, AMORTIZATION AND FIXED ASSET RETIREMENTS increased to
$10,437,000 in the 1995 Three Months from $9,299,000 in the 1994 Three
Months, an increase of $1,138,000, or 12.2%. This is due primarily to
additions in fixed assets resulting from the acquisition of inns, including
the CIGNA partnerships, and from the image enhancement program.
Depreciation, amortization and fixed asset retirements also include
retirements associated with the image enhancement program and other capital
improvements.
As a result of the above, OPERATING INCOME increased to $40,936,000 in
the 1995 Three Months from $30,352,000 in the 1994 Three Months, an increase
of $10,584,000, or 34.9%. Additionally, operating margins were up 4.4
percentage points, to 37.2% from 32.8%.
INTEREST INCOME is primarily related to earnings on notes receivable and
on short-term investments of Company funds in money market instruments prior
to their use in operations or the acquisition of inns. Interest income
decreased to $299,000 in the 1995 Three Months from $632,000 in the 1994
Three Months, a decrease of $333,000.
INTEREST ON LONG-TERM DEBT increased to $9,839,000 in the 1995 Three
Months from $9,447,000 in the 1994 Three Months, an increase of $392,000, or
4.1%. The increase is primarily attributable to the increase in the
outstanding balance on the Company's credit facilities as a result of the
acquisitions of the CIGNA partnerships and fifteen inns since June 1994.
PARTNERS' EQUITY IN EARNINGS AND LOSSES reflects the interest of
partners in the earnings and losses of the combined joint ventures and
partnerships which are owned at least 40% and controlled by the Company.
Partners' equity in earnings and losses increased to $4,548,000 in the 1995
Three Months from $3,045,000 in the 1994 Three Months. The increase is
attributable to improvements in operating performance of inns and the
increase in the number of inns in LQDP. Occupancy for the LQDP inns
increased 3.4 percentage points and ADR increased by $3.50 in the 1995 Three
Months compared to the 1994 Three Months. As of June 30, 1995, LQDP owned
and operated 47 inns, compared to 37 inns at June 30, 1994.
INCOME TAXES for the 1995 Three Months were calculated using an
effective income tax rate of 37.8% compared to an effective income tax rate
of 39% for the 1994 Three Months. The Company estimates that its annual
effective income tax rate will be 38.1% in 1995, which reflects the impact of
the difference between aggregate recorded cost and tax basis of acquired
assets from the AEW Transaction. The reduction in the annual effective
income tax rate also reflects a reduction of estimated state income tax
expense.
For the reasons discussed above, the Company reported NET EARNINGS of
$16,691,000, or $.34 per share, in the 1995 Three Months compared to
$11,280,000, or $.23 per share, in the 1994 Three Months, an increase in net
earnings of $5,411,000, or 48.0%.
THE 1995 SIX MONTHS COMPARED TO THE 1994 SIX MONTHS
TOTAL REVENUES increased to $206,778,000 in the 1995 Six Months from
$170,806,000 in the 1994 Six Months, an increase of $35,972,000 or 21.1%. Of
the total revenues reported in the 1995 Six Months, 98.0% were revenues from
inns and 2.0% were revenues from restaurant rentals and other revenues.
INN REVENUES improved to $202,661,000 in the 1995 Six Months from
$166,003,000 in the 1994 Six Months, an increase of $36,658,000, or 22.1%.
The improvement in inn revenues was related to an increase in occupancy
percentage and ADR along with the revenues associated with the acquisition of
nine inns in the 1995 Six Months, the CIGNA partnerships in July 1994 and six
inns in the last half of 1994. Occupancy percentage increased to 72.3% in
the 1995 Six Months from 70.0% in the 1994 Six Months. ADR increased to
$50.87 in the 1995 Six Months from $46.62 in the 1994 Six Months.
Improvements in both ADR and occupancy percentage are due, in part, to the
substantial completion of the Company's image enhancement program in
mid-1994, as well as general improvements in the hotel industry. In the 1994
Six Months, the image enhancement program had only been partially completed.
RESTAURANT RENTAL AND OTHER REVENUES increased to $4,017,000 in the 1995
Six Months from $3,796,000 in the 1994 Six Months, an increase of $221,000,
or 5.8%. The increase is primarily the result of the additional restaurant
buildings owned by the Company through the acquisition of the CIGNA
partnerships.
