<PAGE>
===============================================================================
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, 1995.
OR
/ / TRANSITION PERIOD REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ________________
COMMISSION FILE NUMBER: 1-7790
_______________________
LA QUINTA INNS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1724417
(State of Incorporation) (I.R.S. Employer Identification No.)
WESTON CENTRE
112 E. PECAN STREET
P.O. BOX 2636
SAN ANTONIO, TEXAS 78299-2636
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code:(210) 302-6000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ------
_______________________
Number of shares of Common Stock, $.10 par value
outstanding at September 30, 1995:
52,467,225
_______________________
===============================================================================
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LA QUINTA INNS, INC.
COMBINED CONDENSED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................... $ 3,690 $ 2,589
Receivables (net of allowance of $154 and
$441):
Trade....................................... 12,780 10,185
Other....................................... 2,686 2,363
Supplies...................................... 6,582 7,474
Prepaid expenses.............................. 1,455 1,202
Deferred income taxes......................... 8,089 7,223
---------- ----------
Total current assets.................... 35,282 31,036
---------- ----------
Notes receivable, excluding current
installments (net of allowance of $2,451
and $3,351).................................... 2,838 7,320
---------- ----------
Investments..................................... 1,532 2,647
---------- ----------
Properties held for sale, at estimated net
realizable value............................... 2,664 2,664
---------- ----------
Land held for development, at cost.............. 1,324 1,324
---------- ----------
Property and equipment, at cost, substantially
all pledged (note 5):
Buildings..................................... 852,260 767,665
Furniture, fixtures and equipment............. 131,585 124,336
Land and leasehold improvements............... 179,586 150,311
---------- ----------
Total property and equipment............ 1,163,431 1,042,312
Less accumulated depreciation and
amortization................................. 287,585 252,372
---------- ----------
Net property and equipment.............. 875,846 789,940
---------- ----------
Deferred charges and other assets, at cost less
applicable amortization........................ 11,590 10,850
---------- ----------
Total assets............................ $ 931,076 $ 845,781
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to combined condensed financial statements.
2
<PAGE>
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt
(note 3)..................................... $ 14,419 $ 39,976
Accounts payable:
Trade....................................... 13,656 10,292
Other....................................... 6,232 6,386
Income taxes................................ 8,191 3,641
Accrued expenses:
Payroll and employee benefits............... 22,799 21,238
Interest.................................... 5,145 3,023
Property taxes.............................. 12,162 8,387
Other....................................... 1,191 1,125
-------- --------
Total current liabilities............... 83,795 94,068
-------- --------
Long-term debt, excluding current installments
(note 3)....................................... 485,732 448,258
-------- --------
Deferred income taxes, pension and other........ 20,995 22,125
-------- --------
Partners' capital (note 4)...................... 6,007 92,099
-------- --------
Shareholders' equity:
Common stock ($.10 par value; 100,000,000
shares authorized, 54,833,831 and 48,758,528
shares issued) (note 4)...................... 5,483 4,876
Additional paid-in capital.................... 221,658 68,759
Retained earnings............................. 126,366 134,409
Minimum pension liability..................... (1,474) (1,474)
-------- --------
352,033 206,570
Less treasury stock, at cost (2,366,606 and
2,361,366 shares)............................ 17,486 17,339
-------- --------
Total shareholders' equity.............. 334,547 189,231
-------- --------
Total liabilities and shareholders'
equity................................. $931,076 $845,781
-------- --------
-------- --------
</TABLE>
See accompanying notes to combined condensed financial statements.
3
<PAGE>
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
---------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Inn.......................................... $111,738 $102,271 $314,399 $268,274
Restaurant rental and other.................. 2,143 2,001 6,160 5,797
Management services.......................... 25 92 125 1,099
-------- -------- -------- --------
Total revenues............................. 113,906 104,364 320,684 275,170
-------- -------- -------- --------
Operating costs and expenses:
Direct....................................... 56,086 53,638 159,214 146,787
Corporate.................................... 4,574 4,489 13,966 13,745
Depreciation, amortization and
asset retirements........................... 10,131 10,305 30,761 28,077
Provision for premature retirement of
assets (note 5)............................. 8,577 -- 8,577 --
-------- -------- -------- --------
Total operating costs and expenses......... 79,368 68,432 212,518 188,609
-------- -------- -------- --------
Operating income........................... 34,538 35,932 108,166 86,561
-------- -------- -------- --------
Other (income) expense:
Interest income.............................. (239) (299) (818) (1,368)
Interest on long-term debt................... 10,020 10,060 30,403 28,659
Partners' equity in earnings (note 4)........ 635 3,202 9,611 8,724
-------- -------- -------- --------
Earnings before income taxes and
extraordinary items...................... 24,122 22,969 68,970 50,546
Income taxes................................... 9,190 8,958 26,277 19,713
-------- -------- -------- --------
Earnings before extraordinary items....... 14,932 14,011 42,693 30,833
Extraordinary items, net of income taxes....... (717) -- (717) --
-------- -------- -------- --------
Net earnings.............................. 14,215 14,011 41,976 30,833
Conversion of partner's interest into
common stock (note 4)......................... (46,364) -- (46,364) --
-------- -------- -------- --------
Net earnings (loss) available
to shareholders.......................... $(32,149) $ 14,011 $ (4,388) $ 30,833
-------- -------- -------- --------
-------- -------- -------- --------
Earnings (loss) per common and
common equivalent share:
Earnings (loss) after conversion of
partner's interest into common stock
and before extraordinary items............... $ (.58) $ .29 $ (.07) $ .64
Extraordinary items, net of income taxes...... (.01) -- (.02) --
-------- -------- -------- --------
Net earnings (loss) available
to shareholders................................ $ (.59) $ .29 $ (.09) $ .64
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average number of common
and common equivalent shares
outstanding (note 2)........................... 54,869 48,600 51,127 48,477
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
See accompanying notes to combined condensed financial statements.
