UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: December 15, 1993
Date of earliest event reported: November 30, 1993
LA QUINTA INNS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 1-7790 #74-1724417
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
112 E. Pecan Street
San Antonio, Texas 78299
(Address of principal executive offices) (Zip Code)
(210)302-6000
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Item 2. ACQUISITION OR DISPOSITION OF ASSETS.
Pursuant to the Partnership Acquisition Agreement (the "Merger Agreement"),
dated as of October 27, 1993, among La Quinta Inns, Inc., a Texas corporation
(the "Registrant"), La Quinta Motor Inns Limited Partnership, a Delaware limited
partnership (the "Partnership"), La Quinta Realty Corp., a Texas corporation,
LQI Acquisition Corporation, a Delaware corporation (the "Purchaser"), and LQI
Merger Corporation, a Delaware corporation, on December 1, 1993, the Registrant,
through the Purchaser, which is a wholly owned subsidiary of the Registrant,
acquired through a tender offer (the "Offer") 2,805,190 units of limited
partnership interest in the Partnership ("Units") (representing approximately
70.6% of the presently outstanding Units) for $13.00 net in cash per Unit. As a
result of the contribution by the Registrant of 452,700 additional Units
subsequent to the termination of the Offer, the Purchaser beneficially owns
3,257,890 Units (representing approximately 82.0% of the presently outstanding
Units). The Registrant may also be deemed to beneficially own the Units both
acquired by and contributed to the Purchaser.
The Purchaser obtained the funds to acquire the Units through the Offer
as a result of a capital contribution by the Registrant. In order to make such
a capital contribution to the Purchaser, the Registrant borrowed approximately
$36.6 million under its existing bank credit facility with NationsBank of Texas,
N.A., as administrative agent for the several lenders thereunder (the "Credit
Facility"). Under the Credit Facility (i) borrowings under a $40,000,000 line
of credit (the "Bank Line of Credit"), which will expire on May 31, 1996, are
made at varying interest rates up to LIBOR plus 1 3/4%, the prime rate, or the
certificate of deposit rate plus 1 7/8% and (ii) borrowings under a $30,000,000
secured term credit facility (the "Secured Term Facility"), which will expire
on May 31, 1999, can be made through September 30, 1994 and bear interest at
varying interest rates up to LIBOR plus 2%, the prime rate plus 1/4%, or the
certificate of deposit rate plus 2 1/8%. Amounts borrowed under the Secured
Term Facility require equal semi-annual principal payments commencing
November 30, 1994 through May 31, 1999. The Secured Term Facility is secured by
first priority liens on 19 of the properties on which the Registrant owns or
operates "La Quinta" inns. Of the approximately $36.6 million borrowed under
the Credit Facility to fund the capital contribution, $30 million was borrowed
under the Secured Term Facility and approximately $6.6 million was borrowed
under the Bank Line of Credit.
Pursuant to the Merger Agreement, the remaining Units not beneficially
owned by the Registrant will be acquired in a subsequent merger pursuant to
which each Unit (other than Units beneficially owned by the Purchaser, the
Registrant or their affiliates) will be converted into the right to receive
the same consideration as is paid in connection with the Offer.
On November 30, 1993, the Registrant also acquired the limited partners'
interest in one of the Registrant's combined unincorporated joint ventures for
a purchase price of $9,171,000 which included cash of $5,619,000 and the
assumption of $3,552,000 of existing debt attributable to the limited
partners' interest.
The information set forth in Exhibits 2.1, 21.1, 28.1 and 28.2 is
incorporated herein by reference.
2
Item 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements of business acquired.
3
INDEPENDENT AUDITORS' REPORT
The Partners
La Quinta Motor Inns Limited Partnership:
We have audited the consolidated balance sheets of La Quinta Motor Inns
Limited Partnership and subsidiary limited partnership as of December 31, 1992
and 1991, and the related consolidated statements of operations, partners'
capital, and cash flows for each of the years in the three-year period ended
December 31, 1992. These consolidated financial statements are the responsi-
bility of the Partnership's management. Our responsibility is to express an
opinion on these consolidated financial statements 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of La Quinta
Motor Inns Limited Partnership and subsidiary limited partnership as of December
31, 1992 and 1991, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1992, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
February 8, 1993, except as to note 7,
which is as of February 13, 1993,
and except as to note 8, which is as of
February 15, 1993.
4
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
----------------------------------
1992 1991
---------------- ----------------
ASSETS:
Current assets:
Cash and cash equivalents................................................... $ 423,000 $ 488,000
Receivables................................................................. 921,000 758,000
Supplies.................................................................... 655,000 669,000
---------------- ----------------
Total current assets.................................................... 1,999,000 1,915,000
---------------- ----------------
Property and equipment, at cost, substantially all pledged
(notes 3 and 4):
Land........................................................................ 22,688,000 22,715,000
Buildings................................................................... 105,464,000 105,012,000
Furniture, fixtures and equipment........................................... 16,605,000 16,273,000
---------------- ----------------
Total property and equipment............................................ 144,757,000 144,000,000
Less accumulated depreciation and amortization.............................. 34,140,000 28,364,000
---------------- ----------------
Net property and equipment.............................................. 110,617,000 115,636,000
---------------- ----------------
Deferred charges and other assets, at cost less applicable amortization....... 754,000 947,000
---------------- ----------------
$ 113,370,000 $ 118,498,000
---------------- ----------------
---------------- ----------------
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Current installments of long-term debt (note 3)............................. $ 1,261,000 $ 768,000
Accounts payable:
Trade..................................................................... 1,573,000 1,590,000
La Quinta Motor Inns, Inc................................................. 364,000 396,000
Advances from La Quinta Motor Inns, Inc. (note 5)........................... -- 100,000
Accrued expenses:
Payroll and employee benefits............................................. 775,000 680,000
Interest.................................................................. 922,000 709,000
Property taxes............................................................ 745,000 745,000
Other..................................................................... 61,000 141,000
---------------- ----------------
Total current liabilities............................................... 5,701,000 5,129,000
---------------- ----------------
Long-term debt, excluding current installments (note 3)....................... 67,047,000 68,332,000
Other deferred credits........................................................ 36,000 62,000
---------------- ----------------
Total liabilities....................................................... 72,784,000 73,523,000
---------------- ----------------
La Quinta Realty Corp. equity in Operating Partnership........................ (318,000) (275,000)
---------------- ----------------
Partners' capital (notes 2 and 7):
La Quinta Realty Corp.-general partner in Partnership....................... 11,975,000 12,018,000
Limited partners (3,975,000 units).......................................... 28,929,000 33,232,000
---------------- ----------------
Total partners' capital................................................. 40,904,000 45,250,000
Commitments and contingencies (notes 4 and 8).................................
---------------- ----------------
$ 113,370,000 $ 118,498,000
---------------- ----------------
---------------- ----------------
See accompanying notes to consolidated financial statements.
5
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP AND
SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31
----------------------------------------------
1992 1991 1990
-------------- -------------- --------------
Revenues:
Inn............................................................ $ 42,117,000 $ 40,482,000 $ 38,193,000
Restaurant rental and other (note 4)........................... 1,202,000 1,178,000 1,213,000
-------------- -------------- --------------
Total revenues............................................. 43,319,000 41,660,000 39,406,000
-------------- -------------- --------------
Operating costs and expenses:
Direct (note 5)................................................ 22,195,000 22,560,000 21,755,000
Fees paid to La Quinta Motor Inns, Inc. (note 5)............... 5,964,000 5,733,000 5,073,000
Administrative (note 5)........................................ 491,000 456,000 348,000
Unitholder litigation/solicitation (note 8).................... 1,525,000 110,000 --
Depreciation, amortization and fixed asset retirements......... 6,942,000 6,773,000 7,570,000
-------------- -------------- --------------
Total operating costs and expenses......................... 37,117,000 35,632,000 34,746,000
-------------- -------------- --------------
Operating income........................................... 6,202,000 6,028,000 4,660,000
-------------- -------------- --------------
Other income (expenses):
Interest income................................................ 18,000 26,000 26,000
Interest on long-term debt (notes 3 and 5)..................... (7,365,000) (7,010,000) (6,928,000)
La Quinta Realty Corp. equity in loss of Operating
Partnership................................................... 11,000 10,000 23,000
-------------- -------------- --------------
Total other income (expenses).............................. (7,336,000) (6,974,000) (6,879,000)
-------------- -------------- --------------
Net loss......................................................... $ (1,134,000) $ (946,000) $ (2,219,000)
-------------- -------------- --------------
-------------- -------------- --------------
General partner's interest....................................... $ (11,000) $ (9,000) $ (22,000)
Limited partners' interest....................................... (1,123,000) (937,000) (2,197,000)
-------------- -------------- --------------
$ (1,134,000) $ (946,000) $ (2,219,000)
-------------- -------------- --------------
-------------- -------------- --------------
Net loss per limited partnership unit............................ $ (.28) $ (.24) $ (.55)
-------------- -------------- --------------
-------------- -------------- --------------
Cash distribution per limited partnership unit................... $ .80 $ 0.80 $ 1.25
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to consolidated financial statements.
