1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997. OR [ ] TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO ------ ------ COMMISSION FILE NUMBER: 1-7790 --------------------- LA QUINTA INNS, INC. (Exact name of registrant as specified in its charter) TEXAS #74-1724417 (State of Incorporation) (I.R.S. Employer Identification No.) WESTON CENTRE 112 E. PECAN STREET P.O. BOX 2636 SAN ANTONIO, TEXAS 78299-2636 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (210) 302-6000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] --------------------- Number of shares of Common Stock, $.10 par value, outstanding at September 30, 1997: 77,211,258 --------------------- ================================================================================ 2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS LA QUINTA INNS, INC. CONDENSED BALANCE SHEETS (in thousands) September 30, 1997 December 31, 1996 ------------------ ----------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents ............................................. $ 1,317 $ 1,508 Receivables: Trade (net of allowance of $77 and $108) ............................ 15,108 10,689 Other (net of allowance of $952 in 1997) ............................ 5,419 1,613 Income taxes ........................................................ -- 3,835 Supplies and prepayments .............................................. 15,423 10,811 Deferred income taxes ................................................. 9,210 9,277 ----------- ----------- Total current assets ................................................ 46,477 37,733 ----------- ----------- Notes receivable, excluding current installments (net of allowance of $1,793 in 1996) ..................................... 865 3,700 Property and equipment, net .............................................. 1,349,035 1,148,190 Deferred charges and other assets, at cost less applicable amortization .. 10,176 10,177 ----------- ----------- Total assets ........................................................ $ 1,406,553 $ 1,199,800 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of long-term debt ................................ $ 10,822 $ 33,299 Accounts payable ...................................................... 46,060 55,088 Accrued expenses ...................................................... 47,878 53,584 ----------- ----------- Total current liabilities ........................................... 104,760 141,971 ----------- ----------- Long-term debt, excluding current installments ........................... 842,872 659,369 Deferred income taxes, pension and other ................................. 36,615 29,591 Partners' capital ........................................................ 2,618 3,293 Shareholders' equity: Common stock ($.10 par value per share; 200,000 and 100,000 shares authorized; 84,920 and 84,274 shares issued) ........................ 8,492 8,427 Additional paid-in capital ............................................ 247,646 240,453 Retained earnings ..................................................... 255,708 188,610 Treasury stock, at cost (7,709 and 6,704 shares) ...................... (92,158) (71,914) ----------- ----------- Total shareholders' equity .......................................... 419,688 365,576 ----------- ----------- Total liabilities and shareholders' equity .......................... $ 1,406,553 $ 1,199,800 =========== =========== See accompanying notes to condensed financial statements. 2 3 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 --------------------- --------------------- 1997 1996 1997 1996 -------- --------- -------- --------- Revenues: Inn ...................................................... $ 135,909 $ 119,907 $ 380,951 $ 334,468 Restaurant rental and other .............................. 1,989 1,995 5,966 6,214 --------- --------- --------- --------- Total revenues ........................................ 137,898 121,902 386,917 340,682 --------- --------- --------- --------- Operating costs and expenses: Direct ................................................... 66,250 57,853 186,069 165,488 Corporate ................................................ 4,451 4,722 13,638 13,513 Depreciation, amortization and asset retirements ......... 17,195 12,390 45,674 35,149 Provision for premature retirement of assets ............. -- 3,141 -- 12,203 --------- --------- --------- --------- Total operating costs and expenses .................... 87,896 78,106 245,381 226,353 --------- --------- --------- --------- Operating income ...................................... 50,002 43,796 141,536 114,329 --------- --------- --------- --------- Other (income) expense: Interest, net ............................................ 12,494 10,685 36,434 31,045 Partners' equity in earnings ............................. 194 336 670 1,264 Gain on property transactions ............................ (8,585) -- (8,585) -- --------- --------- --------- --------- Earnings before income taxes and extraordinary items... 45,899 32,775 113,017 82,020 Income taxes ................................................ 