4
<PAGE>
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
-----------------
1995 1994
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . $41,976 $30,833
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization of property
and equipment and fixed asset retirements. . . 30,761 28,077
Provision for premature retirement of assets . . 8,577 --
Partners' equity in earnings . . . . . . . . . . 9,611 8,724
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . (3,122) (4,530)
Income taxes . . . . . . . . . . . . . . . . . 9,338 7,605
Supplies and prepaid expenses. . . . . . . . . (108) (1,226)
Accounts payable and accrued expenses. . . . . 9,702 5,988
Deferred charges and other assets. . . . . . . 526 1,221
Deferred credits and other . . . . . . . . . . 1,107 2,358
------- -------
Net cash provided by operating activities. . 108,368 79,050
------- -------
Cash flows from investing activities:
Construction and conversion of inns. . . . . . (56,658) (29,321)
Other capital expenditures . . . . . . . . . . (19,088) (68,704)
Purchase of partners' equity interests . . . . (48,200) (53,255)
Decrease in notes receivable and other
investments. . . . . . . . . . . . . . . . . 5,820 3,690
------- -------
Net cash used by investing activities. . . . (118,126) (147,590)
------- -------
Cash flows from financing activities:
Proceeds from lines of credit and long-term
borrowings . . . . . . . . . . . . . . . . . 532,394 354,352
Principal payments on lines of credit and
long-term borrowings . . . . . . . . . . . . (520,640) (301,845)
Capital distributions to partners. . . . . . . (2,181) (726)
Dividends to shareholders. . . . . . . . . . . (3,655) (2,300)
Purchases of treasury stock. . . . . . . . . . (102) (2,626)
Net proceeds from stock transactions . . . . . 5,043 2,456
------- -------
Net cash provided by financing activities. . 10,859 49,311
------- -------
Increase (decrease) in cash and cash equivalents . . . 1,101 (19,229)
Cash and cash equivalents at beginning of period . . . 2,589 23,848
------- -------
Cash and cash equivalents at end of period . . . . . . 3,690 4,619
======= =======
Supplemental disclosure of cash flow information:
Interest paid. . . . . . . . . . . . . . . . . . . . . $29,098 $26,539
======= =======
Income tax paid. . . . . . . . . . . . . . . . . . . . $15,852 $ 6,583
======= =======
Income tax refunds . . . . . . . . . . . . . . . . . . $ (51) $ (26)
======= =======
</TABLE>
See accompanying notes to combined condensed financial statements.
5
<PAGE>
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------
1995 1994
------ ------
<S> <C> <C>
Supplemental schedule of non-cash
investing and financing activities --
Conversion of partner's interest into
common stock . . . . . . . . . . . . . . . $142,764 $ --
======== ======
Tax benefit from stock options exercised . . 5,654 3,409
======== ======
Effect of stock splits . . . . . . . . . . . -- 1,616
======== ======
</TABLE>
See accompanying notes to combined condensed financial statements.
6
<PAGE>
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) Basis of Presentation
The accompanying unaudited combined condensed financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, which are necessary for a fair presentation of
financial position and results of operations have been made. The combined
condensed financial statements should be read in conjunction with the combined
financial statements and notes thereto included in the December 31, 1994 Annual
Report on Form 10-K.
(2) Earnings (loss) per Common and Common Equivalent Share
Primary and fully diluted earnings per share are not materially different.
(3) Long-Term Debt
On September 12, 1995, the Company amended its credit facilities to
provide the Company with a $200 million Unsecured Line of Credit and a $50
million 364-Day Unsecured Line of Credit (the "Amended Credit Facility")
which mature September 2000 and August 1996, respectively. The Amended
Credit Facility bears interest at the prime rate or LIBOR, plus an applicable
margin, as defined in the related credit agreements. The applicable margin
is determined quarterly based upon predetermined levels of indebtedness to
cash flows or ratings received by specified credit rating agencies as defined
in the related credit agreements. Currently, borrowings bear interest at
either LIBOR plus 65 basis points or the prime rate. At September 30, 1995,
the Company had $102,650,000 available on its Amended Credit Facility.
In September 1995, the Company completed an offering of $100,000,000 in
principal amount of 7.4% Senior Notes due 2005. The proceeds of the note
offering were used to repay indebtedness under the Company's previous credit
facilities and approximately $16.8 million of long-term mortgage debt with an
average interest rate of 10.3%. As a result of the early extinguishment of
this mortgage debt, the Company recognized extraordinary items of
approximately $1,158,000 ($717,000 net of income taxes) from prepayment fees.