6
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1992, 1991, 1990
GENERAL LIMITED
PARTNER PARTNERS TOTAL
-------------- -------------- --------------
Balances at December 31, 1989.................................... $ 12,131,000 $ 44,515,000 $ 56,646,000
Cash distributions............................................. (50,000) (4,969,000) (5,019,000)
Net loss....................................................... (22,000) (2,197,000) (2,219,000)
-------------- -------------- --------------
Balances at December 31, 1990.................................... 12,059,000 37,349,000 49,408,000
Cash distributions............................................. (32,000) (3,180,000) (3,212,000)
Net loss....................................................... (9,000) (937,000) (946,000)
-------------- -------------- --------------
Balances at December 31, 1991.................................... 12,018,000 33,232,000 45,250,000
Cash distributions............................................. (32,000) (3,180,000) (3,212,000)
Net loss....................................................... (11,000) (1,123,000) (1,134,000)
-------------- -------------- --------------
Balances at December 31, 1992.................................... $ 11,975,000 $ 28,929,000 $ 40,904,000
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to consolidated financial statements.
7
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31
----------------------------------------------
1992 1991 1990
-------------- -------------- --------------
Cash flows from operating activities:
Net loss........................................................ $ (1,134,000) $ (946,000) $ (2,219,000)
Adjustments to reconcile net loss to cash provided by operating
activities:
Depreciation and amortization of property and equipment....... 6,218,000 6,259,000 6,235,000
Amortization of deferred charges.............................. 325,000 173,000 200,000
Loss on retirement of fixed assets............................ 399,000 341,000 1,135,000
La Quinta Realty Corp. equity in loss of Operating
Partnership.................................................. (11,000) (10,000) (23,000)
Changes in operating assets and liabilities:
Deferred charges and credits.................................. (28,000) (168,000) 7,000
Receivables................................................... (163,000) 179,000 117,000
Supplies and other............................................ 14,000 32,000 (17,000)
Accounts payable and accrued expenses......................... 199,000 1,242,000 (5,000)
-------------- -------------- --------------
Net cash provided by operating activities................... 5,819,000 7,102,000 5,430,000
-------------- -------------- --------------
Cash flows from investing activities:
Additions to property and equipment............................. (1,655,000) (1,238,000) (3,647,000)
Proceeds from property transactions............................. 36,000 34,000 42,000
Advances on note receivable..................................... -- (80,000) --
-------------- -------------- --------------
Net cash used in investing activities....................... (1,619,000) (1,284,000) (3,605,000)
-------------- -------------- --------------
Cash flows from financing activities:
Advances from La Quinta Motor Inns, Inc. ....................... 6,345,000 1,450,000 7,005,000
Repayments of advances from La Quinta Motor Inns, Inc. ......... (6,445,000) (3,300,000) (5,055,000)
Principal payments on long-term debt............................ (792,000) (265,000) (170,000)
Payments to refinance mortgage debt............................. (129,000) (205,000) --
General Partners' distribution from Operating Partnership....... (32,000) (33,000) (37,000)
Partnership distributions....................................... (3,212,000) (3,212,000) (5,019,000)
-------------- -------------- --------------
Net cash used in financing activities....................... (4,265,000) (5,565,000) (3,276,000)
-------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents.............. (65,000) 253,000 (1,451,000)
Cash and cash equivalents at beginning of year.................... 488,000 235,000 1,686,000
-------------- -------------- --------------
Cash and cash equivalents at end of year.......................... $ 423,000 $ 488,000 $ 235,000
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to consolidated financial statements.
8
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1992 AND 1991
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
La Quinta Motor Inns Limited Partnership, a Delaware limited partnership
("the Partnership" or "LQP") was formed pursuant to an Agreement of Limited
Partnership, dated July 30, 1986, to operate 31 La Quinta Inns, which are
generally located in the "Sunbelt" (the "Inns") through its 99% limited
partnership interest in LQM Operating Partners, L.P. (the "Operating
Partnership"). La Quinta Realty Corp. ("LQ Realty" or the "General Partner"), a
wholly-owned subsidiary of La Quinta Motor Inns, Inc. ("La Quinta"), is the
general partner of both the Partnership and the Operating Partnership, holding a
1% interest in each. The Partnership and the Operating Partnership are
collectively referred to as the "Partnerships".
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Partnership and the Operating Partnership. All significant intercompany
accounts and transactions have been eliminated in consolidation. Certain
reclassifications of prior year amounts have been made to conform with the
current year presentation.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
of property and equipment are computed using the straight-line method over the
following estimated useful lives:
Buildings....................................................... 30 years
Furniture, fixtures, and equipment.............................. 4-10 years
Maintenance and repairs are charged to operations as incurred. Expenditures
for improvements are capitalized.
DEFERRED CHARGES
Costs incurred by the Operating Partnership in connection with the mortgage
notes are amortized using the interest method over the life of the mortgage
notes.
NET LOSS PER UNIT
Net loss per limited partnership unit is computed based on the 3,975,000
limited partnership units outstanding for the periods included in the
accompanying consolidated financial statements, after giving effect to the
General Partner's 1% interest.
(2) PARTNERSHIP ALLOCATIONS
CASH DISTRIBUTIONS
Pursuant to the terms of the agreements governing the Partnerships, net cash
flow, as defined, shall be distributed in the ratio of 1.99% to the General
Partner and 98.01% to the Unitholders no less frequently than quarterly until
the Unitholders have received an amount equal to 12 1/2% simple annual
noncumulative return on the weighted average value of their unrecovered capital
contributions (as defined) from all distributions of net cash flow during such
year. Thereafter, net cash flow shall be distributed 29.29% to the general
partner and 70.71% to the Unitholders.
9
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Cash distributions from the sale of an Inn will be allocated 98.01% to the
limited partners and 1.99% to the General Partner until such time as the limited
partners have received a cumulative amount of distributions from sales or
refinancings to return their initial capital contributions in full. The General
Partner will then receive 100% of the proceeds until on a cumulative basis the
General Partner has received distributions sufficient to return all
contributions required under the guarantee (note 5). Remaining proceeds will be
distributed 98.01% to the Unitholders and 1.99% to the General Partner until the
Unitholders have received a cumulative 12 1/2% simple annual cumulative return
on the weighted average balance of their unrecovered capital contributions, and
thereafter 70.71% to the Unitholders and 29.29% to the General Partner.
Generally, distributions resulting from a liquidation of the Partnership's
interest in the Operating Partnership will be made in the same manner as
distributions from sales of inns, subject to the overall requirement that such
distributions be made to the Unitholders and the General Partner in accordance
with their positive capital account balances.
Excess proceeds resulting from the refinancing of a property, if any, will
be distributed 100% to the General Partner until all capital contributions
required under the guarantee (note 5) are recovered, then 98.01% to the
Unitholders and 1.99% to the General Partner until the Unitholders have received
a cumulative 12 1/2% simple annual cumulative return on the weighted average
balance of their unrecovered capital contributions, and thereafter 70.71% to the
Unitholders and 29.29% to the General Partner.
ALLOCATIONS OF TAXABLE INCOME (LOSS)
Taxable income for each year generally will be allocated among the
Unitholders and the General Partner in the same proportions that net cash flow
is distributed for that year. Taxable loss will generally be allocated in
accordance with positive capital account balances. Gain and loss from any
capital transaction generally will be allocated among the Unitholders and the
General Partner in the same proportions that proceeds of such capital
transaction are distributed except to the extent necessary to reflect capital
account adjustments. Upon the transfer of a unit, the Partnership allocates tax
items allocable thereto between the transferor and the transferee based on the
number of months during the year that each owned the unit, with the holder of
such unit on the last day of the month being treated as the holder of such unit
for the entire month.