MANAGEMENT SERVICES REVENUE decreased to $100,000 in the 1995 Six Months
from $1,007,000 in the 1994 Six Months. The decrease is due to the
acquisition of the CIGNA partnerships in July 1994, eliminating the related
management fees earned by the Company.
11
Approximately 42.2% of DIRECT EXPENSES were represented by salaries,
wages and related costs. Direct expenses increased to $103,128,000 ($26.88
per occupied room) in the 1995 Six Months from $93,149,000 ($27.18 per
occupied room) in the 1994 Six Months. The increase in direct expenses
period over period is primarily attributable to the growth in number of inns
and increase in occupancy. The improvement in direct expenses per occupied
room was primarily due to efficiencies the Company achieved in labor costs,
repairs and maintenance and utilities expense and was partially offset by
rising labor costs in regions with low unemployment, increased credit card
discounts resulting from a higher percentage of guests paying with credit
cards and increased property taxes.
CORPORATE EXPENSES increased to $9,392,000 ($1.77 per available room) in
the 1995 Six Months from $9,256,000 ($1.81 per available room, including
Managed Inns) in the 1994 Six Months, an increase of $136,000, or 1.5%. The
decrease in corporate expenses on a per available room basis is the result of
the Company's efforts to control fixed costs, while executing its growth plan
in order to increase operating profit.
DEPRECIATION, AMORTIZATION AND FIXED ASSET RETIREMENTS increased to
$20,630,000 in the 1995 Six Months from $17,772,000 in the 1994 Six Months,
an increase of $2,858,000, or 16.1%. This is due primarily to the increase
in fixed assets resulting from the acquisition of inns, including the CIGNA
partnerships, and additions from the image enhancement program.
Depreciation, amortization and fixed asset retirements also include
retirements associated with the image enhancement program and other capital
improvements.
As a result of the above, OPERATING INCOME increased to $73,628,000 in
the 1995 Six Months from $50,629,000 in the 1994 Six Months, an increase of
$22,999,000, or 45.4%. Additionally, operating margins were up 6.0
percentage points, to 35.6% from 29.6%.
INTEREST INCOME decreased to $579,000 in the 1995 Six Months from
$1,069,000 in the 1994 Six Months, a decrease of $490,000.
INTEREST ON LONG-TERM DEBT increased to $20,383,000 in the 1995 Six
Months from $18,599,000 in the 1994 Six Months, an increase of $1,784,000, or
9.6%. The increase is primarily attributable to the increase in the
outstanding balance on the Company's credit facilities as a result of the
acquisitions of the CIGNA partnerships and 15 inns since June 1994.
PARTNERS' EQUITY IN EARNINGS AND LOSSES increased to $8,976,000 in the
1995 Six Months from $5,522,000 in the 1994 Six Months. The increase is
attributable to improvements in operating performance of the inns and the
increase in the number of inns in LQDP. Occupancy for the LQDP inns
increased 4.8 percentage points and ADR increased by $3.78 in the 1995 Six
Months compared to the 1994 Six Months. As of June 30, 1995, LQDP owned and
operated 47 inns, compared to 37 inns at June 30, 1994.
INCOME TAXES for the 1995 Six Months were calculated using an effective
income tax rate of 38.1% compared to an effective income tax rate of 39.0%
for the 1994 Six Months. The effective income tax rate decrease reflects the
estimated impact of the AEW Transaction as further described above and a
reduction of estimated state income tax expense.
For the reasons discussed above, the Company reported NET EARNINGS of
$27,761,000, or $0.56 per share, in the 1995 Six Months compared to
$16,822,000, or $0.35 per share, in the 1994 Six Months, an increase in net
earnings of $10,939,000, or 65.0%.
ANALYSIS OF CASH FLOWS
- ----------------------
At June 30, 1995, the Company had $6,694,000 of cash and cash
equivalents, an increase of $4,105,000 from December 31, 1994. As of June
30, 1995, the Company had $74,650,000 available on its existing credit
facilities, including the Unsecured Line of Credit in LQDP. This amount was
reduced to $26,450,000 on July 3, 1995 following the drawings to finance the
AEW Transaction discussed above.
Net cash from operations improved to $66,566,000 in the 1995 Six Months
from $41,400,000 in the 1994 Six Months, an increase of $25,166,000, or
60.8%. The increase is the result of the improvement in inn revenue and
operating margins.
