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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _____________________
Commission File No. 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 Number)
WESTON CENTRE 78299-2636
112 EAST PECAN STREET (Zip Code)
P.O. BOX 2636
SAN ANTONIO, TEXAS
(Address of principal executive office)
Registrant's telephone number, including area code: (210) 302-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock New York Stock Exchange, Inc.
($.10 par value)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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 Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates
of registrant as of February 28, 1994 was $420,847,410. As of February 28,
1994, there were 32,111,364 shares of registrant's Common Stock issued and
30,378,497 such shares outstanding, giving effect for the three for two stock
split in March 1994.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the following document are
incorporated by reference into the designated parts of this Form 10-K:
definitive Proxy Statement, dated on or about April 15, 1994 relating to
Registrant's 1994 Annual Meeting of Shareholders (in Part III), which Registrant
intends to file not later than 120 days after the end of the fiscal year covered
by this Form 10-K.
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FORM 10-K INDEX
PART I
PAGE
----
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders. . . 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . 13
Item 8. Financial Statements and Supplementary Data . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. . . . . . . . . . . . . . . . . 46
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . 46
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . 47
Item 13. Certain Relationships and Related Transactions. . . . . . 47
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 47
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
2
PART I
ITEM 1. BUSINESS
La Quinta Inns, Inc. ("La Quinta" or the "Company") is a leader in the
upper economy segment of the lodging market. Founded in 1968, the La Quinta
chain's 221 inns are located in 29 states with concentrations in Texas, Florida
and California. As of January 31, 1994, the Company owned interests in and
operated all but one of its inns. The Company maintains a minority interest in
nine inns which it manages pursuant to long-term management contracts and has
one licensed inn.
La Quinta is incorporated under the laws of Texas and maintains its
executive offices at Weston Centre, 112 East Pecan Street, P.O. Box 2636, San
Antonio, Texas 78299-2636, telephone (210) 302-6000.
PRODUCT
La Quinta inns appeal to guests who desire high-quality rooms and
convenient locations at attractive prices and whose needs do not include banquet
and convention facilities, in-house restaurants, cocktail lounges or room
service. As a result of the cost savings associated with the elimination of
these management intensive facilities and services, the Company believes it is
able to offer its guests an excellent value -- convenient locations and room
quality comparable to mid-priced full service hotels at a lower price.
La Quinta inns contain an average of 130 spacious, quiet and comfortably
furnished rooms with an average of 300 square feet. Each inn features a choice
of rooms for non-smokers and smokers, complimentary continental breakfast, free
unlimited local telephone calls, remote-control television with Showtime or The
Movie Channel, telecopy services, same day laundry and dry cleaning service,
24-hour front desk and message service and free parking. La Quinta inns are
generally located near interstate highways, major traffic arteries or
destination areas such as airports and convention centers. Food service to La
Quinta guests generally is provided by adjacent free-standing restaurants.
La Quinta's strategy is to continue its growth as a high-quality provider
in the upper economy segment of the hotel industry, focusing on enhancing
revenues, cash flow and profitability. Specifically, the Company's strategy
centers upon:
CONTINUED FOCUS ON UPPER ECONOMY SEGMENT - The upper economy
segment of the lodging industry is characterized by inns that
provide for the basic needs of cost-conscious business travelers
who desire high-quality rooms and convenient locations. Because
the Company competes primarily in the upper economy segment,
management's attention is totally focused on meeting the needs of
La Quinta's target customers. The upper economy segment is one
of the fastest growing segments in the lodging industry, growing
over 5% annually, since 1989.
LA QUINTA MANAGEMENT OF INNS - In contrast to many of its
competitors, La Quinta manages and has ownership interests in
virtually all of its inns. La Quinta manages all but one of the
221 inns in the chain. At January 31, 1994, the Company owned
100% of 166 inns and 40% or more of an additional 45.
As a result, the Company believes it is able to achieve a
higher level of consistency in both product quality and
service than its competition. In addition, La Quinta's position
as one of the few primarily owner-operated chains enables La
Quinta to offer new services, direct expansion, effect pricing
and to make other marketing decisions on a system-wide or local
basis as conditions dictate, usually without consulting
third-party owners, management companies or franchisees as
required of most other lodging chains. The Company's management
of the inns also enables it to control costs and allocate
resources effectively to provide excellent value to the consumer.
IMAGE ENHANCEMENT PROGRAM - In 1993, La Quinta has undertaken a
comprehensive chainwide image enhancement program intended to
give its properties a new, fresh, crisp appearance while
preserving their unique character. The program features new
signage displaying a new logo as well as exterior and lobby
upgrades including brighter colors, more extensive lighting,
additional
3
landscaping, enhanced guest entry and a full lobby renovation
with contemporary furnishings and seating area for continental
breakfast. Thirty nine properties completed the reimaging process
in 1993 with program completion targeted for June 1994.
REGIONALLY FOCUSED GROWTH - La Quinta acquired eleven existing
lodging facilities and converted them to the La Quinta brand in
1993 and anticipates expanding in a similar manner in 1994.
COMPETITION
Inns operated and licensed by La Quinta are in competition with other
major lodging brands. Each La Quinta inn competes in its market area with
numerous full service lodging brands, especially in the mid-priced range, and
with numerous other hotels, motels and other lodging establishments. Chains such
as Hampton Inns, Red Roof Inns, Fairfield Inns and Drury Inns are direct
competitors of La Quinta. Other well-known competitors include Holiday Inns,
Ramada Inns, Quality Inns, and Travelodge. There is no single competitor or
group of competitors of La Quinta that is dominant in the lodging industry.
Competitive factors in the industry include reasonableness of room rates,
quality of accommodations, degree of service and convenience of locations.
Demand is affected by normally recurring seasonal patterns. At most La
Quinta inns demand is higher in the spring and summer months (March through
August) than in the balance of the year. Overall occupancy levels may also be
affected by the number of new inns opened by the Company and the length of time
such inns have been in operation.
The lodging industry in general, including La Quinta, may be adversely
affected by national and regional economic conditions and government
regulations. The demand for accommodations at a particular inn may be adversely
affected by many factors including changes in travel patterns, local and
regional economic conditions and the degree of competition with other inns in
the area.
STRUCTURE AND OWNERSHIP
The Company is a combined entity comprised of La Quinta Inns, Inc., which
owns and operates 211 inns, four subsidiaries and 16 combined unincorporated
partnerships and joint ventures. The combined unincorporated partnerships and
joint ventures own 45 inns operated by the Company. The Company manages 9 inns,
99% owned by CIGNA which are accounted for using the equity method in the
Company's financial statements.
During 1993, the Company acquired, in separately negotiated transactions,
limited partners' interests in 14 of the Company's combined unincorporated
partnerships and joint ventures which owned 44 La Quinta inns. The Company
purchased the ownership interests for an aggregate purchase price of $87,897,000
which included cash at closing, the assumption of $22,824,000 of existing debt
attributable to certain limited partners' interests, and $29,878,000 in notes to
certain sellers.
The Board of Directors of the Company authorized three-for-two stock
splits effective in October 1993 and March 1994. References to the Company's
common stock prior to the October split is described herein as "pre-split" and
references to the Company's common stock after the March split is described
herein as "post split".
On October 27, 1993, the Company entered into a definitive Partnership
Acquisition Agreement (the "Merger Agreement") with La Quinta Motor Inns Limited
Partnership ("the Partnership" or "LQP") and other parties, pursuant to which
the Company, through wholly-owned subsidiaries, would acquire all units of the
Partnership (the "Units") that it did not beneficially own at a price of $13.00
net per Unit in cash. The Merger Agreement provided for a tender offer (the
"Offer") for all of the Partnership's outstanding Units at a price of $13.00 net
per Unit in cash, which Offer commenced on November 1, 1993 and expired at
midnight on November 30, 1993. The Offer resulted in the purchase of 2,805,190
Units (approximately 70.6% of the outstanding Units) by the Company through its
wholly-owned subsidiary, LQI Acquisition Corporation. As a result of a
contribution of additional units previously owned by the Company subsequent to
the Offer, LQI Acquisition Corporation beneficially owned 3,257,890 Units
(approximately 82% of the Units) at December 31, 1993. Pursuant to the Merger
Agreement, a Special Meeting of Unitholders was then held on January 24, 1994 to
approve the merger of a subsidiary of LQI Acquisition Corporation with and into
the Partnership, with the Partnership as the surviving entity. As a result of
this merger which was approved by the requisite vote of Unitholders on January
24, 1994, all of the Partnership's outstanding Units other than Units
4
owned by the Company or any direct or indirect subsidiary of the Company were
converted into the right to receive $13.00 net in cash without interest.
The following table describes the composition of inns in the La Quinta
chain at:
December 31, 1993 (5) December 31, 1992
------------------------------------ ------------------------------------
La Quinta La Quinta
Equivalent Equivalent
Inns Rooms Rooms(1) Inns Rooms Rooms (1)
------ --------- ----------- ------ -------- ----------
Owned 100% (2) . . . . . . . . . . . . . 166 21,001 21,001 89 11,456 11,456
Owned 40 - 80% (3) . . . . . . . . . . . 45 6,077 2,588 80 10,218 4,919
------ --------- ----------- ------ -------- ----------
Total Company owned and operated . . . . 211 27,078 23,589 169 21,674 16,375
Managed Inns . . . . . . . . . . . . . . 9 1,176 12 40 4,978 75
Licensed Inns (4). . . . . . . . . . . . 1 120 -- 3 366 --
------ --------- ----------- ------ -------- ----------
221 28,374 23,601 212 27,018 16,450
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------ --------- ----------- ------ -------- ----------
<FN>
(1) Represents the Company's proportionate ownership interest in system rooms.
(2) Two inns are operated under brands other than La Quinta.
(3) One inn is operated under a brand other than La Quinta.
(4) One inn is licensed to a third party.
(5) Includes 100% of the rooms owned by LQP as though the acquisition were
completed on December 31, 1993.
JOINT VENTURES AND PARTNERSHIPS. La Quinta historically financed its
development, in part, through partnerships and joint ventures with large
insurance companies or financial institutions. Under the terms of the joint
venture and partnership agreements, available cash flow is generally used to pay
debt and provide for capital improvements, with remaining cash flow being
distributed to the partners in accordance with their respective ownership
interests. In 1993 La Quinta began to purchase the interests in the
unincorporated joint ventures and partnerships, acquiring 14 by the end of the
year. In addition, the Company successfully completed the acquisition of LQP in
January 1994. See further discussions above.
In March of 1990, the Company entered into the La Quinta Development
Partners, L.P. ("LQDP" or the "Development Partnership") with AEW Partners, L.P.
("AEW Partners"). La Quinta Inns, Inc. is the general partner and owns a 40%
ownership interest and AEW Partners is the limited partner and owns a 60%
ownership interest. This partnership was established for the purpose of owning,
operating, acquiring and developing inns. La Quinta originally contributed 18
inns with a deemed value of $44,000,000 (net of existing debt assumed by LQDP)
and $4,000,000 in cash. AEW Partners contributed $3,000,000 and a promissory
note ("the AEW Note") to the Development Partnership in the amount of
$69,000,000. Under the terms of the agreement, proceeds from the AEW Note are to
be used for the construction of inns or for the acquisition and conversion of
existing inns into the La Quinta brand. In 1993, the AEW Partners fully paid
the balance of the AEW Note. At December 31, 1993, the Development Partnership
had acquired and converted 19 inns (nine during 1993). Under the terms of the
Development Partnership agreement, AEW Partners currently has the ability to
convert 66 2/3% of its ownership interest in the Development Partnership to
3,535,976 (post-split) shares of the Company's common stock. Such number of
shares is reduced as distributions are made out of the Development Partnership
to AEW Partners. The partnership units may be converted at any time prior to
December 31, 1998. As of December 31, 1993, no partnership units had been
converted. Shares of the Company's common stock issuable upon conversion are
antidilutive at December 31, 1993.
Under the terms of a management agreement between the Company and the
Development Partnership, La Quinta earns management, national advertising, chain
services and license fees for the use of its name and services. La Quinta is
also entitled to receive acquisition and conversion fees for its services in
finding inns suitable for acquisition and in managing the conversion of such
inns. La Quinta is also entitled to receive fees on project costs of inns
constructed by the Development Partnership.
MANAGED INNS. In 1987, the Company formed two joint ventures with
investment partnerships managed by CIGNA Investments, Inc. ("CIGNA I" and "CIGNA
II"). The Company maintains a 1% ownership interest in
5
each of these ventures and manages the inns pursuant to long-term management
contracts. As of December 31, 1993, the ventures owned nine inns and six
free-standing restaurants operated by third parties.
La Quinta receives licensing, management, national advertising and chain
services fees for the use of its brand name and services from management of the
inns. The Company accounts for its ownership interest in these entities using
the equity method.
LICENSING
The Company selectively licensed the name "La Quinta" to others for
operations in the United States until February 1977, at which time La Quinta
discontinued its domestic licensing program to unrelated third parties. One inn
remains in operation under a franchise agreement.
During 1990, the Company entered into a licensing agreement with
Desarrollos Turisticos Vanguardia S.A. de C.V. ("Desarrollos") for expansion of
the La Quinta chain into Saltillo, Coahuila, Mexico. In February 1994, one inn
developed under the license agreement opened for operation. Under the
arrangement, the inn is owned by the licensee and managed by La Quinta under a
separate management agreement. The Company is currently reviewing other
potential management/licensing arrangements within Mexico and other Latin
American countries.
"La Quinta -R-" and "teLQuik -R-" have been registered as service marks by
La Quinta with the U.S. Patent and Trademark Office, and in Mexico, Canada and
the United Kingdom.
OPERATIONS
Management of the La Quinta chain is coordinated from the Company's
headquarters in San Antonio, Texas. Centralized corporate services and
functions include marketing, accounting and reporting, purchasing, quality
control, development, legal, reservations and training.
Inn operations are currently organized into Eastern and Western divisions
with each division headed by a Divisional Vice President. Regional Managers
report to the Divisional Vice Presidents and are each responsible for
approximately 13 inns. Regional Managers are responsible for the service,
cleanliness and profitability of the inns in their regions.
Individual inns are typically managed by resident managers who live on the
premises. Managers receive inn management training which includes an emphasis
on service, cleanliness, cost controls, sales and basic repair skills. Because
La Quinta's professionally trained managers are substantially relieved of
responsibility for food service, they are able to devote their attention to
assuring friendly guest service and quality facilities, consistent with
chain-wide standards. On a typical day shift, they will supervise one
housekeeping supervisor, eight room attendants, two laundry workers, two general
maintenance persons and three front desk service representatives.
At December 31, 1993, La Quinta employed approximately 6,100 persons, of
whom approximately 88% were compensated on an hourly basis. Approximately 240
individuals were employed at corporate and 5,850 were employed in inn management
and services. The Company's employees are not currently represented by labor
unions. Management believes its ongoing labor relations are good.
MARKETING
La Quinta's primary media focus is on business travelers, who account for
over half of La Quinta's rooms rented. The Company's core market consists of
business travelers who visit a given area several times per year. For example,
typical customers include salespersons covering a regional territory, government
and military personnel and technicians. The profile of a typical La Quinta
customer is a college educated business traveler, age 25 to 54, from a two
income household who has a middle management, white collar occupation or upper
level blue collar occupation. In addition, the Company's target markets include
vacation travelers and retired travelers. The Company focuses on reaching its
target markets by utilizing advertising, direct sales, programs which provide
incentives to repeat travelers, and other marketing programs targeted at
specific customer segments.
6
The Company advertises primarily through network and local radio, cable
television networks and print advertisements which focus on value. The Company
utilizes the same campaign concept throughout the country with minor
modifications made to address regional differences. The Company also utilizes
billboard advertisements along major highways which announce a La Quinta inn's
presence in upcoming towns.
The Company markets directly to companies and other organizations through
its direct sales force of 24 sales representatives and managers. This sales
force calls on companies which have a significant number of individuals
traveling in the regions in which La Quinta operates and which are capable of
producing a high volume of room nights.
La Quinta enjoys a large amount of repeat business. Based on internal
surveys conducted in 1993, management estimates the average customer spent
approximately 14 nights per year in a La Quinta inn during the year ended
December 31, 1993. The Company focuses a number of marketing programs on
maintaining the high number of repeat visits. La Quinta promotes a "Returns
Club" for repeat guests. This club provides its members with preferred status
and rates when checking into a La Quinta inn and offers rewards for frequent
stays. The Returns Club currently has over 140,000 members.