(3) LONG-TERM DEBT
Long-term debt, which is secured by substantially all property and
equipment, consisted of the following at December 31:
1992 1991
-------------- --------------
Mortgage notes payable, due in monthly installments through November
1994................................................................ $ 66,883,000 $ 67,455,000
9.90% industrial revenue bond, payable in increasing annual
installments through 1997, with a final installment due by July 1,
1998, interest payable semiannually................................. 1,425,000 1,645,000
-------------- --------------
Total.............................................................. 68,308,000 69,100,000
Less current installments............................................ 1,261,000 768,000
-------------- --------------
Net long-term debt................................................. $ 67,047,000 $ 68,332,000
-------------- --------------
-------------- --------------
10
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Operating Partnership's original mortgage notes payable, totaling
$67,500,000, matured November 1, 1991. The Operating Partnership modified and
extended the mortgage notes payable with the original lender. (The mortgage loan
as extended and modified is referred to as the "AEtna Loan" and the individual
notes comprising the AEtna Loan are referred to as the "Mortgage Notes".)
The AEtna Loan covers a three-year period, from November 1, 1991 to November
1, 1994. The stated interest rates in the AEtna Loan as extended and modified
began at 10 1/4% at November 1, 1991, and increases by a 1/2 percentage point
each November 1 thereafter until it reaches a rate of 11 1/4% at November 1,
1993. Interest expense included in the accompanying statement of operations for
the escalating interest rate Mortgage Notes was computed using an effective rate
of interest over the term of the AEtna Loan of 10.75%. The principal payments on
the Mortgage Notes are payable in thirty-six (36) monthly installments. The
principal payments are structured to reduce the outstanding principal balance on
a per annum basis in an amount equal to 0.75%, 1.50% and 2.00% at November 1,
1991, 1992 and 1993, respectively. On November 1, 1994, the then outstanding
balance on the Aetna Loan, plus all accrued but unpaid interest thereon, will
become due and payable.
The Mortgage Notes may be prepaid at the Operating Partnership's option at
any time prior to maturity, subject to a prepayment premium equal to a yield
differential between the yield on United States Treasury obligations of a
comparable maturity and interest rates specified for the year of prepayment.
The agreements associated with the Mortgage Notes contain certain
restrictions including a limitation of $10,000,000 on future borrowings for
working capital purposes, the written consent of the note holder prior to the
sale of the properties and that the management agreement with La Quinta not be
terminated. The AEtna loan requires the Operating Partnership to spend
$3,500,000 for additions to property and certain repair items within each
calendar year. As of December 31, 1992, the Partnership had spent $3,026,000 of
the required expenditures and will place $474,000 in an escrow account in 1993.
The Partnership is in compliance with all restrictions related to the Mortgage
Notes.
The industrial revenue bond obligation was assumed by the Operating
Partnership from La Quinta. These bonds are redeemable in November 1993 at
101 1/2% of face value decreasing to face value in 1994. La Quinta purchased
these bonds in September 1990. Interest paid on these bonds was $233,000 and
$185,000, in 1992 and 1991, respectively.
Annual maturities of long-term debt for the four years subsequent to
December 31, 1993 follow:
1994.......................................................... $66,082,000
1995.......................................................... 235,000
1996.......................................................... 250,000
1997.......................................................... 250,000
Interest paid during the years ended December 31, 1992, 1991 and 1990
amounted to $7,577,000, $6,421,000, and $6,910,000, respectively.
11
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) OPERATING LEASES
RESTAURANT RENTAL INCOME
The Operating Partnership owns 20 restaurants, 19 of which are leased to
third parties and one which is vacant. The leases, which are accounted for as
operating leases, expire from 1993 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:
1992
-------------
Buildings...................................................................... $ 6,539,000
Less: Accumulated depreciation................................................. 1,337,000
-------------
5,202,000
Land........................................................................... 4,547,000
-------------
Total leased property........................................................ $ 9,749,000
-------------
-------------
Minimum future rentals to be received under the non-cancelable restaurant
leases in effect at December 31, 1992 follow:
1993........................................................ $1,000,000
1994........................................................ 1,002,000
1995........................................................ 984,000
1996........................................................ 974,000
1997........................................................ 885,000
Later Years................................................. 5,151,000
----------
$9,996,000
----------
----------
Contingent rental income amounted to $201,000, $148,000, and $126,000 for
the years ended December 31, 1992, 1991, and 1990, respectively.
As a result of having incurred substantial operating losses, Kettle
Restaurants, Inc. ("Kettle"), the tenant of six (6) restaurant leases with the
Operating Partnership, entered into a letter agreement with La Quinta and the
Operating Partnership on December 28, 1990, which provided for, among other
things: (i) the termination of five (5) of the six restaurant leases with the
Operating Partnership on the earlier of June 30, 1991 or the date La Quinta
leased such restaurants to another tenant or otherwise disposed of the
properties; (ii) the conveyance of leasehold improvements and restaurant
equipment, free and clear of all liens and encumbrances, at the five facilities
to the Operating Partnership upon the lease termination date; (iii) the ability
of La Quinta on behalf of the Operating Partnership to operate the five
restaurants for four (4) years after June 30, 1991 under the Kettle trade dress
pursuant to a license agreement with no fees; and (iv) the reimbursement of
certain administrative and legal costs of La Quinta and the Operating
Partnership incurred in implementing the lease termination agreement. Under the
terms of this lease termination agreement with Kettle, which included a total of
the five Kettle restaurants adjacent to the Inns and 15 Kettle restaurants
adjacent to other inns in the La Quinta chain, the remaining 24 Kettle
restaurant leases with La Quinta and the remaining one Kettle restaurant lease
with the Operating Partnership, not being terminated pursuant to such agreement,
were amended to include cross default provisions, which permit La Quinta to
terminate all of the remaining Kettle restaurant leases upon an event of default
involving any one such lease.
12
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1992, four of the five restaurants owned by the Operating
Partnership which were subject to the lease termination agreement discussed
above have been leased to other third parties. The table above includes minimum
future rental payments to be received under the terms of the new leases on the
four restaurants.
LAND LEASE EXPENSE
The Operating Partnership has one Inn subject to an operating land lease
with annual rental payments of $77,000 plus contingent rentals based on gross
room and adjacent restaurant revenues through December 31, 2004. The Partnership
has an option to extend the lease for an additional thirty-five years. The
accompanying consolidated statements of operations include land rental expense
of $98,000, $94,000, and $95,000 for the years ended December 31, 1992, 1991 and
1990, respectively.
(5) RELATED PARTY TRANSACTIONS
REFINANCING OF MORTGAGE NOTES
The original mortgage notes totaling $67,500,000 were initially payable by
the Operating Partnership to La Quinta. La Quinta sold the mortgage notes to
AEtna Life Insurance Company, an unaffiliated institutional lender in December
1986. During the years ended December 31, 1991 and 1990, La Quinta received
$387,000 and $422,000 respectively, representing the difference between the
9.875% interest rate payable on the original mortgage notes and 9.25% interest
rate payable to the institutional lender. The original mortgage notes were
refinanced in November 1991.
GENERAL PARTNER OBLIGATIONS AND WORKING CAPITAL PROVISIONS
The General Partner had an obligation, guaranteed by La Quinta and limited
to $6,000,000 annually on a non-cumulative basis, to make additional capital
contributions to the Partnership during the first three years of operation if
cash flow available for distribution to unitholders was less than $2.00 per unit
during any of such years. The General Partner contributed $12,410,000 to the
Partnership under the terms of this guarantee.
Under the terms of the Partnership Agreements, the General Partner or its
affiliates may loan money to the Partnerships. Such loans will be repaid with
cash flow from operations and will bear interest at an annual rate equal to the
prime rate quoted by a designated major bank located in Texas from time to time
plus one percentage point. No such loans, with the exception of the credit line
discussed below, were outstanding during the years ended December 31, 1992 or
1991.