16,982 12,126 41,816 30,347 --------- --------- --------- --------- Earnings before extraordinary items ................... 28,917 20,649 71,201 51,673 Extraordinary items, net of income taxes ................... (38) (165) (38) (409) --------- --------- --------- --------- Net earnings .......................................... $ 28,879 $ 20,484 $ 71,163 $ 51,264 ========= ========= ========= ========= Earnings per common and common equivalent share: Earnings before extraordinary items ................... $ .36 $ .25 $ .89 $ .64 Extraordinary items, net of income taxes .............. -- -- -- (.01) --------- --------- --------- --------- Net earnings .......................................... $ .36 $ .25 $ .89 $ .63 ========= ========= ========= ========= Weighted average number of common and common equivalent shares outstanding ...................................... 80,028 81,083 80,312 80,945 ========= ========= ========= ========= See accompanying notes to condensed financial statements. 3 4 ITEM I - FINANCIAL STATEMENTS (continued) LA QUINTA INNS, INC. CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands) Additional Common Stock Treasury Stock Paid-In Retained Shares Amount Shares Amount Capital Earnings Total --------- --------- --------- --------- --------- --------- --------- Balances at December 31, 1995 ............. 54,883 $ 5,488 (2,849) ($ 29,741) $ 222,221 $ 133,745 $ 331,713 Effect of stock split at July 15, 1996 .. 27,678 2,768 (1,735) -- (2,768) -- -- Stock options ........................... 1,713 171 (3) (79) 21,000 -- 21,092 Purchase of treasury stock .............. -- -- (2,117) (42,094) -- -- (42,094) Dividends paid .......................... -- -- -- -- -- (5,330) (5,330) Net earnings ............................ -- -- -- -- -- 60,195 60,195 --------- --------- --------- --------- --------- --------- --------- Balances at December 31, 1996 ............. 84,274 8,427 (6,704) (71,914) 240,453 188,610 365,576 Stock options ........................... 646 65 (9) (198) 7,193 -- 7,060 Purchase of treasury stock .............. -- -- (996) (20,046) -- -- (20,046) Dividends paid .......................... -- -- -- -- -- (4,065) (4,065) Net earnings ............................ -- -- -- -- -- 71,163 71,163 --------- --------- --------- --------- --------- --------- --------- Balances at September 30, 1997, unaudited ................................ 84,920 $ 8,492 (7,709) ($ 92,158) $ 247,646 $ 255,708 $ 419,688 ========= ========= ========= ========= ========= ========= ========= See accompanying notes to condensed financial statements. 4 5 ITEM 1 - FINANCIAL STATEMENTS (continued) LA QUINTA INNS, INC. CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Nine months ended September 30 ---------------------- 1997 1996 --------- --------- Cash flows from operating activities: Net earnings ............................................................. $ 71,163 $ 51,264 Adjustments to reconcile net earnings to net cash provided by operating activities: Non-cash items: Depreciation, amortization and asset retirements ................. 45,674 35,149 Provision for premature retirement of assets ..................... -- 12,203 Gain on property transactions .................................... (8,585) -- Partners' equity in earnings ..................................... 670 1,264 Changes in operating assets and liabilities: Receivables ........................................................ (4,901) (2,156) Income taxes ....................................................... 13,985 6,879 Supplies and prepayments ........................................... (5,564) (321) Accounts payable and accrued expenses .............................. 874 5,152 Deferred charges and other assets .................................. (52) 1,453 Deferred credits and other ......................................... 7,024 1,520 --------- --------- Net cash provided by operating activities ...................... 120,288 112,407 --------- --------- Cash flows from investing activities: Construction, purchase and conversion of inns ............................ (175,352) (100,752) Other capital expenditures ............................................... (97,092) (90,768) Proceeds from property transactions ...................................... 20,657 182 Purchase of partners' equity interests ................................... (81) (8,578) Other .................................................................... 916 159 --------- --------- Net cash used by investing activities .......................... (250,952) (199,757) --------- --------- Cash flows from financing activities: Proceeds from line of credit and long-term borrowings .................... 829,178 464,977 Principal payments on line of credit and long-term borrowings ............ (670,354) (359,783) Capital distributions to partners ........................................ (581) (950) Dividends to shareholders ................................................ (4,065) (3,959) Purchase of treasury stock ............................................... (26,628) (23,406) Net proceeds from stock transactions ..................................... 