The Company provides a reservation system, "teLQuik" -R-, which currently
accounts for reservations for approximately 50% of room occupancy. The
teLQuik system allows customers to make reservations toll free or from special
reservations phones placed in the lobbies of all La Quinta inns. The teLQuik
system enables guests to make their next night's reservations from their
previous night's La Quinta inn. In 1994, the Company completed a new
reservation center which is a part of its program to improve operating results
by providing state-of-the-art technology in processing reservations more
efficiently. La Quinta, through its national sales managers, markets its
reservation services to travel agents and corporate travel planners who may
access teLQuik through the five major airline reservation systems.
ASSET MANAGEMENT
La Quinta's asset management strategy is founded on the importance of
ownership of all or a significant portion of each of its inns. See "Structure
and Ownership" on this Form 10-K. Management believes that Company ownership
and management of La Quinta inns enables the Company to achieve more consistency
in quality and service than its competitors.
Historically, the Company financed a large part of its development through
partnerships and joint ventures with large insurance companies and other
financial institutions, while managing the inns. However, during 1993, the
Company acquired in separately negotiated transactions limited partners'
interests in 14 of the Company's combined unincorporated partnerships and joint
ventures that owned 44 La Quinta inns. The Company also completed the
acquisition of 100% of the limited partners' interests in an additional 31
inns owned by a subsidiary of LQP in January of 1994, after acquiring 82% of
LQP during 1993. Additionally, the Company acquired eleven existing inns
during 1993. Currently, the Company owns 100% of 166 inns and between 40%-80%
of 45 other inns. The Company manages an additional nine La Quinta inns in
which it owns a 1% interest.
La Quinta's current development program focuses on the acquisition of
competitor properties at discounts to replacement costs. At current prices,
acquisition and conversion of existing properties is more cost effective than
new construction. In 1993, La Quinta acquired and is converting a total of
eleven inns, nine were purchased through the Development Partnership and two
were purchased as wholly-owned, with an aggregate of 1,611 rooms, at an average
cost of approximately $28,000 per room.
ITEM 2. PROPERTIES
La Quinta inns appeal to guests who desire high-quality rooms and whose
needs do not include banquet and convention facilities, in-house restaurants,
cocktail lounges or room service. La Quinta inns contain an average of 130
rooms and provide spacious, quiet and comfortably furnished rooms with an
average of 300 square feet, a choice of rooms for non-smokers and smokers,
complimentary continental breakfast, free unlimited local telephone calls,
remote-control television with Showtime or The Movie Channel, telecopy services,
same-day laundry and dry cleaning service, 24-hour front desk and message
service and free parking.
7
To maintain the overall quality of La Quinta's inns and to remain
competitive in its service-oriented environment, each inn undergoes
refurbishments and capital improvements as needed. Typically, refurbishing has
been provided at intervals of between five and seven years, based on an annual
review of the condition of each inn. In each of the years ended December 31,
1993, 1992 and 1991, the Company spent approximately $32,600,000 (of which
$15,400,000 was spent on the image enhancement program described below),
$15,500,000 and $13,800,000, respectively, on capital improvements to existing
inns. As a result of these expenditures, the Company believes it has been able
to maintain a chainwide quality of rooms and common areas at its properties
unmatched by any other national economy hotel chain.
In 1993, the Company undertook an image enhancement program intended to
give its properties a new, fresh, crisp appearance while preserving their unique
character. The program features new signage displaying a new logo as well as
exterior and lobby upgrades including brighter colors, additional landscaping,
enhanced guest entry and a full lobby renovation with contemporary furnishings
and seating area for continental breakfast. Of the chain's 221 inns, 97 began
the image enhancement program during 1993, of which 39 were complete as of
December 31, 1993. Twenty properties begin the reimaging process every six to
eight weeks with program completion targeted for June 1994. Signs displaying the
Company's new logo were in place at substantially all properties at December 31,
1993. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Commitments."
8
At December 31, 1993, there were 221 inns located in 29 states, with
concentrations in Texas, Florida and California. The states and cities in which
the inns are located are set forth in the following table:
ALABAMA KANSAS TENNESSEE WYOMING
Birmingham Lenexa Knoxville Casper
Huntsville (2) Wichita Memphis (3) Cheyenne
Mobile Nashville (3) Rock Springs
Montgomery KENTUCKY
Tuscaloosa Lexington TEXAS LICENSED
Abilene LA QUINTA INN
ARIZONA LOUISIANA Amarillo (2)
Phoenix (3) Baton Rouge Arlington Texas
Tucson (2) Bossier City Austin (5) McAllen
Kenner Beaumont
ARKANSAS Lafayette Bedford OTHER
Little Rock (5) Monroe Brownsville OWNED INNS
New Orleans (5) Clute (operated under other
CALIFORNIA Slidell College Station brands)
Bakersfield Sulphur Corpus Christi (2)
Costa Mesa Dallas Metro Area(12) TEXAS
Fresno MICHIGAN Del Rio El Paso
Irvine Kalamazoo Denton La Marque
La Palma Eagle Pass San Antonio
Redding MISSISSIPPI El Paso (3)
Sacramento (2) Jackson (2) Fort Worth (2)
San Bernardino Galveston
San Diego (3) MISSOURI Harlingen
San Francisco St. Louis Houston Metro Area (17)
Stockton Killeen
Ventura NEBRASKA Laredo
Omaha Longview
COLORADO Lubbock
Colorado Springs NEVADA Lufkin
Denver (7) Las Vegas Midland
Reno Nacogdoches
FLORIDA Odessa
Daytona Beach NEW Mexico Round Rock
Deerfield Beach Albuquerque (3) San Angelo
Ft. Myers Farmington San Antonio (11)
Gainesville Las Cruces Temple
Jacksonville (3) Santa Fe Texarkana
Miami Tyler
Orlando (2) NORTH CAROLINA Victoria
Pensacola Charlotte (2) Waco
Tallahassee (2) Wichita Falls
Tampa (5) OHIO
Columbus Utah
GEORGIA Layton
Atlanta (7) OKLAHOMA Salt Lake City
Augusta Oklahoma City (2)
Columbus Tulsa (3) VIRGINIA
Savannah Hampton
PENNSYLVANIA Richmond
ILLINOIS Pittsburgh Virginia Beach
Champaign
Chicago Metro Area (5) SOUTH CAROLINA WASHINGTON
Moline Charleston Seattle (2)
Columbia Tacoma
INDIANA Greenville
Indianapolis (2)
Merrillville
Typically, food service for La Quinta guests is provided by adjacent, free
standing restaurants. At December 31, 1993, the Company had an ownership
interest in 124 restaurant buildings adjacent to its inns. These restaurants
generally are leased pursuant to build-to-suit leases that require the operator
to pay, in addition to minimum and percentage rentals, all expenses, including
building maintenance, taxes and insurance.
9
The Company's inns and restaurants were substantially pledged to secure all
long-term debt maturing in various years from 1994 to 2015 (See note 2 of Notes
to Combined Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
On October 18, 1993, the Company announced that its Board of Directors had
authorized its officers to enter into negotiations with La Quinta Motor Inns
Limited Partnership (the "Partnership") regarding the acquisition of all units
of the Partnership which it did not currently own, at a price of up to $12 per
unit. See "Structure and Ownership" on this Form 10-K. On October 18, 1993, the
Board of Directors of the General Partner of the Partnership elected three
independent directors (the "Special Committee"), among other things, to
negotiate the sale of Units to the Company. On October 18, 1993, two separate
lawsuits were filed in Delaware Court of Chancery on behalf of the Partnership's
unitholders against the Company, the Partnership, La Quinta Realty Corp., a
subsidiary of the Company, and general partner of the Partnership (the "General
Partner") and certain directors and officers of the General Partner
(collectively, the "Defendants"). The lawsuits are captioned GREENBERG V.
SCHULTZ, ET AL., C.A. No. 13199 and GORIN BROTHERS, INC., V. SCHULTZ, ET. AL.,
C.A. No. 13200 (collectively, the "Actions"). The complaints in the Actions
allege, among other things, that Defendants breached their fiduciary duties to
Unitholders by offering grossly inadequate consideration to entrench themselves
in control of the Partnership, by failing to solicit competing bids, and by
making inadequate public disclosure regarding the transaction. The complaints
additionally allege that the Company used unequal knowledge and economic power,
given its affiliation with the General Partner, to the detriment of the
Unitholders. The independence of the members of the Special Committee was also
questioned, allegedly resulting in the lack of arm's length negotiations and the
lack of any independent appraisal or evaluation. The complaints in the Actions
sought, among other things, (i) a declaration that the Defendants breached their
fiduciary duties to members of the alleged class, (ii) an order preliminarily
and permanently enjoining consummation of the proposed transaction, (iii) the
award of compensatory damages, and (iv) the award of costs and disbursements. On
October 27, 1993, the parties reached a settlement in principle in these
actions. The settlement is subject to certain conditions, including court
approval. On March 15, 1994, the Delaware Court of Chancery entered an Order and
Final Judgment ("Judgment") which approved the settlement and dismissed the
cases. All persons and entities who were owners of Units of the Partnership at
October 18, 1993 and their transferees and successors in interest, immediate and
remote (the "Class"), are bound by the Judgment. The Company and all other
defendants were discharged from any and all liability under any claims which
were or could have been brought by plaintiffs or any member of the Class
regarding the acquisition and merger of the Partnership. The appeal period on
the Judgment will run on April 14, 1994.
In September 1993, a former officer of the Company filed suit against the
Company and certain of its directors and their affiliate companies. 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. The suit seeks
compensatory damages of $2,500,000 and exemplary damages of $5,000,000. The
Company believes that the claims are wholly without merit and intends to
vigorously defend against this suit.
Actions for negligence or other tort claims occur routinely as an ordinary
incident to the Company's business. Several lawsuits are pending against the
Company which have arisen in the ordinary course of the business, but none of
these proceedings involves a claim for damages (in excess of applicable excess
umbrella insurance coverages) involving more than 10% of current assets of the
Company. The Company does not anticipate any amounts which it may be required to
pay as a result of an adverse determination of such legal
10
proceedings and the matters discussed above, 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.
The Company has established a paid loss program (the "Paid Loss Program")
for inns owned and managed by the Company, which includes excess umbrella
policies for commercial general liability insurance, automobile liability
insurance, fire and extended property insurance, workers' compensation and
employer's liability insurance for losses above the deductible limits, and such
other insurance as is customarily obtained for similar properties and which may
be required by the terms of loan or similar documents with respect to the inns.
In connection with the general liability, workers' compensation and automobile
coverages, all inns participate in the Paid Loss Program, under which claims and
expenses are shared pro rata, with excess umbrella insurance being maintained to
cover losses, claims and costs in excess of the deductible limits per matter of
$500,000 for general liability, $250,000 for workers' compensation and $250,000
for automobile coverage. All pro rata expenses and premiums under the Paid Loss
Program with respect to inns owned by persons other than the Company constitute
direct operating expenses of said inns under the terms of the respective
management agreements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year covered by this Annual Report on Form
10-K, no matter was submitted to a vote of Registrant's security holders through
the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on The New York Stock Exchange. The
range of the high and low sale prices, as adjusted for the three-for-two stock
split in October 1993 and the three-for-two stock split in March 1994, of the
Company's Common Stock for each of the quarters during the years ended December
31, 1993 and 1992 is set forth below:
1993 1992
--------------------------- -----------------------
Per Share Per Share
High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
First Quarter. . . . . . $13 3/4 $9 $-- $7 7/8 $6 3/8 $--
Second Quarter . . . . . 14 3/8 12 -- 8 3/8 7 1/4 --
Third Quarter. . . . . . 19 3/8 12 1/2 .025 8 1/4 7 1/8 --
Fourth Quarter . . . . . 23 7/8 18 5/8 .025 9 1/4 7 7/8 --
The Company paid cash dividends in both the third and fourth quarters of
1993 in the amount of $.025 per share under its quarterly dividend policy as
authorized by the Board of Directors. The Company increased its cash dividend by
50 percent in conjunction with the March 1994 three-for-two stock split to an
annual rate of $.10 per share on post-split common shares. For restrictions on
the Company's present or future ability to pay cash dividends, see note 2 of
Notes to Combined Financial Statements. The declaration and payment of dividends
in the future will be determined by the Board of Directors based upon the
Company's earnings, financial condition, capital requirements and such other
factors as the Board of Directors may deem relevant.
As of February 28, 1994, the approximate number of holders of record of the
Company's Common stock was 915.
11
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31
-------------------------------------------------------------------
1993 1992 1991 1990 1989 (2)
-------- -------- ------- -------- ---------
(in thousands, except per share amounts, ratios, and inn statistics)
STATEMENT OF OPERATIONS DATA
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . $271,850 $254,122 $240,888 $226,830 $206,172
Direct and corporate operating costs and expenses (4). . . . . 168,365 156,845 155,126 147,809 131,528
Depreciation, amortization and asset retirements . . . . . . . 23,711 24,477 34,921 34,411 32,962
Performance stock option . . . . . . . . . . . . . . . . . . . 4,407 -- -- -- --
Non-recurring cash and non-cash charges (4). . . . . . . . . . -- 38,225 7,952 503 --
Operating income . . . . . . . . . . . . . . . . . . . . . . . 75,367 34,575 42,889 44,107 41,682
Net interest expense . . . . . . . . . . . . . . . . . . . . . 26,219 27,046 30,271 32,304 36,692
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . 20,301 (8,754) 129 2,175 6,130
Net earnings (loss) before extraordinary items
and cumulative effect of accounting change . . . . . . . . . 19,420 (7,796) 1,398 2,175 6,130
Net earnings (loss) per share (3). . . . . . . . . . . . . . .. .64 (.29) -- .07 .21
OTHER DATA
Capital expenditures (5) . . . . . . . . . . . . . . . . . . . 32,623 15,529 13,803 17,696 26,317
Purchase of inns and conversion costs. . . . . . . . . . . . . 38,858 4,060 15,487 18,574 15,477
Purchase of partners' equity interests (6) . . . . . . . . . . 78,169 -- 3,546 -- 754
Net cash provided by operating activities. . . . . . . . . . . 77,364 60,543 54,056 42,106 39,719
Net cash used by investing activities. . . . . . . . . . . . . (145,027) (15,166) (35,083) (40,061) (44,920)
Net cash provided (used) by financing activities . . . . . . . 78,650 (40,471) (24,428) (101) (15,819)
Cash dividends declared per common share . . . . . . . . . . . .05 -- -- -- --
EBITDA (7) . . . . . . . . . . . . . . . . . . . . . . . . . . 103,485 97,277 85,762 79,021 74,644
BALANCE SHEET DATA
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . 744,241 539,183 574,687 586,969 577,388
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . 149,057 124,321 130,175 129,167 123,193
Partners' capital. . . . . . . . . . . . . . . . . . . . . . . 85,976 62,060 50,471 37,270 29,223
Current installments of long-term debt . . . . . . . . . . . . 22,491 21,711 22,116 24,002 16,991
Long-term debt, excluding current installments . . . . . . . . 414,004 274,824 316,014 341,902 350,986
Combined effective debt-to-equity ratio (1). . . . . . . . . . 1.76 1.47 1.75 2.05 2.3
OPERATING DATA
Inns owned . . . . . . . . . . . . . . . . . . . . . . . . . . 211 169 168 164 161
Inns managed . . . . . . . . . . . . . . . . . . . . . . . . . 9 40 40 40 40
Inns licensed. . . . . . . . . . . . . . . . . . . . . . . . . 1 3 4 6 6
------ ------ ------ ------ ------
Number of inns . . . . . . . . . . . . . . . . . . . . . . . . 221 212 212 210 207
Occupancy percentage . . . . . . . . . . . . . . . . . . . . . 65.1% 65.6% 64.8% 66.0% 65.5%
Average daily room rate. . . . . . . . . . . . . . . . . . . . $46.36 $44.33 $43.11 $40.93 $38.67
- -----------------------------
<FN>
(1) Ratio of long-term debt, excluding current installments, to partners'
capital plus shareholders' equity at year end.
(2) Effective June 1, 1989, the Company changed its year-end from May 31 to
December 31. The year ended December 31, 1989 is an aggregation of the
results from the seven months ended December 31, 1989 and the five months
ended May 31, 1989.
(3) Earnings (loss) per share are computed on the basis of the weighted average
number of common and common equivalent shares outstanding in each year
after giving effect to the three-for-two stock splits.
(4) Non-recurring cash and non-cash charges include charges related to the
write-down of certain joint venture interests carried on the equity method,
land and computer equipment, severance and other employee-related
costs and charges associated with a series of studies to improve operating
results. For the year ended December 31, 1992, these charges also include
a $2,696,000 increase in the allowance for certain notes receivable related
to inns sold by the Company, prior to 1985, and $210,000 related to other
corporate expense items.
(5) The December 31, 1993 capital expenditures include $15,400,000 for the
Company's image enhancement program.