The General Partner, on behalf of the Operating Partnership, executed a
promissory note establishing a $4,000,000 line of credit with La Quinta to fund
operational needs (including renovation and refurbishing expenditures) of the
Partnerships as deemed necessary by management. There were no advances
outstanding at December 31, 1992, and $100,000 at December 31, 1991.
MANAGEMENT SERVICES FEE
The Operating Partnership entered into a long-term management agreement with
La Quinta whereby La Quinta provides services as manager of the Inns. For the
year ended December 31, 1990 the Operating Partnership paid La Quinta 6% of
gross room revenue per month for management services and 3.75% of gross room
revenue plus $4.50 per room per month for bookkeeping, marketing and reservation
services provided pursuant to the management agreement. Effective January 1,
1991 these fees were 6% of gross room revenue per month for management services
and 5% of gross room revenue plus $2.00 per room per month for bookkeeping,
marketing and reservation services. In addition, La Quinta also receives a
license royalty fee equal to 3.5% of annual gross room revenue. Fees paid to La
Quinta under the management agreement totaled $5,964,000, $5,733,000, and
$5,073,000
13
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
respectively, for the years ended December 31, 1992, 1991 and 1990. The
Operating Partnership will also pay La Quinta an annual incentive management fee
should the Operating Partnership's cash flow before debt service, as defined,
exceed $15,644,000.
OTHER RECURRING TRANSACTIONS
Under the terms of the Partnership Agreements, the General Partner is
responsible for managing the business and affairs of the Partnerships and is
entitled to be reimbursed by the Partnerships for the actual out-of-pocket
expenditures incurred by the General Partner or its affiliates on behalf of each
of the Partnerships in connection with the administration and supervision of the
Partnerships and their assets. During the years ended December 31, 1992, 1991
and 1990, the Partnerships reimbursed La Quinta $148,000, $124,000, and $65,000,
respectively, for expenses incurred in connection with administration of the
Partnerships. These reimbursements are included in administrative expense in the
accompanying consolidated statements of operations.
As manager of the Inns, La Quinta pays on behalf of the Operating
Partnership all direct operating expenses. The Operating Partnership reimburses
La Quinta for all such payments. Neither the Partnership, the Operating
Partnership, nor the General Partner have any employees and the fee and
reimbursement structured under the management agreement presently covers the
costs of all employees at the Inns and chain services allocable to the Inns. The
Operating Partnership participates in a paid loss retrospective self-insurance
program (the "Paid Loss Program") established by La Quinta, which includes
excess umbrella policies for commercial general liability insurance, fire and
extended property insurance, workers' compensation and employer's liability
insurance. All inns in the La Quinta chain participate in the Paid Loss Program,
under which claims and expenses are shared pro rata by all inns participating
therein.
(6) INCOME TAXES
No provision, credit or payment for income taxes has been made as the
liability for such taxes is that of the Unitholders rather than the
Partnerships. Under the Omnibus Budget Reconciliation Act of 1987 the
Partnerships will retain their non-corporate tax status through December 31,
1997. The Partnerships file their tax returns on the accrual basis.
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires a change from the deferred method under APB Opinion 11 to the
asset and liability method of accounting for income taxes. Under the asset and
liability method of Statement 109, deferred income taxes are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Statement 109 must be adopted in 1993. Upon adoption, the provisions of the
Statement may be applied without restating prior years' financial statements or
may be applied retroactively by restating any number of consecutive prior years'
financial statements.
Upon adoption in 1993, the Partnership plans to apply the provisions of the
Statement without restating prior years' financial statements. It is estimated
that adoption of Statement 109 will result in the recording of a deferred tax
liability in the amount of $2.8 million and that this amount will be reported
separately as the cumulative effect of the change in the method of accounting
for income taxes in the consolidated statement of the operations for the year
ending December 31, 1993.
14
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A reconciliation of financial statement net loss to ordinary tax loss
follows:
Net loss per consolidated financial statements....... $(1,134,000) $ (946,000) $(2,219,000)
La Quinta Realty Corp. equity in loss of Operating
Partnership......................................... (11,000) (10,000) (23,000)
Excess tax depreciation over financial statement
depreciation........................................ (527,000) (1,425,000) (2,067,000)
Non-deductible loss on early retirements............. 468,000 237,000 920,000
Gain on lease termination............................ -- 180,000 --
Other................................................ 126,000 125,000 112,000
----------- ----------- -----------
Tax loss on consolidated basis....................... (1,078,000) (1,839,000) (3,277,000)
La Quinta Realty Corp. equity in tax loss of
Operating Partnership............................... 11,000 18,000 33,000
----------- ----------- -----------
$(1,067,000) $(1,821,000) $(3,244,000)
----------- ----------- -----------
----------- ----------- -----------
General Partner's interest in Partnership tax loss... (568,000) (403,000) (675,000)
Limited Partners' interest in Partnership tax loss... (499,000) (1,418,000) (2,569,000)
----------- ----------- -----------
$(1,067,000) $(1,821,000) $(3,244,000)
----------- ----------- -----------
----------- ----------- -----------
Tax loss per limited partnership unit................ $ (.13) $ (.36) $ (.65)
----------- ----------- -----------
----------- ----------- -----------
The 1992 net tax loss allocation between the General Partner and the Limited
Partners reflects a $271,000 cumulative corrective adjustment to the allocation
of prior year losses. Such adjustment increases the 1992 loss allocation to the
General Partner with a corresponding decrease to the Limited Partners.
(7) SUBSEQUENT EVENT
On February 13, 1993, the Board of Directors of La Quinta Realty Corp., the
General Partner, approved a cash distribution of $.20 per unit, payable on March
12, 1993 to Unitholders of record as of March 5, 1993, totaling $795,000. In
addition, it approved distributions to the General Partner of $15,000 from the
Partnerships. The cash distribution applies to the quarter ended December 31,
1992.
(8) CONTINGENCIES
On February 15, 1993, LQP, La Quinta and Ronin Partners, L.P. ("Ronin")
announced that they had entered into a Memorandum of Understanding to settle all
of the litigation between them. As part of the settlement, Ronin agreed not to
contest the tabulation of its latest consent solicitation, to cease all
activities relating to LQP and to refrain from further consent solicitations or
similar activities relating to LQP or La Quinta.
If approved by the Delaware Court of Chancery and the United States District
Court for the District of Delaware, the settlement contemplates that LQP will
increase the annual distribution to Unitholders from $.80 per Unit to $1.00 per
Unit, effective for the first quarterly distribution after the settlement has
been approved by the Courts and has become final (which is expected to occur in
the summer of 1993). Also, as part of the settlement, the Board of Directors of
La Quinta Motor Inns, Inc. has authorized the purchase of up to 15% of the
outstanding LQP Units in the open market or in privately negotiated transactions
from time to time, subject to market conditions, over the period beginning on
February 17, 1993, and ending on June 30, 1994. La Quinta Motor Inns, Inc. is
not obligated to purchase any LQP Units at any particular price or at any
particular time during such period. The settlement is subject to certain
contingencies, including approval of definitive settlement agreements and
approval by both Courts. Upon final approval by the Courts, the General Partner
of
15
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LQP and La Quinta have agreed to reimburse Ronin for certain of its expenses
incurred in connection with the litigation. Such payment will not be reimbursed
to the General Partner or La Quinta by LQP. The settlement was a culmination of
a series of actions which began in September 1991.
In September 1991, Ronin filed two lawsuits against the Partnership and the
General Partner. One lawsuit was filed in Delaware state court on behalf of the
Partnership's unitholders and derivatively on behalf of the Partnership (the
"First Delaware State Suit"). These two lawsuits allege, among other matters,
that the defendants wasted Partnership assets by paying excessive management
fees to La Quinta and breached their fiduciary duties and violated federal
securities laws by disseminating misleading statements, acting recklessly with
respect to the Partnership's mortgage loan refinancings and participating in a
purported scheme to depress the market price for units of the Partnership. Ronin
seeks, among other things, injunctive relief barring certain conduct about which
it complains, compensatory damages in an unspecified amount and attorney's fees.
On June 22, 1992, Ronin filed its Second Amended and Supplemental Complaint in
the First Delaware Federal Suit against the Partnership, the General Partner, La
Quinta, and the Operating Partnership and certain individual officers of La
Quinta repeating certain of the alleged violations of those laws. Recently, the
parties stipulated to the stay of the First Delaware State Suit pending
resolution of the Second Delaware Federal Suit described below.
