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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 JUNE 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 June 30, 1996,
giving effect to the three-for-two stock split in July 1996:
77,866,909
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LA QUINTA INNS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
June 30, 1996 December 31, 1995
------------- -----------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents .............................................. $ 2,209 $ 2,590
Receivables (net of allowance of $160 and $118) ........................ 16,343 12,789
Supplies and prepayments ............................................... 10,866 9,602
Deferred income taxes .................................................. 8,884 8,981
----------- -----------
Total current assets ................................................. 38,302 33,962
----------- -----------
Notes receivable, excluding current installments (net of allowance
of $2,108 and $2,171) .................................................. 3,209 3,240
Property and equipment, net ............................................... 1,011,294 915,750
Deferred charges and other assets, at cost less applicable amortization ... 11,186 11,163
----------- -----------
Total assets ......................................................... $ 1,063,991 $ 964,115
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ................................. $ 14,338 $ 13,322
Accounts payable ....................................................... 30,619 32,758
Accrued expenses ....................................................... 42,888 40,915
----------- -----------
Total current liabilities ............................................ 87,845 86,995
----------- -----------
Long-term debt, excluding current installments ............................ 597,414 518,416
Deferred income taxes, pension and other .................................. 20,911 20,682
Partners' capital ......................................................... 3,681 6,309
Shareholders' equity:
Common stock ($.10 par value per share; 100,000 shares
authorized; 83,073 and 54,883 shares issued) ......................... 8,307 5,488
Additional paid-in capital ............................................. 228,126 222,221
Retained earnings ...................................................... 161,941 133,745
Treasury stock, at cost (5,206 and 2,849 shares) ....................... (44,234) (29,741)
----------- -----------
Total shareholders' equity ........................................... 354,140 331,713
----------- -----------
Total liabilities and shareholders' equity ........................... $ 1,063,991 $ 964,115
=========== ===========
See accompanying notes to condensed financial statements.
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ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three months ended Six months ended
June 30 June 30
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Revenues:
Inn .................................................. $ 113,727 $ 107,938 $ 214,561 $ 202,661
Restaurant rental and other .......................... 2,295 2,105 4,219 4,117
---------- ---------- ---------- ----------
Total revenues .................................... 116,022 110,043 218,780 206,778
---------- ---------- ---------- ----------
Operating costs and expenses:
Direct ............................................... 54,744 53,776 107,635 103,128
Corporate ............................................ 4,141 4,894 8,791 9,392
Depreciation, amortization and asset retirements ..... 12,034 10,437 22,759 20,630
Provision for premature retirement of assets ......... 2,427 -- 9,062 --
---------- ---------- ---------- ----------
Total operating costs and expenses ................ 73,346 69,107 148,247 133,150
---------- ---------- ---------- ----------
Operating income .................................. 42,676 40,936 70,533 73,628
---------- ---------- ---------- ----------
Other expense:
Interest on long-term debt, net ...................... 10,195 9,540 20,360 19,804
Partners' equity in earnings ......................... 485 4,548 928 8,976
---------- ---------- ---------- ----------
Earnings before income taxes and extraordinary
items ............................................ 31,996 26,848 49,245 44,848
Income taxes ............................................ 11,839 10,157 18,221 17,087
---------- ---------- ---------- ----------
Earnings before extraordinary items ............... 20,157 16,691 31,024 27,761
Extraordinary items, net of income taxes ............... (244) -- (244) --
---------- ---------- ---------- ----------
Net earnings ...................................... $ 19,913 $ 16,691 $ 30,780 $ 27,761
========== ========== ========== ==========
Earnings per common and common equivalent share:
Earnings before extraordinary items ............... $ .25 $ .23 $ .38 $ .38
Extraordinary items, net of income taxes .......... -- -- -- --
---------- ---------- ---------- ----------
Net earnings ...................................... $ .25 $ .23 $ .38 $ .38
========== ========== ========== ==========
Weighted average number of common and common equivalent
shares outstanding, as restated ..................... 81,093 74,139 80,876 73,884
========== ========== ========== ==========
See accompanying notes to condensed financial statements.
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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) $189,231
Exercise of stock options ................ 824 82 (6) (158) 11,228 -- -- 11,152
Purchase of treasury stock ............... -- -- (482) (12,244) -- -- -- (12,244)
Conversion of partner's interest into
common stock ............................ 5,300 530 -- -- 142,234 (46,364) -- 96,400
Dividends paid ($.10 per share) .......... -- -- -- -- -- (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 ................ 512 51 (2) (46) 8,673 -- -- 8,678
Purchase of treasury stock ............... -- -- (620) (14,447) -- -- -- (14,447)
Dividends paid ($.05 per share) .......... -- -- -- -- -- (2,584) -- (2,584)
Net earnings ............................. -- -- -- -- -- 30,780 -- 30,780
------ ------ ------ -------- --------- --------- ------- --------
Balances at June 30, 1996, unaudited ...... 83,073 $8,307 (5,206) ($44,234) $228,126 $161,941 $ -- $354,140
====== ====== ====== ======== ========= ========= ======= ========
See accompanying notes to condensed financial statements.