(4) Acquisition of Partner's Interest
On June 15, 1995, AEW Partners, L. P. ("AEW") notified the Company that
it would exercise its option, subject to certain conditions, to convert
two-thirds of its ownership interest in La Quinta Development Partners, L.P.
("LQDP") into 5,299,821 shares of the Company's Common Stock and also agreed
to sell its remaining ownership interest in LQDP to the Company for a
negotiated price of $48.2 million in cash (collectively, the "AEW
Transaction"). Under the terms of the LQDP Partnership Agreement, AEW paid
$3.0 million in 1990 for an option, subject to certain vesting and other
conditions, to convert two-thirds of its ownership interest in LQDP into a
specified number of shares (adjusted for stock splits, cash dividends and
distributions from LQDP to AEW) of the Company's Common Stock. The AEW
Transaction was consummated on July 3, 1995. The Company financed the cash
portion of the AEW Transaction through borrowings under its bank credit
facilities.
Upon conversion of the partnership interest into La Quinta Common Stock,
the Company issued 5,299,821 shares of Common Stock having a fair market
value of $142.8 million based on the July 3, 1995 New York Stock Exchange
closing price. The conversion was accounted for by increasing shareholders'
equity by the $46.4 million value of the option and recording a $46.4 million
non-recurring, non-cash adjustment entitled Converison of Partner's Interest
into Common Stock below net earnings in the Statement of Operations. There
will therefore be no net effect to shareholders' equity as a result of this
accounting treatment.
The sale to La Quinta of AEW's remaining one-third interest in LQDP was
accounted for as an acquisition of a minority interest and purchase
accounting was applied.
7
<PAGE>
As permitted under the LQDP Partnership Agreement, AEW requested that
the Common Stock be registered with the Securities and Exchange Commission
for sale in an underwritten secondary public offering. Pursuant to this
request, the Company filed a registration statement, which became effective
July 31, 1995, with the Securities and Exchange Commission with respect to
such sale. AEW bore all of the costs related to the registration and sale of
the Common Stock in the offering.
The following unaudited pro forma information reflects the combined
results of operations of the Company as if the AEW Transaction had occurred
on January 1, 1995 and January 1, 1994. The pro forma information gives
effect to certain adjustments, including additional depreciation expense on
property and equipment based on their fair values, increased interest expense
on additional debt incurred, elimination of AEW's Partners' equity in
earnings and the related income tax effect of those adjustments. The pro
forma information does not reflect the non-cash, non-recurring item described
above.
<TABLE>
<CAPTION>
(Unaudited)
Actual Pro Forma Actual Pro Forma
Nine months ended Nine months ended Year ended Year ended
September 30, 1995 September 30, 1995 December 31, 1994 December 31, 1994
------------------ ------------------ ----------------- -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenues. . . . . . . . . . . . $320,684 $320,684 $362,242 $362,242
======== ======== ======== ========
Earnings before extraordinary
items . . . . . . . . . . . . . . . $ 42,693 $ 46,017 $ 37,815 $ 41,050
======== ======== ======== ========
Earnings per share . . . . . . . . . $ .84 $ .84 $ .78 $ .76
======== ======== ======== ========
</TABLE>
(5) Provision for Premature Retirement of Assets
The Company launched its chain wide room upgrade program during which
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, the Company will record non-cash
provisions for premature retirement of assets totaling approximately $17.0
million, of which $13.0 million will be reported in 1995 and the remainder in
1996. The Company reported non-cash charges related to the premature
retirement of these assets of approximately $8.6 million as a separate line
item entitled "Provision for Premature Retirements of Assets" on the
Statement of Operations for the current quarter.
(6) Subsequent Event
Through November 2, 1995, the Company committed to repurchase
67,500 shares of its Common Stock for approximately $1,735,000 under a plan
previously approved by the Board of Directors to repurchase up to $10,000,000
of its Common Stock. Total repurchases under this plan approximate
$8,849,000. On October 31, 1995, the Board of Directors authorized the
repurchase of an additional $10,000,000 of its Common Stock. Purchases will
be made from time to time in the open market as deemed appropriate by the
Company.
(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 Court has pending before it the La
Quinta Defendants' motion for summary judgment. The parties subsequently filed
a required, joint Pre-Trial Order, in which the plaintiff has conceded a number
of his claims. Currently, no trial date has been set for this action. The
Company intends to vigorously defend itself against this suit.
The Company is also party to various lawsuits and claims generally
incidental to its business. The ultimate disposition of these and the above
discussed matters are not expected to have a material adverse effect on the
Company's financial position or results of operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis addresses the results of operations
for the three month periods ended September 30, 1995 (the "1995 Three Months")
and September 30, 1994 (the "1994 Three Months") and the nine month periods
ended September 30, 1995 (the "1995 Nine Months") and September 30, 1994 (the
"1994 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 40% ownership interest and over which it
exercises substantial legal, financial and operational control. References to
"Managed Inns" are to those inns in which the Company owns less than a 40%
interest and which were managed by the Company under long-term management
contracts.
