<PAGE> 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
---------------------
================================================================================
<PAGE> 2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
LA QUINTA INNS, INC.
CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
2
<PAGE> 3
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
--------------------- ---------------------
1997 1996 1997 1996
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
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
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE> 4
ITEM I - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Additional
Common Stock Treasury Stock Paid-In Retained
Shares Amount Shares Amount Capital Earnings Total
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE> 5
ITEM 1 - FINANCIAL STATEMENTS (continued)
LA QUINTA INNS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
----------------------
1997 1996
--------- ---------
<S> <C> <C>
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
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE> 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:
<TABLE>
<CAPTION>
(in thousands)
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
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)
<S> <C> <C>
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
=========== ===========
</TABLE>
6
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 1
EXHIBIT 12
LA QUINTA INNS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(in thousands, except ratios)
<TABLE>
<CAPTION>
Nine Months
Ended September 30 Years Ended December 31
---------------------- -------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings (loss) before income
taxes, extraordinary items
and cumulative effect of
accounting change (1) ........ $ 113,017 $ 82,020 $ 96,379 $ 82,994 $ 61,991 $ 31,836 $ (7,270)
Partners' equity in earnings .... 670 1,264 1,499 10,227 11,406 12,965 15,081
Partners' equity in earnings
of combined unincorporated
ventures that do not have
fixed charges ................ -- (705) (770) (1,854) (1,577) (1,652) (1,504)
Fixed charges ................... 44,558 35,952 48,983 42,797 40,814 32,477 34,270
Interest capitalized ............ (6,553) (3,596) (5,429) (1,313) (889) -- (50)
Amortization of capitalized
interest ..................... 720 647 893 803 772 799 799
--------- --------- --------- --------- --------- --------- ---------
Earnings as adjusted ........ $ 152,412 $ 115,582 $ 141,555 $ 133,654 $ 112,517 $ 76,425 $ 41,326
========= ========= ========= ========= ========= ========= =========
Fixed charges:
Interest on long-term debt
(before capitalized
interest) .................. $ 43,625 $ 35,141 $ 47,897 $ 41,734 $ 39,749 $ 31,366 $ 33,137
Portion of rental expense
allocated to interest ...... 933 811 1,086 1,063 1,065 1,111 1,133
--------- --------- --------- --------- --------- --------- ---------
Total fixed charges ....... $ 44,558 $ 35,952 $ 48,983 $ 42,797 $ 40,814 $ 32,477 $ 34,270
========= ========= ========= ========= ========= ========= =========
Ratio of earnings to fixed
charges ...................... 3.4x 3.2x 2.9x 3.1x 2.8x 2.4x 1.2x
========= ========= ========= ========= ========= ========= =========
</TABLE>
(1) The Nine Months Ended September 30, 1996 and Years Ended December 31, 1996
and 1995, include a non-cash provision for premature retirement of assets
totaling $12,203, $18,076 and $12,630, respectively.
16
<PAGE> 1
Exhibit 15
La Quinta Inns, Inc.
San Antonio, Texas
Gentlemen:
Re: Registration Statements Nos. 33-26470, 2-97266, 2-67606, 33-55102,
33-58866, 333-32637 and 333-33789.
With respect to the subject registration statements, we acknowledge our
awareness of the use therein of our report dated October 31, 1997, 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, 1997
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30,
1997, 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-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,317
<SECURITIES> 0
<RECEIVABLES> 22,420
<ALLOWANCES> 1,029
<INVENTORY> 0
<CURRENT-ASSETS> 46,477
<PP&E> 1,670,055
<DEPRECIATION> 321,020
<TOTAL-ASSETS> 1,406,553
<CURRENT-LIABILITIES> 104,760
<BONDS> 842,872
0
0
<COMMON> 8,492
<OTHER-SE> 411,196
<TOTAL-LIABILITY-AND-EQUITY> 1,406,553
<SALES> 0
<TOTAL-REVENUES> 386,917
<CGS> 0
<TOTAL-COSTS> 186,069
<OTHER-EXPENSES> 45,674
<LOSS-PROVISION> 337
<INTEREST-EXPENSE> 36,434
<INCOME-PRETAX> 113,017
<INCOME-TAX> 41,816
<INCOME-CONTINUING> 71,201
<DISCONTINUED> 0
<EXTRAORDINARY> 38
<CHANGES> 0
<NET-INCOME> 71,163
<EPS-PRIMARY> .89
<EPS-DILUTED> .89
</TABLE>