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ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six months ended
June 30
------------------------
1996 1995
---------- ----------
Cash flows from operating activities:
Net earnings ........................................................... $ 30,780 $ 27,761
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Non-cash items:
Depreciation, amortization and asset retirements ................. 22,759 20,630
Provision for premature retirement of assets ..................... 9,062 --
Partners' equity in earnings ..................................... 928 8,976
Changes in operating assets and liabilities:
Receivables ...................................................... (3,611) (2,832)
Income taxes ..................................................... 5,596 9,648
Supplies and prepayments ......................................... (1,711) (1,457)
Accounts payable and accrued expenses ............................ 4,602 2,123
Deferred charges and other assets ................................ 753 266
Deferred credits and other ....................................... 229 1,451
---------- ----------
Net cash provided by operating activities .................... 69,387 66,566
---------- ----------
Cash flows from investing activities:
Construction, purchase and conversion of inns .......................... (57,942) (44,912)
Other capital expenditures ............................................. (69,434) (11,802)
Purchase of partners' equity interests ................................. (8,578) --
Other .................................................................. 224 1,481
---------- ----------
Net cash used by investing activities ........................ (135,730) (55,233)
---------- ----------
Cash flows from financing activities:
Proceeds from line of credit and long-term borrowings .................. 363,783 187,260
Principal payments on line of credit and long-term borrowings .......... (284,887) (195,001)
Capital distributions to partners ...................................... (710) (967)
Dividends to shareholders .............................................. (2,584) (2,344)
Purchase of treasury stock ............................................. (14,447) (102)
Net proceeds from stock transactions ................................... 4,807 3,926
---------- ----------
Net cash provided (used) by financing activities ............. 65,962 (7,228)
---------- ----------
(Decrease) increase in cash and cash equivalents .......................... (381) 4,105
Cash and cash equivalents at beginning of period .......................... 2,590 2,589
---------- ----------
Cash and cash equivalents at end of period ................................ $ 2,209 $ 6,694
========== ==========
Supplemental disclosure of cash flow information:
Interest paid ............................................................. $ 20,344 $ 20,749
========== ==========
Income tax paid ........................................................... $ 13,538 $ 6,582
========== ==========
Supplemental schedule of non-cash investing and financing activities:
Tax benefit from stock options exercised .................................. $ 3,871 $ 4,111
========== ==========
Effect of stock split ..................................................... $ 2,768 $ --
========== ==========
Note issued in purchase of partners' equity interest ...................... $ 2,510 $ --
========== ==========
See accompanying notes to condensed financial statements.
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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 June 30, 1996 and December 31, 1995, property and equipment consisted
of the following:
June 30, 1996 December 31, 1995
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(Unaudited)
Buildings ........................................ $ 922,658 $ 864,605
Furniture, fixtures and equipment ................ 141,975 121,032
Land and leasehold improvements .................. 174,676 174,165
Construction in progress ......................... 68,056 29,862
---------- ----------
Total property and equipment ................... 1,307,365 1,189,664
Less accumulated depreciation and amortization ... 296,071 273,914
---------- ----------
Net property and equipment ..................... $1,011,294 $ 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 will now be 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 June 30, 1996 and December 31, 1995, accounts payable and accrued
expenses consisted of the following:
June 30, 1996 December 31, 1995
------------- -----------------
(Unaudited)
Accounts payable:
Trade ........................................ $16,016 $13,695
Construction ................................. 337 9,666
Other ........................................ 9,678 6,437
Income taxes ................................. 4,588 2,960
------- -------
$30,619 $32,758
======= =======
Accrued expenses:
Payroll and employee benefits ................ $24,434 $25,201
Interest ..................................... 7,452 4,845
Property taxes ............................... 9,187 9,640
Other ........................................ 1,815 1,229
------- -------
$42,888 $40,915
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(5) Long-Term Debt
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.