2,923 8,968 --------- --------- Net cash provided by financing activities ...................... 130,473 85,847 --------- --------- Decrease in cash and cash equivalents ....................................... (191) (1,503) Cash and cash equivalents at beginning of period ............................ 1,508 2,590 --------- --------- Cash and cash equivalents at end of period .................................. $ 1,317 $ 1,087 ========= ========= Supplemental disclosure of cash flow information: Interest paid ............................................................... $ 43,861 $ 33,077 Income tax paid ............................................................. 22,803 20,865 Income tax refunds .......................................................... 2,572 5 Supplemental schedule of non-cash investing and financing activities: Tax benefit from stock options exercised .................................... $ 4,137 $ 8,885 Note issued in purchase of partners' equity interest ........................ 2,500 2,510 Effect of stock split ....................................................... -- 2,768 See accompanying notes to condensed financial statements. 5 6 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, 1996 Annual Report on Form 10-K. (2) Property and Equipment At September 30, 1997 and December 31, 1996, property and equipment consisted of the following: (in thousands) September 30, 1997 December 31, 1996 ------------------ ----------------- (Unaudited) Buildings ................................................... $ 1,144,877 $ 988,711 Furniture, fixtures and equipment ........................... 187,345 148,691 Land and leasehold improvements ............................. 204,515 183,207 Construction in progress .................................... 133,318 120,286 ----------- ----------- Total property and equipment .............................. 1,670,055 1,440,895 Less accumulated depreciation and amortization .............. 321,020 292,705 ----------- ----------- Net property and equipment ................................ $ 1,349,035 $ 1,148,190 =========== =========== (3) Earnings per Common and Common Equivalent Share Fully diluted earnings per share is not materially different than primary earnings per share (4) Accounts Payable and Accrued Expenses At September 30, 1997 and December 31, 1996, accounts payable and accrued expenses consisted of the following: (in thousands) September 30, 1997 December 31, 1996 ------------------ ----------------- (Unaudited) Accounts payable: Trade ................................................... $ 16,284 $ 16,125 Construction ............................................ 14,516 30,920 Other ................................................... 9,314 8,043 Income taxes ............................................ 5,946 -- ----------- ----------- $ 46,060 $ 55,088 =========== =========== Accrued expenses: Payroll and employee benefits ........................... $ 23,278 $ 25,570 Property taxes .......................................... 13,360 10,607 Interest ................................................ 8,005 8,241 Other ................................................... 3,235 2,584 Treasury stock purchase ................................. -- 6,582 ----------- ----------- $ 47,878 $ 53,584 =========== =========== 6 7 (5) Long-Term Debt On February 7, 1997, the Company completed negotiations to amend and restate its existing credit facilities. The amended credit facility provides the Company with a $325,000,000 Unsecured Line of Credit with a consortium of banks which will mature in February 2002. The Unsecured Line of Credit bears interest at the prime rate or LIBOR, adjusted for an applicable margin, as defined in the related credit agreement. The applicable margin is determined quarterly based upon predetermined levels of indebtedness to cash flow or ratings received by specified credit rating agencies, as defined in the related credit agreement. At September 30, 1997, borrowings under the Unsecured Line of Credit bear interest at LIBOR plus 33.75 basis points on $275,000,000 of outstanding borrowings and the prime rate less 50 basis points on $6,750,000 of outstanding borrowings. The Unsecured Line of Credit requires a facility fee of 18.75 basis points on the average amount of the commitment. On February 24, 1997, the Company issued $50,000,000 in 7.27% Medium-Term Notes due 2007, with an effective interest rate of 7.33%. On July 18, 1997, the Company issued $50,000,000 in 7.33% Medium-Term Notes due 2008, with an effective interest rate of 7.39%. The proceeds of the note issuances were used to repay indebtedness under the Company's Unsecured Line of Credit. On August 15, 1997, La Quinta filed a shelf registration statement with the Securities and Exchange Commission which would allow the Company to issue up to $300,000,000 principal amount of Debt Securities. The registration statement became effective on August 25, 1997. The Company has not issued any Debt Securities under this registration statement. (6) Provision for Premature Retirement of Assets The Company launched its Gold Medal(R) rooms program during the third quarter of 1995 and completed the program during the second quarter of 1997. During this program, the Company replaced certain furniture and fixtures before the end of their normal useful life and therefore made an adjustment to reflect shorter remaining lives. As a result, the Company recorded a non-cash provision for premature retirement of 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 third quarter of 1996 and approximately $12.2 million during the nine months ended September 30, 1996. (7) Contingencies The Company is party to various lawsuits and claims generally incidental to its business. The ultimate disposition of these lawsuits and claims is not expected to have a material adverse effect on the Company's financial position or results of its operations. 