8
<PAGE>
The following table describes the composition of inns in the La Quinta
chain at:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
-------------------------------- --------------------------------
La Quinta La Quinta
Total Equivalent Total Equivalent
Inns Rooms Rooms (1) Inns Rooms Rooms (1)
---- ------ ---------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Owned 100% 227 29,137 29,137 176 22,296 22,296
Owned 40-80% 7 836 467 49 6,675 2,803
---- ------ ------ --- ------ ------
Total Company owned
and operated 234 29,973 29,604 225 28,971 25,099
=== ====== ====== === ====== ======
</TABLE>
(1) Represents the Company's proportionate ownership in system rooms.
The Company launched its room upgrade 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 enhance the decor
package of the rooms, including fresh colors, wood design furniture,
contemporary bathrooms, new draperies and bedspreads and 25 inch televisions.
Service enhancements include movies-on-demand, interactive video games,
dataport telephones and greatly expanded free television channel choices.
During implementation of this 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,
the Company will record non-cash provisions for premature retirement of
assets totaling approximately $17.0 million, of which $13.0 million will be
reported in 1995 and the remainder in 1996.
The Company acquired ten inns during the nine months ended September 30,
1995 and six inns during the year ended 1994 for conversion to the La
Quinta-Registered Trademark- brand. In some cases acquisition and conversion
of existing properties is more cost effective than new construction.
However, in markets where existing inns for acquisition and conversion are
not readily available at attractive discounts to replacement costs, the
Company has begun the selective construction of new inns. The construction
of five new inns was begun during 1995.
On July 1, 1994, the Company purchased nine inns which it managed and
which were previously held in two unincorporated joint ventures with CIGNA
Investments, Inc. (the "CIGNA partnerships"). The Company has continued to
operate these properties as La Quinta inns.
On June 15, 1995, AEW Partners, L.P. ("AEW") notified the Company that
it would exercise, subject to certain conditions, its option to convert
two-thirds of its ownership interest in La Quinta Development Partners, L.P.
("LQDP") into 5,299,821 shares of the Company's Common Stock. AEW also
agreed to sell the remaining one-third of its ownership interest in LQDP to
the Company for a negotiated price of $48.2 million in cash (collectively,
the "AEW Transaction"). The AEW Transaction was consummated on July 3, 1995.
Upon conversion of the partnership interest into La Quinta Common Stock, the
Company issued 5,299,821 shares of the Company's Common Stock having a fair
market value of $142.8 million based on the July 3, 1995 New York Stock
Exchange closing price. The conversion was accounted for by increasing
shareholders' equity by the $46.4 million value of the option and recording a
$46.4 million non-recurring, non-cash adjustment entitled Conversion of
Partner's Interest into Common Stock below net earnings in the Statement of
Operations. There will therefore be no net effect to shareholders' equity as
a result of this accounting treatment.
9
<PAGE>
The following chart shows certain historical operating statistics and
revenue data. References to occupancy percentages and average daily rate
("ADR") refer to Company Inns (inns owned by the Company or by unincorporated
partnerships and joint ventures in which the Company owns at least a 40%
interest). Managed Inns and the La Quinta licensed inn are excluded from
occupancy and ADR statistics for all periods for purposes of comparability.
All financial data is related to Company Inns unless otherwise specified.
<TABLE>
<CAPTION>
Comparative Operating Statistics and Revenue Data
----------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- -------------------
1995 1994 1995 1994
------ ------ ------ ------
(amounts in thousands, except ADR)
<S> <C> <C> <C> <C>
Room revenue . . . . . . . . . . $107,621 $ 98,620 $302,805 $258,446
Other inn revenue . . . . . . . 4,117 3,651 11,594 9,828
Restaurant rental and other. . . 2,143 2,001 6,160 5,797
Management services . . . . . . 25 92 125 1,099
-------- -------- -------- --------
Total revenues . . . . . . . . $113,906 $104,364 $320,684 $275,170
======== ======== ======== ========
Occupancy percentage . . . . . . 75.8% 76.2% 73.5% 72.1%
ADR. . . . . . . . . . . . . . . $ 51.76 $ 48.97 $ 51.18 $ 47.49
Available rooms (1). . . . . . . 2,743 2,643 8,048 7,544
</TABLE>
_______________
(1) Available rooms represent the number of rooms available for sale multiplied
by the number of days in the period reported.
THE 1995 THREE MONTHS COMPARED TO THE 1994 THREE MONTHS
TOTAL REVENUES increased to $113,906,000 in the 1995 Three Months from
$104,364,000 in the 1994 Three Months, an increase of $9,542,000, or 9.1%. Of
the total revenues reported in the 1995 Three Months, 98.1% were revenues from
inns and 1.9% were revenues from restaurant rentals and other revenues.