Net cash used by investing activities decreased to ($55,233,000) in
the 1995 Six Months from ($82,772,000) in the 1994 Six Months, a decrease
of $27,539,000, or 33.3%. The 1995 Six Months and 1994 Six Months capital
expenditures include the purchase of nine inns and six inns, respectively.
The 1994 Six Months capital expenditures also include expenditures of
approximately $40,103,000 related to the Company's image enhancement
program and the purchase of the remaining Units of La Quinta Motor Inns
Limited Partnership.
12
Net cash used by financing activities was ($7,228,000) in the 1995 Six
Months compared to net cash provided by financing activities of $18,998,000
in the 1994 Six Months. Payments on the Company's credit facilities, an
increase in dividends to shareholders and a reduction in the proceeds
received on the Company's credit facilities and long-term borrowings
contributed to the increase in cash used by financing activities.
EBITDA increased to $51,373,000 during the second quarter of 1995, an
increase of 29.6% over the 1994 comparable period. EBITDA, as used above, is
defined by the Company's debt covenants as earnings before net interest
expense, income taxes, depreciation, amortization and fixed asset
retirements, partners' equity in earnings and losses and loss on property
transactions. The Company believes this definition of EBITDA provides a
meaningful measure of its ability to service debt.
Capital expenditures planned by La Quinta for 1995 focus on acquisition
and conversion of existing inns and construction of inns in markets where
existing inns for acquisition and conversion are not readily available. The
estimated additional cost to complete the conversion and renovation of inns
for which commitments have been made is $9,716,000 at June 30, 1995.
The Company broke ground for the new construction of one inn in June
1995 and one inn in July 1995. The Company is committed to approximately
$12,773,000 for the completion of these inns.
Funds on hand, internally generated future cash flows and funds
available on the Company's credit facilities will be sufficient to meet
capital requirements, as well as operating expenses and debt service
requirements through at least the second quarter of 1996. From time to time,
the Company will continue to evaluate the necessity of other financing
alternatives.
13
Independent Accountants' Review Report
--------------------------------------
The Board of Directors
La Quinta Inns, Inc.:
We have reviewed the combined condensed balance sheet of La Quinta Inns, Inc.
as of June 30, 1995, and the related combined condensed statements of
operations for the three-month and six-month periods ended June 30, 1995 and
1994 and cash flows for the six-month periods ended June 30, 1995 and 1994.
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, 1994 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 23, 1995, we expressed an unqualified opinion on
those combined financial statements. In our opinion, the information set
forth in the accompanying combined condensed balance sheet as of December 31,
1994, is fairly stated, in all material respects, in relation to the combined
balance sheet from which it has been derived.
KPMG Peat Marwick LLP
San Antonio, Texas
July 20, 1995
14
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 4 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
At the annual Shareholder's Meeting on May 25, 1995, the Company
submitted to a vote to its shareholders the election of the following persons
to serve as Directors of the Company until the 1996 Shareholder's Meeting.
NUMBER OF VOTES
---------------
Name of Nominee For Withheld
--------------- --- --------
Joseph F. Azrack 41,332,996 115,458
William H. Cunningham 41,411,209 37,245
Donald J. McNamara 41,332,264 116,190
Gary L. Mead 41,330,946 117,508
Peter Sterling 41,330,979 117,475
Thomas M. Taylor 41,333,200 115,254
Additionally, the shareholders approved the appointment of KPMG Peat
Marwick, LLP as the Company's Independent Public Accountants by a vote of
41,432,922 "For", 8,259 "Against" and 7,273 "Abstain".
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
July 25, 1995
27 Filed Herewith Financial Data Schedule
(b) Reports on Form 8-K:
Registrant filed one Current Report on Form 8-K, dated June 15, 1995
with the Securities and Exchange Commission, which reported under Item 5 the
Company's acquisition of the limited partnership interest in La Quinta
Development Partners, L.P. from AEW Partners, L.P.
15
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)
July 26, 1995 By: /S/ William C. Hammett, Jr.
------------------------------
William C. Hammett, Jr.
Senior Vice President -
Accounting and Administration
July 26, 1995 By: /S/ Irene C. Primera
------------------------------
Irene C. Primera
Vice President - Controller
16