12
(6) Purchase of partners' equity interests in 1993 includes approximately
$42,091,000 related to acquisition of 3,257,890 units of LQP through
December 1993.
(7) EBITDA is earnings before net interest expense, income taxes, depreciation,
amortization and fixed asset retirements, extraordinary items, partners'
equity in earnings and losses, gain or loss on property and investment
transactions and other non-recurring cash and non-cash charges. EBITDA is
not intended to represent cash flow or any other measure of performance in
accordance with generally accepted accounting principles ("GAAP"). EBITDA
is included herein because management believes that certain investors find
it to be a useful tool for measuring the ability to service debt.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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% interest and over which it exercises
substantial legal, financial and operational control. Investments in other
entities in which the Company has less than a 40% ownership interest and over
which the Company has the ability to exercise significant influence, but does
not have control, are accounted for using the equity method.
During 1993, the Company acquired, in separately negotiated transactions,
limited partners' interests in 14 of the Company's combined unincorporated
partnerships and joint ventures which owned 44 inns. The Company purchased the
ownership interests for an aggregate purchase price of $87,897,000 which
included cash at closing, the assumption of $22,824,000 of existing debt
attributable to certain limited partners' interests, and $29,878,000 in notes to
certain sellers.
As a result of the following transactions, the operations of LQP for the
month of December 1993 were included in the combined financial statements of the
Company. On October 27, 1993, the Company entered into a definitive Partnership
Acquisition Agreement (the "Merger Agreement") with LQP and other parties,
pursuant to which the Company, through wholly-owned subsidiaries, would acquire
all units of the Partnership (the "Units") that it did not beneficially own at a
price of $13.00 net per Unit in cash. The Merger Agreement provided for a tender
offer (the "Offer") for all of the Partnership's outstanding Units at a price of
$13.00 net per Unit in cash, which Offer commenced on November 1, 1993 and
expired at midnight on November 30, 1993. The Offer resulted in the purchase of
2,805,190 Units (approximately 70.6% of the outstanding Units) by the Company
through its wholly-owned subsidiary, LQI Acquisition Corporation. As a result of
a contribution of additional units previously owned by the Company subsequent to
the Offer, LQI Acquisition Corporation beneficially owned 3,257,890 Units
(approximately 82% of the Units) at December 31, 1993. Pursuant to the Merger
Agreement, a Special Meeting of Unitholders was then held on January 24, 1994 to
approve the merger of a subsidiary of LQI Acquisition Corporation with and into
the Partnership, with the Partnership as the surviving entity. As a result of
this merger which was approved by the requisite vote of Unitholders on January
24, 1994, all of the Partnership's outstanding Units other than Units owned by
the Company or any direct or indirect subsidiary of the Company were converted
into the right to receive $13.00 net in cash without interest.
In 1993, the Company completed the acquisition of eleven inns and began
renovating and converting them to the La Quinta brand. Of these inns, nine were
purchased through the Development Partnership and two were purchased as
wholly-owned properties. Although these inns remained open for business during
conversion construction, hotel operations are disrupted during the typical
three-to-four month construction period. Conversion of these inns will be
completed during the first quarter of 1994.
References to "Company Inns" are to inns owned by the Company or by
unincorporated partnerships and joint ventures in which the Company owns at
least a 40% interest. References to "Managed Inns" are to those inns in which
the Company owns less than a 40% interest and which are managed by the Company
under long-term management contracts. "Managed Inns" include nine inns held in
two joint ventures with CIGNA Investments, Inc. ("CIGNA") for the year ended
December 31, 1993 and the 31 inns of the LQP through November 30, 1993. "Managed
Inns" were accounted for using the equity method.
13
The following chart shows certain historical operating statistics and
revenue data. References to the percentages of occupancy and the average daily
rate refer to Company Inns. Managed Inns and the La Quinta licensed inn are
excluded from occupancy and average daily rate statistics for all periods for
purposes of comparability. All financial data is related to Company Inns unless
otherwise specified.
COMPARATIVE OPERATING STATISTICS AND REVENUE DATA
----------------------------------------------------
YEARS ENDED DECEMBER 31
-----------------------
(IN THOUSANDS, EXCEPT RATES AND PERCENTAGES)
----------------------------------------------------
1993 1992 1991
---- ---- ----
Room revenue $248,428 $230,054 $218,225
Other inn revenue 10,101 9,772 8,871
-------- -------- --------
Total inn revenue $258,529 $239,826 $227,096
-------- -------- -------
-------- -------- -------
Percentage of occupancy 65.1% 65.6% 64.8%
Average room rate $ 46.36 $ 44.33 $ 43.11
Available rooms (1) 8,226 7,916 7,817
<FN>
(1) Available rooms represent the number of rooms available for sale multiplied
by the number of days in the period reported.
During 1991, the Company implemented certain changes in its operations
and organization which resulted in charges of $7,952,000. Such charges included
severance costs resulting from a reduction in work force and the termination of
four executive officers of the Company, charges related to the write-down of
computer equipment and other assets and costs associated with the Company's cost
reduction study. During 1992, the Company made additional changes in operations
and organization based on a comprehensive review of the Company by its senior
management team and recognized charges of approximately $39,751,000. These
charges included a provision for the write-down of partnership investments,
land, severance and other employee- related costs and other charges which
affected corporate expenses and partners' equity in earnings and losses, as more
fully described below.
YEAR ENDED DECEMBER 31, 1993
COMPARED TO YEAR ENDED DECEMBER 31, 1992
TOTAL REVENUES increased to $271,850,000 in 1993 from $254,122,000 in 1992,
an increase of $17,728,000 or 7.0%. Of the total revenues reported in 1993,
95.1% were revenues from inns, 2.4% were revenues from restaurant rentals and
other revenue and 2.5% were revenues from management services.
INN REVENUES are derived from room rentals and other sources such as
charges to guests for long-distance telephone calls, fax machine use and laundry
services. Inn revenues increased to $258,529,000 in 1993 from $239,826,000 in
1992, an increase of $18,703,000 or 7.8%. The increase in inn revenues was due
primarily to an increase in average room rate, an increase in the number of
available rooms and the acquisition of LQP. The average room rate increased to
$46.36 in 1993 from $44.33 in 1992, an increase of $2.03 or 4.6%, while
occupancy declined .5 percentage points. As anticipated, the Company's image
enhancement program caused temporary construction related disruption in normal
business operations and occupancies at properties which underwent the process.
Newly acquired inns remain open during conversion construction which also
disrupts the hotel operations during the typical three-to-four month
construction period. Also, management's decision to discontinue a coupon
promotion used in 1992 had a positive impact on room rate and had the effect of
reducing occupancy in 1993. Available rooms for 1993 were 8,226,000 as compared
to 7,916,000 for 1992, an increase of 310,000 available rooms, or 3.9%. The
increase in the number of available rooms was due to the acquisitions of 11 inns
during the year ended December 31, 1993 and the acquisition of LQP in December
of 1993. The acquisition of LQP in December 1993 added $2,758,000 to inn
revenues.
RESTAURANT RENTAL AND OTHER REVENUES includes rental payments from
restaurants owned by the Company and leased to and operated by third parties.
Restaurant rental and other revenues also include the Company's interest in the
earnings (accounted for using the equity method) of two CIGNA joint ventures
through the year ended December 31, 1993 and LQP, up to December 1, 1993, and
miscellaneous other revenues, such as third party rental revenue from an office
building which also housed the Company's corporate offices through May 1993.
Restaurant rental and other decreased to $6,464,000 in 1993 from $7,208,000 in
1992, a decrease of $744,000 or 10.3%, primarily due to a reduction in earnings
related to investments accounted for on the equity method.
MANAGEMENT SERVICES REVENUE is primarily related to fees earned by the
Company for services rendered in conjunction with Managed Inns. Management
service revenue decreased to $6,857,000 in 1993 from $7,088,000
14
in 1992, a decrease of $231,000 or 3.3%. Management fees decreased due to
there being two less franchisees and the consolidation of LQP in December 1993
eliminating the related management fees charged by the Company to LQP for that
month.
DIRECT EXPENSES include costs directly associated with the operation of
Company Inns. In 1993, approximately 42% of direct expenses were represented by
salaries, wages, and related costs. Other major categories of direct expenses
include utilities, repairs and maintenance, property taxes, advertising and room
supplies.
Direct expenses increased to $148,915,000 ($27.79 per occupied room) in
1993 compared to $135,790,000 ($26.17 per occupied room) in 1992, an increase of
$13,125,000 or 9.7%. As a percentage of total revenues, direct expenses
increased to 54.8% in 1993 from 53.4% in 1992. The increase in direct expense
resulted primarily from the Company's implementation of a complimentary
continental breakfast at all La Quinta inns during the first quarter of 1993,
(which amounted to $1.08 per occupied room). Newly acquired inns typically
incur more direct expenses as a percentage of revenue during the first twelve
months of operations compared to the inns which have been operating as a La
Quinta for more than a twelve month period. The Company acquired 11 inns during
1993 and did not acquire or convert any inns in the 1992 period. Direct
expenses incurred by LQP in December 1993 were $2,048,000.
CORPORATE EXPENSES include the costs of general management, office rent,
training and field supervision of inn managers and other marketing and
administrative expenses. The major components of corporate expenses are
salaries, wages and related expenses and information systems. Corporate
expenses decreased to $19,450,000 ($1.96 per available room, including Managed
Inns) in 1993 from $21,055,000 ($2.16 per available room before non-recurring
charges, including Managed Inns) in 1992 before non-recurring charges, a
decrease of $1,605,000 or 7.6%. As a percent of total revenues, corporate
expenses decreased to 7.2% in 1993 from 8.3% in 1992 before non-recurring
charges. The 1992 corporate expenses included a non-recurring charge to
increase the allowance for certain notes receivable, based upon estimates of the
value of the real estate held as collateral for such notes and evaluations of
the financial condition of certain borrowers, and a provision related to the
settlement of certain litigation.
The PROVISION FOR WRITE-DOWN OF PARTNERSHIP INVESTMENTS, LAND AND OTHER in
1992 includes charges related to the write-down of certain joint venture
interests, land previously held for future development, computer equipment and
other assets, as more fully described in "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year Ended December 31, 1992
Compared to Year Ended December 31, 1991."
SEVERANCE AND OTHER EMPLOYEE RELATED COSTS in 1992 consisted of costs
related to the severance of certain executive officers and other employees,
executive search fees and relocation costs for new officers.
PERFORMANCE STOCK OPTION relates to the costs of stock options which became
exercisable when the average price of the Company's stock reached $30 per share
(pre-split) for twenty consecutive days. Performance stock option expense and
certain other options were accelerated as a result of this condition being met.
See note 5 to the Combined Financial Statements.
DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS decreased to $23,711,000
in 1993 from $24,477,000 in 1992, a decrease of $766,000 or 3.1%. The decrease
in depreciation, amortization and asset retirements was due to assets which
became fully depreciated during 1993 and the write-off of computer equipment and
signage in the prior year. Replacement and installation of new computer
equipment and signs was substantially completed in the latter part of 1993.
OPERATING INCOME increased to $75,367,000 in 1993 from $34,575,000 in 1992,
an increase of $40,792,000. Operating income before a non-recurring, non-cash
charge of approximately $4,407,000 to recognize compensation expense related to
the vesting of performance stock options, increased to $79,774,000 in 1993 from
$73,112,000 in 1992 before write-downs, severance and employee related costs and
other non-recurring charges, an increase of $6,662,000 or 9.1%.
INTEREST INCOME primarily represents earnings on the note receivable from
AEW Partners (the "AEW Note") and on the short-term investment of Company funds
in money market instruments prior to their use in operations or acquiring inns.
Interest income decreased to $5,147,000 in 1993 from $6,041,000 in 1992, a
decrease of $894,000 or 14.8%. The decrease in interest income is primarily
attributable to principal reductions on the AEW Note of $16,700,000 and
$19,300,000 in September and December 1993 respectively, and the
15
corresponding reduction in interest earned thereon. As of December 31, 1993 the
AEW Note had been fully collected.
INTEREST ON LONG-TERM DEBT decreased to $31,366,000 in 1993 from
$33,087,000 in 1992, a decrease of $1,721,000 or 5.2%. The decrease in
interest expense is attributable to the early extinguishment of approximately
$117,000,000 of certain high interest rate debt with proceeds from the 9 1/4%
Senior Subordinated Notes due 2003 and bank financing which more than offset
interest on borrowings to purchase limited partners' interests. In addition,
certain Industrial Revenue Bond issues were refinanced to obtain more favorable
interest rates.
PARTNERS' EQUITY IN EARNINGS AND LOSSES reflects the interests of partners
in the earnings and losses of the combined joint ventures and partnerships which
are owned at least 40% and controlled by the Company. Partners' equity in
earnings and losses decreased to $12,965,000 in 1993 from $15,081,000 in 1992, a
decrease of $2,116,000 or 14.0%. The decrease in partners' equity in earnings
and losses is attributable to the acquisition of limited partners' interests in
14 combined unincorporated partnerships and joint ventures partially offset by
increases in the earnings of the Development Partnership. As of December 31,
1993, the Development Partnership operated 37 inns compared to 28 inns as of
December 31, 1992.
NET GAIN (LOSS) ON PROPERTY AND INVESTMENT TRANSACTIONS decreased to a loss
of ($4,347,000) in 1993 from a gain of $282,000 in 1992. The loss in 1993
includes a $4,900,000 loss related to the Company's conveyance to the mortgagee
of the title on the property in which the Company's headquarters were located.
INCOME TAXES for 1993 were calculated using an estimated effective tax rate
of 39%.
For the reasons discussed above, the Company reported EARNINGS (LOSS)
BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE OF
$19,420,000 in 1993 compared with ($7,796,000) in 1992, an increase of
$27,216,000.
The Company reported EXTRAORDINARY ITEMS, NET OF INCOME TAXES of ($619,000)
in 1993 compared with ($958,000) in 1992. The 1993 extraordinary loss consisted
of ($6,007,000), ($3,664,0000) net of income taxes, related to the early
extinguishment and refinancing of certain debt partially offset by an
extraordinary gain of $4,991,000, $3,045,000 net of income taxes, resulting from
the Company's transfer of ownership to the mortgagee of property in which the
Company's headquarters were located.
The cumulative effect of a change in accounting for income taxes of
$1,500,000 or $.05 per share in 1993 was the result of the implementation of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes."
For the reasons discussed above, the Company reported NET EARNINGS of
$20,301,000 in 1993 compared with a net loss of ($8,754,000) in 1992, an
increase of $29,055,000.
YEAR ENDED DECEMBER 31, 1992
COMPARED TO YEAR ENDED DECEMBER 31, 1991
TOTAL REVENUES increased to $254,122,000 in 1992 from $240,888,000 in 1991,
an increase of $13,234,000 or 5.5%. Of the total revenues reported in 1992,
94.4% were revenues from inns, 2.8% were revenues from restaurant rentals and
other revenue and 2.8% were revenues from management services.
INN REVENUES increased to $239,826,000 in 1992 from $227,096,000 in 1991,
an increase of $12,730,000 or 5.6%. The increase in inn revenues was due
primarily to an increase in average room rate, an increase in the number of
available rooms and a slight increase in the percentage of occupancy. The
average room rate increased to $44.33 in 1992 from $43.11 in 1991, an increase
of $1.22 or 2.8%. The increase in room rate for 1992 was primarily attributable
to rate increases made in selected stronger markets in January and June. The
percentage of occupancy increased to 65.6% in 1992 from 64.8% in 1991. Available
rooms for 1992 were 7,916,000 as compared to 7,817,000 for 1991, an increase of
99,000 available rooms or 1.3%. The increase in the number of available rooms
was due to the acquisition of two inns in the fourth quarter of 1991 and the
conversion of a licensed inn to a wholly-owned inn in 1992.
RESTAURANT RENTAL AND OTHER increased slightly to $7,208,000 in 1992 from
$6,910,000 in 1991. Management service revenue increased to $7,088,000 in 1992
from $6,882,000 in 1991, an increase of $206,000 or 3.0%.
In 1992, approximately 44% of DIRECT EXPENSES were represented by salaries,
wages and related costs. Direct expenses were $135,790,000 ($26.17 per occupied
room) in 1992 compared to $135,443,000 ($26.75 per
16
occupied room) in 1991, an increase of $347,000 or 0.3%. As a percentage of
total revenues, direct expenses decreased to 53.4% in 1992 from 56.2% in 1991.
The increase in total direct expenses was primarily due to increases in property
taxes, insurance and employee health care claims expenses. However, the
increase was partially offset by decreases in workers' compensation insurance
resulting from new safety programs implemented by the Company, supplies and
advertising expenses.
