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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, 1996.
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, 1996:
78,259,233
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LA QUINTA INNS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
September 30, 1996 December 31, 1995
------------------ -----------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,087 $ 2,590
Receivables (net of allowance of $140 and $118) . . . . . . . . . . . . . . . 14,837 12,789
Supplies and prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,070 9,602
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,839 8,981
---------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,833 33,962
---------- --------
Notes receivable, excluding current installments (net of allowance of $2,068
and $2,171) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,139 3,240
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . 1,065,412 915,750
Deferred charges and other assets, at cost less applicable amortization. . . . 10,474 11,163
---------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,112,858 $964,115
---------- --------
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt. . . . . . . . . . . . . . . . . . . . $ 22,622 $ 13,322
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,481 32,758
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,104 40,915
---------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 94,207 86,995
---------- --------
Long-term debt, excluding current installments . . . . . . . . . . . . . . . . 619,207 518,416
Deferred income taxes, pension and other . . . . . . . . . . . . . . . . . . . 22,202 20,682
Partners' capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,777 6,309
Shareholders' equity:
Common stock ($.10 par value per share; 100,000 shares authorized; 83,984
and 54,883 shares issued). . . . . . . . . . . . . . . . . . . . . . . . . . 8,398 5,488
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . 237,210 222,221
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181,050 133,745
Treasury stock, at cost (5,725 and 2,849 shares). . . . . . . . . . . . . . . (53,193) (29,741)
---------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . 373,465 331,713
---------- --------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . $1,112,858 $964,115
---------- --------
---------- --------
See accompanying notes to condensed financial statements.
2
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended Nine months ended
September 30 September 30
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
Revenues:
Inn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $119,907 $111,738 $334,468 $314,399
Restaurant rental and other. . . . . . . . . . . . . . . . . . . 1,995 2,168 6,214 6,285
-------- -------- -------- --------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . 121,902 113,906 340,682 320,684
-------- -------- -------- --------
Operating costs and expenses:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,853 56,086 165,488 159,214
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,722 4,574 13,513 13,966
Depreciation, amortization and asset retirements . . . . . . . . 12,390 10,131 35,149 30,761
Provision for premature retirement of assets . . . . . . . . . . 3,141 8,577 12,203 8,577
-------- -------- -------- --------
Total operating costs and expenses. . . . . . . . . . . . . . 78,106 79,368 226,353 212,518
-------- -------- -------- --------
Operating income. . . . . . . . . . . . . . . . . . . . . . . 43,796 34,538 114,329 108,166
-------- -------- -------- --------
Other expense:
Interest on long-term debt, net. . . . . . . . . . . . . . . . . 10,685 9,781 31,045 29,585
Partners' equity in earnings . . . . . . . . . . . . . . . . . . 336 635 1,264 9,611
-------- -------- -------- --------
Earnings before income taxes and extraordinary
items . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,775 24,122 82,020 68,970
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,126 9,190 30,347 26,277
-------- -------- -------- --------
Earnings before extraordinary items . . . . . . . . . . . . . 20,649 14,932 51,673 42,693
Extraordinary items, net of income taxes . . . . . . . . . . . . . (165) (717) (409) (717)
-------- -------- -------- --------
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . 20,484 14,215 51,264 41,976
Conversion of partner's interest into common stock . . . . . . . . -- (46,364) -- (46,364)
-------- -------- -------- --------
Net earnings (loss) available to shareholders . . . . . . . . $ 20,484 $(32,149) $ 51,264 $ (4,388)
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per common and common equivalent
share:
Earnings (loss) after conversion of partner's interest
into common stock and before extraordinary items . . . . . . $ .25 $ (.38) $ .64 $ (.05)
Extraordinary items, net of income taxes. . . . . . . . . . . -- (.01) (.01) (.01)
-------- -------- ------- --------
Net earnings (loss) available to shareholders . . . . . . . . $ .25 $ (.39) $ .63 $ (.06)
-------- -------- ------- --------
-------- -------- ------- --------
Weighted average number of common and common
equivalent shares outstanding, as restated . . . . . . . . . . . 81,083 82,303 80,945 76,690
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to condensed financial statements.