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, 1997 (the "1997 Three Months") and September 30, 1996 (the "1996 Three Months") and the nine month periods ended September 30, 1997 (the "1997 Nine Months") and September 30, 1996 (the "1996 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 over which it exercises substantial legal, financial and operational control. At October 31, 1997, the Company owned and operated 234 inns and 24 Inn & Suites hotels with a combined total of over 33,200 rooms. The Company is pursuing a two-pronged growth strategy comprised of a unit growth program as well as a revenue enhancement initiative. The unit growth program is based primarily on the construction of new Inn & Suites hotels. During 1997, the Company has opened 13 new Inn & Suites hotels. Including the 11 which were opened during 1996, the Company anticipates having a total of 36 new Inn & Suites hotels open by the end of 1997, 65 by the end of 1998 and over 100 during 1999. The revenue enhancement initiative is comprised of the Company's Gold Medal(R) rooms program, as described below, and other operating and marketing programs. As part of this revenue enhancement initiative, during 1997 the Company established a revenue management team and plans to implement a chainwide revenue management system during 1998 to assist with yield and capacity management. 7 8 During 1995, the Company launched its Gold Medal rooms program designed to strengthen the Company's ability to gain additional market share and pricing advantage relative to its competitors. The program improved 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 included movies-on-demand, interactive video games from Nintendo(R), dataport telephones for computer connections and greatly expanded free television channel choices. The program required 20-30 rooms at a time to be taken out of available supply at an inn during the typical 10-12 week construction period. The Company did not adjust its available rooms or occupancy percentage for rooms unavailable due to construction as a result of this program. The Company completed the program during the second quarter of 1997. During January 1997, the Company acquired the limited partners' interest in one of its combined unincorporated partnerships which owned one inn. As a result, the Company now has remaining one unincorporated partnership and one joint venture, each owning one inn. THE 1997 THREE MONTHS COMPARED TO THE 1996 THREE MONTHS TOTAL REVENUES increased to $137,898,000 in the 1997 Three Months from $121,902,000 in the 1996 Three Months, an increase of $15,996,000, or 13.1%. Of the total revenues reported in the 1997 Three Months, 98.6% were revenues from inns and 1.4% 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, phone, movie and vending commissions, meeting room and banquet revenues and laundry services. Inn revenues improved to $135,909,000 in the 1997 Three Months from $119,907,000 in the 1996 Three Months, an increase of $16,002,000, or 13.3%. The improvement in inn revenues reflects an increase in the average daily room rate ("ADR") and occupancy percentage, along with revenues associated with the opening of new Inn & Suites hotels. ADR increased to $56.95 in the 1997 Three Months from $54.97 in the 1996 Three Months, an increase of $1.98, or 3.6%. Occupancy percentage increased 1.5 percentage points to 75.0% in the 1997 Three Months from 73.5% in the 1996 Three Months. The increase in ADR and occupancy percentage primarily resulted from the favorable impact of the Gold Medal rooms program which was completed during the second quarter of 1997 and the opening of new Inn & Suites hotels. Revenue per available room ("REVPAR," which is the product of occupancy percentage and ADR) increased $2.33, or 5.8%, to $42.73 in the 1997 Three Months from $40.40 in the 1996 Three Months. Inns in the Atlanta area experienced sharply higher room rates during the 1996 summer Olympics. Excluding these inns, the increase in REVPAR and ADR quarter over quarter was 7.3% and 5.1%, respectively. 