CORPORATE EXPENSES increased to $21,055,000 ($2.16 per available room,
including Managed Inns) in 1992 before $2,906,000 of non-recurring charges from
$19,683,000 ($2.04 per available room, including Managed Inns) in 1991, an
increase of $1,372,000 or 7.0%. As a percent of total revenues, corporate
expenses before non-recurring charges increased to 8.3% in 1992 from 8.2% in
1991. The 1992 non-recurring charge was primarily attributable to an increase
of $2,696,000 in the allowance for certain notes receivable, related to inns
sold by the company prior to 1985, based on estimates of the value of the real
estate held as collateral for such notes and evaluations of the financial
condition of certain borrowers. The increase in corporate expense was partially
related to a provision for settlement of certain litigation.
During 1992, the Company recorded NON-RECURRING CASH AND NON-CASH CHARGES
of approximately $39,751,000. Of these charges $28,383,000 are included as a
provision for write-down of partnership investments, land and other; $6,936,000
related to severance and other employee related costs; and the remaining
$4,432,000 affected corporate expenses and partners' equity in earnings and
losses. All of these charges resulted from certain changes being made in the
Company's operations and organization based on a comprehensive review by the
Company's senior management team.
During 1991, the Company recognized non-recurring cash and non-cash charges
of $7,952,000 resulting from certain changes made in the Company's operations
and organization. Of those charges, approximately $4,097,000 were for severance
related costs for former employees which resulted from a reduction in the work
force of approximately 72 employees, 50 of which were employed at the Company's
headquarters and the termination of four executive officers of the Company under
the various provisions of their severance agreements. Of the remaining charges,
approximately $2,165,000 related to the write-down of computer equipment and
other assets and approximately $1,690,000 represented costs associated with the
Company's study to enhance shareholder value.
DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS decreased to $24,477,000
in 1992 from $34,921,000 in 1991, a decrease of $10,444,000 or 29.9%.
Approximately $9,200,000 of the decrease was due to the Company's change in
the depreciable lives of the building assets from 30 years to 40 years,
effective January 1, 1992.
OPERATING INCOME decreased to $34,575,000 in 1992 from $42,889,000 in 1991,
a decrease of $8,314,000 or 19.4%, primarily due to certain charges recorded in
1992, as more fully described above. Operating income before non-recurring
charges and the effect of a change in estimated useful lives of buildings
increased to $63,914,000 in 1992 from $50,841,000 in 1991 an increase of
$13,073,000 or 25.7%. The net impact of these charges and adjustments on
operating income for 1992 amounted to a net charge of $29,339,000 compared with
$7,952,000 for 1991. As a percentage of total revenues, operating income
decreased to 13.6% in 1992 from 17.8% in 1991.
INTEREST INCOME decreased to $6,041,000 in 1992 from $8,442,000 in 1991, a
decrease of $2,401,000 or 28.4% The decrease in interest income is primarily
attributable to a $14,866,000 reduction in principal on the AEW Note in March
1992 and the corresponding reduction in interest earned thereon.
INTEREST ON LONG-TERM DEBT decreased to $33,087,000 in 1992 from
$38,713,000 in 1991, a decrease of $5,626,000 or 14.5%. The decrease in
interest expense is related to the refinancing of approximately $42,000,000
in industrial revenue bond issues in 1992 and 1991 to obtain more favorable
interest rates, the decline in the prime interest rate and the reduction of the
average outstanding balance on the Company's Credit Facility due to improving
operating cash flow.
PARTNERS' EQUITY IN EARNINGS AND LOSSES increased to $15,081,000 in 1992
from $9,421,000 in 1991, an increase of $5,660,000 or 60.1%. The increase in
partners' equity in earnings and losses is primarily attributable to a decrease
in depreciation expense related to the change in building lives of properties
owned by the combined partnerships and joint ventures from 30 years to 40 years
and to the increase in earnings of the Development Partnership. As of December
31, 1992, the Development Partnership operated 28 inns compared to 26 inns as of
December 31, 1991. Partners' equity in earnings and losses in 1992 was also
impacted by a $1,214,000 adjustment to reallocate losses of a joint venture to
the Company.
17
NET GAIN (LOSS) ON PROPERTY AND INVESTMENT TRANSACTIONS increased to
$282,000 in 1992 from a loss of ($1,012,000) in 1991. The majority of the 1991
loss was the result of write-downs on four properties partially offset by gains
on three land condemnations.
The Company's effective tax rate for 1992 was primarily affected by
deferred tax benefits that had not been recognized related to certain charges
incurred during the year.
For the reasons discussed above, the Company reported a LOSS BEFORE
EXTRAORDINARY ITEMS of ($7,796,000) in 1992 compared with the earnings before
extraordinary items of $1,398,000 in 1991, a decrease of $9,194,000.
The Company reported EXTRAORDINARY ITEMS, NET OF INCOME TAXES of
($958,000) in 1992 compared with ($1,269,000) in 1991. The extraordinary items
reported in each period were primarily a result of the refinancing of three
industrial revenue bond issues totaling $12,910,000 in principal in 1992 and
nine industrial revenue bond issues totaling $28,950,000 in principal in 1991.
Extraordinary items in 1992 also relate to the early extinguishment of the
Company's 10% Convertible Subordinated Debentures due 2002.
For the reasons discussed above, the Company reported a NET LOSS of
($8,754,000) in 1992 compared with net earnings of $129,000 in 1991, a decrease
of $8,883,000.
CAPITAL RESOURCES AND LIQUIDITY
The Company has historically financed its development program through
partnerships with financial institutions, a public debt offering and borrowings
under the Company's Credit Facilities. During the years ended December 31, 1993
and 1992, the Company funded a majority of its development program through the
Development Partnership. The Company's inns and adjacent restaurant land and
buildings are substantially pledged to secure long-term debt of the Company.
Distributions of cash, if any, from the Company's joint ventures and
partnerships are made from cash available after payment of operating expenses,
debt service, capital expenditures and acquisition and development of new inns.
At December 31, 1993, the Company had $23,848,000 of cash and cash
equivalents, an increase of $10,987,000 from December 31, 1992. The increase
was due to the collection of $19,300,000 on AEW Partners' obligation to the
Development Partnership in December 1993. In July 1993, the Company completed
negotiations on a new $40,000,000 Secured Line of Credit and $30,000,000 Secured
Term Credit Facility. On December 22, 1993, the Company completed negotiations
on an additional $30,000,000 Secured Line of Credit which bore interest at the
prime rate plus 1/2%. The additional Line of Credit matured upon the closing of
the amendment to the $40,000,000 Secured Line of Credit and $30,000,000 Secured
Term Credit Facility more fully discussed below. At December 31, 1993 the
Company had approximately $31,380,000 available on its credit facility.
In January 1994, the Company completed negotiations to amend the
$40,000,000 Secured Line of Credit and increase the Secured Term Credit Facility
from $30,000,000 to $145,000,000. Borrowings under the $40,000,000 secured line
of credit, which will expire May 30, 1997 will be made at varying interest rates
of LIBOR plus 1 3/4%, the prime rate, or certificate of deposit rate plus 1
7/8%. Borrowings under the $145,000,000 Secured Term Credit Facility, which
will expire May 31, 2000, will be made through October 31, 1994 and will bear
interest at varying interest rates of LIBOR plus 2%, the prime rate plus 1/4%,
or certificate of deposit rate plus 2 1/8%. Amounts borrowed under the Secured
Term Credit Facility will require semi-annual principal payments commencing
November 30, 1994 through May 31, 2000. In February 1994, the Company used the
Secured Term Credit Facility to retire $65,742,000 of 11.25% mortgage debt
assumed through the acquisition of LQP, which would have matured in November
1994. As of February 28, 1994, the Company had $27,125,000 available on its
credit facility.
At December 31, 1993, the AEW Note to the Development Partnership had been
fully collected. The Company anticipates that substantially all of its
development activity in 1994 will occur through the Development Partnership by
using the Partnership's available cash and cash from operations and that no
distributions of cash will be made to partners.
Net cash provided by operating activities increased to $77,364,000 in 1993
from $60,543,000 in 1992, an increase of $16,821,000 or 27.8%. The increase was
due to increased inn revenues and an increase in accounts payable and accrued
expenses due to the timing of payment. Net cash provided by operating
activities increased to $60,543,000 in 1992 from $54,056,000 in 1991, an
increase of $6,487,000 or 12.0%. The majority of the increase was due to an
increase in inn revenues as a result of increased occupancy and average room
rates.
18
Net cash used by investing activities increased to $145,027,000 in 1993
from $15,166,000 in 1992, an increase of $129,861,000. The increase was related
to the acquisition of LQP, the acquisition of partners' interest in 14
unincorporated joint ventures and partnerships, the acquisition of eleven inns
and capital expenditures related to the Company's image enhancement program. Net
cash used by investing activities decreased to $15,166,000 in 1992 from
$35,083,000 in 1991, a decrease of $19,917,000 or 56.8%. This decrease
resulted from no inns being acquired during 1992 compared to three inns and a
partner's interest in an additional five inns in 1991.
Net cash provided by financing activities was $78,650,000 in 1993 compared
to net cash used by financing activities of ($40,471,000) in 1992. The increase
in cash provided by financing activities was the result of the issuance of the 9
1/4% Senior Subordinated Notes due 2003, the collection of the AEW Note and the
decrease in distributions to partners partially offset payments on long-term
debt. Net cash used by financing activities increased to $40,471,000 in 1992
from $24,428,000 in 1991, an increase of $16,043,000 or 65.7%. This increase
was primarily impacted by a reduction of the Company's average outstanding
balance on the Credit Facility.
COMMITMENTS
In accordance with the unincorporated partnership or joint venture
agreements executed by the Company, La Quinta is committed to advance funds
necessary to cover operating expenses of a joint venture. In addition, four
other unincorporated partnerships and joint ventures executed promissory notes
in which the Company guaranteed to fund amounts not to exceed $4,985,000 in the
aggregate.
The estimated additional cost to complete the conversion and renovation of
inns for which commitments have been made is $36,455,000 at December 31, 1993,
of which includes amounts for the Company's image enhancement program that were
in process or under contract. Funds on hand, committed and anticipated from
cash flow are sufficient to complete these projects.
The Company has undertaken a comprehensive chainwide image enhancement
program intended to give its properties a new, fresh, crisp appearance while
preserving their unique character. The program features new signage displaying
a new logo as well as exterior and lobby upgrades including brighter colors,
more extensive lighting, additional landscaping, enhanced guest entry and full
lobby renovation with contemporary furnishings and seating area for continental
breakfast. In the first quarter of 1993, the Company began its property and
image enhancement program on the La Quinta inns it manages or owns. The Company
anticipates that $36,379,000 will be needed to complete the project, including
$27,493,000 related to work which was in process or under contract at
December 31, 1993. The Company intends to fund its image enhancement program
through funds generated from operations and available on its Credit Facility.
The Company does not anticipate the funding of this program will have an
adverse effect on its ability to fund its operations.
Under the terms of a Partnership agreement between the Company and AEW
Partners, the Company maintains a reserve for renovating, remodeling and
conversion of the inns in the Development Partnership based on 5% of gross room
revenue of the Partnership which includes certain amounts required by loan
agreements. At December 31, 1993 and 1992 the Company had $3,833,000 and
$3,920,000, respectively, of restricted cash which is classified as investments.
In accordance with the requirements of an escrow agreement related to a
pool of mortgage notes executed by the Company and a third party lender, the
Company is required to make annual deposits into an escrow account for the
purpose of establishing a reserve for the replacement of furnishings, fixtures
and equipment used on or incorporated into the mortgaged properties. The
Company shall be relieved of its obligation to make such annual deposits for any
year in which the escrow account has an aggregate balance of $2,431,000. At
December 31, 1993 and 1992, the Company had reserved $2,431,000 and $5,754,000,
respectively.
In 1993, the Company entered into a ten year operating lease for its
corporate headquarters in San Antonio. In addition, the Company entered into a
ten year lease in December 1993 to house the Company's reservation facilities.
Funds on hand, anticipated from future cash flows and available on the
Company's Credit Facility are sufficient to fund operating expenses, debt
service and other capital requirements through at least the end of 1994.
The Company will evaluate from time to time the necessity of other financing
alternatives.
19
SEASONALITY
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns and, in most La Quinta inns, is higher in the spring and summer months
(March through August) than in the balance of the year.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes". This
Statement requires the use of the asset and liability method of accounting for
deferred income taxes and was implemented in 1993. The impact of the
Statement's implementation has been disclosed in note 4 of Notes to Combined
Financial Statements.
INFLATION
The rate of inflation as measured by changes in the average consumer price
index has not had a material effect on the revenues or net earnings (loss) of
the Company in the three most recent years.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LA QUINTA INNS, INC.
COMBINED BALANCE SHEETS
(in thousands, except share data)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
December 31
--------------------
ASSETS 1993 1992
----- -----
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . $23,848 $12,861
Receivables:
Trade. . . . . . . . . . . . . . . . . . . . . . . . 6,744 4,093
La Quinta Motor Inns Limited Partnership . . . . . . -- 364
Other. . . . . . . . . . . . . . . . . . . . . . . . 3,191 2,167
Income taxes . . . . . . . . . . . . . . . . . . . . -- 1,076
Supplies . . . . . . . . . . . . . . . . . . . . . . . 5,921 4,554
Prepaid expenses . . . . . . . . . . . . . . . . . . . 581 341
------- -------
Total current assets . . . . . . . . . . . . . . . 40,285 25,456
------- -------
Notes receivable, excluding current installments
(net of allowance of $3,167 and $3,058) . . . . . . . . 7,683 7,696
------- -------
Investments, including joint ventures accounted for
on the equity method (notes 6, 9, 12 and 14) . . . . . 6,583 10,296
------- -------
Properties held for sale, at estimated net realizable
value . . . . . . . . . . . . . . . . . . . . . . . . . 3,401 3,920
------- -------
Land held for future development, at cost. . . . . . . . 1,452 1,452
------- -------
Property and equipment, at cost, substantially all
pledged (notes 2, 7 and 14):
Buildings. . . . . . . . . . . . . . . . . . . . . . . 660,278 512,317
Furniture, fixtures and equipment. . . . . . . . . . . 114,113 90,715
Land and leasehold improvements. . . . . . . . . . . . 129,862 94,836
------- -------
Total property and equipment . . . . . . . . . . . 904,253 697,868
Less accumulated depreciation and amortization . . . . 230,917 214,398
------- -------
Net property and equipment . . . . . . . . . . . . 673,336 483,470
------- -------
Deferred charges and other assets, at cost
less applicable amortization . . . . . . . . . . . . . 11,501 6,893
------- -------
Total assets . . . . . . . . . . . . . . . . . . . $744,241 $539,183
------- -------
------- -------
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
21
LA QUINTA INNS, INC.