INN REVENUES are derived from room rentals and other sources such as
charges to guests for long-distance telephone service, fax machine use,
vending commissions, banquet revenues and laundry services. Inn revenues
improved to $111,738,000 in the 1995 Three Months from $102,271,000 in the
1994 Three Months, an increase of $9,467,000 or 9.3%. The improvement in inn
revenues was related to an increase in ADR along with the revenues associated
with the acquisition of ten inns during 1995 and six inns in 1994. Occupancy
percentage was essentially unchanged at 75.8% in the 1995 Three Months
compared to 76.2% in the 1994 Three Months. ADR increased to $51.76 in the
1995 Three Months from $48.97 in the 1994 Three Months. Revenue per
available room ("REVPAR," which is the product of occupancy percentage and
ADR) increased 5.2% to $39.23 in the 1995 Three Months from $37.30 in the
1994 Three Months.
RESTAURANT RENTAL AND OTHER REVENUES include rental payments from
restaurant buildings owned by La Quinta and leased to and operated by third
parties. Restaurant rental and other revenues increased to $2,143,000 in the
1995 Three Months from $2,001,000 in the 1994 Three Months, an increase of
$142,000, or 7.1%.
DIRECT EXPENSES include costs directly associated with the operation of
Company Inns. In the 1995 Three Months approximately 41.0% of direct expenses
were represented by salaries, wages and related costs. Other major categories
of direct expenses include utilities, property taxes, repairs and maintenance
and room supplies. Direct expenses increased to $56,086,000 ($26.98 per
occupied room) in the 1995 Three Months from $53,638,000 ($26.64 per occupied
room) in the 1994 Three Months. The increase in direct expenses period over
period is primarily attributable to the growth in number of inns. The increase
is also impacted by rising labor costs in regions with low unemployment and
increased credit card fees resulting from an increase in the number of customers
paying with credit cards.
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 $4,574,000 ($1.67
per available room) in the 1995 Three Months from $4,489,000 ($1.70 per
available room, including Managed Inns) in the 1994 Three Months, an increase
of $85,000, or 1.9%.
DEPRECIATION, AMORTIZATION AND FIXED ASSET RETIREMENTS decreased to
$10,131,000 in the 1995 Three Months from $10,305,000 in the 1994 Three
Months, a decrease of $174,000, or 1.7%. This decrease is primarily
attributable to assets which have become fully depreciated during 1995 and a
decrease in loss on retirement of fixed assets. Depreciation, amortization
and fixed
10
<PAGE>
asset retirements include retirements associated with the image enhancement
program, which was substantially complete by mid-1994 and other capital
improvements.
A PROVISION FOR PREMATURE RETIREMENT OF ASSETS totaling $8,577,000 was
recorded during the 1995 Three Months. This non-cash charge is directly
attributable to the Company's room upgrade 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 $34,538,000 in
the 1995 Three Months from $35,932,000 in the 1994 Three Months, a decrease
of $1,394,000, or 3.9%. Operating income before the provision for premature
retirement of assets increased to $43,115,000 in the 1995 Three Months from
$35,932,000 in the 1994 Three Months, an increase of $7,183,000 or 20.0%.
INTEREST ON LONG-TERM DEBT remained relatively constant at $10,020,000
in the 1995 Three Months compared to $10,060,000 in the 1994 Three Months.
While long-term debt, including current installments has increased, the
Company's weighted average interest rate on long-term borrowings decreased
due to favorable interest rates negotiated in the Amended Credit Facility and
the issuance of the 7.4% Senior Notes due 2005, along with improved market
conditions.
PARTNERS' EQUITY IN EARNINGS reflects the interest of partners in the
earnings of the combined joint ventures and partnerships which are owned at
least 40% and controlled by the Company. Partners' equity in earnings
decreased to $635,000 in the 1995 Three Months from $3,202,000 in the 1994
Three Months, a decrease of $2,567,000. This decrease is primarily
attributable to the elimination of LQDP's equity in earnings as a result of
the AEW Transaction.
INCOME TAXES for the 1995 Three Months were calculated using an
effective income tax rate of 38.1% compared to an effective income tax rate
of 39% for the 1994 Three Months. The Company estimates that its annual
effective income tax rate will be 38.1% in 1995, which reflects the impact of
the difference between aggregate recorded cost and tax basis of acquired
assets from the AEW Transaction. The reduction in the annual effective
income tax rate also reflects a reduction of estimated state income tax
expense.
For the reasons discussed above, EARNINGS BEFORE EXTRAORDINARY ITEMS
increased to $14,932,000 in the 1995 Three Months from $14,011,000 in the
1994 Three Months, an increase of $921,000, or 6.6%.
EXTRAORDINARY ITEMS, NET OF TAX, of ($717,000), or ($.01) per share,
were recorded in the 1995 Three Months and resulted primarily from prepayment
fees related to the early extinguishment of approximately $16,800,000 of
long-term mortgage debt with an average interest rate of 10.3%.
NET EARNINGS increased to $14,215,000 in the 1995 Three Months from
$14,011,000 in the 1994 Three Months, an increase of $204,000, or 1.5%.
During the 1995 Three Months, the Company recorded a non-cash,
non-recurring charge of $46,364,000 as "Conversion of Partner's Interest into
Common Stock" which was directly attributable to the AEW Transaction. This
charge reduced NET EARNINGS (LOSS) AVAILABLE TO SHAREHOLDERS to
($32,149,000), or ($.59) per share, in the 1995 Three Months from
$14,011,000, or $0.29 per share, in the 1994 Three Months.