The Partnership and the General Partner filed answers containing denials to
the allegations and motions to dismiss the complaint. Simultaneous therewith,
the Partnership, the Operating Partnership and the General Partner filed suit in
the United States District Court for the Western District of Texas (the "Texas
Federal Suit") against Ronin for injunctive relief and/or compensatory and
punitive damages as a result of the various alleged wrongful actions including
various alleged securities law violations and common law claims, such as
wrongful interference with contractual and business relations, fraud, negligent
misrepresentation, commercial defamation and breach of a confidential agreement.
On April 20, 1992, the Texas Federal Suit was transferred to the United States
Court for the District of Delaware.
In February 1992, Ronin commenced a consent solicitation seeking a special
meeting of the Partnership's unitholders to vote on amendments to the management
agreement dealing with management compensation. The General Partner, having
determined that the consents were untimely delivered, did not call a special
meeting. On June 22, 1992, Ronin filed an additional lawsuit in Delaware state
court, naming the General Partner and La Quinta as defendants (the "Second
Delaware State Suit"). This lawsuit seeks to compel the General Partner to call
a special meeting of the Partnership's unitholders, and seeks compensatory
damages from La Quinta alleging that the fees received under the terms of the
management agreement between La Quinta and the Operating Partnership are
excessive. In addition, declaratory relief with respect to the parties' rights
under the management agreement is sought, along with damages. On September 3,
1992, the defendants filed a motion to stay the Second Delaware State Suit
pending resolution of other litigation. Although the parties have not briefed
that motion to stay, the case has been inactive since last September.
In June 1992, Ronin commenced a second consent solicitation, seeking a
dissolution of the Partnership, replacement of the General Partner with a
special liquidator to seek bids for the sale of its assets, and to reimburse
Ronin for certain alleged expenses. Ronin filed another suit in the United
States District Court for the District of Delaware (the "Second Delaware Federal
Suit"), seeking a declaration from the court that this second consent
solicitation did not violate the disclosure provisions of the securities laws.
On October 21, 1992, the court ordered the consolidation of the First Delaware
Federal Suit, as well as an action brought by Exel Inns of America, Inc. seeking
declaration that its proposal to manage the Partnership's properties and press
release did not violate the securities laws. Ronin voluntarily withdrew its
second consent solicitation on August 24, 1992.
16
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On or about November 3, 1992, Ronin commenced a third consent solicitation,
seeking to dissolve LQP so as to effect a restructuring or disposition of its
assets, business and operations, and reimbursement of certain expenses.
Thereafter, Ronin claimed to have delivered on January 8, 1993, sufficient
consents to LQP for Ronin's third consent solicitation to have succeeded. La
Quinta and the General Partner disputed that claim, and the independent
inspector of election determined that Ronin's third consent solicitation did not
succeed. A hearing on that issue was conducted in the Second Delaware Federal
Suit on February 8 and 9, 1993.
17
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
SEPTEMBER 30, 1993 DECEMBER 31, 1992
------------------- ------------------
(UNAUDITED)
Current assets:
Cash and cash equivalents...................................... $ 988,000 $ 423,000
Receivables.................................................... 1,616,000 921,000
Supplies....................................................... 621,000 655,000
------------------- ------------------
Total current assets......................................... 3,225,000 1,999,000
------------------- ------------------
Property and equipment, at cost, substantially all pledged:
Land........................................................... 22,688,000 22,688,000
Buildings...................................................... 106,767,000 105,464,000
Furniture, fixtures and equipment.............................. 16,653,000 16,605,000
------------------- ------------------
Total property and equipment................................. 146,108,000 144,757,000
Less accumulated depreciation and amortization................. 38,346,000 34,140,000
------------------- ------------------
Net property and equipment................................... 107,762,000 110,617,000
------------------- ------------------
Deferred charges and other assets, at cost less applicable
amortization.................................................... 513,000 754,000
------------------- ------------------
$111,500,000 $113,370,000
------------------- ------------------
------------------- ------------------
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
Current installments of long-term debt......................... $ 1,497,000 $ 1,261,000
Accounts payable:
Trade........................................................ 1,363,000 1,573,000
La Quinta Inns, Inc.......................................... 1,047,000 364,000
Accrued expenses:
Payroll and employee benefits................................ 520,000 775,000
Interest..................................................... 949,000 922,000
Property taxes............................................... 1,261,000 745,000
Other........................................................ 78,000 61,000
------------------- ------------------
Total current liabilities.................................. 6,715,000 5,701,000
------------------- ------------------
Long-term debt, excluding current installments................... 65,827,000 67,047,000
Deferred credits, principally income taxes (note 2).............. 3,226,000 36,000
------------------- ------------------
Total liabilities.......................................... 75,768,000 72,784,000
------------------- ------------------
La Quinta Realty Corp. equity in Operating Partnership........... (366,000) (318,000)
------------------- ------------------
Partners' capital
La Quinta Realty Corp. -- general partner in Partnership....... 11,925,000 11,975,000
Limited partners' (3,975,000 units)............................ 24,173,000 28,929,000
------------------- ------------------
Total partners' capital.................................... 36,098,000 40,904,000
------------------- ------------------
$111,500,000 $113,370,000
------------------- ------------------
------------------- ------------------
See accompanying notes to consolidated condensed financial statements.
18
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ ------------------------------
1993 1992 1993 1992
-------------- -------------- -------------- --------------
Revenues:
Inn............................................ $ 11,992,000 $ 11,747,000 $ 33,950,000 $ 32,324,000
Restaurant rental and other.................... 314,000 308,000 910,000 894,000
-------------- -------------- -------------- --------------
Total revenues............................... 12,306,000 12,055,000 34,860,000 33,218,000
-------------- -------------- -------------- --------------
Operating costs and expenses:
Direct......................................... 6,104,000 5,935,000 17,659,000 16,650,000
Fees paid to La Quinta Inns, Inc............... 1,697,000 1,659,000 4,810,000 4,581,000
Administrative................................. 62,000 125,000 344,000 393,000
Unitholder litigation/solicitation............. 9,000 756,000 401,000 1,304,000
Depreciation, amortization and fixed asset
retirements................................... 1,666,000 1,901,000 5,287,000 5,302,000
-------------- -------------- -------------- --------------
Total operating costs and expenses........... 9,538,000 10,376,000 28,501,000 28,230,000
-------------- -------------- -------------- --------------
Operating income............................. 2,768,000 1,679,000 6,359,000 4,988,000
-------------- -------------- -------------- --------------
Other income (expenses):
Interest income................................ 11,000 6,000 15,000 11,000
Interest on long-term debt..................... (1,800,000) (1,829,000) (5,447,000) (5,537,000)
La Quinta Realty Corp. equity in (earnings)
loss of Operating Partnership................. (9,000) 1,000 22,000 5,000
-------------- -------------- -------------- --------------
Total other income (expenses)................ (1,798,000) (1,822,000) (5,410,000) (5,521,000)
-------------- -------------- -------------- --------------
Earnings (loss) before income taxes and
cumulative effect of change in accounting for
income taxes.................................... 970,000 (143,000) 949,000 (533,000)
Income taxes..................................... 115,000 -- 345,000 --
-------------- -------------- -------------- --------------
Earnings (loss) before cumulative effect of
change in accounting for income taxes........... 855,000 (143,000) 604,000 (533,000)
Cumulative effect of change in accounting for
income taxes.................................... -- -- 2,800,000 --
-------------- -------------- -------------- --------------
Net earnings (loss).............................. $ 855,000 $ (143,000) $ (2,196,000) $ (533,000)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
General partner's interest....................... $ 9,000 $ (1,000) $ (22,000) $ (5,000)
Limited partners' interest....................... 846,000 (142,000) (2,174,000) (528,000)
-------------- -------------- -------------- --------------
$ 855,000 $ (143,000) $ (2,196,000) $ (533,000)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Net earnings (loss) per limited partnership unit:
Earnings (loss) before cumulative effect of
change in accounting for income taxes......... $ .21 $ (.03) $ .14 $ (.13)
Cumulative effect of change in accounting for
income taxes.................................. -- -- (.69) --
-------------- -------------- -------------- --------------
Net earnings (loss)............................ $ .21 $ (.03) $ (.55) $ (.13)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Cash distributions per limited partnership
unit.......................................... $ .25 $ .20 $ .65 $ .60
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
See accompanying notes to consolidated condensed financial statements.