3
ITEM I - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Common Stock Treasury Stock Additional Minimum
------------- -------------- Paid-In Retained Pension
Shares Amount Shares Amount Capital Earnings Liability Total
------ ------ ------ -------- -------- -------- ------- --------
Balances at December 31, 1994. . . . . . . . 48,759 $4,876 (2,361) ($17,339) $ 68,759 $134,409 ($1,474) $189,231
Exercise of stock options . . . . . . . . . 824 82 (6) (158) 11,228 -- -- 11,152
Purchase of treasury stock. . . . . . . . . -- -- (482) (12,244) -- -- -- (12,244)
Conversion of partner's interest into
common stock . . . . . . . . . . . . . . . 5,300 530 -- -- 142,234 (46,364) -- 96,400
Dividends paid. . . . . . . . . . . . . . . -- -- -- -- -- (4,957) -- (4,957)
Net earnings. . . . . . . . . . . . . . . . -- -- -- -- -- 50,657 -- 50,657
Minimum pension liability . . . . . . . . . -- -- -- -- -- -- 1,474 1,474
------ ------ ------ -------- -------- -------- ------- --------
Balances at December 31, 1995. . . . . . . . 54,883 5,488 (2,849) (29,741) 222,221 133,745 -- 331,713
Effect of stock split on July 15, 1996. . . 27,678 2,768 (1,735) -- (2,768) -- -- --
Exercise of stock options . . . . . . . . . 1,423 142 (2) (46) 17,757 -- -- 17,853
Purchase of treasury stock. . . . . . . . . -- -- (1,139) (23,406) -- -- -- (23,406)
Dividends paid. . . . . . . . . . . . . . . -- -- -- -- -- (3,959) -- (3,959)
Net earnings. . . . . . . . . . . . . . . . -- -- -- -- -- 51,264 -- 51,264
------ ------ ------ -------- -------- -------- ------- --------
Balances at September 30, 1996,
unaudited . . . . . . . . . . . . . . . . . 83,984 $8,398 (5,725) ($53,193) $237,210 $181,050 $ -- $373,465
------ ------ ------ -------- -------- -------- ------- --------
------ ------ ------ -------- -------- -------- ------- --------
See accompanying notes to condensed financial statements.
4
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine months ended
September 30
-----------------
1996 1995
---- ----
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,264 $ 41,976
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Non-cash items:
Depreciation, amortization and asset retirements . . . . . . . . . . . 35,149 30,761
Provision for premature retirement of assets . . . . . . . . . . . . . 12,203 8,577
Partners' equity in earnings . . . . . . . . . . . . . . . . . . . . . 1,264 9,611
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,156) (3,122)
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,879 9,338
Supplies and prepayments . . . . . . . . . . . . . . . . . . . . . . . (321) (108)
Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . 5,152 9,702
Deferred charges and other assets. . . . . . . . . . . . . . . . . . . 1,453 526
Deferred credits and other . . . . . . . . . . . . . . . . . . . . . . 1,520 1,107
--------- ---------
Net cash provided by operating activities. . . . . . . . . . . . . . 112,407 108,368
--------- ---------
Cash flows from investing activities:
Construction, purchase and conversion of inns. . . . . . . . . . . . . . . (100,752) (56,658)
Other capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (90,586) (19,088)
Purchase of partners' equity interests . . . . . . . . . . . . . . . . . . (8,578) (48,200)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 5,820
--------- ---------
Net cash used by investing activities. . . . . . . . . . . . . . . . (199,757) (118,126)
--------- ---------
Cash flows from financing activities:
Proceeds from line of credit and long-term borrowings. . . . . . . . . . . 464,977 532,394
Principal payments on line of credit and long-term borrowings. . . . . . . (359,783) (520,640)
Capital distributions to partners. . . . . . . . . . . . . . . . . . . . . (950) (2,181)
Dividends to shareholders. . . . . . . . . . . . . . . . . . . . . . . . . (3,959) (3,655)
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . (23,406) (102)
Net proceeds from stock transactions . . . . . . . . . . . . . . . . . . . 8,968 5,043
--------- ---------
Net cash provided by financing activities. . . . . . . . . . . . . . 85,847 10,859
--------- ---------
(Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . (1,503) 1,101
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . 2,590 2,589
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . $ 1,087 $ 3,690
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,077 $ 29,098
Income tax paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,865 15,852
Supplemental schedule of non-cash investing and financing activities:
Tax benefit from stock options exercised . . . . . . . . . . . . . . . . . . $ 8,885 $ 5,654
Effect of stock split. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,768 --
Note issued in purchase of partners' equity interest . . . . . . . . . . . . 2,510 --
Adjustment to carrying value of property and equipment . . . . . . . . . . . -- 51,081
Conversion of partner's interest into common stock . . . . . . . . . . . . . -- 46,364
See accompanying notes to condensed financial statements.