THE 1995 NINE MONTHS COMPARED TO THE 1994 NINE MONTHS
TOTAL REVENUES increased to $320,684,000 in the 1995 Nine Months from
$275,170,000 in the 1994 Nine Months, an increase of $45,514,000 or 16.5%.
Of the total revenues reported in the 1995 Nine Months, 98.0% were revenues
from inns and 2.0% were revenues from restaurant rentals and other revenues.
INN REVENUES improved to $314,399,000 in the 1995 Nine Months from
$268,274,000 in the 1994 Nine Months, an increase of $46,125,000, or 17.2%.
The improvement in inn revenues was related to an increase in occupancy
percentage and ADR along with the revenues associated with the acquisition of
ten inns in the 1995 Nine Months, the CIGNA partnerships in July 1994 and six
inns in the last half of 1994. Occupancy percentage increased to 73.5% in
the 1995 Nine Months from 72.1% in the 1994 Nine Months. ADR increased to
$51.18 in the 1995 Nine Months from $47.49 in the 1994 Nine Months.
Improvements in both ADR and occupancy percentage are due, in part, to the
substantial completion of the Company's image enhancement program in
mid-1994. REVPAR increased 9.8% to $37.62 in the 1995 Nine Months from
$34.25 in the 1994 Nine Months.
11
<PAGE>
RESTAURANT RENTAL AND OTHER REVENUES increased to $6,160,000 in the 1995
Nine Months from $5,797,000 in the 1994 Nine Months, an increase of $363,000,
or 6.3%. The increase is primarily the result of the additional restaurant
buildings owned by the Company through the acquisition of the CIGNA
partnerships.
MANAGEMENT SERVICES REVENUE decreased to $125,000 in the 1995 Nine
Months from $1,099,000 in the 1994 Nine Months. The decrease is due to the
acquisition of the CIGNA partnerships in July 1994, eliminating the related
management fees earned by the Company.
In the 1995 Nine Months, approximately 41.8% of DIRECT EXPENSES were
represented by salaries, wages and related costs. Direct expenses increased
to $159,214,000 ($26.91 per occupied room) in the 1995 Nine Months from
$146,787,000 ($26.98 per occupied room) in the 1994 Nine Months. The
increase in direct expenses period over period is primarily attributable to
the growth in number of inns and increase in occupancy. The improvement in
direct expenses per occupied room was primarily due to efficiencies the
Company achieved in repairs and maintenance and utilities expense and was
partially offset by rising labor costs in regions with low unemployment and
increased credit card fees resulting from an increase in the number of
customers paying with credit cards.
CORPORATE EXPENSES increased to $13,966,000 ($1.74 per available room)
in the 1995 Nine Months from $13,745,000 ($1.77 per available room, including
Managed Inns) in the 1994 Nine Months, an increase of $221,000, or 1.6%. The
increase was primarily the result of severance related costs for a former
officer of the Company.
DEPRECIATION, AMORTIZATION AND FIXED ASSET RETIREMENTS increased to
$30,761,000 in the 1995 Nine Months from $28,077,000 in the 1994 Nine Months,
an increase of $2,684,000, or 9.6%. This is due primarily to the increase in
fixed assets resulting from the acquisition of inns, including the CIGNA
partnerships, and additions from the image enhancement program, which was
substantially complete by the end of 1994. The increase is partially offset
by a reduction in depreciation on assets which have become fully depreciated
during 1995 and a decrease in loss on retirement of fixed assets.
Depreciation, amortization and fixed asset retirements also include
retirements associated with the image enhancement program and other capital
improvements.
A PROVISION FOR PREMATURE RETIREMENT OF ASSETS totaling $8,577,000 was
recorded during the 1995 Nine Months. This non-cash charge is directly
attributable to the Company's room upgrade 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 $108,166,000 in
the 1995 Nine Months from $86,561,000 in the 1994 Nine Months, an increase of
$21,605,000, or 25.0%. Operating income before the provision for premature
retirement of assets increased to $116,743,000 in the 1995 Nine Months from
$86,561,000 in the 1994 Nine Months, an increase of $30,182,000, or 34.9%.
INTEREST ON LONG-TERM DEBT increased to $30,403,000 in the 1995 Nine
Months from $28,659,000 in the 1994 Nine Months, an increase of $1,744,000,
or 6.1%. The increase is primarily attributable to the increase in the
outstanding balance on the Company's credit facilities as a result of the AEW
Transaction and the acquisitions of the CIGNA partnerships and 16 inns since
June 1994. While long-term debt, including current installments has
increased, the Company's weighted average interest rate on long-term
borrowings decreased due to favorable interest rates negotiated in the
Amended Credit Facility and the issuance of the 7.4% Senior Notes due 2005,
along with improved market conditions.
PARTNERS' EQUITY IN EARNINGS increased to $9,611,000 in the 1995 Nine
Months from $8,724,000 in the 1994 Nine Months. The increase is attributable
to improvements in operating performance of the inns and the increase in the
number of inns in LQDP, which was included in partners' equity in earnings
before the AEW Transaction.