19
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1993 1992
-------------- --------------
Cash flows from operating activities:
Net loss........................................................................ $ (2,196,000) $ (533,000)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization of property and equipment....................... 4,665,000 4,669,000
Amortization of deferred charges.............................................. 270,000 238,000
Loss on retirement of assets.................................................. 352,000 395,000
La Quinta Realty Corp. equity in loss of Operating Partnership................ (22,000) (5,000)
Deferred income taxes......................................................... 345,000 --
Cumulative effect of change in accounting for income taxes.................... 2,800,000 --
Changes in operating assets and liabilities:
Deferred charges and other deferred credits................................. 44,000 137,000
Receivables................................................................. (695,000) (361,000)
Supplies and other.......................................................... 34,000 28,000
Accounts payable and accrued expenses....................................... 774,000 1,406,000
-------------- --------------
Net cash provided by operating activities................................. 6,371,000 5,974,000
-------------- --------------
Cash flows from investing activities:
Additions to property and equipment............................................. (2,155,000) (1,449,000)
Proceeds from sale of fixed assets.............................................. -- 35,000
-------------- --------------
Net cash used in investing activities............................................. (2,155,000) (1,414,000)
-------------- --------------
Cash flows from financing activities:
Advances from La Quinta Inns, Inc............................................... 4,425,000 6,195,000
Repayments of advances from La Quinta Inns, Inc................................. (4,425,000) (6,295,000)
Principal payments on long-term debt............................................ (984,000) (624,000)
Payments to refinance mortgage debt............................................. (31,000) (118,000)
General Partner's distribution from Operating Partnership....................... (26,000) (18,000)
Partnership distributions....................................................... (2,610,000) (2,410,000)
-------------- --------------
Net cash used in financing activities..................................... (3,651,000) (3,270,000)
-------------- --------------
Net increase in cash and cash equivalents......................................... 565,000 1,290,000
Cash and cash equivalents at beginning of year.................................... 423,000 488,000
-------------- --------------
Cash and cash equivalents......................................................... $ 988,000 $ 1,778,000
-------------- --------------
-------------- --------------
Interest paid..................................................................... $ 5,420,000 $ 5,342,000
-------------- --------------
-------------- --------------
See accompanying notes to consolidated condensed financial statements.
20
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments, consisting
of normal recurring adjustments, have been made which are necessary for a fair
presentation of financial position and results of operations. It is suggested
that the consolidated condensed financial statements be read in conjunction with
the consolidated financial statements and notes thereto included in the December
31, 1992 Annual Report on Form 10-K.
(2) INCOME TAXES
Effective January 1, 1993, La Quinta Motor Inns Limited Partnership (the
"Partnership") 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
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 temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities using currently
enacted tax rates in effect for the years in which the differences are expected
to reverse.
Although the Partnership is not a tax paying entity in 1993, under current
U.S. Federal tax law, certain publicly-traded partnerships (such as the
Partnership) will become taxable as corporations beginning January 1, 1998.
Accordingly, with the adoption of SFAS 109 by the Partnership, a deferred tax
liability has been recorded for the portion of the temporary differences which
are not expected to reverse until after December 31, 1997. As of January 1,
1993, the Partnership recorded a deferred tax liability and a cumulative effect
adjustment which increased the net loss by $2,800,000 or $.69 per unit resulting
from the adoption of SFAS 109. Such amount has been reflected in the statement
of operations for the nine month period ended September 30, 1993, as the
cumulative effect of an accounting change. Prior years' financial statements
have not been restated to apply the provisions of SFAS 109.
(3) SUBSEQUENT EVENT
On October 18, 1993 La Quinta Inns, Inc. ("La Quinta") announced that its
Board of Directors authorized its officers to enter into negotiations with the
Partnership regarding the acquisition of all of the 3,522,300 partnership units
of the Partnership that it does not own at a price of up to $12 per unit in
cash. La Quinta currently owns 452,700 partnership units of the Partnership,
representing 11.4% of the outstanding units. The terms and form of a
transaction, if any is agreed to, have yet to be determined, but may include a
merger, acquisition or other business combination. Any transaction would be
financed by La Quinta's available credit lines and would not be subject to a
financing contingency. The Board of Directors of La Quinta Realty Corp., the
General Partner of the Partnership (the "General Partner"), has formed a special
committee (the "Special Committee") comprised solely of board members who are
not affiliated with La Quinta to evaluate the proposal. The Special Committee
has engaged its own legal counsel and financial advisor to advise and assist it.
On October 18, 1993, two separate lawsuits were filed in the Delaware Court
of Chancery on behalf of Unitholders (other than La Quinta and its affiliates)
against La Quinta, 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 have breached their fiduciary duties to Unitholders by, among other
things, offering grossly inadequate consideration to entrench themselves in
control of
21
LA QUINTA MOTOR INNS LIMITED PARTNERSHIP
AND SUBSIDIARY LIMITED PARTNERSHIP
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) SUBSEQUENT EVENT (CONTINUED)
the Partnership, failing to solicit competing bids and by making inadequate
public disclosure regarding the transaction. The complaints additionally allege
that La Quinta has used unequal knowledge and economic power, given its
affiliation with the General Partner, to the detriment of the Unitholders. The
independence of the outside directors is 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 seek, among other things, (i) a
declaration that Defendants have 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 Board of Directors of the General Partner, declared
a cash distribution to Unitholders of record as of November 26, 1993 of $993,750
or $.25 per unit to be paid December 6, 1993.
On October 28, 1993, La Quinta and the Partnership jointly announced that
they have entered into a definitive agreement pursuant to which La Quinta,
through its wholly-owned subsidiaries, will acquire all of the 3,522,300 limited
partnership units of the Partnership that it does not own for $13 per unit in
cash. It is anticipated that the acquisition will be effected in two steps. A
subsidiary of La Quinta will commence, not later than Wednesday, November 3,
1993, a tender offer for all of the Partnership's outstanding units at a price
of $13 net per unit in cash. If all of the Partnership's outstanding units are
not acquired as a result of the tender offer, the remaining units will be
acquired in a subsequent merger pursuant to which each unit will be converted
into the right to receive the same consideration as is paid in connection with
the tender offer, in cash.
The General Partner's Board of Directors, based on the unanimous
recommendation of the Special Committee of independent directors, has
unanimously approved the tender offer and the merger, determined that the tender
offer and merger are fair to the Partnership's public unitholders and
recommended acceptance of the tender offer by the Partnership's public
unitholders. The tender offer will be conditioned on, among other things, there
being validly tendered and not withdrawn prior to the expiration of the tender
offer more than 50% of the Partnership's units not owned by La Quinta. La Quinta
currently owns 11.4% of the outstanding Partnership units. The tender offer and
the merger will be financed by La Quinta through borrowings under its existing
lines of credit and are not subject to any financing contingency.
In addition, La Quinta and the Partnership announced that, in connection
with the foregoing definitive agreement, a settlement in principle has been
reached in the Actions. The settlement in principle is subject to certain
conditions, including court approval.
22
(b) Pro Forma Financial Information
The following pro forma financial information as of and for the year
ended December 31, 1992 and the nine month period ended September 30, 1993,
reflects the effect of the transaction described in Item 2 above:
(1) Year ended December 31, 1992.
The unaudited pro forma combined condensed statement of operations include
the combined statement of operations reported in the Company's Form 10-K
for the period ended December 31, 1992 and adjustments to reflect the
acquisition of certain joint ventures' and partners' ownership interests during
the nine months ended September 30, 1993 and on November 30, 1993 and the
Partnership's Units on December 1, 1993. All numbers in thousands.