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 $1,989,000 in the 1997 Three Months from $1,995,000 in the 1996 Three Months. DIRECT EXPENSES include costs directly associated with the operation of inns. In the 1997 Three Months, approximately 36.8% of direct expenses were represented by salaries, wages and related costs. Other major categories of direct expenses include utilities, property taxes, repairs and maintenance, credit card commissions and room supplies. Direct expenses increased to $66,250,000 in the 1997 Three Months from $57,853,000 in the 1996 Three Months, an increase of $8,397,000, or 14.5%. The increase in direct expenses period over period is primarily attributable to growth in the number of inns. As a percentage of total revenues, direct expenses increased to 48.0% in the 1997 Three Months from 47.5% in the 1996 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 $4,451,000 in the 1997 Three Months from $4,722,000 in the 1996 Three Months, a decrease of $271,000, or 5.7%. DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS increased to $17,195,000 in the 1997 Three Months from $12,390,000 in the 1996 Three Months, an increase of $4,805,000, or 38.8%. This increase is primarily attributable to the opening of new Inn & Suites hotels and increased depreciation for inns due to the completion of the Gold Medal rooms program. A PROVISION FOR PREMATURE RETIREMENT OF ASSETS totaling $3,141,000 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 replaced certain furniture and fixtures before the end of their normal useful lives and therefore made adjustments to reflect shorter remaining lives. 8 9 As a result of the above, OPERATING INCOME increased to $50,002,000 in the 1997 Three Months from $43,796,000 in the 1996 Three Months, an increase of $6,206,000, or 14.2%. INTEREST, NET increased to $12,494,000 in the 1997 Three Months compared to $10,685,000 in the 1996 Three Months, an increase of $1,809,000, or 16.9%. The increase in interest, net is primarily attributable to an increase in long-term borrowings and is partially offset by an increase in capitalized interest of $1,151,000. Capitalized interest amounted to $2,520,000 in the 1997 Three Months compared to $1,369,000 in the 1996 Three Months. The increase in capitalized interest period over period is primarily due to the construction of new Inn & Suites hotels. 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 50% and controlled by the Company. Partners' equity in earnings decreased to $194,000 in the 1997 Three Months from $336,000 in the 1996 Three Months, a decrease of $142,000. This decrease reflects the Company's acquisition of the limited partners' interest in two of its combined unincorporated partnerships and joint ventures since September 1996. The GAIN ON PROPERTY TRANSACTIONS of $8,585,000 for the 1997 Three Months reflects the disposition of certain properties. After a short transition period, these properties will not be operated by the Company or branded as La Quinta(R) Inns. INCOME TAXES for the 1997 and 1996 Three Months were calculated using an effective income tax rate of 37.0%. EXTRAORDINARY ITEMS, NET OF TAX of $38,000 were recorded during the 1997 Three Months and resulted from the early extinguishment of approximately $1,740,000 of industrial development revenue bonds. For the reasons discussed above, NET EARNINGS increased to $28,879,000 in the 1997 Three Months from $20,484,000 in the 1996 Three Months, an increase of $8,395,000, or 41.0%. THE 1997 NINE MONTHS COMPARED TO THE 1996 NINE MONTHS TOTAL REVENUES increased to $386,917,000 in the 1997 Nine Months from $340,682,000 in the 1996 Nine Months, an increase of $46,235,000, or 13.6%. Of the total revenues reported in the 1997 Nine Months, 98.5% were revenues from inns and 1.5% were revenues from restaurant rentals and other revenues. INN REVENUES improved to $380,951,000 in the 1997 Nine Months from $334,468,000 in the 1996 Nine Months, an increase of $46,483,000, or 13.9%. The improvement in inn revenues reflects an increase in ADR and occupancy percentage, along with the revenues associated with the opening of new Inn & Suites hotels. ADR increased to $56.96 in the 1997 Nine Months from $54.01 in the 1996 Nine Months, an increase of $2.95 or 5.5%. Occupancy percentage increased .7 percentage points to 71.7% in the 1997 Nine Months from 71.0% in the 1996 Nine Months. The increase in ADR and occupancy percentage primarily resulted from the favorable impact of the Gold Medal rooms program which was completed during the second quarter of 1997 and the opening of the new Inn & Suites hotels. REVPAR increased $2.50, or 6.5%, to $40.86 in the 1997 Nine Months from $38.36 in the 1996 Nine Months. RESTAURANT RENTAL AND OTHER REVENUES decreased to $5,966,000 in the 1997 Nine Months from $6,214,000 in the 1996 Nine Months, a decrease of $248,000. DIRECT EXPENSES increased to $186,069,000 in the 1997 Nine Months from $165,488,000 in the 1996 Nine Months, an increase of $20,581,000, or 12.4%. The increase in direct expenses period over period is primarily attributable to growth in the number of inns. As a percentage of total revenues, direct expenses decreased to 48.1% in the 1997 Nine Months from 48.6% in the 1996 Nine Months. CORPORATE EXPENSES increased to $13,638,000 in the 1997 Nine Months from $13,513,000 in the 1996 Nine Months, an increase of $125,000, or .9%. DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS increased to $45,674,000 in the 1997 Nine Months from $35,149,000 in the 1996 Nine Months, an increase of $10,525,000, or 29.9%. This increase is primarily attributable to the opening of new Inn & Suites hotels and increased depreciation for inns due to the completion of the Gold Medal rooms program. 