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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, 1995
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
----- ------
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. ( )
The aggregate market value of the voting stock held by non-affiliates of
registrant as of January 31, 1996 was $1,164,535,356. As of January 31, 1996,
there were 51,420,612 shares of registrant's Common Stock issued and
outstanding.
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, 1996 relating to
Registrant's 1996 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 ................ 10
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 .......................................... 14
Item 8. Financial Statements and Supplementary Data ........................ 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ........................................... 45
PART III
Item 10. Directors and Executive Officers of the Registrant ................. 45
Item 11. Executive Compensation ............................................. 46
Item 12. Security Ownership of Certain Beneficial Owners and Management ..... 46
Item 13. Certain Relationships and Related Transactions ..................... 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ... 46
Signatures ................................................................... 49
This Annual Report on Form 10-K for the year ended December 31, 1995, at
the time of filing with the Securities and Exchange Commission, modifies and
supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of
the Securities Exchange Act of 1934 for purposes of any offers or sales of
any securities after the date of such filing pursuant to any registration
statement or prospectus filed pursuant to the Securities Act of 1933 which
incorporates by reference this Annual Report.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Annual Report contains information that is forward-looking, such as the timing
and cost of its inn construction and Gold Medal room construction programs,
its anticipated capital requirements and the results of legal proceedings.
Such forward-looking information involves risks and uncertainties that could
significantly affect expected results. These risks and uncertainties include,
but are not limited to, uncertainties relating to economic conditions, the
pricing and availability of construction materials and changes in the
competitive environment in which the Company operates.
2
PART I
ITEM 1. BUSINESS
La Quinta Inns, Inc. ("La Quinta" or the "Company") is the second largest
owner/operator of hotels in the United States, with 237 inns and more than
30,000 rooms. La Quinta operates primarily in the mid-priced segment of the
lodging industry. La Quinta achieved an occupancy percentage of 70.8% and an
average daily room rate ("ADR") of $51.07 for the year ended December 31, 1995.
The Company has inns located in 29 states, concentrated in the Western and
Southern United States. La Quinta currently owns a 100% interest in 230 of its
inns and a 50% or greater interest in an additional seven inns. La Quinta's
business strategy is to continue to expand its successful core business as an
owner/operator in the mid-priced segment of the lodging industry.
The Company was founded in San Antonio, Texas in 1968. La Quinta was
originally incorporated and became a publicly traded entity in 1972 and is
incorporated under the laws of the State of Texas. The principal executive
offices are located 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, convenient
locations and attractive prices, but who do not require banquet and convention
facilities, in-house restaurants, cocktail lounges or room service. By
eliminating the costs of these management-intensive facilities and services, La
Quinta believes it offers its customers exceptional value by providing rooms
that are comparable in quality to full-service hotels at lower prices.
The typical La Quinta inn contains approximately 130 spacious, quiet and
comfortably furnished guest rooms averaging 300 square feet in size. Guests at
a La Quinta inn are offered a wide range of amenities and services, such as its
complimentary First Light-TM- breakfast program, including cereal and fruit,
free unlimited local telephone calls, Airborne Express Service, a swimming pool,
same-day laundry and dry cleaning, fax services, 24-hour front desk message
service and free parking. Amenities to be added in connection with the
Company's Gold Medal-TM- rooms program include new 25 inch remote control
televisions with greatly expanded free television channel choices, movies-on-
demand, interactive video games from Nintendo-Registered Trademark- and dataport
telephones for computer connections. La Quinta guests typically have convenient
access to food service at adjacent free-standing restaurants, including national
chains such as Cracker Barrel, International House of Pancakes, Denny's and
Perkins. La Quinta has an ownership interest in 126 of these adjacent
buildings, which are leased to restaurant operators.
La Quinta's strategy is to continue its growth as a high-quality provider
in the mid-priced segment of the hotel industry, focusing on enhancing revenues,
cash flow and profitability. Specifically, the Company's strategy centers upon:
CONTINUED FOCUS ON MID-PRICED SEGMENT - Hotels in this price category
provide cost-conscious business travelers with high-quality rooms and
convenient locations at a moderate price. Because the Company
competes primarily in the mid-priced segment, management's attention
is totally focused on meeting the needs of La Quinta's target
customers.
LA QUINTA OWNERSHIP AND MANAGEMENT OF INNS - In contrast to many of
its competitors, La Quinta manages and has ownership interests in all
of its inns. At December 31, 1995, the Company owned 100% of 230 inns
and 50% or more of an additional seven inns. 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 owner-operated chains enables
La Quinta to offer new services, direct expansion, establish pricing
strategy and to make other marketing decisions on a system-wide or
local basis as conditions dictate, without
3
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.
GOLD MEDAL ROOMS PROGRAM - During 1995, La Quinta launched its Gold
Medal rooms program designed to strengthen the Company's ability to
gain additional market share and pricing advantage relative to its
competitors. The program is intended to improve the quality,
functionality and value of the guest rooms by enhancing the decor
package, including fresh, new colors, rich wood furniture,
contemporary bathrooms, built-in closets, oversized desks, 25 inch
televisions and new draperies and bedspreads. Service enhancements
include movies-on-demand, interactive video games from Nintendo,
dataport telephones for computer connections and greatly expanded free
television channel choices.
IMAGE ENHANCEMENT PROGRAM - In 1994, La Quinta completed a
comprehensive chainwide image enhancement program which gave the inns
a new, fresh, crisp appearance while preserving their unique
character. The program featured 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 a
full lobby renovation with contemporary furnishings and seating area
for the complimentary First Light breakfast program.
REGIONALLY FOCUSED GROWTH - During 1995, La Quinta purchased eleven
lodging facilities for conversion to the La Quinta-Registered
Trademark- brand, approved the construction of ten new inns, which
will open between April and December 1996, and approved room additions
at four inns. It is anticipated that the Company's growth in 1996
will continue to include acquisition and conversion of lodging
facilities and selected new development in strategic markets.
COMPETITION
Each La Quinta inn competes in its market area with numerous full service
lodging brands, especially in the mid-priced segment, and with numerous other
hotels, motels and other lodging establishments. Chains such as Hampton Inns,
Fairfield Inns and Drury Inns are direct competitors of La Quinta. Other
competitors include Holiday Inns, Ramada Inns, Red Roof Inns and Comfort Inns.
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.
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 and weather patterns, local
and regional economic conditions and the degree of competition with other
lodging establishments in the area.
STRUCTURE AND OWNERSHIP
The Company is a combined entity comprised of La Quinta Inns, Inc., which
owns and operates 230 inns through wholly-owned subsidiaries and partnerships
and 7 inns through combined unincorporated partnerships and joint ventures.
In 1995, the Company acquired all of AEW Partners, L.P. ("AEW") limited
partner's interest in La Quinta Development Partners, L.P. ("LQDP"), which owned
47 inns. The acquisition was effected through the issuance of common stock and
cash as described below.
On June 15, 1995, AEW notified the Company that it would exercise, subject
to certain conditions, its option to convert two-thirds of its ownership
interest in LQDP into 5,299,821 shares of the Company's Common Stock. AEW also
agreed to sell the remaining one-third of its ownership interest in LQDP to the
Company for a
4
negotiated price of $48.2 million in cash (collectively, the "AEW
Transaction"). The AEW Transaction was consummated on July 3, 1995. Upon
conversion of the partnership interest into La Quinta Common Stock, the
Company issued 5,299,821 shares of the Company's Common Stock having a fair
market value of $142.8 million based on the July 3, 1995 New York Stock
Exchange closing price. The conversion was accounted for by increasing
shareholders' equity by the $46.4 million value of the option and recording a
$46.4 million non-cash adjustment entitled Conversion of Partner's Interest
into Common Stock below net earnings in the Statement of Operations. There
was therefore no effect to shareholders' equity as a result of this
accounting treatment. The sale to La Quinta of AEW's remaining one-third
interest in LQDP was accounted for as an acquisition of a minority interest
and purchase accounting was applied.