5
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited 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 condensed financial
statements should be read in conjunction with the financial statements and notes
thereto included in the December 31, 1995 Annual Report on Form 10-K.
(2) Property and Equipment
At September 30, 1996 and December 31, 1995, property and equipment
consisted of the following:
September 30, 1996 December 31, 1995
------------------ -----------------
(Unaudited)
Buildings . . . . . . . . . . . . . . . . . . . . . . . $ 962,044 $ 864,605
Furniture, fixtures and equipment . . . . . . . . . . . 143,572 121,032
Land and leasehold improvements . . . . . . . . . . . . 180,338 174,165
Construction in progress. . . . . . . . . . . . . . . . 76,663 29,862
---------- ----------
Total property and equipment . . . . . . . . . . . . . 1,362,617 1,189,664
Less accumulated depreciation and amortization. . . . . 297,205 273,914
---------- ------------
Net property and equipment . . . . . . . . . . . . . . $1,065,412 $ 915,750
---------- ------------
---------- ------------
(3) Earnings per Common and Common Equivalent Share
On June 13, 1996, the Board of Directors authorized a three-for-two split
of the Company's common stock effected in the form of a stock dividend. The
stock dividend was paid on July 15, 1996 to shareholders of record on June 24,
1996. Earnings per share, the weighted average number of shares outstanding and
shareholders' equity have been adjusted to give effect to the stock split. The
Company's cash dividends declared subsequent to the stock split are at an annual
rate of $.07 per share on post-split common shares, payable under its quarterly
dividend policy, as authorized by its Board of Directors.
Fully diluted earnings per share is not materially different than primary
earnings per share.
(4) Accounts Payable and Accrued Expenses
At September 30, 1996 and December 31, 1995, accounts payable and accrued
expenses consisted of the following:
September 30, 1996 December 31, 1995
------------------ -----------------
(Unaudited)
Accounts payable:
Trade . . . . . . . . . . . . . . . . . . . . . . $14,631 $13,695
Construction. . . . . . . . . . . . . . . . . . . 5,420 9,666
Other . . . . . . . . . . . . . . . . . . . . . . 5,618 6,437
Income taxes. . . . . . . . . . . . . . . . . . . 812 2,960
------- -------
$26,481 $32,758
------- -------
------- -------
Accrued expenses:
Payroll and employee benefits . . . . . . . . . . $24,612 $25,201
Interest. . . . . . . . . . . . . . . . . . . . . 6,909 4,845
Property taxes. . . . . . . . . . . . . . . . . . 11,747 9,640
Other . . . . . . . . . . . . . . . . . . . . . . 1,836 1,229
------- -------
$45,104 $40,915
------- -------
------- -------
6
(5) Long-Term Debt
In September 1996, the Company renewed its $50 million 364-Day Bank
Unsecured Line of Credit.
In March 1996, the Company completed an offering of $100,000,000 in
principal amount of 7.25% Senior Unsecured Notes with an effective interest rate
of 7.19%, maturing March 2004. The proceeds of the note offering were used to
repay indebtedness under the Company's Bank Unsecured Credit Facilities.
During 1996, the Company has prepaid approximately $13,950,000 of long-term
mortgage debt and industrial development revenue bonds. As a result of the
early extinguishment of this debt, the Company recognized extraordinary items of
$649,000 ($409,000, net of tax) from prepayment fees.
(6) Provision for Premature Retirement of Assets
The Company launched its Gold Medal-TM- rooms program during the third
quarter of 1995. During this program, the Company will be replacing certain
furniture and fixtures before the end of their normal useful life and has
therefore, made adjustments to reflect shorter remaining lives. As a result,
the Company will record non-cash provisions for premature retirement of assets
totaling approximately $27.8 million, of which $24.8 million has been reported
to date. The Company reported non-cash charges related to the premature
retirement of these assets of approximately $3.1 million as a separate line item
entitled provision for premature retirement of assets on the Statement of
Operations for the current quarter.
(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
"La Quinta Defendants"). The suit alleges that in 1991 there was a 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.
On March 5, 1996, the U.S. Magistrate Judge recommended to the U.S. District
Court that the Company's motion for summary judgment be granted. On
September 17, 1996, the Court adopted in full the Magistrate's findings and
recommendations, granting the Company summary judgment as to all of the
plaintiff's claims but one. As to this remaining issue, the Court has
allowed the plaintiff the opportunity to amend his complaint. Damages which
would be available on the remaining issue are significantly reduced from
those discussed above, and exemplary damages are no longer available. The
Company will continue 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.