INCOME TAXES for the 1995 Nine Months were calculated using an effective
income tax rate of 38.1% compared to an effective income tax rate of 39.0%
for the 1994 Nine Months. The effective income tax rate decrease reflects
the estimated impact of the AEW Transaction as further described above and a
reduction of estimated state income tax expense.
For the reasons discussed above, EARNINGS BEFORE EXTRAORDINARY ITEMS
increased to $42,693,000 in the 1995 Nine Months from $30,833,000 in the 1994
Nine Months, an increase of $11,860,000, or 38.5%.
EXTRAORDINARY ITEMS, NET OF TAX, of ($717,000), or ($0.02) per share, were
recorded in the 1995 Nine Months and resulted primarily from prepayment fees
related to the early extinguishment of approximately $16,800,000 of long-term
mortgage debt at an average interest rate of 10.3%.
12
<PAGE>
NET EARNINGS increased to $41,976,000 in the 1995 Nine Months from
$30,833,000 in the 1994 Three Months, an increase of $11,143,000, or 36.1%.
During the 1995 Nine Months, the Company recorded a non-cash,
non-recurring charge of $46,364,000 as "Conversion of Partner's Interest into
Common Stock" which was directly attributable to the AEW Transaction. This
charge reduced NET EARNINGS (LOSS) AVAILABLE TO SHAREHOLDERS to ($4,388,000),
or ($0.09) per share, in the 1995 Nine Months from $30,833,000, or $0.64 per
share, in the 1994 Nine Months.
ANALYSIS OF CASH FLOWS
At September 30, 1995, the Company had $3,690,000 of cash and cash
equivalents, an increase of $1,101,000 from December 31, 1994. As of
September 30, 1995, the Company had $102,650,000 available on its Amended
Credit Facility, as defined below.
On September 12, 1995, the Company amended its credit facilities to
provide the Company with a $200 million Unsecured Line of Credit and a $50
million 364-Day Unsecured Line of Credit (the "Amended Credit Facility")
which mature September 2000 and August 1996, respectively. The Amended
Credit Facility bears interest at the prime rate or LIBOR, plus an applicable
margin, as defined in the related credit agreements. The applicable margin
is determined quarterly based upon predetermined levels of indebtedness to
cash flows or ratings received by specified rating agencies as defined in the
related credit agreements. Currently, borrowings bear interest at either
LIBOR plus 65 basis points or the prime rate.
In September 1995, the Company completed an offering of $100,000,000 in
principal amount of 7.4% Senior Notes due 2005. The proceeds of the note
offering were used to repay indebtedness under the Company's previous credit
facilities and approximately $16.8 million of long-term mortgage debt with an
average interest rate of 10.3%. As a result of the early extinguishment of
this mortgage debt, the Company recognized extraordinary items of
approximately $1,158,000 ($717,000 net of income taxes) from prepayment fees.
Net cash from operations improved to $108,368,000 in the 1995 Nine
Months from $79,050,000 in the 1994 Nine Months, an increase of $29,318,000
or 37.1%. The increase is the result of the improvement in inn revenue and
operating margins.
Net cash used by investing activities decreased to ($118,126,000) in the
1995 Nine Months from ($147,590,000) in the 1994 Nine Months, a decrease of
$29,464,000, or 20.0%. The 1995 Nine Months and 1994 Nine Months capital
expenditures include the purchase of ten inns and four inns, respectively.
The 1995 Nine Months also includes the purchase of one-third of AEW's
ownership interest in LQDP. The 1994 Nine Months also includes expenditures
of approximately $47,684,000 related to the Company's image enhancement
program and the purchase of the remaining Units of La Quinta Motor Inns
Limited Partnership.
Net cash provided by financing activities was $10,859,000 in the 1995
Nine Months compared to $49,311,000 in the 1994 Nine Months. The decrease in
cash provided by financing activities resulted primarily from a decrease in
the excess of proceeds from lines of credit and long-term borrowings over
principal payments on lines of credit and long-term borrowings.
EBITDA increased to $53,246,000 during the third quarter of 1995, an
increase of 15.2% over the 1994 comparable period. EBITDA, as used above, is
defined as earnings before net interest expense, income taxes, depreciation,
amortization and fixed asset retirements, partners' equity in earnings and
provision for premature retirement of assets. The Company believes this
definition of EBITDA provides a meaningful measure of its ability to service
debt.
In the 1995 Nine Months, the Company began its chain wide room upgrade
program. The Company will spend approximately $73 million in excess of its
normal maintenance capital expenditures during the program period of 1995
through 1998, with approximately $69 million of this excess anticipated to be
spent in 1995 and 1996. The capital requirements of the program will be
funded from internally generated cash flows and is not anticipated to have an
adverse effect on the Company's ability to fund its operations. The Company
has made commitments of approximately $32.3 million for this program as of
October 31, 1995.
Additional capital expenditures planned by La Quinta for the remainder
of 1995 and 1996 focus on the expansion of inns, the acquisition and
conversion of inns and the construction of new inns in markets where inns for
acquisition and conversion are not readily available. The estimated
additional cost to complete the expansion of inns, conversion of acquired
inns and construction of new inns for which commitments have been made is
approximately $45.6 million at October 31, 1995.