COMBINED BALANCE SHEETS
(in thousands, except share data)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
December 31
-----------------
1993 1992
------ ------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (notes 2 and 14). . . . . . . . . $ 22,491 $ 21,711
Accounts payable:
Trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,282 9,217
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,584 5,468
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,830 --
Accrued expenses:
Payroll and employee benefits. . . . . . . . . . . . . . . . . . . . . 17,620 12,852
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,379 1,016
Property taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,994 7,233
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,870 1,198
-------- --------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 79,050 58,695
-------- --------
Long term debt, excluding current installments (notes 2 and 14). . . . . . 414,004 274,824
-------- --------
Deferred gain (note 12). . . . . . . . . . . . . . . . . . . . . . . . . . 143 1,618
-------- --------
Deferred income taxes, pension and other . . . . . . . . . . . . . . . . . 16,011 17,665
-------- --------
Partners' capital (notes 3 and 14) . . . . . . . . . . . . . . . . . . . . 85,976 62,060
-------- --------
Shareholders' equity (notes 2 and 5):
Common stock ($.10 par value; 40,000,000 shares authorized;
32,111,364 and 14,668,074 shares issued). . . . . . . . . . . . . . .. 3,211 1,467
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 60,573 56,749
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,059 80,773
Minimum pension liability adjustment (note 6). . . . . . . . . . . . . . (1,458) --
-------- --------
162,385 138,989
Less treasury stock, at cost (1,732,867 and 1,273,416 shares). . . . . . 13,328 14,668
-------- --------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 149,057 124,321
Commitments and contingencies (notes 7, 9, and 10)
-------- --------
Total liabilities and shareholders' equity . . . . . . . . . . . . . $744,241 $539,183
-------- --------
-------- --------
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
22
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Years Ended December 31
--------------------------------------
1993 1992 1991
------- ------- ------
Revenues:
Inn. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $258,529 $239,826 $227,096
Restaurant rental and other. . . . . . . . . . . . . . . . . . . . . 6,464 7,208 6,910
Management services (notes 12 and 14). . . . . . . . . . . . . . . . 6,857 7,088 6,882
-------- -------- --------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 271,850 254,122 240,888
-------- -------- --------
Operating costs and expenses:
Direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,915 135,790 135,443
Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,450 23,961 19,683
Provision for write-down of partnership investments,
land and other (note 8). . . . . . . . . . . . . . . . . . . . . . -- 28,383 3,855
Severance and other employee related costs (note 8). . . . . . . . . -- 6,936 4,097
Performance stock option (note 5). . . . . . . . . . . . . . . . . . 4,407 -- --
Depreciation, amortization and fixed asset retirements (note 1). . . 23,711 24,477 34,921
-------- -------- --------
Total operating costs and expenses . . . . . . . . . . . . . . . . 196,483 219,547 197,999
-------- -------- --------
Operating income.. . . . . . . . . . . . . . . . . . . . . . . . . 75,367 34,575 42,889
-------- -------- --------
Other (income) expense:
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . (5,147) (6,041) (8,442)
Interest on long-term debt:. . . . . . . . . . . . . . . . . . . . . 31,366 33,087 38,713
Partners' equity in earnings and losses (note 3) . . . . . . . . . . 12,965 15,081 9,421
-------- -------- --------
Earnings (loss) before property and investment transactions. . . 36,183 (7,552) 3,197
Net gain (loss) on property and investment transactions
(note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,347) 282 (1,012)
-------- -------- --------
Earnings (loss) before income taxes, extraordinary
items and cumulative effect of accounting change . . . . . . . 31,836 (7,270) 2,185
Income taxes (note 4). . . . . . . . . . . . . . . . . . . . . . . . . 12,416 526 787
-------- -------- --------
Earnings (loss) before extraordinary items and cumulative
effect of accounting change. . . . . . . . . . . . . . . . . . 19,420 (7,796) 1,398
Extraordinary items, net of income taxes (note 2). . . . . . . . . . . (619) (958) (1,269)
-------- -------- --------
Earnings (loss) before cumulative effect of accounting
change . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,801 (8,754) 129
Cumulative effect of accounting change (note 4). . . . . . . . . . . . 1,500 -- --
-------- -------- --------
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . $ 20,301 $ (8,754) $ 129
-------- -------- --------
-------- -------- --------
Earnings (loss) per common and common equivalent share:
Earnings (loss) before extraordinary items and
cumulative effect of accounting change . . . . . . . . . . . . $ .61 $ (.26) $ .05
Extraordinary items, net of income taxes . . . . . . . . . . . . (.02) (.03) (.05)
Cumulative effect of accounting change . . . . . . . . . . . . . .05 -- --
-------- -------- --------
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . $ .64 $ (.29) $ --
-------- -------- --------
-------- -------- --------
Weighted average number of common and common
equivalent shares outstanding, as restated (note 5). . . . . . . . . 31,537 30,201 29,704
-------- -------- --------
-------- -------- --------
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
23
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Minimum
Additional Pension
Common Stock Treasury Stock Paid-In Retained Liability
--------------- ---------------
Shares Amount Shares Amount Capital Earnings Adjustment Total
--------------- ------ -------- ------- -------- ----------- ---------
Balances at December 31, 1990. . . . . . . . 14,668 $1,467 (1,548) $(17,839) $55,878 $89,661 $ -- $129,167
Stock options. . . . . . . . . . . . . . . -- -- 90 1,066 76 -- -- 1,142
Redemption of stock rights . . . . . . . . -- -- -- -- -- (263) -- (263)
Net earnings . . . . . . . . . . . . . . . -- -- -- -- -- 129 -- 129
------ ------- ------- -------- ------- ------- --------- --------
Balances at December 31, 1991. . . . . . . . 14,668 1,467 (1,458) (16,773) 55,954 89,527 -- 130,175
Stock options. . . . . . . . . . . . . . . -- -- 185 2,105 795 -- -- 2,900
Net loss . . . . . . . . . . . . . . . . . -- -- -- -- -- (8,754) -- (8,754)
------- ------ ------ ------- ------ ------- -------- --------
Balances at December 31, 1992. . . . . . . . 14,668 1,467 (1,273) (14,668) 56,749 80,773 -- 124,321
Effect of stock split at October 1, 1993 . 6,740 674 -- -- (674) -- -- --
Effect of stock split at March 15, 1994. . 10,703 1,070 (578) -- (1,070) -- -- --
Stock options. . . . . . . . . . . . . . . -- -- 118 1,340 5,568 -- -- 6,908
Dividends paid . . . . . . . . . . . . . . -- -- -- -- -- (1,015) -- (1,015)
Net earnings . . . . . . . . . . . . . . . -- -- -- -- -- 20,301 -- 20,301
Minimum pension liability adjustment . . . -- -- -- -- -- -- (1,458) (1,458)
------- ------ ------ ------- ------ ------- -------- --------
Balances at December 31, 1993. . . . . . . . 32,111 $3,211 (1,733) $(13,328) $60,573 $100,059 $(1,458) $149,057
------- ------ ------ ------- ------ ------- -------- --------
------- ------ ------ ------- ------ ------- -------- --------
See accompanying notes to combined financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
24
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
- ----------------------------------------------------------------------------
Years ended December 31
-----------------------------------------
1993 1992 1991
------ ------ -----
Cash flows from operating activities
Net earnings (loss) .. . . . . . . . . . . . . . . . . . . $ 20,301 $ (8,754) $ 129
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization of property and
equipment. . . . . . . . . . . . . . . . . . . . . . 22,994 22,700 32,354
Amortization of deferred charges . . . . . . . . . . . 1,651 1,446 1,676
Loss on retirement of fixed assets . . . . . . . . . . 156 1,074 1,536
Non-recurring, non-cash charges. . . . . . . . . . . . -- 32,913 1,380
Performance stock options. . . . . . . . . . . . . . . 4,407 -- --
(Gain) loss on sale of assets. . . . . . . . . . . . . (616) (282) 1,012
Undistributed earnings of affiliates . . . . . . . . . 50 72 441
Partners' equity in earnings and losses. . . . . . . . 12,965 15,081 9,421
Cumulative effect of change in accounting for
income taxes . . . . . . . . . . . . . . . . . . . . (1,500) -- --
--------- --------- ---------
Net cash provided by operating activities before
changes in operating assets and liabilities. . . . . 60,408 64,250 47,949
--------- --------- ---------
Changes in operating assets and liabilities:
Receivables . . . . . . . . . . . . . . . . . . . . . (1,832) 410 3,336
Income taxes . . . . . . . . . . . . . . . . . . . . . 2,906 (1,244) 3,501
Supplies and prepaid expenses. . . . . . . . . . . . . (991) 584 138
Accounts payable and accrued expenses. . . . . . . . . 13,685 947 6,869
Deferred charges and other assets. . . . . . . . . . . 460 (969) (2,386)
Deferred credits and other . . . . . . . . . . . . . . 2,728 (3,435) (5,351)
--------- --------- ---------
Net cash provided by operating activities. . . . . 77,364 60,543 54,056
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . (32,623) (15,529) (13,803)
Proceeds from property transactions. . . . . . . . . . . 982 1,998 1,576
Purchase and conversion of inns. . . . . . . . . . . . . (38,858) (4,060) (15,487)
Purchase of partners' equity interests . . . . . . . . . (78,169) -- (3,546)
Decrease (increase) in notes receivable and
other investments. . . . . . . . . . . . . . . . . . 3,641 2,425 (3,823)
--------- --------- ---------
Net cash used by investing activities. . . . . . . (145,027) (15,166) (35,083)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from secured line of credit and
long-term borrowings . . . . . . . . . . . . . . . . 223,198 61,275 47,957
Principal payments on secured line of credit
and long-term borrowings . . . . . . . . . . . . . . (178,528) (101,156) (77,940)
Capital contributions by partners . . . . . . . . . . . . 35,908 15,216 18,226
Capital distributions to partners . . . . . . . . . . . . (3,414) (18,706) (13,550)
Dividends to shareholders . . . . . . . . . . . . . . . . (1,015) -- --
Net proceeds from stock transactions . . . . . . . . . . 2,501 2,900 879
--------- --------- ---------
Net cash provided (used) by
financing activities . . . . . . . . . . . . . . 78,650 (40,471) (24,428)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents . . . . . . 10,987 4,906 (5,455)
Cash and cash equivalents at beginning of period . . . . . . 12,861 7,955 13,410
--------- --------- ---------
Cash and cash equivalents at end of period . . . . . . . . . $ 23,848 $ 12,861 $ 7,955
--------- --------- ---------
--------- --------- ---------
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
25
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The Company develops, owns and operates inns. The combined financial
statements include the accounts of subsidiaries (all wholly-owned) and
unincorporated partnerships and joint ventures in which the Company has at least
a 40% interest and exercises substantial legal, financial and operational
control. All significant intercompany accounts and transactions have been
eliminated in combination. Investments in other unconsolidated affiliates in
which the Company has less than a 40% ownership interest and over which the
Company has the ability to exercise significant influence are accounted for
using the equity method. Certain reclassifications of prior period amounts have
been made to conform with the current period presentation.
PARTNERS' CAPITAL
Partners' capital at December 31, 1992 is shown net of a $35,908,000 note
receivable to La Quinta Development Partners, L.P. ("LQDP" or the "Development
Partnership") representing a portion of the initial capital contribution to LQDP
by AEW Partner's L.P. Collections on this note are reflected as an increase to
partners' capital. In 1993, the outstanding balance of this note was fully
collected.
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment for 1993 and 1992
are computed using the straight-line method over the following estimated useful
lives:
Buildings............................................ 40 years
Furniture, fixtures and equipment.................... 4-10 years
Leasehold and land improvements...................... 10-20 years
Maintenance and repairs are charged to operations as incurred. Expenditures
for improvements are capitalized.
During the third quarter of 1992, the Company changed the estimated useful
lives of its buildings from 30 years to 40 years effective January 1, 1992,
based on a review of the depreciable lives of its assets.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at
the date of acquisition are considered cash equivalents.
DEFERRED CHARGES
Deferred charges consist primarily of issuance costs related to Senior
Subordinated Notes due 2003, Industrial Development Revenue Bonds ("IRB"), loan
fees, preopening and organizational costs. Issuance costs are amortized over
the life of the related debt using the interest method. Preopening costs are
amortized over two years, organizational costs over five years and loan fees
over the respective terms of the loans using the straight-line method.
SELF-INSURANCE PROGRAMS
The Company uses a paid loss retrospective self-insurance plan for general
and auto liability and workers' compensation. Predetermined loss limits have
been arranged with insurance companies to limit the Company's per occurrence
cash outlay.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
26
The Company maintains a self-insurance program for major medical and
hospitalization coverage for employees and dependents which is partially
funded by payroll deductions. Payments for major medical and hospitalization
to individual participants less than specified amounts are self-insured by
the Company. Claims for benefits in excess of these amounts are covered by
insurance purchased by the Company.
Provisions have been made in the combined financial statements which
represent the expected future payments based on estimated ultimate cost for
incidents incurred through the balance sheet date.
INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using currently enacted tax rates in effect for the years in
which the differences are expected to reverse. In 1993, the Company recorded
an adjustment to income of $1,500,000 which represents the net decrease of
the deferred tax liability at January 1, 1993. Such amount has been
reflected in the combined statement of operations for the year ended December
31, 1993 as the cumulative effect of an accounting change. Prior years'
financial statements have not been restated to apply the provisions of SFAS
109. The deferred method under APB Opinion 11 was applied in 1992 and prior
years.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed on the basis of the weighted
average number of common and common equivalent (dilutive stock options)
shares outstanding in each year after giving retroactive effect to the stock
splits effected as stock dividends as discussed in note 5 of these Combined
Financial Statements. Shares of the Company's common stock issuable upon
conversion of the Development Partnership Units are antidilutive at December
31, 1993 and prior years. Primary and fully diluted earnings (loss) per share
are not significantly different.
PROPERTIES HELD FOR SALE
Properties held for sale are stated at the lower of cost or estimated
net realizable value. Charges to reduce the carrying amounts of properties
held for sale to estimated net realizable value are recognized in income.
The Company recorded charges of $9,926,000 in 1992 and $2,145,000 in 1991 in
the statements of operations related to the write-down of properties held for
sale.
(2) LONG-TERM DEBT
December 31,
------------
1993 1992
---- ----
(in thousands)
Mortgage loans maturing 1994-2015 (9.4% weighted average)......... $179,418 $194,085
Industrial Development Revenue Bonds, maturing 1994-2012
(7.3% weighted average)........................................... 72,682 79,450
Senior subordinated notes, due 2003 (9.25%)....................... 120,000 -
Bank secured term credit facility, maturing May 31, 2000 (5.6%)... 28,620 -
Bank secured line of credit (5.4% at December 31, 1993)........... 35,775 23,000
-------- -------
Total......................................................... 436,495 296,535
Less current installments......................................... 22,491 21,711
------- --------
Net long-term debt............................................ $414,004 $274,824
-------- --------
-------- --------
At December 31, 1993, the Company had a $40,000,000 Secured Line of Credit,
renegotiated in July 1993, and a $30,000,000 Secured Term Credit Facility with
participating banks. On December 22, 1993, the Company completed negotiations
on an additional $30,000,000 Secured Line of Credit which bore interest at the
prime rate plus 1/2%. At December 31, 1993, the Company had $31,380,000
available on its Secured Term and Line of Credit. In January 1994, the Company
completed negotiations to amend the $40,000,000 Secured Line of Credit and
increase its Secured Term Credit Facility from $30,000,000 to $145,000,000.
Borrowings under the
27
$40,000,000 Secured Line of Credit, which will expire May 30, 1997 will be made
at varying interest rates of LIBOR plus 1 3/4%, the prime rate, or certificate
of deposit rate plus 1 7/8%. Borrowings under the $145,000,000 Secured Term
Credit Facility, which will expire May 31, 2000, will be made through October
31, 1994 and will bear interest at varying interest rates of LIBOR plus 2%, the
prime rate plus 1/4%, or certificate of deposit rate plus 2 1/8%. Amounts
borrowed under the Secured Term Credit Facility will require semi-annual
principal payments commencing November 30, 1994 through May 31, 2000. The
Company pays a commitment fee of .5% per annum on the undrawn portion of the
credit line. The annual maturities reflect the payment terms of the amended and
restated Secured Line of Credit and Secured Term Credit Facility. Commitment
fees totaled $164,000, $105,000 and $71,000 for the years ended December 31,
1993, 1992 and 1991, respectively.
Annual maturities for the four years subsequent to December 31, 1994 are as
follows:
(in thousands)
1995. . . . . . . . . . . . . $28,487
1996. . . . . . . . . . . . . 29,548
1997. . . . . . . . . . . . . 66,598
1998. . . . . . . . . . . . . 36,205
Interest paid during the years ended December 31, 1993, 1992 and 1991
amounted to $27,913,000, $32,523,000 and $38,320,000, respectively.
In December 1993, the Company assumed the outstanding mortgage notes
payable of La Quinta Motor Inns Master Limited Partnership ("LQP") totaling
$65,962,000 (see note 14). The notes bear interest at 11 1/4% and mature on
November 1, 1994. Subsequent to December 31, 1993, the Company paid off the
entire outstanding balance with proceeds from its renegotiated Secured Term
Credit Facility. In 1993, the Company recognized an extraordinary loss of
$986,000 ($602,000 net of income taxes) related to the prepayment fees for the
early retirement of this debt.
In 1993, the Company completed an offering of $120,000,000 in principal
amount of 9 1/4% Senior Subordinated Notes due 2003. The proceeds of the
financing and the Secured Term Credit Facility were used to partially fund the
acquisitions of partners' interests in certain consolidated partnerships and
joint ventures and to prepay approximately $106,000,000 of existing
indebtedness. In addition, the Company refinanced three issues of IRBs
totaling $11,200,000 in 1993. In 1992, the Company refinanced three issues of
IRBs totaling $12,910,000 and retired its 10% Convertible Subordinated
Debentures due 2002. The Company reported extraordinary items, net of income
taxes, of $3,062,000 and $958,000 in 1993 and 1992, respectively, related to
these refinancings and retirements.
In May 1993, the Company conveyed title to the property in which its
corporate headquarters was located to the lender holding a $10.1 million
non-recourse mortgage on the property. Completion of this transaction resulted
in the elimination of the liability for the non-recourse mortgage on the
Company's balance sheet. The Company recognized a loss on property transactions
of $4,900,000 related to the write-down of the property to its estimated fair
value and an extraordinary gain of $4,991,000, $3,045,000 net of income taxes,
for the difference between the carrying amount of the debt and the estimated
fair value of the building.