In April 1996, the Company prepaid $9.3 million 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
$387,000 ($244,000 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 implementation of 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 $24.5 million, of which $21.7 million has been
reported to date. The Company reported non-cash charges related to the
premature retirement of these assets of approximately $2.4 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 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 parties filed a required,
joint Pre-Trial Order, in which the plaintiff has conceded a number of his
claims. On March 5, 1996, the U.S. Magistrate Judge recommended to the Court
that the Company's motion for summary judgment be granted in full. The
plaintiff has filed objections to this recommendation and the matter now awaits
review by the Court. The Company will 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 July 1996, the Board of Directors authorized a plan for the
repurchase of up to $10,000,000 of the Company's common stock. Under this plan
and a series of previously approved plans, the Company repurchased 479,000
shares of its common stock for approximately $8,233,000 subsequent to June 30,
1996. At August 7, 1996, the Company had approximately $9,461,000 available
under these plans. Purchases will be made from time to time in the open market
or in private transactions as deemed appropriate by the Company.
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, 1996 (the "1996 Three Months") and
June 30, 1995 (the "1995 Three Months") and the six month periods ended June
30, 1996 (the "1996 Six Months") and June 30, 1995 (the "1995 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 50% interest, and in one case a 40% interest
during the 1995 Three Months and 1995 Six Months, and over which it exercises
substantial legal, financial and operational control.
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The following table describes the composition of inns in the La Quinta
chain at:
June 30, 1996 December 31, 1995
----------------------------- -----------------------------
La Quinta La Quinta
Equivalent Equivalent
Inns Rooms Rooms (1) Inns Rooms Rooms (1)
------ ------ ---------- ------ ------ ----------
Owned 100% (2)..................... 233 30,022 30,022 230 29,522 29,522
Owned 50-67% ...................... 4 477 268 7 836 467
------ ------ ------ ------ ------ ------
Total Company owned and operated .. 237 30,499 30,290 237 30,358 29,989
====== ====== ====== ====== ====== ======
(1) Represents the Company's proportionate ownership in system rooms.
(2) At June 30, 1996 and December 31, 1995 includes one and two inns,
respectively, acquired in 1995 that were closed for conversion to the
La Quinta(R) 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. Three newly constructed inns
with a total of 427 rooms and one acquired inn with 122 rooms were opened
during July 1996. The Company anticipates opening a total of 36 inns by the
end of 1997, including nine inns currently under construction that are
scheduled to open by the end of 1996.
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.
The Company has completed approximately 12,000 rooms under the Gold Medal
rooms program. A total of 89 inns have been completed, while 13 inns are
undergoing construction related to the program. 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 Three Months, the Company acquired the limited partners'
interest in three of its combined unincorporated partnerships and joint
ventures, which each owned one inn. As a result, the Company has four
remaining unincorporated partnerships and joint ventures, each owning one inn.
THE 1996 THREE MONTHS COMPARED TO THE 1995 THREE MONTHS
Total revenues increased to $116,022,000 in the 1996 Three Months from
$110,043,000 in the 1995 Three Months, an increase of $5,979,000, or 5.4%. Of
the total revenues reported in the 1996 Three Months, 98.0% were revenues from
inns and 2.0% 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 $113,727,000 in the 1996 Three Months from $107,938,000 in the 1995
Three Months, an increase of $5,789,000 or 5.4%. The improvement in inn
revenues reflects an increase in the average daily room rate ("ADR"), along
with the revenues associated with the opening of inns. ADR increased to $53.57
in the 1996 Three Months from $51.24 in the 1995 Three Months, an increase of
$2.33, or 4.5%. Occupancy percentage decreased to 73.5% in the 1996 Three
Months from 75.7% 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 1.5% to $39.39 in the 1996 Three Months
from $38.79 in the 1995 Three Months.
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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 increased to $2,295,000 in
the 1996 Three Months from $2,105,000 in the 1995 Three Months, an increase of
$190,000.
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 $54,744,000 in the 1996 Three Months from
$53,776,000 in the 1995 Three Months. The increase in direct expenses period
over period is primarily attributable to growth in the number of inns and also
reflects additional guest amenities. As a percentage of total revenues, direct
expenses decreased to 47.2% in the 1996 Three Months from 48.9% 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 decreased to $4,141,000 in the
1996 Three Months from $4,894,000 in the 1995 Three Months. The 1995 Three
Months include severance related costs for a former officer of the Company.
Depreciation, amortization and asset retirements increased to $12,034,000
in the 1996 Three Months from $10,437,000 in the 1995 Three Months, an increase
of $1,597,000, or 15.3%. 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 $2,427,000 was
recorded during the 1996 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 $42,676,000 in the
1996 Three Months from $40,936,000 in the 1995 Three Months, an increase of
$1,740,000, or 4.3%. Operating income before the provision for premature
retirement of assets increased to $45,103,000 in the 1996 Three Months from
$40,936,000 in the 1995 Three Months, an increase of $4,167,000, or 10.2%.