(8) Subsequent Event
During October 1996, the Company issued $50,000,000 in principal amount of
7.11% Medium Term Notes with an effective interest rate of 7.21%, maturing
October 2001. The proceeds of the note issuance were used to repay indebtedness
under the Company's Bank Unsecured Credit Facilities.
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 September 30, 1996 (the "1996 Three Months")
and September 30, 1995 (the "1995 Three Months") and the nine month periods
ended September 30, 1996 (the "1996 Nine Months") and September 30, 1995 (the
"1995 Nine 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 50% interest, and in one case a 40% interest
during the 1995 Nine Months, and over which it exercises substantial legal,
financial and operational control.
7
The following table describes the composition of inns in the La Quinta
chain at:
September 30, 1996 December 31, 1995
------------------------------- ------------------------------
La Quinta La Quinta
Equivalent Equivalent
Inns Rooms Rooms (1) Inns Rooms Rooms (1)
---- ----- ---------- ---- ----- ----------
Owned 100% (2) . . . . . . . . . . . . . 238 30,787 30,787 230 29,522 29,522
Owned 50-67% . . . . . . . . . . . . . . 4 477 268 7 836 467
--- ------ ------ --- ------ ------
Total Company owned and operated . . . . 242 31,264 31,055 237 30,358 29,989
--- ------ ------ --- ------ ------
--- ------ ------ --- ------ ------
(1) Represents the Company's proportionate ownership in system rooms.
(2) At December 31, 1995 includes two inns acquired in 1995 that were closed
for conversion to the La Quinta-Registered Trademark- brand and re-opened
during 1996.
In recent years, growth in inn count has resulted from the acquisition
and conversion of inns to the La Quinta brand. Although acquisitions may
continue in markets where inns for acquisition and conversion are available
at attractive discounts to replacement costs, the Company's growth program
will be based primarily on the construction of new inns. Five newly
constructed inns and one acquired inn with a total of 834 rooms were opened
during the 1996 Three Months. The Company anticipates opening a total of 36
inns by the end of 1997.
During 1995, the Company launched its Gold Medal-TM- rooms program
designed to strengthen the Company's ability to gain additional market share and
pricing advantage relative to its competitors. The program is intended to
improve the quality, functionality and value of guest rooms by enhancing the
decor package, including fresh, new colors, rich wood furniture, contemporary
bathrooms, built-in closets, oversized desks, 25 inch televisions and new
draperies and bedspreads. Service enhancements include movies-on-demand,
interactive video games from Nintendo, dataport telephones for computer
connections and greatly expanded free television channel choices. Guest
feedback has been very positive resulting in an acceleration of the program.
At October 31, 1996, the Company had completed approximately 14,000
rooms under the Gold Medal rooms program. A total of 109 inns had been
completed, while 24 inns were undergoing construction related to the program.
The Company is on schedule to complete most markets by April 1997. The program
requires 20-30 rooms at a time to be taken out of available supply at an inn
during the construction period. Construction activities at each inn are
typically completed within 10-12 weeks. Occupancy is negatively impacted for a
period of time following completion of construction. The Company does not
adjust its available rooms or occupancy percentage for rooms unavailable to rent
due to construction as a result of this program.
During the 1996 Nine Months, the Company acquired the limited
partners' interest in three of its combined unincorporated partnerships and
joint ventures, which each owned one inn. One additional limited partner's
interest was acquired during October 1996. As a result, the Company now has
three remaining unincorporated partnerships and joint ventures, each owning one
inn.
THE 1996 THREE MONTHS COMPARED TO THE 1995 THREE MONTHS
TOTAL REVENUES increased to $121,902,000 in the 1996 Three Months from
$113,906,000 in the 1995 Three Months, an increase of $7,996,000, or 7.0%. Of
the total revenues reported in the 1996 Three Months, 98.4% were revenues from
inns and 1.6% 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 and movie commissions, banquet revenues and laundry services. Inn
revenues improved to $119,907,000 in the 1996 Three Months from $111,738,000
in the 1995 Three Months, an increase of $8,169,000, or 7.3%. The
improvement in inn revenues reflects an increase in the average daily room
rate ("ADR") and the opening of inns. ADR increased to $54.97 in the 1996
Three Months from $51.76 in the 1995 Three Months, an increase of $3.21, or
6.2%. Occupancy percentage decreased to 73.5% in the 1996 Three Months from
75.8% in the 1995 Three Months. The decrease in occupancy percentage
primarily resulted from a significant number of rooms that were unavailable
to rent because of construction related to the Gold Medal rooms program.