On January 24, 1994, the Company concluded the acquisition of La Quinta
Motor Inns Limited Partnership ("the Partnership" or "LQP"), which owned 31 La
Quinta inns that were managed by the Company. The operations of LQP were
accounted for under the equity method until December 1, 1993, and were included
in the combined financial statements of the Company thereafter. In July 1994,
the Company purchased nine La Quinta inns previously held in two unincorporated
joint ventures with CIGNA Investments, Inc. (the "CIGNA partnerships") in which
the Company held a 1% interest and also managed. Also, during the second
quarter of 1994, the Company purchased the limited partners' interest in one of
the Company's combined unincorporated joint ventures which owned one inn. The
aggregate purchase price of these transactions was $53,255,000 of which a
portion was financed through the Company's credit facilities.
During 1993, the Company acquired, in separately negotiated transactions,
the 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
effected in the form of stock dividends effective in October 1994, March 1994
and October 1993. References to the Company's common stock prior to the October
1993 split are described herein as "pre-split" and references to the Company's
common stock after the October 1994 split are described herein as "post-split".
The following table describes the composition of inns in the La Quinta
chain at:
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------- ---------------------------
LA QUINTA LA QUINTA
EQUIVALENT EQUIVALENT
INNS ROOMS ROOMS (1) INNS ROOMS ROOMS (1)
---- ------ ---------- ---- ------ ----------
Owned 100% (2) ............ 230 29,522 29,522 176 22,296 22,296
Owned 40-80% .............. 7 836 467 50 6,775 2,843
--- ------ ------ --- ------ ------
Total Company owned ....... 237 30,358 29,989 226 29,071 25,139
--- ------ ------ --- ------ ------
--- ------ ------ --- ------ ------
(1) Represents the Company's proportionate ownership interest in system rooms.
(2) At December 31, 1995, includes two inns acquired in 1995 that were closed
for conversion to the La Quinta brand and are expected to re-open in 1996.
JOINT VENTURES AND PARTNERSHIPS. Prior to 1993, La Quinta 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 was 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. Since 1993, the Company has purchased the interests in 18
partnerships and unincorporated joint ventures, including LQDP and the CIGNA
partnerships. In addition, the Company
5
successfully completed the acquisition of LQP in January 1994. At December
31, 1995, the Company had ownership interests between 50% and 67% in seven
unincorporated joint ventures and partnerships.
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, financing, accounting and reporting, purchasing,
quality control, development, legal, reservations and training.
Inn operations are currently organized into Eastern, Western and Central
divisions with each division headed by a Divisional Vice President. Regional
Managers report to the Divisional Vice Presidents and are each responsible for
approximately twelve inns. Regional Managers are responsible for the service,
cleanliness and profitability of the inns in their regions.
Inn 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, each inn manager will supervise one
housekeeping supervisor, eight room attendants, two laundry workers, two general
maintenance persons and three front desk service representatives.
At January 31, 1996, La Quinta employed approximately 6,600 persons, of
whom approximately 89% were compensated on an hourly basis. Approximately 300
individuals were employed at the corporate headquarters and 6,300 were employed
as inn managers and employees. The Company's employees are not currently
represented by labor unions. Management believes its ongoing labor relations
are good.
CUSTOMER BASE AND MARKETING
La Quinta's combination of consistent, high-quality accommodations and good
value is attractive to business customers, who account for nearly 60% of rooms
rented. These core customers typically visit a given area several times a year,
and include salespersons covering a specific territory, government and military
personnel and technicians. The Company also targets both vacation travelers and
senior citizens. For the convenience of these targeted customer groups, inns
are generally located near suburban office parks, major traffic arteries or
destination areas such as airports and convention centers.
La Quinta has developed a strong following among its customers; internal
customer surveys show that the average customer spends 19 nights per year in a
La Quinta inn. The Company focuses a number of its marketing programs on
maintaining a high number of repeat customers. For example, La Quinta promotes
a "Returns-Registered Trademark- Club" offering members preferred status and
rates at La Quinta inns, along with rewards for frequent stays. The Returns
Club had approximately 255,000 members as of December 31, 1995.
The Company focuses on reaching its target markets by utilizing
advertising, direct sales, repeat traveler incentive programs and other
marketing programs targeted at specific customer segments. The Company
advertises primarily through network and local radio and print advertisements
which focus on quality and 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 an upcoming La Quinta inn.
The Company markets directly to companies and other organizations through
its direct sales force of 39 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.
6
The Company provides a central reservation system, "teLQuik-Registered
Trademark-," which currently accounts for advance reservations for approximately
28% of room nights. The teLQuik system allows customers to make reservations by
dialing 1-800-531-5900 toll free, or from reservations phones placed in all La
Quinta inns. The teLQuik system enables guests to make their next night's
reservation from their previous night's La Quinta inn. In addition,
approximately 45% of room nights reflect advance reservations made directly with
individual inns and forwarded to the central reservation system. In total,
advance reservations account for approximately 73% of room nights. 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.
Information regarding inn locations, services and amenities is available on
the Company's Travel Web site at http://www.travelweb.com/laquinta.html, with
reservation capabilities beginning in the Spring of 1996.
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.
In some cases acquisition and conversion of properties is more cost
effective than new construction. However, in markets where inns for acquisition
and conversion are not readily available at attractive discounts to replacement
costs, the Company has begun the selective construction of new inns. During
1995, the Company approved the construction of ten inns which are expected to
open between April and December 1996.
ITEM 2. PROPERTIES
La Quinta inns appeal to guests who desire high-quality rooms, convenient
locations and attractive prices, but who do not require banquet and convention
facilities, in-house restaurants, cocktail lounges or room service. By
eliminating the costs of these management-intensive facilities and services, La
Quinta believes it offers its customers exceptional value by providing rooms
that are comparable in quality to full-service hotels at lower prices.
To maintain the overall quality of La Quinta's inns, 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,
1995, 1994 and 1993, the Company spent approximately $40,000,000 $75,200,000 and
$32,600,000, respectively, on capital improvements to existing inns. The
amounts for 1995 include expenditures related to the Company's Gold Medal rooms
program, while the amounts for 1994 and 1993 include expenditures related to the
Company's image enhancement program. 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 mid-priced hotel
chain.
During 1995, the Company launched its Gold Medal rooms program designed to
strengthen the Company's ability to gain additional market share and pricing
advantage relative to its competitors. The program is intended to improve the
quality, functionality and value of the guest rooms by enhancing the decor
package, including fresh, new colors, rich wood furniture, contemporary
bathrooms, built-in closets, oversized desks, 25 inch televisions and new
draperies and bedspreads. Service enhancements include movies-on-demand,
interactive video games from Nintendo, dataport telephones for computer
connections and greatly expanded free television channel choices. The program
is expected to cost approximately $75 million in excess of normal maintenance
capital expenditures.
7
In 1994, the Company completed an image enhancement program which gave its
properties a new, fresh, crisp appearance while preserving their unique
character. It featured 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 a full lobby renovation
with contemporary furnishings and seating area for the complimentary First
Light breakfast program.