Interest on long-term debt, net increased to $10,195,000 in the 1996 Three
Months compared to $9,540,000 in the 1995 Three Months, an increase of $655,000
or 6.9%. Interest on long-term debt, net includes capitalized interest of
$1,412,000 in the 1996 Three Months compared to $330,000 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 $485,000 in the 1996 Three Months from $4,548,000 in the
1995 Three Months, a decrease of $4,063,000. 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 Three Months.
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 37.8% 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 ($244,000) were recorded during the
1996 Three Months and resulted primarily from prepayment fees related to the
early extinguishment of approximately $9,336,000 of long-term mortgage debt and
industrial development revenue bonds.
For the reasons discussed above, net earnings increased to $19,913,000 in
the 1996 Three Months from $16,691,000 in the 1995 Three Months, an increase of
$3,222,000, or 19.3%. Net earnings before the provision for premature
retirement of assets and extraordinary items increased to $21,686,000 in the
1996 Three Months from $16,691,000 in the 1995 Three Months, an increase of
$4,995,000, or 29.9%.
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THE 1996 SIX MONTHS COMPARED TO THE 1995 SIX MONTHS
Total revenues increased to $218,780,000 in the 1996 Six Months from
$206,778,000 in the 1995 Six Months, an increase of $12,002,000, or 5.8%. Of
the total revenues reported in the 1996 Six Months, 98.1% were revenues from
inns and 1.9% were revenues from restaurant rentals and other revenues.
Inn revenues improved to $214,561,000 in the 1996 Six Months from
$202,661,000 in the 1995 Six Months, an increase of $11,900,000 or 5.9%. The
improvement in inn revenues reflects an increase in ADR, along with the
revenues associated with the opening of inns. ADR increased to $53.49 in the
1996 Six Months from $50.87 in the 1995 Six Months, an increase of $2.62 or
5.2%. Occupancy percentage decreased to 69.8% in the 1996 Six Months from
72.3% in the 1995 Six 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 1.4% to $37.31 in the 1996 Six Months from $36.79 in the 1995 Six
Months.
Restaurant rental and other revenues increased to $4,219,000 in the 1996
Six Months from $4,117,000 in the 1995 Six Months, an increase of $102,000.
Direct expenses increased to $107,635,000 in the 1996 Six Months from
$103,128,000 in the 1995 Six Months. The increase in direct expenses period
over period is primarily attributable to growth in the number of inns and also
reflects additional guest amenities. As a percentage of total revenues, direct
expenses decreased to 49.2% in the 1996 Six Months from 49.9% in the 1995 Three
Months.
Corporate expenses decreased to $8,791,000 in the 1996 Six Months from
$9,392,000 in the 1995 Six Months. The 1995 Six Months include severance
related costs for a former officer of the Company.
Depreciation, amortization and asset retirements increased to $22,759,000
in the 1996 Six Months from $20,630,000 in the 1995 Six Months, an increase of
$2,129,000, or 10.3%. 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 $9,062,000 was
recorded during the 1996 Six 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 decreased to $70,533,000 in the
1996 Six Months from $73,628,000 in the 1995 Six Months, a decrease of
$3,095,000, or 4.2%. Operating income before the provision for premature
retirement of assets increased to $79,595,000 in the 1996 Six Months from
$73,628,000 in the 1995 Six Months, an increase of $5,967,000, or 8.1%.
Interest on long-term debt, net increased to $20,360,000 in the 1996 Six
Months compared to $19,804,000 in the 1995 Six Months. Interest on long-term
debt, net includes capitalized interest of $2,227,000 in the 1996 Six Months
compared to $388,000 in the 1995 Six Months. The increase in capitalized
interest period over period is primarily due to the construction of inns.
Partners' equity in earnings decreased to $928,000 in the 1996 Six Months
from $8,976,000 in the 1995 Six Months, a decrease of $8,048,000. 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 Six Months.
Income taxes for the 1996 Six 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 Six 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 ($244,000) were recorded during the
1996 Six Months and resulted primarily from prepayment fees related to the
early extinguishment of approximately $9,336,000 of long-term mortgage debt and
industrial development revenue bonds.
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For the reasons discussed above, net earnings increased to $30,780,000 in
the 1996 Six Months from $27,761,000 in the 1995 Six Months, an increase of
$3,019,000, or 10.9%. Net earnings before the provision for premature
retirement of assets and extraordinary items increased to $36,733,000 in the
1996 Six Months from $27,761,000 in the 1995 Six Months, an increase of
$8,972,000, or 32.3%.