The Company is obligated by agreements relating to seventeen issues of IRBs
in an aggregate amount of $55,515,000 to purchase the bonds at face value prior
to maturity under certain circumstances. The bonds have floating interest rates
which are indexed periodically. Bondholders may, when the rate is changed, put
the bonds to the designated remarketing agent. If the remarketing agent is
unable to resell the bonds, it may draw upon an irrevocable letter of credit
which secure the IRBs. In such event, the Company would be required to repay
the funds drawn on the letters of credit within 24 months.
As of December 31, 1993 no draws had been made upon any such letters of
credit. The schedule of annual maturities shown above includes these IRBs as if
they will not be subject to repayment prior to maturity. Assuming all bonds
under such IRB arrangements are presented for payment prior to December 31, 1994
and the remarketing agents are unable to resell such bonds, the maturities of
long-term debt shown above would increase by $42,210,000 for the year ending
December 31, 1995.
28
In January 1992, the Company entered into several five year interest rate
swap agreements with a commercial bank in order to manage exposure to
fluctuations in interest rates on certain floating rate long-term obligations.
The agreement effectively changes the Company's interest rate exposure on
approximately $39,050,000 and $13,218,000 of certain floating rate IRBs
outstanding at December 31, 1993 to fixed rates of 5.26% and 6.5%, respectively.
Net payments or receipts due under these agreements are included as adjustments
to interest expense. The Company is exposed to credit loss in the event of
nonperformance by the other party to the interest rate swap agreements, however,
the Company does not anticipate nonperformance by the counterparty.
The Secured Line of Credit, Secured Term Credit Facility and certain
agreements associated with IRBs are governed by a uniform covenant agreement.
The most restrictive covenants preclude the following: payment of cash
dividends in excess of defined limits, limitations on the incurrence of debt,
mergers, sales of substantial assets, loans and advances, certain investments or
any material changes in character of business. The agreement contains
provisions to limit the total dollar amounts of certain investments and capital
expenditures.
The Company's 9 1/4% Senior Subordinated Notes are governed by a Trust
Indenture dated May 15, 1993. The Trust Indenture contains certain covenants
for the benefit of holders of the notes, including, among others, covenants
placing limitations on the incurrence of debt, dividend payments, certain
investments, transactions with related persons, asset sales, mergers and the
sale of substantially all the assets of the Company.
At December 31, 1993, the Company was in compliance with all restrictions
and covenants.
(3) UNINCORPORATED VENTURES AND PARTNERSHIPS
Summary financial information with respect to unincorporated ventures and
partnerships included in the combined financial statements follows. In 1993 the
Company acquired several unincorporated ventures and partnerships which are
included in the December 1992 financial information for the balance sheet and
statement of operations which are not included in the balance sheet at December
31, 1993 or statement of operations for a full year in 1993. LQP was not
included in the balance sheet or income statement for 1992, however, as a result
of the acquisition of Units by the Company the financial information below
includes assets and liabilities at December 31, 1993 and operations for the
month of December 31, 1993 (also see note 14):
December 31,
--------------------
1993 1992
---- ----
(in thousands)
ASSETS
Total current assets..................................................................... $ 27,956 $ 14,924
Notes receivable, excluding current installments......................................... 2,668 2,665
Investments and other assets............................................................. 5,883 6,464
Property and equipment, net.............................................................. 252,343 205,075
-------- --------
$288,850 $229,128
-------- --------
-------- --------
LIABILITIES AND OWNERS' EQUITY
Total current liabilities................................................................ $ 28,542 $ 28,032
Long-term debt, excluding current installments............................................ 97,465 93,264
Deferred credits.......................................................................... 10 244
Owners' equity:
Company's............................................................................ 76,857 45,528
Partners'............................................................................ 85,976 62,060
-------- --------
$288,850 $229,128
-------- --------
-------- --------
29
Years Ended December 31,
------------------------------------
1993 1992 1991
--------- --------- -----------
(in thousands)
Revenues................................................................................ $104,394 $119,040 $111,880
Operating costs and expenses............................................................ 75,661 85,127 87,417
-------- -------- --------
Operating income........................................................................ 28,733 33,913 24,463
Other deductions, principally interest.................................................. (5,690) (7,794) (8,040)
-------- -------- --------
Earnings before gain on property transactions........................................... 23,043 26,119 16,423
Gain on property transactions........................................................... 324 73 1,339
--------- ---------- --------
Earnings before extraordinary items..................................................... 23,367 26,192 17,762
Extraordinary items..................................................................... (133) (280) -
--------- ----------- --------
Pretax earnings.................................................................... $ 23,234 $ 25,912 $ 17,762
--------- ----------- ---------
--------- ----------- ---------
Equity in pretax earnings:
Company's ......................................................................... $ 10,269 $ 10,831 $ 8,341
Partners'.......................................................................... 12,965 15,081 9,421
--------- ---------- ---------
$ 23,234 $ 25,912 $ 17,762
--------- ---------- --------
--------- ---------- --------
(4) INCOME TAXES
As discussed in note 1, the Company adopted SFAS 109 effective
January 1, 1993.
Income tax expense attributable to income from continuing
operations consists of:
Years Ended December 31,
-------------------------------------------
1993 1992 1991
------- ------- -------
(in thousands)
Federal
Current $ 8,752 $ 3,818 $ 4,970
Deferred 1,918 (3,759) (4,262)
------- ------- -------
10,670 59 708
------- ------- -------
State
Current 974 937 707
Deferred 772 (470) (628)
------- ------- -------
1,746 467 79
------- ------- -------
Total $12,416 $ 526 $ 787
------- ------- -------
------- ------- -------
The effective tax rate varies from the statutory rate for the following
reasons:
Years Ended December 31,
-------------------------------------
1993 1992 1991
---- ---- ----
(in thousands)
Tax expense (benefit) at statutory rate............. $11,143 $(2,472) $ 743
Unrecognized tax benefits of write-downs of
partnerships, investments and other............ - 2,856 -
Targeted jobs tax credit............................ (39) (109) (182)
Capital gains....................................... - (13) (31)
State income taxes.................................. 1,157 491 80
Other, net.......................................... 155 (227) 177
------- ------- ------
Provision for income taxes........................ $12,416 $ 526 $ 787
------- ------ -----
------- ------ -----
30
The following are cash transactions relating to the Company's income taxes:
Years Ended December 31,
-------------------------------------
1993 1992 1991
---- ---- ----
(in thousands)
Income taxes paid $5,953 $5,459 $4,012
------ ------ ------
------ ------ ------
Income tax refund $ 71 $ 99 $2,338
------ ------ ------
------ ------ ------
For the years ended December 31, 1992 and 1991, deferred income tax expense
resulted from timing differences in the recognition of income and expense for
income tax and financial reporting purposes. The sources and tax effects of
those timing differences are presented below:
Years Ended December 31,
--------------------------------
1992 1991
------ ------
(in thousands)
Depreciation and asset write-downs.............. $ 1,101 $(1,242)
Capitalized loan interest....................... 335 351
State income taxes.............................. (208) (500)
Installment sales............................... (124) (99)
Deferred gain................................... 24 24
Partners' losses recognized by Company.......... (398) 80
Expense provisions, including non-recurring charges (4,017) (2,914)
Preopening costs.................................... (33) (94)
Minimum tax......................................... (658) (257)
Targeted jobs tax credit........................... (26) (23)
Special partnership allocations.................... 347 (3)
Other, net......................................... (572) (213)
------ -------
$(4,229) $(4,890)
------- --------
------- --------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1993 are presented below:
(in thousands)
Deferred tax assets:
Notes receivable, principally due to allowance for financial reporting purposes.......... $ 1,529
Land, principally due to write-downs for financial reporting purposes.................... 2,991
Property and equipment, principally due to acquisitions of partnership interests......... 8,307
Expense provisions....................................................................... 8,785
Deferred gain for financial reporting purposes........................................... 82
Targeted jobs tax credit carryforwards................................................... 411
Minimum pension liability................................................................ 932
Alternative minimum tax credit carryforwards............................................. 2,781
Other.................................................................................... 97
-------
Total gross deferred tax assets........................................................ 25,915
Less valuation allowance............................................................... (277)
-------
Net deferred tax assets................................................................ 25,638
-------
Deferred tax liabilities:
Investments in partnerships, principally due to differences in depreciation
and capitalized interest.............................................................. (3,439)
Property and equipment, principally due to differences in depreciation and
capitalized interest.................................................................. (25,899)
Deferred gains for tax purposes......................................................... (1,251)
Other................................................................................... (5)
-------
Total gross deferred tax liabilities.................................................. (30,594)
--------
Net deferred tax liability............................................................ $ (4,956)
--------
--------
31
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The valuation allowance at December 31, 1993 represents the tax benefit of
certain future deductible amounts which are not expected to offset future
taxable amounts resulting from the reversal of existing taxable temporary
differences. The Company anticipates that the reversal of existing taxable
temporary differences will provide sufficient taxable income to realize the tax
benefits of the remaining deferred tax assets. The valuation allowance decreased
by $6,816,000, principally as a result of the acquisition of a substantial
portion of the units of the La Quinta Motor Inns Limited Partnership as more
fully described in Note 14 of these notes to Combined Financial Statements.
At December 31, 1993, the Company had targeted jobs tax credit
carryforwards for Federal income tax purposes of approximately $411,000
(expiring 2007 through 2009) which are available to reduce future Federal
income taxes. In addition, the Company had alternative minimum tax credit
carryforwards of approximately $2,781,000 which are available to reduce future
regular Federal income taxes over an indefinite period.
(5) SHAREHOLDERS' EQUITY
The Board of Directors authorized three-for-two stock splits effective in
October 1993 and March 1994. Earnings per share, the weighted average number
of shares outstanding, shareholders' equity and the following information have
been adjusted to give effect to each of these distributions. In January 1994,
the Company announced that its Board of Directors authorized the purchase of
up to $10,000,000 of its common stock. Such purchases would be made from time
to time in the open market as deemed appropriate by the Company.
The Company's stock option plans cover the granting of options to purchase
an aggregate of 6,155,996 common shares. Options granted under the plans are
issuable to certain officers, certain employees and Board Members generally at
prices not less than fair market value at date of grant. Options are generally
exercisable in four equal installments on successive anniversary dates of the
date of grant and are exercisable thereafter in whole or in part. Outstanding
options not exercised expire ten years from the date of grant.
Total
Option price option
Number range price
of shares per share (in thousands)
---------- --------------- ---------------
Outsanding December 31, 1991................ 1,720,073 $ 4.64 - $10.84 $ 9,877
Granted................................... 3,471,750 6.67 - 8.78 25,441
Canceled or expired....................... (347,465) 5.25 - 8.98 (2,117)
Exercised................................. (463,403) 4.64 - 7.95 (2,654)
--------- --------
Outstanding December 31, 1992............... 4,380,995 $ 4.64 - $10.84 30,547
Granted................................... 164,250 12.89 - 13.56 2,189
Canceled or expired....................... (100,112) 5.25 - 8.67 (581)
Exercised................................. (244,271) 4.78 - 10.83 (1,556)
--------- --------
Outstanding December 31, 1993............... 4,200,822 $ 4.64 - $13.56 $30,599
--------- --------
--------- --------
Exercisable at:
December 31, 1992......................... 648,347 $ 4.78 - $10.84 $3,930
--------- --------
--------- --------
December 31, 1993......................... 2,563,745 $ 4.78 - $ 8.78 $17,397
--------- --------
--------- --------
Available for future grants at:
December 31, 1992......................... 2,022,725
---------
---------
December 31, 1993......................... 1,955,174
---------
---------
Upon exercise, the excess of the option price received over the par value of
the shares issued, net of expenses and including the related income tax
benefits, is credited to additional paid-in capital.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
32
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In 1993, the Company recognized compensation expense of $4,407,000 related to
performance stock options for the difference between the option price at the
date of grant and a predetermined level when it became probable that the
Company's stock would trade at that predetermined level. Beginning in 1992, the
Company recognized $367,000 in compensation expense for the difference between
the market price and option price on date of grant related to a portion of
these options which vested in annual increments.
Under the terms of the La Quinta Development Partners, L.P. ("LQDP" or the
"Development Partnership") partnership agreement, AEW Partners, L.P. ("AEW
Partners") has the ability to convert 66 2/3% of its 60% ownership in the
Development Partnership currently to 3,535,976 shares (post-split) of the
Company's common stock after giving retroactive effect to the stock splits
effected as stock dividends. Shares of the Company's common stock issuable upon
conversion of the Development Partnership Units are antidilutive at December 31,
1993. AEW partner's units in LQDP may be converted over the seven year period
beginning December 31, 1991. As of December 31, 1993, AEW Partners had not
converted any of its ownership in the Development Partnership into the Company's
common stock.
(6) PENSION PLAN
The Retirement Plan and Trust of La Quinta Inns, Inc. (the "Plan") is a
defined benefit pension plan covering all employees. The Plan was amended in
1993 to allow highly compensated employees to rejoin the Retirement Plan as
active participants. Benefits accruing under the Plan are determined according
to a career average benefit formula which is integrated with Social Security
benefits. For each year of service as a participant in the Plan, an employee
accrues a benefit equal to one percent of his or her annual compensation plus
.65 percent of compensation in excess of the Social Security covered
compensation amount. The Company's funding policy for the Retirement Plan is to
annually contribute the minimum amount required by federal law.
The Supplemental Executive Retirement Plan and Trust ("SERP") continues to
cover a select group of management employees. Benefits under the SERP are
determined by a formula which considers service and total compensation; the
results of the formula-derived benefit are then reduced by the participant's
pension entitlement from the qualified Retirement Plan.
In accordance with the provisions of Statement of Financial Standards No. 87
- - Employer's Accounting for Pensions, the Company has recorded an additional
minimum liability of $4,092,000 at December 31, 1993. This provision represents
the excess of the accumulated benefit obligation over the fair value of plan
assets and accrued pension liability at the measurement date. An amount of
$1,702,000 was recognized as an intangible asset to the extent of unrecognized
prior service cost and the balance of $2,390,000 ($1,458,000 net of income tax)
is recorded as a reduction of shareholders' equity.
The following table sets forth the funded status and amounts recognized in
the Company's combined financial statements for the Plan at December 31, 1993
and 1992.
December 31,
------------------------
1993 1992
---- ----
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $7,947 and $6,876................................ $(12,298) $ (7,874)
-------- --------
-------- --------
Projected benefit obligation for services rendered to date..... $(15,585) $ (9,016)
Plan assets at fair value, primarily marketable stocks and CDs 6,727 6,536
-------- --------
Projected benefit obligation in excess of plan assets.......... (8,858) (2,480)
Unrecognized net loss from past experiences different from
that assumed................................................. 5,677 1,065
Prior service costs............................................ 1,702 (243)
Additional liability due to plan adjustment.................... (4,092) -
-------- --------
Accrued pension costs.................................... $ (5,571) $ (1,658)
-------- --------
-------- --------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
33
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table sets forth the funded status of the SERP and amounts
recognized in the Company's financial statements for the SERP:
December 31,
-------------------------
1993 1992
----- -----
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,851 and $1,285................................. $(1,983) $ (1,355)
------- --------
------- --------
Projected benefit obligation for services rendered to date...... $(3,868) $ (5,674)
Unrecognized net (gain) loss from past experience different from
that assumed.................................................. (208) 203
Unrecognized net loss from modifications........................ 294 2,437
------- --------
Accrued pension costs..................................... $ (3,782) $ (3,034)
------- --------
------- --------
At December 31, 1993, the Company had accumulated $1,144,000 in a trust
account intended for use in settling benefits due under the SERP. These funds,
which are included in investments on the accompanying balance sheets, are not
restricted for the exclusive benefit of SERP participants and their
beneficiaries. The SERP funds are invested primarily in equity investments.
However, in the event of a change in the Company's control, as defined, such
funds would become restricted for the exclusive benefit of SERP participants and
their beneficiaries.