8
At December 31, 1995, there were 237 inns located in 29 states,
concentrated in the Western and Southern United States. The Company had
approved the construction of an additional ten inns, which are scheduled to
open between April and December 1996. The states and cities in which the inns
are located are set forth in the following table:
ALABAMA INDIANA SOUTH CAROLINA VIRGINIA
Birmingham Indianapolis (2) Anderson Bristol
Huntsville (2) Merrillville Charleston Hampton
Mobile Columbia Richmond
Montgomery KANSAS Greenville Virginia Beach
Tuscaloosa Lenexa
Wichita TENNESSEE WASHINGTON
ARIZONA Chattanooga Seattle (2)
Phoenix (3) KENTUCKY Kingsport Tacoma
Tucson (2) Lexington Knoxville (2)
Memphis (3) WYOMING
ARKANSAS LOUISIANA Nashville (3) Casper
Little Rock (5) Baton Rouge Cheyenne
Bossier City TEXAS Rock Springs
CALIFORNIA Kenner Abilene
Bakersfield Lafayette Amarillo (2) OTHER
Costa Mesa Monroe Arlington OWNED INNS
Fresno New Orleans (5) Austin (5) (operated under other
Irvine Slidell Beaumont brands)
La Palma Sulphur Bedford
Redding Brownsville GEORGIA
Sacramento (2) MICHIGAN Clute Columbus
San Bernardino Kalamazoo College Station
San Diego (3) Corpus Christi (2) TEXAS
San Francisco MISSISSIPPI Dallas Metro Area (12) El Paso
Stockton Jackson (2) Del Rio La Marque
Ventura Denton San Antonio
MISSOURI Eagle Pass
COLORADO St. Louis El Paso (3) APPROVED
Colorado Springs Fort Stockton CONSTRUCTION
Denver (7) NEBRASKA Fort Worth (2) LOCATIONS
Omaha Galveston
FLORIDA Georgetown ALABAMA
Coral Springs NEVADA Harlingen Birmingham
Cypress Creek Las Vegas (2) Houston Metro Area (17)
Daytona Beach Reno Huntsville ARIZONA
Deerfield Beach Killeen Flagstaff
Ft. Myers NEW MEXICO Laredo Tucson
Gainesville Albuquerque (3) Longview
Jacksonville (3) Farmington Lubbock (2) COLORADO
Miami Las Cruces Lufkin Denver
Orlando (3) Santa Fe Midland
Pensacola Nacogdoches GEORGIA
Tallahassee (2) NORTH CAROLINA Odessa Macon
Tampa (5) Charlotte (2) Round Rock
San Angelo NORTH CAROLINA
GEORGIA OHIO San Antonio (11) Raleigh
Atlanta (7) Columbus San Marcos
Augusta Temple TEXAS
Columbus OKLAHOMA Texarkana Addison
Savannah (2) Oklahoma City (3) Tyler Austin
Tulsa (3) Victoria Dallas
ILLINOIS Waco Fort Worth
Champaign PENNSYLVANIA Wichita Falls
Chicago Metro Area (5) Pittsburgh
Moline UTAH
Layton
Salt Lake City
9
Typically, food service for La Quinta guests is provided by adjacent, free
standing restaurants. At December 31, 1995, the Company had an ownership
interest in 126 restaurant buildings adjacent to its inns. The restaurant
facilities are owned by the Company or its partnerships and joint ventures,
which own the related inn. 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. At December 31, 1995, the Company's ownership interests in such
restaurants were as follows:
NUMBER OF RESTAURANTS
---------------------
Owned 100% 121
Owned 50-67% 5
---
126
---
---
ITEM 3. LEGAL PROCEEDINGS
In September 1993, a former officer of the Company filed suit against the
Company and certain of its directors and their affiliate companies (the "La
Quinta Defendants"). The suit alleges breach of an employment agreement,
misrepresentation, wrongful termination, self-dealing, breach of fiduciary duty,
usurpation of corporate opportunity and tortious interference with contractual
relations. Compensatory damages of $2,500,000 and exemplary damages of
$5,000,000 are sought in the action. The Court has pending before it the La
Quinta Defendants' motion for summary judgment. The parties subsequently filed
a required, joint Pre Trial Order, in which the plaintiff has conceded a number
of his claims. Currently, no trial date has been set for this action. The
Company will vigorously defend against this suit.
Actions for negligence or other tort claims occur routinely as an ordinary
incident to the Company's business. Lawsuits are pending against the Company
which have arisen in the ordinary course of the business, but none of these
proceedings involves a claim for damages (in excess of applicable excess
umbrella insurance coverages) involving more than 10% of current assets of the
Company. The Company does not anticipate any amounts which it may be required
to pay as a result of an adverse determination of such legal proceedings and the
matter 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 insurance program (the "Paid Loss
Program") for inns owned and managed by the Company for commercial general
liability, automobile liability and workers' compensation and employer's
liability. In addition to the Paid Loss Program, the Company has purchased
excess umbrella liability policies and extended coverage property insurance 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 occurrence of $500,000 for general liability and workers' compensation and
$250,000 for automobile coverage. All pro rata expenses and premiums under the
Paid Loss Program and such other insurance as is customarily obtained 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.
10
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 splits effected in the form of stock dividends in October 1994 and
March 1994, of the Company's Common Stock for each of the quarters during the
years ended December 31, 1995 and 1994 is set forth below:
1995 1994
----------------------------- ---------------------------
PER SHARE PER SHARE
HIGH LOW DIVIDEND HIGH LOW DIVIDEND
------- ------- -------- ------- ------- --------
First Quarter . . . .$29 $19 5/8 $.025 $20 7/8 $12 7/8 $.025
Second Quarter. . . . 30 1/4 25 1/4 .025 21 5/8 16 7/8 .025
Third Quarter . . . . 30 3/4 26 1/4 .025 24 3/8 17 .025
Fourth Quarter. . . . 29 1/2 24 5/8 .025 25 3/4 19 1/8 .025
During 1995 and 1994, the Company paid quarterly cash dividends in the
amount of $.025 per share under its quarterly dividend policy as authorized
by the Board of Directors. For restrictions on the Company's present or
future ability to pay cash dividends, see note 3 of Notes to Combined
Financial Statements. The declaration and payment of dividends in the
future will be determined by the Board of Directors based upon the Company's
earnings, financial condition, capital requirements and such other factors as
the Board of Directors may deem relevant.
As of January 31, 1996, the approximate number of holders of record of
the Company's Common Stock was 1,007.
11
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31
-------------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, RATIOS, AND INN STATISTICS)
STATEMENT OF OPERATIONS DATA
Total revenues . . . . . . . . . . . . . . . . . . . . . .$ 413,919 $ 362,242 $ 271,850 $254,122 $240,888
Direct and corporate operating costs and expenses . . . . . 227,675 213,405 168,021 156,529 154,846
Depreciation, amortization and asset retirements. . . . . . 40,951 38,080 24,055 24,793 35,201
Provision for premature retirement of assets. . . . . . . . 12,630 - - - -
Performance stock option . . . . . . . . . . . . . . . . . - - 4,407 - -
Non-recurring cash and non-cash charges (3) . . . . . . . . - - - 38,225 7,952
Operating income . . . . . . . . . . . . . . . . . . . . . 132,663 110,757 75,367 34,575 42,889
Net interest expense . . . . . . . . . . . . . . . . . . . 39,442 37,439 26,219 27,046 30,271
Earnings (loss) before extraordinary items and
cumulative effect of accounting change . . . . . . . . . . 51,374 37,815 19,420 (7,796) 1,398
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . 50,657 37,815 20,301 (8,754) 129
Conversion of partner's interest into common stock (7) . . (46,364) - - - -
Earnings (loss) per share after conversion of partner's
interest into common stock and before extraordinary
items and cumulative effect of accounting change (2). . . .10 .78 .41 (.17) .03
Net earnings (loss) available to shareholders per
share (2) . . . . . . . . . . . . . . . . . . . . . . . . .08 .78 .43 (.19) -
OTHER DATA
Construction, purchase and conversion of inns . . . . . . . 77,502 34,690 38,858 4,060 15,487
Other capital expenditures (4). . . . . . . . . . . . . . . 39,962 75,248 32,623 15,529 13,803
Purchase of partners' equity interests (5). . . . . . . . . 48,200 53,255 78,169 - 3,546
Net cash provided by operating activities . . . . . . . . . 128,798 94,233 78,043 60,853 54,270
Net cash used by investing activities . . . . . . . . . . . (158,828) (156,492) (145,027) (15,166) (35,083)
Net cash provided (used) by financing activities. . . . . . 30,031 41,000 77,971 (40,781) (24,642)
Cash dividends declared per common share. . . . . . . . . . .10 .10 .05 - -
EBITDA (6). . . . . . . . . . . . . . . . . . . . . . . . . 186,244 148,837 103,829 97,593 86,042
BALANCE SHEET DATA
Total assets. . . . . . . . . . . . . . . . . . . . . . . . 964,115 845,781 749,495 539,183 574,687
Shareholders' equity. . . . . . . . . . . . . . . . . . . . 331,713 189,231 149,057 124,321 130,175
Partners' capital . . . . . . . . . . . . . . . . . . . . . 6,309 92,099 85,976 62,060 50,471
Current installments of long-term debt. . . . . . . . . . . 13,322 39,976 22,491 21,711 22,116
Long-term debt, excluding current installments. . . . . . . 518,416 448,258 414,004 274,824 316,014
Combined effective debt-to-equity ratio (1) . . . . . . . . 1.53 1.59 1.76 1.47 1.75
OPERATING DATA
Inns owned (8). . . . . . . . . . . . . . . . . . . . . . . 237 226 211 169 168
Inns managed. . . . . . . . . . . . . . . . . . . . . . . . - - 9 40 40
------- ------- ------- ------- -------
Number of inns. . . . . . . . . . . . . . . . . . . . . . . 237 226 220 209 208
Occupancy percentage. . . . . . . . . . . . . . . . . . . . 70.8% 70.1% 65.1% 65.6% 64.8%
Average daily room rate . . . . . . . . . . . . . . . . . . $ 51.07 $ 47.65 $ 46.36 $ 44.33 $ 43.11
_____________________________
12
(1) Ratio of long-term debt, excluding current installments, to partners'
capital plus shareholders' equity at year end.