Revenue per available room ("REVPAR," which is the product of occupancy
percentage and ADR) increased 3.0% to $40.40 in the 1996 Three Months from
$39.23 in the 1995 Three Months.
8
RESTAURANT RENTAL AND OTHER REVENUES primarily include rental payments
from restaurant buildings owned by La Quinta and leased to and operated by third
parties. Restaurant rental and other revenues decreased to $1,995,000 in the
1996 Three Months from $2,168,000 in the 1995 Three Months, a decrease of
$173,000, or 8.0%.
DIRECT EXPENSES include costs directly associated with the operation of
inns. Major categories of direct expenses are salaries, wages and related
costs, utilities, property taxes, repairs and maintenance and room supplies.
Direct expenses increased to $57,853,000 in the 1996 Three Months from
$56,086,000 in the 1995 Three Months, an increase of $1,767,000, or 3.2%.
The increase in direct expenses period over period is primarily attributable
to growth in the number of inns and also reflects additional amenities
provided to guests. As a percentage of total revenues, direct expenses
decreased to 47.5% in the 1996 Three Months from 49.2% in the 1995 Three
Months.
CORPORATE EXPENSES include the costs of general management, office rent,
training and field supervision of inn managers and other marketing and
administrative expenses. Corporate expenses increased to $4,722,000 in the
1996 Three Months from $4,574,000 in the 1995 Three Months, an increase of
$148,000, or 3.2%.
DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS increased to
$12,390,000 in the 1996 Three Months from $10,131,000 in the 1995 Three
Months, an increase of $2,259,000, or 22.3%. This increase is primarily
attributable to the opening of inns and increased depreciation for inns which
have completed the Gold Medal rooms program.
A PROVISION FOR PREMATURE RETIREMENT OF ASSETS totaling $3,141,000 was
recorded during the 1996 Three Months compared to $8,577,000 recorded during
the 1995 Three Months. This non-cash charge is directly attributable to the
Company's Gold Medal rooms program. During the program, the Company will be
replacing certain furniture and fixtures before the end of their normal
useful lives and has therefore made adjustments to reflect shorter remaining
lives.
As a result of the above, OPERATING INCOME increased to $43,796,000 in
the 1996 Three Months from $34,538,000 in the 1995 Three Months, an increase
of $9,258,000, or 26.8%. Operating income before the provision for premature
retirement of assets increased to $46,937,000 in the 1996 Three Months from
$43,115,000 in the 1995 Three Months, an increase of $3,822,000, or 8.9%.
INTEREST ON LONG-TERM DEBT, NET increased to $10,685,000 in the 1996
Three Months compared to $9,781,000 in the 1995 Three Months, an increase of
$904,000, or 9.2%. The increase in interest on long-term debt, net is
primarily attributable to the increase in long-term debt and is partially
offset by an increase in capitalized interest. Interest on long-term debt,
net includes capitalized interest of $1,369,000 in the 1996 Three Months
compared to $429,000 in the 1995 Three Months. The increase in capitalized
interest period over period is primarily due to the construction of inns.
PARTNERS' EQUITY IN EARNINGS reflects the interest of partners in the
earnings of the combined unincorporated partnerships and joint ventures which
are owned at least 40% and controlled by the Company. Partners' equity in
earnings decreased to $336,000 in the 1996 Three Months from $635,000 in the
1995 Three Months, a decrease of $299,000. This decrease reflects the
Company's acquisition of the limited partners' interest in three of its
combined unincorporated partnerships and joint ventures during 1996.
INCOME TAXES for the 1996 Three Months were calculated using an
effective income tax rate of 37.0% compared to an effective income tax rate
of 38.1% for the 1995 Three Months. The reduction in the annual effective
income tax rate is attributable to a difference between aggregate recorded
cost and tax basis of certain acquired assets and a reduction of estimated
state income tax expense.
EXTRAORDINARY ITEMS, NET OF TAX of ($165,000) were recorded during the
1996 Three Months and resulted primarily from prepayment fees related to the
early extinguishment of approximately $4,614,000 of long-term mortgage debt.
For the reasons discussed above, NET EARNINGS increased to $20,484,000
in the 1996 Three Months from $14,215,000 in the 1995 Three Months, an
increase of $6,269,000, or 44.1%. Net earnings before the provision for
premature retirement of assets and extraordinary items increased to
$22,628,000 in the 1996 Three Months from $20,241,000 in the 1995 Three
Months, an increase of $2,387,000, or 11.8%.