LQI LQP
As Reported As Reported Pro Forma
December 31, December 31, Pro Forma adjustments (1) December 31,
1992 1992 Debit Credit 1992
INCOME STATEMENTS ------------- ------------- --------- --------- ------------
Revenues:
Inn $ 241,536 $ 42,117 $ 283,653
Restaurant rental and other 7,208 1,202 I) 185 8,225
Management services 7,088 E) 5,964 1,124
------------- ------------- -------------
Total Revenues 255,832 43,319 293,002
------------- ------------- -------------
Operating costs and expenses:
Direct 137,500 22,195 159,695
Corporate 23,961 23,961
Fees paid to La Quinta Motor Inns, Inc. 5,964 E) 5,964 0
Administrative 491 K) 491 0
Unitholder litigation/solicitation 1,525 1,525
Provision for write-down of partnership investments, land 28,383 28,383
and other
Severance and other employee related costs 6,936 6,936
Depreciation, Amortization, and fixed asset retirements 25,220 6,942 A) 1,175 C) 40 33,449
------------- ------------ F) 60 -------------
M) 92
Total Operating Costs 222,000 37,117 253,949
------------- ------------- -------------
Operating Income 33,832 6,202 39,053
------------- ------------- -------------
Other income (expenses):
Interest Income 6,041 18 E) 158 5,901
Interest on long-term debt (32,344) (7,365)C) 3,111 E) 158 (44,707)
G) 2,522 O) 477
Partner's Equity (15,081) 11 L) 11 B) 4,557 (10,201)
N) 323
------------- ------------- -------------
Loss before property and investment transactions (7,552) (1,134) (9,954)
Net gain on investment transactions 282 H) 220 62
------------- ------------- -------------
Net loss before income taxes and extraordinary items (7,270) (1,134) (9,892)
Income tax expense (benefit) 526 D) 118 J) 1,115 (471)
------------- ------------- -------------
Net loss before extraordinary items (7,796) (1,134) (9,421)
Extraordinary items, net of income taxes (958) C) 675 (1,862)
P) 229
------------- ------------- --------- --------- -------------
Net loss $ (8,754) $ (1,134) $ 14,520 $ 13,125 $ (11,283)
------------- ------------- --------- --------- -------------
------------- ------------- --------- --------- -------------
Loss per common and common equivalent share:
Loss before extraordinary items $ (0.39) $ (0.47)
Extraordinary Items, net of income taxes (0.05) (0.09)
------------- -------------
Net loss $ (0.44) $ (0.56)
------------- -------------
------------- -------------
Weighted average number of common and common equivalent
shares outstanding, as restated 20,134 20,134
------------- -------------
------------- -------------
23
Notes to pro forma financial information as of and for the twelve month period
ended December 31, 1992:
1. Pro forma adjustments to the unaudited pro forma combined condensed
statement of operations for the twelve month period ended December 31, 1992
to reflect the acquisition of the limited partners' interests in unincorporated
joint ventures acquired during the eleven months ended November 30, 1993 and the
acquisition of the Units of the Partnership on December 1, 1993.
JOINT VENTURES ACQUIRED JANUARY 1 THROUGH SEPTEMBER 30, 1993
- - --------------------------------------------------------------------------------
A) Records additional depreciation expense on the addition of $29,366,000 of
property, plant and equipment resulting from the acquisition of limited
partners' interests in unincorporated joint ventures. The depreciation
expense was calculated using the straight line method based on a 25 year
remaining life.
B) Represents the elimination of the net limited partners' equity in earnings
and losses.
C) Represents the interest expense on additional debt of $87,644,000 relating to
the acquisition of partners' interests at varying interest rates from 7.5% to
9.25% per annum, adjustment to reverse $40,000 of amortization expense on
deferred loan fees written off and the $675,000 of prepayment penalty (net
of tax) related to debt refinancing and early extinguishment of debt on
unincorporated joint ventures.
D) Reflects income tax adjustment assuming an income tax rate of 38%.
ACQUISITION OF PARTNERSHIP UNITS
- - --------------------------------------------------------------------------------
E) Eliminates the related party revenues and expenses.
F) Records additional depreciation expense on the $904,000 step up of property,
plant and equipment resulting from the acquisition of the Partnership. The
depreciation expense was calculated using the straight line method based on
a 15 year remaining life.
G) Records interest expense at 6% per annum related to the $42,033,000 of total
funds required to purchase the Partnership Units and pay related costs.
H) Adjusts deferred gain recognized due to the acquisition of the Partnership
and related Harlingen IRB.
I) Represents the elimination of minority interest in the Partnership earnings
and losses.
J) Reflects income tax adjustment assuming an income tax rate of 38% on the
acquisition of the Partnership and the joint venture acquired November
30,1993.
K) To eliminate administrative fees paid that are not part of continuing
operations.
L) To eliminate La Quinta Realty Corporation's equity in loss of Operating
Partnership.
JOINT VENTURE ACQUIRED NOVEMBER 30, 1993
- - --------------------------------------------------------------------------------
M) Records additional depreciation expense on the $2,303,000 step up of
property, plant and equipment resulting from the acquisition of the limited
partners' interest in unincorporated joint venture. The depreciation
expense was calculated using the straight line method based on a 25 year
remaining life.
N) Represents the elimination of the net limited partners' equity in earnings
and losses.
O) Represents net interest savings on additional debt incurred and refinancing
of existing debt related to the acquisition of limited partners' interest
calculated at 6% per annum.
P) Records extraordinary losses on the early extinguishment of debt and related
costs due to the refinancing of outstanding joint venture debt at the time of
acquisition.
24
The unaudited pro forma combined condensed statement of operations include the
unaudited pro forma combined condensed statement of operations reported in the
Company's Form 10-Q for the period ended September 30, 1993 and adjustments to
reflect the acquisitions of certain joint venture's ownership interest on
November 30, 1993 and the Partnership's units on December 1, 1993. All numbers
in thousands.
LQI LQP
As Reported As Reported Pro Forma
September 30, September 30, Pro Forma adjustments (1) September 30,
1993 1993 Debit Credit 1993
------------- ------------- ------ -------- -------------
INCOME STATEMENTS
Revenues:
Inn $ 199,189 $ 33,950 $ 233,139
Restaurant rental and other 4,825 910 I) 322 5,413
Management services 5,602 0 E) 4,810 792
------------ ------------ ------------
Total Revenues 209,616 34,860 239,344
------------ ------------ ------------
Operating costs and expenses:
Direct 111,099 17,659 128,758
Fees paid to LQI 4,810 E) 4,810 0
Administrative 344 K) 344 0
Unitholder litigation/solicitation 401 401
Corporate 14,469 14,469
Performance stock options 4,407 4,407
Depreciation, Amortization, and fixed asset
retirements 17,635 5,287 A) 596 C) 24 23,657
F) 89
M) 74
------------ ------------- ------------
Total Operating Costs 147,610 28,501 171,692
------------ ------------ ------------
Operating Income 62,006 6,359 67,652
------------ ------------ ------------
Other income (expenses):
Interest income 4,158 15 E) 118 4,055
Interest on long-term debt (22,056) (5,447) C) 2,413 E) 118
G) 1,707 0) 352 (31,153)
Partner's Equity (11,619) 22 L) 22 B) 2,380 (8,885)
N) 354
------------ ------------ ------------
Earnings before property and investment transactions 32,489 949 31,669
Net loss on investment transactions (4,375) H) 230 (4,605)
------------ ------------ ------------
Earnings before income taxes, extraordinary items
and cumulative effect of change in accounting
for income taxes 28,114 949 27,064
Income tax expense 10,855 345 D) 236 10,445
J) 174
L) 345
Effect of a change in income tax law 412 412
------------ ------------ ------------
Earnings before extraordinary items and cumulative
effect of change in accounting for income taxes 16,847 604 16,207
Extraordinary items, net of income taxes 642 P) 222 420
------------ ------------ ------------
Earnings before cumulative effect of change in
accounting for income tax 17,489 604 16,627
Cumulative effect of change in accounting for income
taxes 1,500 (2,800) L) 2,800 1,500
------------ ------------ ------ ------ ------------
Net earnings $ 18,989 $ (2,196) 10,603 11,937 $ 18,127
------------ ------------ ------ ------ ------------
------------ ------------ ------ ------ ------------
Earnings per common and common equivalent share:
Earnings before extraordinary items and cumulative
effect of change in accounting for income taxes $ 0.81 $ 0.78
Extraordinary items, net of income taxes 0.03 0.02
Cumulative effect of change in accounting for
income taxes 0.07 0.07
------------ ------------
Net earnings $ 0.91 $ 0.87
------------ ------------
------------ ------------