(2) 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.
(3) 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.
(4) The December 31, 1995 capital expenditures include costs related to
the Company's Gold Medal rooms program, while the December 31, 1994 and
1993 capital expenditures include costs related to the Company's image
enhancement program.
(5) Purchase of partners' equity interests in 1995 is related to the
acquisition of LQDP, while purchase of partners' equity interests in 1994
and 1993 includes approximately $9,672,000 and $42,091,000, respectively,
related to the acquisition of LQP.
(6) EBITDA is defined as earnings before net interest expense, income
taxes, depreciation, amortization and asset retirements, provision for
premature retirement of assets, extraordinary items, partners' equity in
earnings and losses, gain or loss on property transactions and other
non-recurring cash and non-cash charges and performance stock
option. This definition differs from the traditional EBITDA definition
which does not include adjustments for extraordinary items, partners'
equity in earnings and losses, provision for premature retirement of
assets, gain or loss on property transactions and other non-recurring
cash and non-cash charges and performance stock option as follows:
1995 1994 1993 1992 1991
------- ------- ------- ------- ------
Extraordinary items ............................. $ 717 $ - $ 619 $ 958 $1,269
Partners' equity in earnings and losses ......... 10,227 11,406 12,965 15,081 9,421
(Gain) loss on property transactions ............ - (79) 4,347 (282) 1,012
Provision for premature retirement of assets .... 12,630 - - - -
Non-recurring cash and non-cash charges
and performance stock option .................. - - 4,407 38,225 7,952
EBITDA is not intended to represent cash flow or any other measure of
performance in accordance with generally accepted accounting principles
("GAAP"). EBITDA, as defined above, is included herein because management
believes that certain investors find it to be a useful tool for measuring
the ability to service debt.
(7) Conversion of partner's interest into common stock is a non-recurring,
non-cash item related to the AEW Transaction. (See note 15 of Notes to
Combined Financial Statements.)
(8) As of December 31, 1995, the Company owns and operates 230 inns
through wholly-owned subsidiaries and partnerships and 7 inns through
combined unincorporated partnerships and joint ventures.
13
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. References to "Managed
Inns" are to those inns in which the Company owns less than a 40% interest and
which were managed by the Company under long-term management contracts.
During 1995, the Company launched its Gold Medal rooms program designed to
strengthen the Company's ability to gain additional market share and pricing
advantage relative to its competitors. The program is intended to improve the
quality, functionality and value of guest rooms by enhancing the decor package,
including fresh, new colors, rich wood furniture, contemporary bathrooms, built-
in closets, oversized desks, 25 inch televisions and new draperies and
bedspreads. Service enhancements include movies-on-demand, interactive video
games from Nintendo, dataport telephones for computer connections and greatly
expanded free television channel choices.
As of January 31, 1996, a total of 70 inns had either been completed or
were undergoing construction related to the Gold Medal rooms program. The
Company anticipates completing a total of 10,000 rooms by Spring 1996. The
program requires 20-30 rooms at a time to be taken out of available supply at an
inn during the construction period. Construction activities at each inn are
completed within 10-12 weeks. The Company does not adjust its available rooms
or occupancy percentage for rooms unavailable due to construction as a result of
this program.
The Company acquired eleven inns during the year ended December 31, 1995
and six inns during the year ended December 31, 1994 for conversion to the La
Quinta brand. In some cases acquisition and conversion of properties is more
cost effective than new construction. However, in markets where inns for
acquisition and conversion are not readily available at attractive discounts to
replacement costs, the Company has begun the selective construction of new inns.
During 1995, the Company approved the construction of ten inns which are
expected to open between April and December 1996.
On June 15, 1995, AEW Partners, L.P. ("AEW") notified the Company that it
would exercise, subject to certain conditions, its option to convert two-thirds
of its ownership interest in La Quinta Development Partners, L.P. ("LQDP") into
5,299,821 shares of the Company's Common Stock. AEW also agreed to sell the
remaining one-third of its ownership interest in LQDP to the Company for a
negotiated price of $48.2 million in cash (collectively, the "AEW Transaction").
The AEW Transaction was consummated on July 3, 1995. Upon conversion of the
partnership interest into La Quinta Common Stock, the Company issued 5,299,821
shares of the Company's Common Stock having a fair market value of $142.8
million based on the July 3, 1995 New York Stock Exchange closing price. The
conversion was accounted for by increasing shareholders' equity by the $46.4
million value of the option and recording a $46.4 million non-recurring, non-
cash adjustment entitled Conversion of Partner's Interest into Common Stock
below net earnings in the Statement of Operations. There was therefore no net
effect to shareholders' equity as a result of this accounting treatment. The
sale to La Quinta of AEW's remaining one-third interest in LQDP was accounted
for as an acquisition of a minority interest and purchase accounting was
applied.
On July 1, 1994, the Company purchased nine inns which it managed and which
were previously held in two unincorporated joint ventures with CIGNA
Investments, Inc. (the "CIGNA partnerships"). The Company has continued to
operate these properties as La Quinta inns.
On January 24, 1994, the Company concluded the acquisition of LQP which
owned 31 inns managed by the Company. The operations of LQP were accounted for
under the equity method until December 1, 1993, and were included in the
Combined Financial Statements of the Company thereafter.
14
The following chart shows certain historical operating statistics and
revenue data. References to occupancy percentages and average daily rate
("ADR") refer to Company Inns (inns owned by the Company or by unincorporated
partnerships and joint ventures in which the Company owns at least a 40%
interest). Managed Inns are excluded from occupancy and ADR statistics for all
periods for purposes of comparability. All financial data is related to Company
Inns unless otherwise specified.
COMPARATIVE OPERATING STATISTICS AND REVENUE DATA
-------------------------------------------------
YEARS ENDED DECEMBER 31
---------------------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT RATES AND PERCENTAGES)
Room revenue $390,449 $340,230 $248,459
Other inn revenue 15,245 13,118 10,070
-------- -------- --------
Total inn revenue 405,694 353,348 258,529
Restaurant rental and other 8,071 7,675 6,464
Management services 154 1,219 6,857
-------- -------- --------
Total revenue $413,919 $362,242 $271,850
-------- -------- --------
-------- -------- --------
Percentage of occupancy 70.8% 70.1% 65.1%
ADR $ 51.07 $ 47.65 $ 46.36
Available rooms (1) 10,793 10,188 8,226
____________________________
(1) Available rooms represent the number of rooms available for sale multiplied
by the number of days in the period reported.
YEAR ENDED DECEMBER 31, 1995
COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL REVENUES increased to $413,919,000 in 1995 from $362,242,000 in 1994,
an increase of $51,677,000, or 14.3%. Of the total revenues reported in 1995,
98.0% were revenues from inns and 2.0% were revenues from restaurant rentals and
other revenue.
INN REVENUES are derived from room rentals and other sources such as
charges to guests for long-distance telephone service, fax machine use, vending
commissions, banquet revenues and laundry services. Inn revenues increased to
$405,694,000 in 1995 from $353,348,000 in 1994, an increase of $52,346,000, or
14.8%. The increase in inn revenues was due primarily to an increase in
occupancy percentage and ADR along with the revenues associated with the
acquisition of 9 operating inns in 1995, the CIGNA partnerships in July 1994 and
six inns in the last half of 1994. Occupancy percentage increased to 70.8% in
1995 from 70.1% in 1994. ADR increased to $51.07 in 1995 from $47.65 in 1994.
Revenue per available room ("REVPAR", which is the product of occupancy
percentage and ADR) increased 8.3% over 1994. Improvements are due, in part, to
the substantial completion of the Company's image enhancement program in mid-
1994.