During the 1995 Three Months, the Company recorded a $46,364,000 charge
as CONVERSION OF PARTNER'S INTEREST INTO COMMON STOCK. This charge was a
non-recurring, non-cash item directly attributable to the acquisition of the
limited partnership interest in La Quinta Development Partners, L.P. during
July 1995.
9
NET EARNINGS (LOSS) AVAILABLE TO SHAREHOLDERS were $20,484,000, or .$25
per share, during the 1996 Three Months compared to ($32,149,000), or ($.39)
per share, in the 1995 Three Months.
THE 1996 NINE MONTHS COMPARED TO THE 1995 NINE MONTHS
TOTAL REVENUES increased to $340,682,000 in the 1996 Nine Months from
$320,684,000 in the 1995 Nine Months, an increase of $19,998,000, or 6.2%.
Of the total revenues reported in the 1996 Nine Months, 98.2% were revenues
from inns and 1.8% were revenues from restaurant rentals and other revenues.
INN REVENUES improved to $334,468,000 in the 1996 Nine Months from
$314,399,000 in the 1995 Nine Months, an increase of $20,069,000, or 6.4%.
The improvement in inn revenues reflects an increase in ADR and the opening
of inns. ADR increased to $54.01 in the 1996 Nine Months from $51.18 in the
1995 Nine Months, an increase of $2.83 or 5.5%. Occupancy percentage
decreased to 71.0% in the 1996 Nine Months from 73.5% in the 1995 Nine
Months. The decrease in occupancy percentage primarily resulted from a
significant number of rooms that were unavailable to rent because of
construction related to the Gold Medal rooms program. REVPAR increased 2.0%
to $38.36 in the 1996 Nine Months from $37.62 in the 1995 Nine Months.
RESTAURANT RENTAL AND OTHER REVENUES decreased to $6,214,000 in the 1996
Nine Months from $6,285,000 in the 1995 Nine Months, a decrease of $71,000.
DIRECT EXPENSES increased to $165,488,000 in the 1996 Nine Months from
$159,214,000 in the 1995 Nine Months. The increase in direct expenses period
over period is primarily attributable to growth in the number of inns and
also reflects additional amenities provided to guests. As a percentage of
total revenues, direct expenses decreased to 48.6% in the 1996 Nine Months
from 49.6% in the 1995 Three Months.
CORPORATE EXPENSES decreased to $13,513,000 in the 1996 Nine Months from
$13,966,000 in the 1995 Nine Months, a decrease of $453,000, or 3.2%.
DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS increased to
$35,149,000 in the 1996 Nine Months from $30,761,000 in the 1995 Nine Months,
an increase of $4,388,000, or 14.3%. This increase is primarily attributable
to the opening of inns and increased depreciation for inns which have
completed the Gold Medal rooms program.
A PROVISION FOR PREMATURE RETIREMENT OF ASSETS totaling $12,203,000 was
recorded during the 1996 Nine Months compared to $8,577,000 recorded during
the 1995 Nine Months. This non-cash charge is directly attributable to the
Company's Gold Medal rooms program. During the program, the Company will be
replacing certain furniture and fixtures before the end of their normal
useful lives and has therefore made adjustments to reflect shorter remaining
lives.
As a result of the above, OPERATING INCOME increased to $114,329,000
in the 1996 Nine Months from $108,166,000 in the 1995 Nine Months, an increase
of $6,163,000, or 5.7%. Operating income before the provision for premature
retirement of assets increased to $126,532,000 in the 1996 Nine Months from
$116,743,000 in the 1995 Nine Months, an increase of $9,789,000, or 8.4%.
INTEREST ON LONG-TERM DEBT, NET increased to $31,045,000 in the 1996
Nine Months compared to $29,585,000 in the 1995 Nine Months, an increase of
$1,460,000, or 4.9%. The increase in interest on long-term debt, net is
primarily attributable to the increase in long-term debt and is partially
offset by an increase in capitalized interest. Interest on long-term debt,
net includes capitalized interest of $3,596,000 in the 1996 Nine Months
compared to $817,000 in the 1995 Nine Months. The increase in capitalized
interest period over period is primarily due to the construction of inns.
PARTNERS' EQUITY IN EARNINGS decreased to $1,264,000 in the 1996 Nine
Months from $9,611,000 in the 1995 Nine Months, a decrease of $8,347,000.
This decrease is primarily attributable to the elimination of La Quinta
Development Partners, L.P. equity in earnings as a result of its acquisition
by the Company during the third quarter of 1995. The decrease also reflects
the Company's acquisition of the limited partners' interest in three of its
combined unincorporated partnerships and joint ventures during the 1996 Nine
Months.