Weighted average number of common and common
equivalent shares outstanding, as restated 20,914 20,914
------------ ------------
------------ ------------
25
The unaudited pro forma combined condensed balance sheets of the Company as
if the acquisitions of the limited partners' interest of a certain joint venture
on November 30, 1993 and the Partnership's units on December 1, 1993 occurred on
September 30, 1993 is provided as follows (numbers in thousands):
LQI LQP
As Reported As Reported Pro Forma
September 30, September 30, Pro Forma adjustments (2) September 30,
1993 1993 Debit Credit 1993
------------- ------------- ------ -------- -------------
Assets:
Current assets $ 38,867 $ 3,225 S) 1,047 $ 41,045
------------- ------------- -------------
Notes recievable, excluding current
installments (net of allowance of $2,854 and $3,058) 7,502 0 Q) 80 7,582
------------- ------------- -------------
Investments, including, joint ventures
accounted for on the equity method 10,934 0 R) 366 R) 5,151 6,149
------------- ------------- -------------
Properties held for sale, at estimated
net realizable value 3,920 0 3,920
------------- ------------- -------------
Land held for future development, at cost 1,452 0 1,452
------------- ------------- -------------
Property and equipment, at cost, substantially
all pledged 755,546 107,762 Q) 2,103 868,308
T) 2,897
Less accumulated depreciation and amortization 223,184 0 223,184
------------- ------------- -------------
Net property and equipment 532,362 107,762 645,124
------------- ------------- -------------
Deferred charges and other assets, at cost less
applicable amortization 11,579 513 Q) 80 12,012
------------- ------------- ------- ------ -------------
$ 606,616 $ 111,500 5,446 6,278 $ 717,284
------------- ------------- ------- ------ -------------
------------- ------------- ------- ------ -------------
Liabilities and shareholders' equity:
Current liabilities $ 62,688 $ 6,715 S) 1,047 $ 68,126
R) 230
------------- ------------- -------------
Long-term debt, excluding current installments 310,816 65,827 R) 965 T) 5,619 419,240
Q) 37,943
------------- ------------- -------------
Deferred credits, principally income taxes 18,243 3,226 R) 1,246 13,446
Q) 6,777
------------- ------------- -------------
Partners' capital (net of note receivable
of $19,237 and $35,908) 65,021 0 T) 2,722 Q) 4,325 66,624
------------- ------------- -------------
La Quinta Realty Corp Equity 0 (366) R) 366 0
------------- ------------- -------------
Partners' equity 0 36,098 Q) 36,098 0
-------------
Shareholders' equity 163,563 0 163,563
Less treasury stock, at cost (1,783,607 and 1,910,124) (13,715) 0 (13,715)
------------- ------------- -------------
Total equity 149,848 36,098 149,848
------------- ------------- ------- ------ -------------
$ 606,616 $ 111,500 49,085 48,253 $ 717,284
------------- ------------- ------- ------ -------------
------------- ------------- ------- ------ -------------
26
Notes to pro forma financial information as of and for the nine month period
ended September 30, 1993:
1. Pro forma adjustments to the unaudited pro forma combined condensed
statement of operations for the nine month period ended September 30, 1993 to
reflect the acquisition of the limited partners' interests in unincorporated
joint ventures acquired during the eleven months ended November 30, 1993 and the
acquisition of the Units of the Partnership on December 1, 1993.
JOINT VENTURES ACQUIRED JANUARY 1 THROUGH SEPTEMBER 30, 1993
- - -------------------------------------------------------------------------------
A) Records additional depreciation expense on the $29,366,000 step up of
property, plant and equipment resulting from the acquisition of limited
partners' interests in unincorporated joint ventures. The depreciation
expense was calculated using the straight line method based on a 25 year
remaining life.
B) Represents the elimination of the net limited partners' equity in earnings
and losses.
C) Represents the interest expense on additional debt of $87,664,000 relating
to the acquisition of partners' interests at varying interest rates from
7.5% to 9.25% per annum and adjustment to reverse $24,000 of amortization
expense on deferred loan fees written off related to debt refinancing.
D) Reflects income tax adjustment assuming an income tax rate of 39%.
AQUISITION OF PARTNERSHIP UNITS
- - -------------------------------------------------------------------------------
E) Eliminates the related party revenues and expenses.
F) Records additional depreciation expense on the addition of $1,787,000 of
property, plant and equipment resulting from the acquisition of the
Partnership. The depreciation expense was calculated using the
straight line method based on a 15 year remaining life.
G) Records interest expense at 6% per annum related to the $37,943,000 of
total funds required to purchase Units and pay related costs.
H) Adjusts deferred gain recognized due to the acquisition of the Partnership
and related Harlingen IRB.
I) Represents the elimination of minority interest in the Partnership earnings
and losses.
J) Reflects income tax adjustment assuming an income tax rate of 39% on the
acquisition of the Partnership and the joint venture acquired on November
30, 1993.
K) To eliminate administrative fees paid that are not a part of continuing
operations.
L) To eliminate La Quinta Realty Corporation's equity in loss of Operating
Partnership and the Partnership's income tax expense and cumulative effect
of accounting change for the implementation of SFAS 109.
JOINT VENTURE ACQUIRED NOVEMBER 30, 1993
- - -------------------------------------------------------------------------------
M) Repesents additional depreciation expense on the $2,462,000 step up of
property, plant and equipment resulting from the acquisition of limited
partners' interest based on a 25 year remaining life.
N) Represents the elimination of the net limited partners' equity in earnings
and losses.
O) Represents net interest savings on additional debt incurred and refinancing
of existing debt related to the acquisition of limited partners' interest
calculated at 6 % per annum.
P) Records extraordinary losses on the early extinguishment of debt and
related costs due to the refinancing of outstanding joint venture debt at
the time of acquisition.
2. Pro forma adjustments to the unaudited pro forma combined condensed balance
sheets at September 30, 1993 reflect the acquisition of the limited partners'
interests in a certain joint venture on November 30, 1993 and the acquisition of
the Units of the Partnership on December 1, 1993.
Q) Records assets acquired, liabilities assumed, deferred tax effects due to
SFAS 109 and minority interest related to the acquisition of 2,811,038 of
the La Quinta Motor Inns Limited Partnership's ("LQP") 3,522,300
outstanding units the Company does not own for a total purchase price of
$37.9 million.
R) Eliminates the Company's investment in the Partnership acquired prior to
December 1, 1993, the Company's note receivable from the Partnership, and
the related deferred gain arising from the original sale of the properties
to the Partnership in 1986.
S) Eliminates the related party receivables and payables.
T) Records the purchase of the limited partners' interest in a joint venture
at November 30, 1993.
27
(c) Exhibits.
The following Exhibits are referenced herein in accordance
with the provisions of Item 601 of Regulation S-K:
2.1 Partnership Acquisition Agreement, dated as of October 27, 1993, among
the Registrant, the Partnership, the General Partner, LQI Acquisition
Corporation and LQI Merger Corporation (Incorporated by reference to
Exhibit (c)(1) to the Schedule 14D-1 filed by the Registrant and the
Purchaser on November 1, 1993);
21.1 Text of Press Release issued by the Purchaser, dated December 1, 1993
(Incorporated by reference to Exhibit (a)(11) to the Amendment No. 3 (Final
Amendment) to Schedule 14D-1 filed by the Registrant and the Purchaser on
December 1, 1993);
23 Consent by KPMG Peat Marwick, LLP dated November 4, 1994 to
incorporation by reference of their reports dated February 8, 1993,
except as to note 7 which is as of February 13, 1993, and except as to
note 8, which is as of February 15, 1993, relating to La Quinta Motor
Inns Limited Partnership filed herewith.
28.1 Credit Agreement, dated as of June 15, 1993, among the Registrant and
NationsBank of Texas, N.A., as Administrative Lender (Incorporated by
reference to Exhibit 10(b) to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1993);
28.2 First Amendment to Credit Agreement, dated as of October 25, 1993,
among the Registrant and NationsBank of Texas, N.A., as Administrative
Lender (Incorporated by reference to Exhibit (b)(2) to the Schedule 14D-1
filed by the Registrant and the Purchaser on November 1, 1993)
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
LA QUINTA INNS, INC.
(Registrant)
Date: December 14, 1993 By: /s/ WILLIAM C. HAMMETT, JR.
---------------------------------------
William C. Hammett, Jr.
Senior Vice President,
Accounting and Administration
29