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 increased to $8,071,000 in 1995 from $7,675,000 in
1994, an increase of $396,000, or 5.2%. This increase is primarily the result
of the additional restaurant buildings owned by the Company through the
acquisition of the CIGNA partnerships.
MANAGEMENT SERVICES revenue is primarily related to fees earned by the
Company for services rendered in conjunction with Managed Inns. Management
services revenue decreased to $154,000 in 1995 from $1,219,000 in 1994. The
decrease is due to the acquisition of the CIGNA partnerships in July 1994,
eliminating the related management fees earned by the Company.
DIRECT EXPENSES include costs directly associated with the operation of
Company Inns. In 1995, approximately 42.0% of direct expenses were represented
by salaries, wages, and related costs. Other major categories of direct
expenses include utilities, property taxes, repairs and maintenance and room
supplies. Direct
15
expenses increased to $209,153,000 ($27.36 per occupied room) in 1995
compared to $194,894,000 ($27.30 per occupied room) in 1994, an increase of
$14,259,000, or 7.3%. The increase in direct expenses period over period is
primarily attributable to the growth in number of inns. As a percent of
total revenues, direct expenses decreased to 50.5% in 1995 from 53.8% in 1994.
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. Corporate expenses increased to
$18,522,000 ($1.72 per available room) in 1995 from $18,511,000 ($1.78 per
available room, including Managed Inns) in 1994. As a percent of total
revenues, corporate expenses decreased to 4.5% in 1995 from 5.1% in 1994.
DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS increased to $40,951,000
in 1995 from $38,080,000 in 1994, an increase of $2,871,000, or 7.5%. This is
due primarily to the increase in fixed assets resulting from the acquisition of
inns, partnerships and additions from the image enhancement program, which was
substantially complete by the end of 1994. The increase is partially offset by
a reduction in depreciation on assets which became fully depreciated during
1995. Depreciation, amortization and asset retirements also includes asset
retirements associated with the image enhancement program and other capital
improvements.
A PROVISION FOR PREMATURE RETIREMENT OF ASSETS totaling $12,630,000 was
recorded during 1995. This non-cash charge is directly attributable to the
Company's Gold Medal rooms program. During the program, the Company will be
replacing certain furniture and fixtures before the end of their normal useful
lives and has therefore made adjustments to reflect shorter remaining lives. As
a result, the Company will record non-cash provisions for premature retirement
of assets totaling approximately $17,000,000, with the remaining $4,370,000 to
be reported in 1996.
As a result of the above, OPERATING INCOME increased to $132,663,000 in
1995 from $110,757,000 in 1994, an increase of $21,906,000, or 19.8%. Operating
income before the provision for premature retirement of assets increased to
$145,293,000 in 1995 from $110,757,000 in 1994, an increase of $34,536,000, or
31.2%.
INTEREST INCOME primarily represents earnings on notes receivable and on
the short-term investment of Company funds in money market instruments prior to
their use in operations or the acquisition of inns. Interest income decreased
to $979,000 in 1995 from $1,421,000 in 1994, a decrease of $442,000, or 31.1%.
The decrease in interest income is primarily attributable to the decrease in
notes receivable.
INTEREST ON LONG-TERM DEBT increased to $40,421,000 in 1995 from
$38,860,000 in 1994, an increase of $1,561,000, or 4.0%. The increase is
primarily attributable to the increase in the outstanding balance on the
Company's credit facilities as a result of the AEW Transaction and the
acquisitions of the CIGNA partnerships and 17 inns since June 1994. While long-
term debt, including current installments has increased, the Company's weighted
average interest rate on long-term borrowings decreased due to favorable
interest rates negotiated in the Amended Credit Facility and the issuance of the
7.4% Senior Notes due 2005, along with improved market conditions.
PARTNERS' EQUITY IN EARNINGS reflects the interests of partners in the
earnings of the combined joint ventures and partnerships which are owned at
least 40% and controlled by the Company. Partners' equity in earnings decreased
to $10,227,000 in 1995 from $11,406,000 in 1994, a decrease of $1,179,000, or
10.3%. This decrease is primarily attributable to the elimination of LQDP's
equity in earnings for the last half of 1995 and is partially offset by
increases in LQDP's equity in earnings during the first half of 1995.
INCOME TAXES for 1995 were calculated using an estimated effective tax rate
of 38.1% compared to an effective income tax rate of 39.0% for 1994. The
Company's annual income tax rate in 1995 reflects the impact of the difference
between aggregate recorded cost and tax basis of acquired assets from the AEW
Transaction. The reduction in the annual effective income tax rate also
reflects a reduction of the estimated state income tax rate.
16
For the reasons discussed above, the Company reported EARNINGS BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE of $51,374,000 in
1995 compared with $37,815,000 in 1994, an increase of $13,559,000, or 35.9%.
Earnings before extraordinary items and cumulative effect of accounting change
before the provision for premature retirement of assets increased $21,377,000,
or 56.5% to $59,192,000 in 1995 from $37,815,000 in 1994.
EXTRAORDINARY ITEMS, NET OF TAX, of ($717,000) or ($.02) per share, were
recorded during 1995 and resulted primarily from prepayment fees related to the
early extinguishment of approximately $16,800,000 of long-term mortgage debt
with an average interest rate of 10.3%.
For the reasons discussed above, the Company reported NET EARNINGS of
$50,657,000 in 1995 compared with $37,815,000 in 1994, an increase of
$12,842,000, or 34.0%.
During 1995, the Company recorded a non-cash, non-recurring charge of
$46,364,000 as CONVERSION OF PARTNER'S INTEREST INTO COMMON STOCK which was
directly attributable to the AEW Transaction. This charge reduced NET EARNINGS
AVAILABLE TO SHAREHOLDERS to $4,293,000, or $.08 per share, in 1995 from
$37,815,000, or $.78 per share in 1994.
YEAR ENDED DECEMBER 31, 1994
COMPARED TO YEAR ENDED DECEMBER 31, 1993
TOTAL REVENUES increased to $362,242,000 in 1994 from $271,850,000 in 1993,
an increase of $90,392,000, or 33.3%. Of the total revenues reported in 1994,
97.6% were revenues from inns, 2.1% were revenues from restaurant rentals and
other revenue and 0.3% were revenues from management services.
INN REVENUES increased to $353,348,000 in 1994 from $258,529,000 in 1993,
an increase of $94,819,000, or 36.7%. The increase in inn revenues was due
primarily to the acquisitions of LQP and the CIGNA partnerships, an increase in
average room rate and occupancy and an increase in the number of available
rooms. The average room rate increased to $47.65 in 1994 from $46.36 in 1993,
an increase of $1.29 or 2.8%, while occupancy increased 5 percentage points.
The completion of the Company's image enhancement program contributed to the
increases in average room rate and occupancy. Available rooms for 1994 were
10,188,000 as compared to 8,226,000 for 1993, an increase of 1,962,000 available
rooms, or 23.9%. The increase in the number of available rooms was due to the
acquisitions of five operating inns and the CIGNA partnerships during 1994 and
LQP in December of 1993.
RESTAURANT RENTAL AND OTHER REVENUES increased to $7,675,000 in 1994 from
$6,464,000 in 1993, an increase of $1,211,000, or 18.7%. This increase is
primarily the result of an increase in the number of Company owned restaurants
leased to and operated by third parties due to the acquisitions of LQP and the
CIGNA partnerships.
MANAGEMENT SERVICES revenue decreased to $1,219,000 in 1994 from $6,857,000
in 1993. Management fees decreased due to the consolidation of LQP in December
1993 and the acquisition of the CIGNA partnerships in July 1994 eliminating the
related management fees earned by the Company.
In 1994, approximately 41.9% of DIRECT EXPENSES were represented by
salaries, wages, and related costs. Direct expenses increased to $194,894,000
($27.30 per occupied room) in 1994 compared to $148,571,000 ($27.72 per occupied
room) in 1993, an increase of $46,323,000, or 31.2%. Direct expenses decreased
to 53.8% in 1994 from 54.7% in 1993 as a percent of total revenue primarily from
a decrease in salaries and related benefit costs and property taxes. The
acquisitions of LQP and the CIGNA partnerships caused the increase of direct
expense in total year over year .