INCOME TAXES for the 1996 Nine Months were calculated using an effective
income tax rate of 37.0% compared to an effective income tax rate of 38.1%
for the 1995 Nine Months. The reduction in the annual effective income tax
rate is attributable to a difference between aggregate recorded cost and tax
basis of certain acquired assets and a reduction of estimated state income
tax expense.
10
EXTRAORDINARY ITEMS, NET OF TAX of ($409,000) were recorded during the
1996 Nine Months and resulted primarily from prepayment fees related to the
early extinguishment of approximately $13,950,000 of long-term mortgage debt and
industrial development revenue bonds.
For the reasons discussed above, NET EARNINGS increased to $51,264,000
in the 1996 Nine Months from $41,976,000 in the 1995 Nine Months, an increase of
$9,288,000, or 22.1%. Net earnings before the provision for premature
retirement of assets and extraordinary items increased to $59,361,000 in the
1996 Nine Months from $48,002,000 in the 1995 Nine Months, an increase of
$11,359,000, or 23.7%.
During the 1995 Nine Months, the Company recorded a $46,364,000 charge
as CONVERSION OF PARTNER'S INTEREST INTO COMMON STOCK. This charge was a non-
recurring, non-cash item directly attributable to the acquisition of the limited
partnership interest in La Quinta Development Partners, L.P. during July 1995.
NET EARNINGS (LOSS) AVAILABLE TO SHAREHOLDERS were $51,264,000, or
$.63 per share, during the 1996 Nine Months compared to ($4,388,000), or ($.06)
per share, in the 1995 Nine Months.
CAPITAL RESOURCES AND LIQUIDITY
At September 30, 1996, the Company had a $200 million Bank Unsecured
Line of Credit and a $50 million 364-Day Bank Unsecured Line of Credit (the
"Bank Unsecured Credit Facilities"). The $200 million Bank Unsecured Line of
Credit matures August 2000 and the $50 million 364-Day Bank Unsecured Line of
Credit matures September 1997. At September 30, 1996, the Company had
$38,944,000 available on its Bank Unsecured Credit Facilities, net of $6,681,000
of letters of credit collateralizing its insurance programs and certain
mortgages. The Bank Unsecured Credit Facilities bear interest at the prime rate
or LIBOR, adjusted for an applicable margin, as defined under the related credit
agreements. The applicable margin is based upon predetermined levels of cash
flow to indebtedness or credit ratings received from specified credit rating
agencies, also as defined in the related credit agreements. At September 30,
1996, borrowings under the Bank Unsecured Credit Facilities bear interest at
LIBOR plus 45 basis points on $200,000,000 of outstanding borrowings and the
prime rate less 50 basis points on $4,375,000 of outstanding borrowings. The
Bank Unsecured Credit Facilities require an annual commitment fee of 20 basis
points on the $200 million Bank Unsecured Line of Credit and 15 basis points on
the $50 million 364-Day Bank Unsecured Line of Credit.
In March 1996, the Company completed an offering of $100,000,000 in
principal amount of 7.25% Senior Unsecured Notes with an effective interest rate
of 7.19%, maturing March 2004. The proceeds of the note offering were used to
repay indebtedness under the Company's Bank Unsecured Credit Facilities.
During October 1996, the Company issued $50,000,000 in principal
amount of 7.11% Medium Term Notes with an effective interest rate of 7.21%,
maturing October 2001. The proceeds of the note issuance were used to repay
indebtedness under the Company's Bank Unsecured Credit Facilities.
At September 30, 1996, the Company had $1,087,000 of cash and cash
equivalents compared with $3,690,000 at September 30, 1995.
Net cash provided by operations increased by $4,039,000 to
$112,407,000 at September 30, 1996 from $108,368,000 at September 30, 1995. The
net increase is primarily the result of improved earnings excluding non-cash
items.
Net cash used by investing activities increased by $81,631,000 from
September 30, 1995 to September 30, 1996. Net cash used by investing activities
reflects capital expenditures for the Company's Gold Medal rooms program,
expenditures for the Company's new inn construction projects and the acquisition
of the limited partners' interest in three of the Company's combined
unincorporated partnerships and joint ventures.
Net cash provided by financing activities increased by $74,988,000 to
$85,847,000 at September 30, 1996. Net borrowings increased to $105,194,000 for
the 1996 Nine Months compared to $11,754,000 for the 1995 Nine Months. The net
increase is primarily the result of borrowings used for capital expenditures
related to the Gold Medal rooms program, new inn construction and $23,406,000 of
cash used for the purchase of treasury stock.