9 10 A PROVISION FOR PREMATURE RETIREMENT OF ASSETS totaling $12,203,000 was recorded during the 1996 Nine Months. During the Company's Gold Medal rooms program, the Company replaced certain furniture and fixtures before the end of their normal useful lives and therefore made adjustments to reflect shorter remaining lives. As a result of the above, OPERATING INCOME increased to $141,536,000 in the 1997 Nine Months from $114,329,000 in the 1996 Nine Months, an increase of $27,207,000, or 23.8%. INTEREST, NET increased to $36,434,000 in the 1997 Nine Months compared to $31,045,000 in the 1996 Nine Months, an increase of $5,389,000, or 17.4%. The increase in interest, net is primarily attributable to an increase in long term borrowings and is partially offset by an increase in capitalized interest of $2,957,000. Capitalized interest amounted to $6,553,000 in the 1997 Nine Months compared to $3,596,000 in the 1996 Nine Months. The increase in capitalized interest period over period is primarily due to the construction of new Inn & Suites hotels. PARTNERS' EQUITY IN EARNINGS decreased to $670,000 in the 1997 Nine Months from $1,264,000 in the 1996 Nine Months, a decrease of $594,000. The decrease reflects the Company's acquisition of the limited partners' interest in five of its combined unincorporated partnerships and joint ventures since March 1996. The GAIN ON PROPERTY TRANSACTIONS of $8,585,000 for the 1997 Nine Months reflects the disposition of certain properties. After a short transition period, these properties will not be operated by the Company or branded as La Quinta Inns. INCOME TAXES for the 1997 and 1996 Nine Months were calculated using an effective income tax rate of 37.0%. EXTRAORDINARY ITEMS, NET OF TAX of $38,000 were recorded during the 1997 Nine Months and resulted from the early extinguishment of approximately $1,740,000 of industrial development revenue bonds. For the reasons discussed above, NET EARNINGS increased to $71,163,000 in the 1997 Nine Months from $51,264,000 in the 1996 Nine Months, an increase of $19,899,000, or 38.8%. ANALYSIS OF CASH FLOWS On February 7, 1997, the Company completed negotiations to amend and restate its existing credit facilities. The amended credit facility provides the Company with a $325,000,000 Unsecured Line of Credit with a consortium of banks which will mature in February 2002. At September 30, 1997, the Company had $35,761,000 available on its Unsecured Line of Credit, net of $7,489,000 of letters of credit collateralizing its insurance programs and certain mortgages. The Unsecured Line of Credit bears interest at the prime rate or LIBOR, adjusted for an applicable margin, as defined in the related credit agreement. The applicable margin is determined quarterly based upon predetermined levels of indebtedness to cash flow or credit ratings received by specified credit rating agencies, as defined in the related credit agreement. At September 30, 1997, borrowings under the Unsecured Line of Credit bear interest at LIBOR plus 33.75 basis points on $275,000,000 of outstanding borrowings and the prime rate less 50 basis points on $6,750,000 of outstanding borrowings. The Unsecured Line of Credit requires a facility fee of 18.75 basis points on the average amount of the commitment. On February 24, 1997, the Company issued $50,000,000 in 7.27% Medium-Term Notes due 2007, with an effective interest rate of 7.33%. On July 18, 1997, the Company issued $50,000,000 in 7.33% Medium-Term Notes due 2008, with an effective interest rate of 7.39%. The proceeds of the note issuances were used to repay indebtedness under the Company's Unsecured Line of Credit. On August 15, 1997, La Quinta filed a shelf registration statement with the Securities and Exchange Commission which would allow the Company to issue up to $300,000,000 principal amount of Debt Securities. The registration statement became effective on August 25, 1997. The Company has not issued any Debt Securities under this registration statement. At September 30, 1997, the Company had $1,317,000 of cash and cash equivalents compared with $1,087,000 at September 30, 1996. Net cash provided by operating activities increased by $7,881,000, or 7.0%, to $120,288,000 at September 30, 1997 from $112,407,000 at September 30, 1996. This increase is primarily the result of a $46,235,000 increase in revenues, which is due in large part to the addition of Inn & Suites hotels. 