CORPORATE EXPENSES decreased to $18,511,000 ($1.78 per available room,
including Managed Inns) in 1994 from $19,450,000 ($1.96 per available room,
including Managed Inns) in 1993, a decrease of $939,000, or 4.8%. As a percent
of total revenues, corporate expenses decreased to 5.1% in 1994 from 7.2% in
1993.
17
PERFORMANCE STOCK OPTION relates to the cost 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. In 1993, performance stock option
expense and certain other options were accelerated as a result of this condition
being met (See note 7 of Notes to the Combined Financial Statements).
Currently, the Company has no options outstanding that require recognition of
additional compensation expense.
DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS increased to $38,080,000
in 1994 from $24,055,000 in 1993, an increase of $14,025,000, or 58.3%. The
increase in depreciation, amortization and fixed asset retirements is primarily
due to the increase in depreciable assets resulting from the acquisitions of
LQP, the CIGNA partnerships, five inns in 1994 and eleven inns in the latter
part of 1993 and the Company's image enhancement program. Depreciation,
amortization and fixed asset retirements also includes asset retirements
associated with the Company's refurbishment program and other capital
improvements.
OPERATING INCOME increased to $110,757,000 in 1994 from $75,367,000 in
1993, an increase of $35,390,000, or 47.0%.
INTEREST INCOME decreased to $1,421,000 in 1994 from $5,147,000 in 1993, a
decrease of $3,726,000, or 72.4%. The decrease in interest income is primarily
attributable to a decrease in interest earned on a note receivable from AEW
Partners (the "AEW Note") due to the collection of the entire principal balance
in December 1993.
INTEREST ON LONG-TERM DEBT increased to $38,860,000 in 1994 from
$31,366,000 in 1993, an increase of $7,494,000, or 23.9%. The increase in
interest expense is attributable to the debt incurred to acquire LQP, the CIGNA
partnerships and certain of the limited partners' interests and debt assumed
with the acquisition of LQP.
PARTNERS' EQUITY IN EARNINGS decreased to $11,406,000 in 1994 from
$12,965,000 in 1993, a decrease of $1,559,000, or 12.0%. The decrease in
partners' equity in earnings is attributable to the acquisition of various
limited partners' interests in unincorporated partnerships and joint ventures
partially offset by increases in the earnings of LQDP. As of December 31, 1994,
LQDP operated 42 inns compared to 37 inns as of December 31, 1993.
NET (GAIN) LOSS ON PROPERTY TRANSACTIONS increased to a gain of ($79,000)
in 1994 from a loss of $4,347,000 in 1993. 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 1994 were calculated using an estimated effective tax rate
of 39%.
For the reasons discussed above, the Company reported EARNINGS BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE of $37,815,000 in
1994 compared with $19,420,000 in 1993, an increase of $18,395,000, or 94.7%.
The Company reported EXTRAORDINARY ITEMS, NET OF INCOME TAXES of ($619,000)
in 1993. The 1993 extraordinary loss consisted of ($6,007,000), ($3,664,000)
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 $.03 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
$37,815,000 in 1994 compared with $20,301,000 in 1993, an increase of
$17,514,000, or 86.3%.
CAPITAL RESOURCES AND LIQUIDITY
During the year ended December 31, 1995, the Company's capital needs were
met primarily through operating cash flows and through the issuance of $100
million of 7.4% Senior Unsecured Notes due 2005 and
18
borrowings under its $250 million Bank Unsecured Credit Facilities. During
the year ended December 31, 1994, the Company funded its capital needs
primarily through operating cash flows and through the Company's and LQDP's
existing bank credit facilities.
At December 31, 1995, the Company had a $200 million Bank Unsecured Line of
Credit and a $50 million 364-Day Bank Unsecured Line of Credit (the "Bank
Unsecured Credit Facilities"). The $200 million Bank Unsecured Line of Credit
matures August 2000 and the $50 million 364-Day Bank Unsecured Line of Credit
matures September 1996. At December 31, 1995, the Company had $66,319,000
available on its Bank Unsecured Credit Facilities, net of $6,681,000 of letters
of credit collateralizing its insurance programs and certain mortgages. The
Bank Unsecured Credit Facilities bear interest at the prime rate or LIBOR,
adjusted for an applicable margin, as defined under the related credit
agreements. The applicable margin is based upon predetermined levels of cash
flow to indebtedness or credit ratings received from specified credit rating
agencies, also, as defined in the related credit agreements. At December 31,
1995, borrowings under the Bank Unsecured Credit Facilities bear interest at
LIBOR plus 45 basis points on $172,000,000 of outstanding borrowings and the
prime rate less 50 basis points on $5,000,000 of outstanding borrowings. The
Credit Facilities require an annual commitment fee of 20 basis points on the
$200 million Bank Unsecured Line of Credit and 15 basis points on the $50
million 364-Day Bank Unsecured Line of Credit.
In September 1995, the Company issued $100 million of Senior Unsecured
Notes, which bear interest at 7.4% and mature September 2005.
At December 31, 1995, the Company had $2,590,000 of cash and cash
equivalents, compared to $2,589,000 at December 31, 1994.
On January 19, 1996, La Quinta filed a shelf registration statement with
the Securities and Exchange Commission which would allow the Company to issue up
to $250 million principal amount of Debt Securities. The registration statement
became effective on January 25, 1996. The Company is currently proposing to
issue up to $150 million in principal amount of Debt Securities at terms
dependent upon market conditions at the time of issuance. No assurance can be
given that these proposed transactions will be consummated.
On January 23, 1992 with the approval of the Company's Board of Directors,
the Company entered two interest rate swap agreements (the "Agreements") which
exchanged the Company's variable rate interest payments for the fixed rate
interest payments of a major financial institution (the "Counterparty"). The
debt ("Notional Amount") underlying the Agreements was $16,890,000 and
$44,420,000. Under the Agreements, the Company effectively pays a fixed rate of
interest at 6.50% and 5.26% and the Counterparty pays a percentage of prime
interest rate and the variable rate demand note interest rate ("VRDN"). In the
event the VRDN rate exceeds the fixed interest rate of 5.26% or the percentage
of prime interest rate exceeds 6.50%, the Counterparty pays to the Company that
difference times the Notional Amount, on a monthly basis. Should the fixed
interest rate of 5.26% exceed the VRDN interest rate or the fixed interest rate
of 6.50% exceeds the percentage of prime interest rate, the Company pays the
difference times the Notional Amount to the Counterparty, on a monthly basis.
These Agreements resulted in net payments to the Counterparty of $442,000,
$1,040,000 and $1,427,000 in the years ended December 31, 1995, 1994 and 1993,
respectively. The Agreements expire on February 1, 1997, and the Notional
Amounts are reduced over the life of the Agreements by scheduled amortization
payments. At December 31, 1995, the Notional Amounts of debt remaining under
the Agreements are $8,896,000 and $33,250,000 which bear interest at a weighted
average variable interest rate of 6.54% and 4.55%, respectively.
The Company is exposed to market risk associated with fluctuations in
interest rates. By entering the interest rate swap agreements, described above,
the Company reduced its exposure to rising interest rates on the aforementioned
variable interest rate debt and has effectively fixed the rate on such debt at a
level acceptable to the Company given the length of the Agreements and the risk
of interest rate changes. The Company is exposed to credit risk to the extent
that the Counterparty fails to perform under the Agreements. The Company has
mitigated its credit risk by entering the Agreements with a major financial
institution, which has received an "A" rating from Standard and Poor's Ratings
Group and an "A2" rating from Moody's Investors Service, Inc. on senior
unsecured
19
debt. The Company regularly monitors the credit ratings of the Counterparty
and considers the risk of default remote.
As a result of the VRDN rate increasing to 4.37% at December 31, 1995 from
4.32% at December 31, 1994 and the fluctuation in the prime rate during the
year, the estimated fair value of the interest rate swap agreements changed to a
net payable position of $402,000 at December 31, 1995 from a net receivable
position of $494,000 at December 31, 1994.
Net cash provided by operating activities increased to $128.8 million in
1995 from $94.2 million in 1994, an increase of $34.6 million or 36.7%. In
1994, net cash provided by operating activities increased by $16.2 million or
20.7% from $78.0 million in 1993. The increase in net cash provided by
operating activities in both 1995 and 1994 was the result of improved REVPAR,
which increased by 8.3% in 1995 and 10.7% in 1994, and increases in accrued
expenses in both years.