Analysis of Cash Flows
At June 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 1996. The Company plans to renew the $50 million 364-Day
Bank Unsecured Line of Credit upon its maturity. At June 30, 1996, the Company
had $77,394,000 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
June 30, 1996, borrowings under the Bank Unsecured Credit Facilities bear
interest at LIBOR plus 45 basis points on $165,000,000 of outstanding
borrowings and the prime rate less 50 basis points on $925,000 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.
At June 30, 1996, the Company had $2,209,000 of cash and cash equivalents
compared with $6,694,000 at June 30, 1995.
Net cash provided by operations increased by $2,821,000 to $69,387,000 at
June 30, 1996 from $66,566,000 at June 30, 1995. The net increase is primarily
the result of improved earnings excluding non-cash items and is partially
offset by a decrease in working capital of $3,341,000.
Net cash used by investing activities increased by $80,497,000 from June
30, 1995 to June 30, 1996, primarily as a result of 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 $73,190,000 to
$65,962,000 at June 30, 1996. Net borrowings increased to $78,896,000 for the
1996 Six Months compared to net repayments of indebtedness of $7,741,000 for
the 1995 Six Months. The net increase is primarily the result of borrowings
used for capital expenditures related to the Gold Medal rooms program and new
inn construction. Net cash provided by financing activities also includes
$14,447,000 of cash used for the purchase of treasury stock.
EBITDA increased to $102,354,000 during the 1996 Six Months, an increase
of 8.6% over the 1995 Six 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 and extraordinary items. The Company believes this definition of
EBITDA provides a meaningful measure of its ability to service debt.
In the third quarter of 1995, the Company began its Gold Medal rooms
program. The Company anticipates spending approximately $90 million in excess
of its normal maintenance capital expenditures on this program during 1996.
The capital requirements of the program will be funded from internally
generated cash flows and amounts available on the Bank Unsecured Credit
Facilities and is not anticipated to have an adverse effect on the Company's
ability to fund its operations. As of June 30, 1996, the Company has made
commitments of approximately $6.8 million for properties undergoing
construction related to this program.
Additional capital expenditures planned by La Quinta for the remainder of
1996 focus on the construction of new inns and expansion of existing inns. The
estimated cost to complete these projects for which commitments have been made
is approximately $79.7 million at June 30, 1996.
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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 second 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.
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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 June
30, 1996, and the related condensed statements of operations for the
three-month and six-month periods ended June 30, 1996 and 1995, shareholders'
equity for the six-month period ended June 30, 1996 and cash flows for the
six-month periods ended June 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
July 19, 1996
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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 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 parties filed a required, joint
Pre-Trial Order, in which the plaintiff has conceded a number of his claims. On
March 5, 1996, the U.S. Magistrate Judge recommended to the Court that the
Company's motion for summary judgment be granted in full. The plaintiff has
filed objections to this recommendation and the matter now awaits review by the
Court. The Company will 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual Shareholders' Meeting on May 23, 1996, the Company submitted
to a vote to its shareholders the election of the following persons to serve as
Directors of the Company until the 1997 Shareholders' Meeting.
NUMBER OF VOTES
--------------------------
Name of Nominee For Withheld
--------------- --- --------
William H. Cunningham 45,962,467 39,321
Gary L. Mead 45,957,447 44,341
Peter Sterling 45,964,695 37,093
Kenneth Stevens 45,860,215 141,573
Thomas M. Taylor 45,962,845 38,943
Additionally, the shareholders approved the appointment of KPMG Peat
Marwick LLP as the Company's Independent Public Accountants by a vote of
45,934,948 "For", 13,883 "Against" and 52,957 "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:
Exhibit Description
12 Computation of Ratio of Earnings to Fixed Charges filed herewith.
15 Letter from KPMG Peat Marwick LLP dated July 19, 1996 filed herewith.
27 Financial Data Schedule filed herewith.
(b) Reports on Form 8-K
Registrant filed one Current Report on Form 8-K, dated July 26, 1996, with
the Securities and Exchange Commission, which provided under Item 5 a
cautionary statement for purposes of the "safe-harbor" provisions of the
Private Securities Litigation Reform Act of 1995.
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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)
August 8, 1996 By: /S/ William C. Hammett, Jr.
---------------------------------
William C. Hammett, Jr.
Senior Vice President - Accounting and
Administration
August 8, 1996 By: /S/ Irene C. Primera
---------------------------------
Irene C. Primera
Vice President - Controller
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
12 Computation of Ratio of Earnings to Fixed Charges filed herewith.
15 Letter from KPMG Peat Marwick LLP dated July 19, 1996 filed herewith.
27 Financial Data Schedule filed herewith.