10 11 Net cash used by investing activities increased by $51,195,000 from September 30, 1996 to September 30, 1997, primarily as a result of capital expenditures for the Company's new Inn & Suites hotel construction projects. Net cash used by investing activities for the 1997 Nine Months was reduced by $20,657,000 of proceeds received primarily from the disposition of certain properties. Net cash used by investing activities for the 1996 Nine Months includes $8,578,000 of cash used in the purchase of partners' equity interests. Net cash provided by financing activities increased by $44,626,000 to $130,473,000 at September 30, 1997. Net borrowings increased to $158,824,000 for the 1997 Nine Months compared to $105,194,000 for the 1996 Nine Months. The net increase is primarily the result of borrowings used for the new Inn & Suites hotel construction projects and the Gold Medal rooms program. Net cash provided by financing activities for the 1997 and 1996 Nine Months is reduced by $26,628,000 and $23,406,000, respectively from cash used for the purchase of treasury stock. EBITDA increased to $187,210,000 during the 1997 Nine Months, an increase of 15.8% over the 1996 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, gain on property transactions and extraordinary items. 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 1997, 1998 and 1999 focus on the construction of new Inn & Suites hotels. Including the 11 which were opened during 1996, the Company anticipates having a total of 36 new Inn & Suites open by the end of 1997, 65 by the end of 1998 and over 100 during 1999. The Company plans to fund the new inn construction program through internally generated cash flows and amounts available on the Company's Unsecured Line of Credit and $300,000,000 shelf registration statement. The capital requirements of this program are not anticipated to have an adverse effect on the Company's ability to fund its operations. The Company has made commitments of approximately $149.0 million for the completion of Inn & Suites hotels for which construction had commenced as of September 30, 1997. Funds on hand, internally generated future cash flows and funds available on the Company's Unsecured Line of Credit and $300,000,000 shelf registration statement 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 1998. From time to time, the Company will continue to evaluate the necessity of other financing alternatives. ACCOUNTING PRONOUNCEMENT In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 (Statement 128), "Earnings per Share", which is effective for periods ending after December 15, 1997, including interim periods. Statement 128 establishes new standards for computing and presenting earnings per share and applies to all entities with publicly held common stock or potential common stock. The Company will implement the statement in the required period. Adoption of the statement is not expected to have a material adverse effect on the Company's previously reported earnings per share. 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 new Inn & Suites hotel construction projects, 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, changes in the competitive environment in which the Company operates and the outcome of pending legal proceedings. Further discussion of these and additional factors which may cause expected results to differ from actual results are included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, filed with the Securities and Exchange Commission dated February 28, 1997. 11 12 Independent Auditors' 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, 1997, and the related condensed statements of operations for the three-month and nine-month periods ended September 30, 1997 and 1996, shareholders' equity for the nine-month period ended September 30, 1997 and cash flows for the nine-month periods ended September 30, 1997 and 1996. 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, 1996 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 31, 1997, except for note 16, which is as of February 26, 1997, 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, 1996 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 31, 1997 12 13 Part II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS Actions for negligence or other tort claims occur routinely as an ordinary incident to the Company's business. Several lawsuits are pending against the Company which have arisen in the ordinary course of the business, but none of these proceedings involves a claim for damages (in excess of applicable excess umbrella insurance coverages) involving more than 10% of current assets of the Company. 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 31, 1997 filed herewith. 27 Financial Data Schedule filed herewith. (b) REPORTS ON FORM 8-K Registrant filed one current report on Form 8-K, dated October 7, 1997, with the Securities and Exchange Commission, which provided under Item 5 a press release, and 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. 13 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, 1997 By: /S/ William S. McCalmont --------------------------------------- William S. McCalmont Senior Vice President Chief Financial Officer November 12, 1997 By: /S/ Irene C. Primera --------------------------------------- Irene C. Primera Vice President - Controller 14 15 INDEX TO EXHIBITS Exhibit Description 12 Computation of Ratio of Earnings to Fixed Charges filed herewith. 15 Letter from KPMG Peat Marwick LLP dated October 31, 1997 filed herewith. 27 Financial Data Schedule filed herewith. 15