Net cash used by investing activities of $158.8 million in 1995 reflects
the impact of the AEW Transaction, the acquisition and conversion of eleven
inns, cost related to the new inn construction projects and the Gold Medal rooms
program. Net cash used in investing activities of $156.5 million in 1994
reflects cash used for completion of the image enhancement program, the purchase
and conversion of inns, the purchase of the remaining partnership units of LQP
and the acquisition of the CIGNA partnerships.
Net cash provided by financing activities was $30.0 million in 1995
compared to $41.0 million in 1994. The decrease was due to improvement in net
cash provided by operating activities and a stabilization of cash used by
investing activities. Net cash provided by financing activities was
$41.0 million in 1994 compared with $78.0 million in 1993. The decrease was
primarily the result of the collection of the AEW Note of approximately
$36 million in 1993.
During 1995 and 1994, the Board of Directors authorized a series of plans
for the repurchase of up to a total of $30,000,000 of the Company's common
stock. Repurchases of 482,000 shares for approximately $7,115,000 and 373,200
shares (post-split) for approximately $12,244,000 were made under these plans
during 1995 and 1994, respectively. Additional repurchases will be made from
time to time as deemed appropriate by the Company. During January 1996, the
Board of Directors, through a resolution independent of the $30,000,000 series
of repurchase plans, approved a private transaction for the repurchase of
$11,500,000 of the Company's common stock from a related party (see note 16 of
Notes to Combined Financial Statements).
COMMITMENTS
The estimated additional cost to complete the Gold Medal rooms program,
room additions of inns, conversion of acquired inns and construction of new inns
for which commitments have been made is approximately $82,134,000 at December
31, 1995, of which $22,963,000 relates to the Gold Medal rooms program.
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 future cash flows and amounts available on
the Company's Bank Unsecured Credit Facilities are sufficient to fund
operating expenses, debt service and other capital requirements through at
least the end of 1996. The Company will evaluate from time to time the
necessity of other financing alternatives.
20
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.
ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement, which
is effective for fiscal years beginning after December 15, 1995, requires that
an entity evaluate long-lived assets and certain other identifiable intangible
assets for impairment whenever events or changes in circumstances indicate that
the carrying amount of the asset may not be recoverable. An impairment loss
meeting the recognition criteria is to be measured as the amount by which the
carrying amount for financial reporting purposes exceeds the fair value of the
asset. The Company plans to adopt this statement in 1996 and does not expect
adoption of the statement to have a material effect, if any, on the Company's
financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15, 1995.
This statement defines a fair value method of accounting for employee stock
options and encourages entities to adopt that method of accounting for its
stock compensation plans. Statement 123 allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by Accounting Pronouncement Bulletin Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company plans to continue
to account for its employee stock compensation plans as prescribed under Opinion
25 and will make the pro forma disclosures of net income and earnings per share
required by Statement 123 beginning with its financial statements for the year
ended December 31, 1996. The Company does not anticipate the implementation of
Statement 123 to have a material adverse impact on the Company's financial
position or results of operations.
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 of the
Company in the three most recent years.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LA QUINTA INNS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
DECEMBER 31
------------------------
ASSETS 1995 1994
---------- ----------
Current assets:
Cash and cash equivalents..................................................... $ 2,590 $ 2,589
Receivables (net of allowance of $118 and $441) ............................... 12,789 12,548
Supplies and prepayments ...................................................... 9,602 8,676
Deferred income taxes (note 6)................................................. 8,981 7,223
---------- ----------
Total current assets....................................................... 33,962 31,036
---------- ----------
Notes receivable, excluding current installments (net of allowance
of $2,171 and $3,351)........................................................ 3,240 7,320
Property and equipment, net (notes 2, 3, 9 and 15)............................... 915,750 793,928
Deferred charges and other assets, at cost less applicable amortization.......... 11,163 13,497
---------- ----------
Total assets............................................................... $ 964,115 $ 845,781
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (notes 3 and 15)........................ $ 13,322 $ 39,976
Accounts payable (note 4)...................................................... 32,758 20,319
Accrued expenses (note 4)...................................................... 40,915 33,773
---------- ----------
Total current liabilities.................................................. 86,995 94,068
---------- ----------
Long-term debt, excluding current installments (notes 3 and 15).................. 518,416 448,258
Deferred income taxes, pension and other (notes 6 and 8)......................... 20,682 22,125
Partners' capital (notes 5 and 15)............................................... 6,309 92,099
Shareholders' equity (notes 3, 7 and 8):
Common stock ($.10 par value; 100,000,000 shares authorized; 54,882,890
and 48,758,528 shares issued)................................................. 5,488 4,876
Additional paid-in capital..................................................... 222,221 68,759
Retained earnings.............................................................. 133,745 134,409
Minimum pension liability...................................................... - (1,474)
Treasury stock, at cost (2,849,035 and 2,361,366 shares) (note 16)............. (29,741) (17,339)
---------- ----------
Total shareholders' equity................................................. 331,713 189,231
---------- ----------
Commitments and contingencies (notes 3, 9, 10 and 11)
Total liabilities and shareholders' equity................................. $ 964,115 $ 845,781
---------- ----------
---------- ----------
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
---------------------------------
1995 1994 1993
-------- -------- --------
Revenues:
Inn.................................................................. $405,694 $353,348 $258,529
Restaurant rental and other.......................................... 8,071 7,675 6,464
Management services (notes 13 and 15)................................ 154 1,219 6,857
-------- -------- --------
Total revenues.................................................... 413,919 362,242 271,850
-------- -------- --------
Operating costs and expenses:
Direct............................................................... 209,153 194,894 148,571
Corporate............................................................ 18,522 18,511 19,450
Performance stock option (note 7).................................... - - 4,407
Depreciation, amortization and asset retirements (note 2)............ 40,951 38,080 24,055
Provision for premature retirement of assets (note 2)................ 12,630 - -
-------- -------- --------
Total operating costs and expenses................................ 281,256 251,485 196,483
-------- -------- --------
Operating income.................................................. 132,663 110,757 75,367
-------- -------- --------
Other (income) expense:
Interest income...................................................... (979) (1,421) (5,147)
Interest on long-term debt........................................... 40,421 38,860 31,366
Partners' equity in earnings (note 5)................................ 10,227 11,406 12,965
Net (gain) loss on property transactions (note 3).................... - (79) 4,347
-------- -------- --------
Earnings before income taxes, extraordinary items and
cumulative effect of accounting change........................... 82,994 61,991 31,836
Income taxes (note 6)................................................. 31,620 24,176 12,416
-------- -------- --------
Earnings before extraordinary items and cumulative effect of
accounting change................................................ 51,374 37,815 19,420
Extraordinary items, net of income taxes (note 3)..................... (717) - (619)
-------- -------- --------
Earnings before cumulative effect of accounting change............ 50,657 37,815 18,801
Cumulative effect of accounting change (note 1)....................... - - 1,500
-------- -------- --------
Net earnings...................................................... 50,657 37,815 20,301
Conversion of partner's interest into common stock (note 15).......... (46,364) - -
-------- -------- --------
Net earnings available to shareholders............................ $ 4,293 $ 37,815 $ 20,301
-------- -------- --------
-------- -------- --------
Earnings per common and common equivalent share:
Earnings after conversion of partner's interest into common
stock and before extraordinary items and cumulative effect of
accounting change................................................ $ .10 $ .78 $ .41