Net pension cost includes the following components:
For The Years Ended December 31,
--------------------------------
1993 1992 1991
----- ----- -----
(in thousands)
Service cost (benefits earned during the period).................. $ 1,564 $ 1,769 $ 1,597
Interest cost on projected benefit obligation..................... 1,207 1,255 1,154
Actual return on plan assets...................................... (493) (72) (1,535)
Net amortization and deferral..................................... 589 (160) 1,239
------- ------- -------
Net periodic pension cost before allocation to
Managed inns.................................................... 2,867 2,792 2,455
Cost allocated to Managed Inns.................................... (238) (222) (184)
------- ------- ------
Net periodic pension cost..................................... $ 2,629 $ 2,570 $ 2,271
------- ------- ------
------- ------- ------
The assumptions used in the calculations shown above were:
1993 1992 1991
------ ------------- ------------
Discount rate (post-termination)........................ 7.50% 4.00% - 7.50% 4.00% - 7.25%
Discount rate (pre-termination)......................... 7.50% 8.00% 9.00%
Expected long-term rate of return on assets............. 8.00% 9.00% 9.00%
Rate of increase in compensation levels................. 5.00% - 6.00% 5.50% - 7.50% 5.50% - 7.50%
(7) OPERATING LEASES
LESSEE
The Company leases a portion of the real estate and equipment used in
operations. Certain ground lease arrangements contain contingent rental
provisions based upon revenues and also contain renewal options at fair market
values at the conclusion of the initial lease terms. In 1993, the Company
entered into two ten year operating leases for its corporate headquarters in San
Antonio and its reservation facilities.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
34
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Future annual minimum rental payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year at
December 31, 1993 follow:
(in thousands)
1994............................. $ 2,510
1995............................. 2,164
1996............................. 1,960
1997............................. 1,790
1998............................. 1,700
Later years...................... 10,986
-------
Total minimum payments required.. $21,110
-------
-------
Total rental expense for operating leases was $2,840,000, $1,976,000 and
$2,359,000 for the years ended December 31, 1993, 1992 and 1991, respectively.
LESSOR
The Company leases 107 restaurants it owns to third parties. The leases are
accounted for as operating leases expiring during a period from 1994 to 2016 and
provide for minimum rentals and contingent rentals based on a percentage of
annual sales in excess of stipulated amounts. The following is a summary of
restaurant property leased at December 31, 1993.
(in thousands)
Buildings............................ $33,861
Less: accumulated depreciation...... 10,565
-------
23,296
Land................................ 17,043
-------
Total leased property............. $40,339
-------
-------
Minimum future rentals to be received under the noncancellable restaurant
leases in effect at December 31, 1993 follow:
(in thousands)
1994................................. $ 5,904
1995................................. 5,918
1996................................. 5,858
1997................................. 5,651
1998................................. 5,387
Later years.......................... 25,815
-------
$54,533
-------
-------
Contingent rental income amounted to $811,000, $854,000, and $669,000 for the
years ended December 31, 1993, 1992 and 1991, respectively.
(8) NON-RECURRING, CASH AND NON-CASH CHARGES
During 1992, the Company recognized charges of $39,751,000 ($27,946,000 net
of income taxes and partners' equity) resulting from certain changes being made
in the Company's operations and organization based on a review by the Company's
senior management team.
Of those charges, $28,383,000 relate to the write-down of certain joint
venture interests, land, computer equipment, and other assets. During the third
quarter of 1992, the senior management team re-evaluated the Company's
investments in joint venture arrangements and shortly thereafter completed
negotiations that resulted in amendments to the agreements related to certain
joint venture arrangements and the write-down of the Company's investments in
those ventures. The write-down of the land, computer equipment and other assets
resulted
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
35
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
primarily from the Company's decisions to sell certain land that had previously
been held for future development and to replace the Company's existing computer
systems and certain other assets.
In addition, the Company recognized $6,936,000 and $4,097,000 for the years
ended December 31, 1992 and 1991, respectively, in severance and other employee
related charges. Those charges relate to severance benefits for certain
terminated employees, costs of hiring and relocating new management and other
employee related costs resulting from personnel changes.
The remaining $4,432,000 of the charges recognized in 1992 affected various
corporate expenses and partners' equity in earnings and losses.
(9) COMMITMENTS
In accordance with the unincorporated partnership or joint venture agreements
executed by the Company, La Quinta is committed to advance funds necessary to
cover operating expenses of a joint venture. In addition, four other
unincorporated partnerships and joint ventures executed promissory notes in
which the Company guaranteed to fund amounts not to exceed $4,985,000 in
aggregate.
The estimated additional cost to complete the conversion and renovation of
inns for which commitments have been made is $36,455,000 at December 31, 1993,
which includes amounts for the Company's image enhancement program that were
in process or under contract. Funds on hand, committed and anticipated from
cash flow are sufficient to complete these projects.
The Company has undertaken an image enhancement program intended to give its
properties a new, fresh, crisp appearance while preserving their unique
character. The program features new signage displaying a new logo as well as
exterior and lobby upgrades including brighter colors, additional landscaping,
enhanced guest entry and full lobby renovation with contemporary furnishings and
seating area for continental breakfast. In the first quarter of 1993, the
Company began its property and image enhancement program on its La Quinta inns
it manages or owns. The Company anticipates that an additional $36,687,000 will
be needed to complete the project, including $27,493,000 related to work which
was in process or under contract at December 31, 1993. The Company intends to
fund its image enhancement program through funds generated from operations and
available on its Credit Facility. The Company does not anticipate the funding of
this program will have an adverse effect on its ability to fund its operations.
Under the terms of a Partnership agreement between the Company and AEW
Partners, the Company maintains a reserve for renovating, remodeling and
conversion of the inns in the Development Partnership based on 5% of gross room
revenue of the Partnership which includes certain amounts required by loan
agreements. At December 31, 1993 and 1992 the Company had $3,833,000 and
$3,920,000, respectively, of restricted cash which is classified as investments.
In accordance with the requirements of an escrow agreement related to a pool
of mortgage notes executed by the Company and a third party lender, the Company
is required to make annual deposits into an escrow account for the purpose of
establishing a reserve for the replacement of furnishings, fixtures and
equipment used on or incorporated into the mortgaged properties. The Company
shall be relieved of its obligation to make such annual deposits for any year in
which the escrow account has an aggregate balance of $2,431,000. At December 31,
1993 and 1992, the Company had reserved $2,431,000 and $5,754,000, respectively.
(10) CONTINGENCIES
LITIGATION
In connection with the Company's tender offer for the units of limited
partnership interest of LQP (see note 14), two separate lawsuits were filed in
Delaware Court of Chancery on behalf of the Partnership's unitholders against
the Company, the Partnership, La Quinta Realty Corp., a subsidiary of the
Company, and general partner of the Partnership (the "General Partner") and
certain directors and officers of the General Partner. On October 27, 1993, the
parties reached a settlement in principle in these actions. The settlement is
subject to certain
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
36
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
conditions, including court approval. On March 15, 1994, the Delaware Court of
Chancery entered an Order and Final Judgment ("Judgment") which approved the
settlement and dismissed the cases. All persons and entities who were owners
of Units of the Partnership at October 18, 1993 and their transferees and
successors in interest, immediate and remote (the "Class"), are bound by the
Judgment. The Company and all other defendants were discharged from any and
all liability under any claims which were or could have been brought by
plaintiffs or any member of the Class regarding the acquisition and merger of
the Partnership. The appeal period on the Judgment will run on April 14, 1994.
In September 1993, a former officer of the Company filed suit against the
Company and certain of its directors and their affiliate companies. 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. The suits
seeks compensatory damages of $2,500,000 and exemplary damages of $5,000,000.
The Company intends to vigorously defend 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 significant adverse effect on the
Company's financial position or results of operations.
SEVERANCE AND EMPLOYMENT AGREEMENT
The Company entered into a five year employment agreement which
includes a severance provision granting the executive the right to receive
certain benefits, including among others, 3.0 times annual base salary
and bonus if there occurs a termination (as defined in the agreement) within
the five year term of the agreement, or resignation (as defined in the
agreement). The maximum contingent liability under the severance provisions of
this agreement is $1,627,000.
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- --------------------------------------------------------------------------------
37
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited combined results of operations by quarter are summarized
below:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data)
Year ended December 31, 1993:
Revenues............................................. $60,607 $70,633 $76,923 $63,687
Operating income..................................... 16,491 19,446 26,887 12,543
Net earnings before extraordinary items
and cumulataive effect of accounting
change............................................. 4,144 2,692 10,011 2,573
Net earnings......................................... 5,644 3,634 9,711 1,312
Earnings per share before extraordinary
items and cumulative effect of
accounting change.................................. .13 .08 .32 .08
Earnings per share................................... $ .18 $ .12 $ .31 $ .04
Year Ended December 31, 1992
Revenues............................................. $57,815 $66,991 $72,286 $57,030
Operating income (loss).............................. 12,150 17,709 (7,596) 12,312
Earnings (loss) before extraordinary
items.............................................. 1,410 4,545 (16,392) 2,641
Net earnings (loss).................................. 1,035 4,348 (16,392) 2,255
Earnings (loss) per share before
extraordinary items................................ .05 .15 (.54) .09
Earnings (loss) per share............................ $ .04 $ .14 $ (.54) $ .08
Year ended December 31, 1991:
Revenues............................................. $55,406 $64,490 $67,829 $53,163
Operating income..................................... 8,942 8,198 19,187 6,562
Net earnings (loss) before
extraordinary items................................ (589) (1,602) 5,624 (2,035)
Net earnings (loss).................................. (589) (2,065) 5,266 (2,483)
Earnings (loss) per share before
extraordinary items................................ (.02) (.05) .19 (.07)
Earnings (loss) per share............................ $ (.02) $ (.07) $ .18 $ (.08)
In the fourth quarter of 1993, the Company recorded an adjustment of $1,273,000
($777,000 net of income taxes) to decrease its expense related to the self-
insurance program for major medical and hospitalization coverage due to
decreases in actual claims and estimates of incurred but not reported claims.
(12) RELATED PARTY TRANSACTIONS
LQM OPERATING PARTNERS, L.P.
In October 1986, the Company sold 31 inns to LQM Operating Partners, L.P.
("the Operating Partnership") which is owned and controlled by La Quinta Motor
Inns Limited Partnership ("LQP"), a publicly traded master limited partnership.
At December 31, 1992, approximately $1,425,000 net of partners' equity, remained
deferred on this sale associated with debt assumed by the Partnership. A pre-tax
gain on sale of assets of approximately $230,000, $220,000 and $592,000, net of
partners' equity, related to this transaction was recognized in the years ended
December 31, 1993, 1992 and 1991. The deferred gain balance remaining at
December 1, 1993 was treated as a purchase price adjustment upon LQI Acquisition
Corporation's acquisition of approximately 82% of the units of limited
partnership interest in the LQP. (See note 14 to Combined Financial Statements).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
38
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT SERVICES FEE
All inns owned by LQP (through November 30, 1993) and by the two joint
ventures (the "Ventures") between the Company and investment partnerships
managed by CIGNA Investments, Inc. (collectively the "Managed Inns") operate
under the La Quinta name and are managed by the Company in accordance with
long-term management agreements. The Company earns management and licensing
fees as well as fees for chain services such as bookkeeping, national
advertising and reservations.
OTHER RECURRING TRANSACTIONS
La Quinta pays all direct operating expenses on behalf of the partnerships
and ventures and is reimbursed for all such payments.
EMPLOYMENT AGREEMENT
In October 1991, the Company and its Chairman of the Board entered into an
Employment Agreement (the "Employment Agreement"), providing for his employment
as the Chairman of the Board of the Company for five years from the date
thereof. Under the terms of the Employment Agreement, he is entitled to receive
as compensation certain benefits, including, among others, (i) an annual base
salary, (ii) incentive compensation awards as a result of his participation in
the Company's long-term and short-term incentive bonus plans or programs, and
(iii) the amount of $2,200,000, which was treated as prepaid compensation for
financial statement purposes. The Employment Agreement generally provides that
20% of the prepaid compensation is earned on each anniversary thereof, with the
exception that in the case of the executive's (a) voluntary resignation (except
for a voluntary resignation within one year following a change in control or
after a constructive termination without cause) or (b) termination for cause,
then the remaining unamortized balance will become due and payable over the
remaining term in equal monthly installments. As a result of changes in
management and reorganization of duties, the remaining compensation of
$1,760,000 related to this Employment Agreement was included in the 1992
non-recurring cash and non-cash charges, described in note 8 to these Combined
Financial Statements. In March 1994 the Chairman retired from the Company and
resigned from the Board of Directors and received certain compensation and
benefits as defined in the Employment Agreement.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the value of
each class of financial instruments for which it is practical to estimate that
value:
CASH AND CASH EQUIVALENTS
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
NOTES RECEIVABLES
The carrying value for notes receivable approximates the fair value based
on the estimated underlying value of the collateral.
INVESTMENTS
The fair value of some investments is estimated based on quoted market
prices for these or similar investments. For other securities, the carrying
amount is a reasonable estimate of fair value.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the
current market prices for the same or similar issues or on the current rates
available to the Company for debt of the same maturities.
INTEREST RATE SWAP AGREEMENTS
The fair value of interest rate swap agreements represents the estimated
amount the Company would pay to terminate the agreements, taking into
consideration current interest rates and the current creditworthiness of the
counterparties.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
39
LA QUINTAS INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The estimated fair values of the Company's financial instruments are
summarized as follows:
December 31, 1993 December 31, 1992
-------------------------------------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- ---------- -----------
(in thousands)
Cash and cash equivalents..................................... $ 23,848 $ 23,848 $ 12,861 $ 12,861
Notes receivable.............................................. 7,683 7,683 7,696 7,696
Investments................................................... 6,583 6,583 10,767 10,892
Long-term debt and related letters of credit.................. (436,493) ( 447,580) (296,535) (310,210)
Interest rate swap agreements-
in a net payable position................................. $ (114) $ (2,276) $ (107) $ (1,705)
(14) ACQUISITION OF PARTNERS' INTERESTS
On October 27, 1993, the Company entered into a definitive Partnership
Acquisition Agreement (the "Merger Agreement") with La Quinta Motor Inns Limited
Partnership ("the Partnership" or "LQP") and other parties, pursuant to which
the Company, through wholly-owned subsidiaries, would acquire all units of the
Partnership (the "Units") that it did not beneficially own at a price of $13.00
net per Unit in cash. The Merger Agreement provided for a tender offer (the
"Offer") for all of the Partnership's outstanding Units at a price of $13.00 net
per Unit in cash, which Offer commenced on November 1, 1993 and expired at
midnight on November 30, 1993. The Offer resulted in the purchase of 2,805,190
Units (approximately 70.6% of the outstanding Units) by the Company through its
wholly-owned subsidiary, LQI Acquisition Corporation. As a result of a
contribution of additional units previously owned by the Company subsequent to
the Offer, LQI Acquisition Corporation beneficially owned 3,257,890 Units
(approximately 82% of the Units) at December 31, 1993. Pursuant to the Merger
Agreement, a Special Meeting of Unitholders was then held on January 24, 1994 to
approve the merger of a subsidiary of LQI Acquisition Corporation with and into
the Partnership, with the Partnership as the surviving entity. As a result of
this merger which was approved by the requisite vote of Unitholders on January
24, 1994, all of the Partnership's outstanding Units other than Units owned by
the Company or any direct or indirect subsidiary of the Company were converted
into the right to receive $13.00 net in cash without interest. The acquisition
has been accounted for as a purchase and the results of LQP's operations have
been included in the Company's combined results of operations since December 1,
1993.
LQI Acquisition Corporation obtained funds to acquire the Units as a result
of a capital contribution by La Quinta. In order to make such a capital
contribution to LQI Acquisition Corporation, the Company borrowed approximately
$45.9 million under its existing credit facility as more fully described in note
2.
During 1993, the Company purchased in separately negotiated transactions,
the limited partners' interests in 14 of the Company's combined unincorporated
partnerships and joint ventures, which own 44 inns, for an aggregate price of
$87,897,000 which included cash at closing, the assumption of $22,824,000 of
existing debt attributable to the limited partners' interest, and $29,878,000 of
notes to the sellers. The Company was the general partner and owned the
remainder of the ownership interests in each of these partnerships and ventures.
The Company intends to continue to operate the properties as La Quinta inns.
The following unaudited pro forma information reflects the combined results
of operations of the Company as if the acquisition of the 82% interest in LQP
and the limited partners' interests in the 14 combined partnerships and joint
ventures had occurred at the beginning of 1993 and 1992. 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 related
party revenues and expenses, and extraordinary losses on early extinguishment of
debt. The pro forma results are not necessarily indicative of operating results
that would have occurred had the acquisitions been consummated as of the
beginning of 1993 and 1992, nor are they necessarily indicative of future
operating results.
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- --------------------------------------------------------------------------------
40
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
December 31,
----------------------
1993 1992
(Unaudited) --------- ---------
(in thousands, except
per share data)
Total revenues $ 308,290 $ 291,477
--------- ----------
--------- ----------
Earnings (loss) before extraordinary items
and cumulative effect of accounting change $ 19,448 $ (8,133)
--------- ----------
--------- ----------
Net earnings (loss) $ 20,738 $ (10,171)
--------- ---------
--------- ---------
Earnings (loss) per share $ 0.66 $ (0.34)
--------- ---------
--------- ---------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
41
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
La Quinta Inns, Inc.:
We have audited the combined balance sheets of La Quinta Inns, Inc. as of
December 31, 1993 and 1992 and the related combined statements of operations,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1993. In connection with our audits of the combined
financial statements, we also have audited the financial statement schedules as
listed in Item 14(a)(2) of Form 10-K. These combined financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these combined
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of La Quinta Inns,
Inc. as of December 31, 1993 and 1992 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1993, in conformity with generally accepted accounting principles. Also in our
opinion, the related financial statement schedules, when considered in relation
to the basic combined financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
As discussed in Note 1 to the combined financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109 in
1993.