11
EBITDA increased to $161,681,000 during the 1996 Nine Months, an
increase of 9.6% over the 1995 Nine Months. EBITDA is defined as earnings
before net interest expense, income taxes, depreciation, amortization and asset
retirements, provision for premature retirement of assets, partners' equity in
earnings, extraordinary items and conversion of partner's interest into common
stock. The Company believes this definition of EBITDA provides a meaningful
measure of its ability to service debt.
Capital expenditures planned by La Quinta for the remainder of 1996
and 1997 will focus on the completion of the Gold Medal rooms program and on the
construction of new inns. The capital requirements of these programs will be
funded through internally generated cash flows and amounts available on the Bank
Unsecured Credit Facilities and are not anticipated to have an adverse effect on
the Company's ability to fund its operations. At September 30, 1996, the
Company had made commitments of approximately $12.6 million for the Gold Medal
rooms program and approximately $82.9 million for the new inn construction
program.
Funds on hand, internally generated future cash flows and funds
available on the Company's Bank Unsecured Credit Facilities are expected to be
sufficient to meet capital requirements, as well as operating expenses and debt
service requirements through at least the third quarter of 1997. From time to
time, the Company will continue to evaluate the necessity of other financing
alternatives.
PRIVATE SECURITIES LITIGATION REFORM ACT
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Quarterly Report on Form 10-Q contains information that is forward-looking, such
as the timing and cost of the inn construction and Gold Medal rooms construction
programs, anticipated capital requirements and the results of legal proceedings.
Such forward-looking information involves risks and uncertainties that could
significantly affect expected results. These risks and uncertainties include,
but are not limited to, uncertainties relating to economic conditions, the
pricing and availability of construction materials and changes in the
competitive environment in which the Company operates. Further discussion of
these and additional factors which may cause expected results to differ from
actual results are included in the Company's Current Report on Form 8-K filed
with the Securities and Exchange Commission dated July 26, 1996.
12
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
La Quinta Inns, Inc.:
We have reviewed the condensed balance sheet of La Quinta Inns, Inc. as of
September 30, 1996, and the related condensed statements of operations for the
three-month and nine-month periods ended September 30, 1996 and 1995,
shareholders' equity for the nine-month period ended September 30, 1996 and cash
flows for the nine-month periods ended September 30, 1996 and 1995. These
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 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 balance sheet of La Quinta Inns, Inc. as of December 31, 1995 and
the related statements of operations, shareholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated January 22,
1996 we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed balance sheet
as of December 31, 1995 and accompanying condensed statement of shareholders'
equity for the year then ended, are fairly stated, in all material respects, in
relation to the respective financial statements from which they have been
derived.
KPMG Peat Marwick LLP
San Antonio, Texas
October 19, 1996
13
Part II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
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 that in 1991 there
was a 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. On March 5, 1996, the U.S. Magistrate Judge
recommended to the U.S. District Court that the Company's motion for summary
judgment be granted. On September 17, 1996, the Court adopted in full the
Magistrate's findings and recommendations, granting the Company summary
judgment as to all of the plaintiff's claims but one. As to this remaining
issue, the Court has allowed the plaintiff the opportunity to amend his
complaint. Damages which would be available on the remaining issue are
significantly reduced from those discussed above, and exemplary damages are
no longer available. The Company will continue to vigorously defend itself
against this suit.
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. 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:
Exhibit Description
------- -----------
12 Computation of Ratio of Earnings to Fixed Charges
filed herewith.
15 Letter from KPMG Peat Marwick LLP dated October
19, 1996 filed herewith.
27 Financial Data Schedule filed herewith.
(b) REPORTS ON FORM 8-K
Registrant filed two Current Reports on Form 8-K during the quarter
ended September 30, 1996 as follows:
(1) Dated July 26, 1996, to provide under Item 5 a cautionary
statement for purposes of the "safe-harbor" provisions of
the Private Securities Litigation Reform Act of 1995, and
(2) Dated September 16, 1996, to file under Item 7 the
Distribution Agreement, Officer's Certificate, Form of Fixed
Rate Note and Form of Floating Rate Note in connection with
the Company's Medium Term Notes Program.
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 12, 1996 By: /S/ William C. Hammett, Jr.
-------------------------------------
William C. Hammett, Jr.
Senior Vice President
Chief Financial Officer
November 12, 1996 By: /S/ Irene C. Primera
-------------------------------------
Irene C. Primera
Vice President - Controller
15