13
<PAGE>
Funds on hand, internally generated future cash flows and funds
available on the Company's Amended Credit Facility will be sufficient to meet
capital requirements, as well as operating expenses and debt service
requirements through at least the third quarter of 1996. From time to time,
the Company will continue to evaluate the necessity of other financing
alternatives.
14
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
La Quinta Inns, Inc.:
We have reviewed the combined condensed balance sheet of La Quinta Inns, Inc.
as of September 30, 1995, and the related combined condensed statements of
operations for the three-month and nine-month periods ended September 30,
1995 and 1994 and cash flows for the nine-month periods ended September 30,
1995 and 1994. These combined condensed financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the combined condensed financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the combined balance sheet of La Quinta Inns, Inc. as of December
31, 1994 and the related combined statements of operations, shareholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated January 23, 1995, we expressed an unqualified opinion on
those combined financial statements. In our opinion, the information set
forth in the accompanying combined condensed balance sheet as of December 31,
1994, is fairly stated, in all material respects, in relation to the combined
balance sheet from which it has been derived.
KPMG Peat Marwick LLP
San Antonio, Texas
October 31, 1995
15
<PAGE>
Part II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Actions for negligence or other tort claims occur routinely as an
ordinary incident to the Company's business. Several lawsuits are pending
against the Company which have arisen in the ordinary course of the business,
but none of these proceedings involves a claim for damages (in excess of
applicable excess umbrella insurance coverages) involving more than 10% of
current assets of the Company (also see note 7 to combined condensed
financial statements). The Company does not anticipate any amounts which it
may be required to pay as a result of an adverse determination of such legal
proceedings, individually or in the aggregate, or any other relief granted by
reason thereof, will have a material adverse effect on the Company's
financial position or results of operations.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
The following exhibits are filed as part of this Quarterly Report on
Form 10-Q:
*4(a) Form of Indenture between La Quinta Inns, Inc. and U.S. Trust
Company of Texas, N.A., as Trustee.
*4(b) Form of Senior Note of La Quinta Inns, Inc.
*10(a) Amended and Restated Credit Agreement (Facility A), dated as of
September 12, 1995, among La Quinta Inns, Inc., Certain Lenders
and NationsBank of Texas, N.A., as Administrative Lender.
*10(b) Amended and Restated Credit Agreement (Facility B), dated as of
September 12, 1995, among La Quinta Inns, Inc., Certain Lenders
and NationsBank of Texas, N.A., as Administrative Lender.
*10(c) Fifth Amended and Restated Master Covenant Agreement, dated as
of September 12, 1995 between La Quinta Inns, Inc. and the Banks
party thereto (NationsBank of Texas, N.A.).
*10(d) Fifth Amended and Restated Master Covenant Agreement, dated as
of September 12, 1995 between La Quinta Inns, Inc. and the
Banks party thereto (First Interstate Bank of Texas, N.A.).
15 Letter from KPMG Peat Marwick LLP dated October 31, 1995 filed
herewith.
27 Financial Data Schedule filed herewith.
___________________________
* Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-3 (No. 33-61755) and incorporated herein by
reference.
16
<PAGE>
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 9, 1995 By:/S/ William C. Hammett, Jr.
-----------------------------------
William C. Hammett, Jr.
Senior Vice President - Accounting and
Administration
November 9, 1995 By:/S/ Irene C. Primera
-----------------------------------
Irene C. Primera
Vice President - Controller
17
<PAGE>
EXHIBIT 15
La Quinta Inns, Inc.
San Antonio, Texas
Gentlemen:
Re: Registration Statements Nos. 33-26470, 2-97266, 2-67606, 33-55102 and
33-58866.
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated October 31, 1995, related to
our review of interim financial information.
Pursuant to Rule 436(c) under the Securities Act of 1933, such report is not
considered a part of a registration statement prepared or certified by an
accountant or a report prepared or certified by an accountant within the
meaning of sections 7 and 11 of the Act.
KPMG Peat Marwick LLP
San Antonio, Texas
October 31, 1995
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
combined condensed financial statements for the nine month period ended
September 30, 1995, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<CASH> 3,690
<SECURITIES> 0
<RECEIVABLES> 20,909
<ALLOWANCES> 2,605
<INVENTORY> 0
<CURRENT-ASSETS> 35,282
<PP&E> 1,163,431
<DEPRECIATION> 287,585
<TOTAL-ASSETS> 931,076
<CURRENT-LIABILITIES> 83,795
<BONDS> 485,732
<COMMON> 5,483
0
0
<OTHER-SE> 329,064
<TOTAL-LIABILITY-AND-EQUITY> 931,076
<SALES> 0
<TOTAL-REVENUES> 320,684
<CGS> 0
<TOTAL-COSTS> 159,214
<OTHER-EXPENSES> 30,761
<LOSS-PROVISION> 633
<INTEREST-EXPENSE> 30,403
<INCOME-PRETAX> 68,970
<INCOME-TAX> 26,277
<INCOME-CONTINUING> 42,693
<DISCONTINUED> 0
<EXTRAORDINARY> (717)
<CHANGES> 0
<NET-INCOME> (4,388)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