KPMG PEAT MARWICK
San Antonio, Texas
January 31, 1994,
except as to the
first paragraph of
note 5, which is as
of February 9, 1994
42
Schedule V
LA QUINTA INNS, INC.
Property, Plant and Equipment
(in thousands)
Balance at Balance
beginning Additions at end
Classifications of period at cost Retirements of period
----------------- ---------- ----------- ----------- ---------
Year ended December 31, 1991
Land . . . . . . . . . . . . . . . . . . . . . . . . $ 81,675 $ 5,546 $ 1,699 $ 85,522
Buildings. . . . . . . . . . . . . . . . . . . . . . 496,448 34,251 24,712 505,987
Furniture, fixtures and equipment. . . . . . . . . . 90,018 10,309 10,129 90,198
Leasehold and land improvements. . . . . . . . . . . 7,274 293 115 7,452
-------- -------- -------- --------
$675,415 $ 50,399 $ 36,655 $689,159
-------- -------- -------- --------
-------- -------- -------- --------
Year ended December 31, 1992
Land . . . . . . . . . . . . . . . . . . . . . . . . $ 85,522 $ 1,792 $ 214 $ 87,100
Buildings. . . . . . . . . . . . . . . . . . . . . . 505,987 25,487 19,157 512,317
Furniture, fixtures and equipment. . . . . . . . . . 90,198 12,188 11,671 90,715
Leasehold and land improvements. . . . . . . . . . . 7,452 312 28 7,736
-------- -------- -------- --------
$689,159 $ 39,779 $31,070 $697,868
-------- -------- -------- --------
-------- -------- -------- --------
Year ended December 31, 1993
Land . . . . . . . . . . . . . . . . . . . . . . . . $ 87,100 $ 38,118 $ 1,424 $123,794
Buildings. . . . . . . . . . . . . . . . . . . . . . 512,317 159,461 11,500 660,278
Furniture, fixtures and equipment. . . . . . . . . . 90,715 25,878 2,480 114,113
Leasehold and land improvements. . . . . . . . . . . 7,736 337 2,005 6,068
-------- -------- -------- --------
$697,868 $223,794 $17,409 $904,253
-------- -------- -------- --------
-------- -------- -------- --------
43
Schedule VI
LA QUINTA INNS, INC.
Accumulated Depreciation and Amortization
of Property, Plant and Equipment
(in thousands)
Balance at Balance
beginning at end
Classifications of period Additions Retirements of period
----------------- ---------- ----------- ----------- ---------
Year ended December 31, 1991
Buildings. . . . . . . . . . . . . . . . . . . . . . $127,626 $ 21,443 $ 4,199 $144,870
Furniture, fixtures and equipment. . . . . . . . . . 50,238 10,465 7,871 52,832
Leasehold and land improvements. . . . . . . . . . . 2,648 478 38 3,088
-------- -------- -------- --------
$180,512 $ 32,386 $12,108 $200,790
-------- -------- -------- --------
-------- -------- -------- --------
Year ended December 31, 1992
Buildings. . . . . . . . . . . . . . . . . . . . . . $144,870 $ 11,574 $ 861 $155,583
Furniture, fixtures and equipment. . . . . . . . . . 52,832 10,968 8,219 55,581
Leasehold and land improvements. . . . . . . . . . . 3,088 158 12 3,234
-------- -------- -------- --------
$200,790 $ 22,700 $ 9,092 $214,398
-------- -------- -------- --------
-------- -------- -------- --------
Year ended December 31, 1993
Buildings. . . . . . . . . . . . . . . . . . . . . . $155,583 $ 12,834 $ 3,418 $164,999
Furniture, fixtures and equipment. . . . . . . . . . 55,581 9,983 1,794 63,770
Leasehold and land improvements. . . . . . . . . . . 3,234 177 1,263 2,148
-------- -------- -------- --------
$214,398 $22,994 $ 6,475 $230,917
-------- -------- -------- --------
-------- -------- -------- --------
44
Schedule X
LA QUINTA INNS, INC.
Supplemental Income Statement Information
(in thousands)
Years ended December 31
------------------------------
1993 1992 1991
---- ---- ----
Maintenance and repairs. . . . . . . . . . . . . $ 9,607 $ 9,555 $10,046
------- ------- -------
------- ------- -------
Taxes, other than income and payroll:
Ad valorem . . . . . . . . . . . . . . . . . . $10,796 $10,781 $10,048
Other. . . . . . . . . . . . . . . . . . . . . 183 530 339
------- ------- -------
$10,979 $11,311 $10,387
------- ------- -------
------- ------- -------
Advertising costs. . . . . . . . . . . . . . . . $ 7,025 $ 5,233 $ 6,216
------- ------- -------
------- ------- -------
45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) DIRECTORS OF REGISTRANT
There is incorporated in this Item 10 by reference that portion of the
Company's definitive Proxy Statement, dated on or about April 15, 1994, which
Registrant intends to file not later than 120 days after the end of the fiscal
year covered by this Form 10-K, appearing under the captions "Election of
Directors," and "Meetings and Committees of the Board of Directors."
(B) EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information is set forth below concerning the executive officers
of the Company, each of whom has been elected to serve until the regular
annual meeting of the Board of Directors following the next Annual Meeting of
Shareholders and until his/her successor is duly elected and qualified.
Gary L. Mead 46 President and Chief Executive
Officer and Director
Michael A. Depatie 37 Sr. Vice President - Finance, Chief
Financing Officer
William C. Hammett, Jr. 47 Sr. Vice President - Accounting &
Administration
Thomas W. Higgins 46 Sr. Vice President - Operations
R. John Kaegi 45 Sr. Vice President - Marketing
Steven T. Schultz 47 Sr. Vice President - Development
John F. Schmutz 46 Vice President - General Counsel
and Secretary
Gary L. Mead has been Director, President and Chief Executive Officer of
the Company since March 1992. He served as Executive Vice President - Finance
of Motel 6 G.P., Inc., the managing general partner of Motel 6, L.P., from
October 1987 to January 1991.
Michael A. Depatie has been Senior Vice President - Finance, Chief
Financing Officer of the Company since July 1992. He served as Senior Vice
President, Summerfield Hotel from May 1989 to July 1992. He served as Managing
General Partner of PacWest Capital Partners from April 1988 to April 1989. He
served as Vice President - Finance of The Residence Inn Company from July 1984
to July 1986 and Senior Vice President - Finance from July 1986 to March 1988.
William C. Hammett, Jr. has been Senior Vice President - Accounting and
Administration since June 1992. He served as Executive Vice President - Finance
of Motel 6 G.P., Inc., from February 1991 to June 1992. He served as Vice
President-Controller of Motel 6 G.P., Inc. from September 1988 to February 1991.
He served as Controller of Spartan Food Systems from August 1973 to September
1988.
Thomas W. Higgins has been Senior Vice President - Operations of the
Company since September 1992. He served as Vice President - Human Resources of
the Company from June 1992 to September 1992. He served as Vice President -
Human Resources of Motel 6 G.P., Inc. from May 1988 to June 1992. He served as
Director of Training/Employment of General Mills from October 1986 to May 1988.
R. John Kaegi has been Senior Vice President - Marketing of the Company
since July 1992. He served as Senior Vice President - Marketing and Strategic
Planning of KinderCare Learning Centers, Inc. from December 1989 to July 1992.
He served as Vice President - Marketing of KinderCare Learning Centers, Inc.
from July 1987 to December 1989. He served as Director Field Marketing of
Holiday Inns, Inc. from November 1985 to July 1987.
Steven T. Schultz has been Senior Vice President - Development of the
Company since June 1992. He served as Senior Vice President - Development of
Embassy Suites from October 1986 to June 1992.
46
John F. Schmutz has been Vice President - General Counsel and Secretary of
the Company since June 1992. He served as Vice President - General Counsel of
Sbarro, Inc. from May 1991 to June 1992. He served as Vice President - Legal of
Hardee's Food Systems, Inc. from April 1983 to May 1991.
ITEM 11. EXECUTIVE COMPENSATION
There are incorporated in this Item 11 by reference those portions of the
Company's definitive Proxy Statement, dated on or about April 15, 1994, which
Registrant intends to file not later than 120 days after the end of the fiscal
year covered by this Form 10-K, appearing under the captions "Executive
Compensation," "Compensation Pursuant to Plans," "Other Compensation,"
"Compensation of Directors," and "Termination of Employment and Change of
Control Arrangements."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
There are incorporated in this Item 12 by reference those portions of the
Company's definitive Proxy Statement, dated on or about April 15, 1994, which
Registrant intends to file not later than 120 days after the end of the fiscal
year covered by this Form 10-K, appearing under the captions "Principal
Shareholders" and "Security Ownership of Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated in this Item 13 by reference that portion of the
Company's definitive Proxy Statement, dated on or about April 15, 1994, which
Registrant intends to file not later than 120 days after the end of the fiscal
year covered by this Form 10-K, appearing under the caption "Certain
Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The Combined Financial Statements of the Company appearing in Item 8
are as follows:
Combined Balance Sheets at December 31, 1993 and 1992
Combined Statements of Operations for the years ended December 31,
1993, 1992 and 1991
Combined Statements of Shareholders' Equity for the years ended
December 31, 1993, 1992 and 1991
Combined Statements of Cash Flows for the years ended December 31,
1993, 1992 and 1991
Notes to Combined Financial Statements
Independent Auditors' Report on financial statements and schedules
(2) Financial Statement Schedules
Schedule V - Property, Plant and Equipment - For the years ended
December 31, 1993, 1992 and 1991.
Schedule VI - Accumulated Depreciation and Amortization of Property,
Plant and Equipment - For the years ended December 31, 1993, 1992
and 1991.
Schedule X - Supplemental Income Statement Information-For the years
ended December 31, 1993, 1992 and 1991.
47
All other schedules for which provision is made in the
applicable regulation to the Securities and Exchange
Commission are not required under the related instructions
or are inapplicable and have been omitted.
(3) The following exhibits are filed as a part of this Report:
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc.,
as amended on May 21, 1993. (8)
(3)(b) Amended and Restated By-Laws of La Quinta Inns, Inc. (1)
(10)(a) La Quinta Inns, Inc. 1978 Non-Qualified Stock Option Plan,
as amended. (2)
(10)(b) La Quinta Inns, Inc. 1984 Stock Option Plan. (3)
(10)(c) Amendment No. 1 to La Quinta Inns, Inc. 1984 Stock Option Plan. (4)
(10)(d) Amendment No. 2 to La Quinta Inns, Inc. 1984 Stock Option Plan. (5)
(10)(e) Amended and Restated La Quinta Inns, Inc. 1984 Stock Option
Plan, as of November 21, 1991. (1)
(10)(f) La Quinta Development Partners, L.P. Amended and Restated
Agreement of Limited Partnership, dated March 21, 1990, by
and between Registrant and AEW Partners, L.P. (6)
(10)(g) La Quinta Development Partners, L.P. Contribution Agreement,
dated March 21, 1990, by and between Registrant and AEW
Partners, L.P. (6)
(10)(h) Management and Development Agreement by and between
Registrant and La Quinta Development Partners, L.P., dated
March 21, 1990. (6)
(10)(i) Supplemental Executive Retirement Plan and Trust Agreement
of Registrant, dated April 20, 1990, by and between
Registrant and Frost National Bank. (7)
(10)(j) La Quinta Inns, Inc. Deferred Compensation Plan, effective
June 1, 1987. (7)
(10)(k) Form of Bonus Agreement dated February 22, 1991, by and
between Registrant and each of Messrs. Sam Barshop, David B.
Daviss, Alan L. Tallis and Francis P. Bissaillon. (7)
(10)(l) Form of Indemnification Agreement, made and entered into as
of November 15, 1990 and thereafter (with respect to persons
who became directors of Registrant after such dates), by
and between Registrant and each of its directors. (7)
(10)(m) Form of Indemnification Agreement, made and entered into as
of November 15, 1990 and thereafter (with respect to persons
who became directors of Registrant after such dates), by and
between Registrant and each of its officers. (7)
(10)(n) Registration Rights Agreement, dated as of July 31, 1991 by
and between Registrant and Sam Barshop and his wife, Ann
Barshop. (1)
(10)(o) Employment Agreement, dated as of October 1, 1991, by and
between Registrant and Sam Barshop. (1)
(10)(p) Employment Agreement, dated as of March 3, 1992, by and
between Registrant and Gary L. Mead. (1)
(10)(q) Non-Qualified Stock Option Agreement, dated as of March 3,
1992, between Registrant and Gary L. Mead. (1)
48
(10)(r) Registration Rights Agreement, dated as of March 3, 1992,
between Gary L. Mead. (1)
(10)(s) Second Amended and Restated Master Convenant Agreement dated
June 15, 1993. (8)
(10)(t) $126,795,786.64 Credit Agreement dated June 15, 1993. (8)
(10)(u) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4%
Senior Subordinated Notes due 1003. (8)
(10)(v) Partnership Acquisition Agreement dated October 27, 1993,
among the Partnership, the General Partner, La Quinta, LQI
Acquisition Corporation and LQI Merger Corporation. (9)
(10)(w) $241,844,955.21 Amended and Restated Credit Agreement Among
La Quinta Inns, Inc. Certain lenders and NationsBank of
Texas, N.A. as Administrative Lender dated January 25, 1994
filed herewith.
(10)(x) Third Amended and Restated Master Covenant Agreement dated
as of January 25, 1994 filed herewith.
(11) Statement regarding computation of per share earnings filed
herewith.
(22) Subsidiaries of La Quinta Inns, Inc. as of March 3, 1994
filed herewith.
(23) Registrant's definitive Proxy Statement, dated on or about
April 15, 1994, to be filed by Registrant within 120 days
after the end of the fiscal year covered by this Form 10-K.
(24) Consent by KPMG Peat Marwick dated March 23, 1994 to
incorporation by reference of their reports dated January
31, 1994, except as to the first paragraph of note 5, which
is as of February 9, 1994, in various Registration Statements
filed herewith.
(25) Powers of Attorney filed herewith.
(b) Reports on Form 8-K.
Registrant filed two Current Reports on Form 8-K, dated
November 3, 1993 and December 15, 1993 with the Securities
and Exchange Commission. The Report dated November 3, 1993
was filed under Items 5 and 7 describing the Merger
Agreement between La Quinta Inns, Inc. and La Quinta Motor
Inns Limited Partnership ("the Partnership"). The report
dated December 15, 1993 was filed under Items 2 and 7
describing the acquisition of the Partnership, the
Partnership's December 31, 1992 Consolidated Financial
Statements and pro forma information for the year ended
December 31, 1992 and the nine month period ended September
30, 1993.
- ----------------------------
(1) Previously filed as an exhibit to the Registrant's
Registration Statement on Form 10-K for the year ended
December 31, 1991 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's
Registration Statement on Form S-8 (No. 2-65645) and
incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's
Registration Statement on Form 10-K for the year ended May
31, 1984 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's
Registration Statement on Form S-8 (No. 2-97266) and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's
Registration Statement and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's
Registration Statement for the Transition Period Report on
Form 10-K for the seven months ended December 31, 1989 and
incorporated herein by reference.
49
(7) Previously filed as an exhibit to the Registrant's
Registration Statement on Form 10-K for the year ended
December 31, 1990 and incorporated herein by reference.
(8) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10-Q for the period ended June 30, 1993.
(9) Previously filed to the Registrant's Schedule 14D-1 filed
November 1, 1993.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By:-----------------------------------
William C. Hammett, Jr.
Senior Vice President
Chief Accounting Officer
By:-----------------------------------
Michael A. Depatie
Senior Vice President
Chief Financing Officer
Date:
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant, and in the capacities and on the date indicated.
Signature Title
Gary L. Mead President and Chief Executive Officer,
Director
William C. Hammett, Jr. Sr. Vice President - Accounting and
Administration
Thomas M. Taylor Chairman of the Board
Michael A. Depatie Sr. Vice President - Finance
Joseph F. Azrack Director
Philip M. Barshop Director
William H. Cunningham Director
Barry K. Fingerhut Director
George Kozmetsky Director
Donald J. McNamara Director
Peter Sterling Director
51