Extraordinary items, net of income taxes.......................... (.02) - (.01)
Cumulative effect of accounting change............................ - - .03
-------- -------- --------
Net earnings available to shareholders............................ $ .08 $ .78 $ .43
-------- -------- --------
-------- -------- --------
Weighted average number of common and common equivalent
shares outstanding, as restated (note 7)............................ 51,977 48,624 47,306
-------- -------- --------
-------- -------- --------
See accompanying notes to combined financial statements.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
23
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
COMMON STOCK TREASURY STOCK ADDITIONAL MINIMUM
-------------- ---------------- PAID-IN RETAINED PENSION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS LIABILITY TOTAL
------ ------ ------ ------ --------- -------- --------- -----
Balances at December 31, 1992 . . . . . . . . 14,668 $1,467 (1,273) $(14,668) $ 56,749 $ 80,773 $ - $124,321
Effect of stock split at October 1, 1993. . 6,740 674 - - (674) - - -
Effect of stock split at March 15, 1994 . . 10,703 1,070 (578) - (1,070) - - -
Stock options . . . . . . . . . . . . . . . - - 118 1,340 5,568 - - 6,908
Dividends paid ($.05 per share) . . . . . . - - - - - (1,015) - (1,015)
Net earnings. . . . . . . . . . . . . . . . - - - - - 20,301 - 20,301
Minimum pension liability . . . . . . . . . - - - - - - (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
Effect of stock split at October 25, 1994 . 16,163 1,616 (717) - (1,616) - - -
Stock options . . . . . . . . . . . . . . . 485 49 412 3,104 9,802 - - 12,955
Purchase of treasury stock. . . . . . . . . - - (323) (7,115) - - - (7,115)
Dividends paid (.10 per share). . . . . . . - - - - - (3,465) - (3,465)
Net earnings. . . . . . . . . . . . . . . . - - - - - 37,815 - 37,815
Minimum pension liability . . . . . . . . . - - - - - - (16) (16)
------ ------ ------ -------- -------- -------- -------- --------
Balances at December 31, 1994 . . . . . . . . 48,759 4,876 (2,361) (17,339) 68,759 134,409 (1,474) 189,231
Stock options . . . . . . . . . . . . . . . 824 82 (6) (158) 11,228 - - 11,152
Purchase of treasury stock (note 16). . . . - - (482) (12,244) - - - (12,244)
Conversion of partner's interest into
common stock (note 15) . . . . . . . . . . 5,300 530 - - 142,234 (46,364) - 96,400
Dividends paid ($.10 per share) . . . . . . - - - - - (4,957) - (4,957)
Net earnings. . . . . . . . . . . . . . . . - - - - - 50,657 - 50,657
Minimum pension liability . . . . . . . . . - - - - - - 1,474 1,474
------ ------ ------ -------- -------- -------- -------- --------
Balances at December 31, 1995 . . . . . . . . 54,883 $5,488 (2,849) $(29,741) $222,221 $133,745 $ - $331,713
------ ------ ------ -------- -------- -------- -------- --------
------ ------ ------ -------- -------- -------- -------- --------
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
24
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
---------------------------------
1995 1994 1993
--------- -------- ---------
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . . $ 50,657 $ 37,815 $ 20,301
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of property and
equipment and asset retirements . . . . . . . . 40,951 38,080 24,055
Provision for premature retirement of assets . . 12,630 - -
Performance stock options. . . . . . . . . . . . - - 4,407
Gain on sale of assets . . . . . . . . . . . . . - (79) (616)
Partners' equity in earnings . . . . . . . . . . 10,227 11,406 12,965
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . . . - - (1,500)
Changes in operating assets and liabilities:
Receivables. . . . . . . . . . . . . . . . . . (537) (2,013) (1,832)
Income taxes . . . . . . . . . . . . . . . . . 2,646 9,291 3,585
Supplies and prepayments . . . . . . . . . . . (1,818) (2,622) (1,334)
Accounts payable and accrued expenses. . . . . 9,704 (1,291) 14,774
Deferred charges and other assets. . . . . . . 656 1,470 460
Deferred credits and other . . . . . . . . . . 3,682 2,176 2,778
--------- -------- ---------
Net cash provided by operating activities. . 128,798 94,233 78,043
--------- -------- ---------
Cash flows from investing activities:
Construction, purchase and conversion of inns . . . (77,502) (34,690) (38,858)
Other capital expenditures. . . . . . . . . . . . . (39,962) (75,248) (32,623)
Proceeds from property transactions . . . . . . . . - 2,565 982
Purchase of partners' equity interests. . . . . . . (48,200) (53,255) (78,169)
Decrease in notes receivable and investments. . . . 6,836 4,136 3,641
--------- -------- ---------
Net cash used by investing activities. . . . (158,828) (156,492) (145,027)
--------- -------- ---------
Cash flows from financing activities:
Proceeds from line of credit and long-term
borrowings . . . . . . . . . . . . . . . . . . . . 645,723 417,102 223,198
Principal payments on line of credit and
long-term borrowings . . . . . . . . . . . . . . . (601,121) (369,955) (178,528)
Capital contributions by partners . . . . . . . . . - - 35,908
Capital distributions to partners . . . . . . . . . (2,495) (1,144) (3,414)
Dividends to shareholders . . . . . . . . . . . . . (4,957) (3,465) (1,015)
Purchase of treasury stock. . . . . . . . . . . . . (12,346) (7,013) -
Net proceeds from stock transactions. . . . . . . . 5,227 5,475 1,822
--------- -------- ---------
Net cash provided by financing activities . . 30,031 41,000 77,971
--------- -------- ---------
Increase (decrease) in cash and cash equivalents. . 1 (21,259) 10,987
Cash and cash equivalents at beginning of year. . . 2,589 23,848 12,861
--------- -------- ---------
Cash and cash equivalents at end of year. . . . . . $ 2,590 $ 2,589 $ 23,848
--------- -------- ---------
--------- -------- ---------
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
25
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
----------------------------
1995 1994 1993
------- ------ -------
Supplemental schedule of non-cash investing
and financing activities:
Adjustment to carrying value of property and
equipment (note 15) . . . . . . . . . . . . . . . $51,081 $ - $ -
Conversion of partner's interest into common
stock (note 15) . . . . . . . . . . . . . . . . . 46,364 - -
Tax benefit from stock options exercised (note 7). 6,027 7,480 679
Minimum pension liability (note 8) . . . . . . . . 2,889 147 4,092
Effect of stock splits (note 7). . . . . . . . . . - 1,616 1,744
Liabilities assumed in connection with
acquisition of LQP (note 15) . . . . . . . . . . - - 65,962
Liabilities assumed in connection with
acquisitions of unincorporated partnerships
and joint ventures (note 15). . . . . . . . . . . - - 29,878
Conveyance of title of property to mortgagee
(note 3) . . . . . . . . . . . . . . . . . . . . - - 10,117
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
26
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 Company owns/operates
237 inns in 29 states, concentrated in the Western and Southern United
States. 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 50% interest, and in one case a
40% interest, and exercises substantial legal, financial and operational
control. All significant intercompany accounts and transactions have been
eliminated in combination. Certain reclassifications of prior period amounts
have been made to conform with the current period presentation.
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
Unsecured Notes due 2005, Senior Unsecured Subordinated Notes due 2003,
Industrial Development Revenue Bonds ("IRB"), loan fees, closing fees
and organizational costs. Issuance costs are amortized over the life of the
related debt using the interest method. Organizational costs are amortized
over five years. Loan fees and closing fees are amortized over the
respective terms of the loans.
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.
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"). As a result, 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.
EARNINGS PER SHARE
Earnings 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 in the
form of stock dividends as discussed in note 7 of these Combined Financial
Statements. Primary and fully diluted earnings per share are not significantly
different.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
27
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ADVERTISING
The costs of advertising, promotion and marketing programs are charged to
operations in the year incurred. These costs were approximately $17,523,000,
$16,167,000 and $12,382,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
INTEREST RATE SWAPS
The accounting treatment for the Company's off balance sheet interest rate
swaps is to record net interest received or paid as an adjustment to interest
expense.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
(2) PROPERTY AND EQUIPMENT
DECEMBER 31
-------------------------
1995 1994
---------- ----------
Buildings . . . . . . . . . . . . . . . . . . . . $ 882,247 $ 767,665
Furniture, fixtures and equipment . . . . . . . . 121,654 124,336
Land and leasehold improvements . . . . . . . . . 185,763 154,299
---------- ----------
Total property and equipment. . . . . . . . . . 1,189,664 1,046,300
Less accumulated depreciation and amortization. . 273,914 252,372
---------- ----------
Net property and equipment. . . . . . . . . . . $ 915,750 $ 793,928
---------- ----------
---------- ----------
Property and equipment is recorded at cost. Depreciation and amortization
of property and equipment is computed using the straight-line method over the
estimated useful lives of the assets as follows: 40 years for buildings; 4 to
10 years for furniture, fixtures and equipment; 10 to 20 years for leasehold
and land improvements. Maintenance and repairs are charged to operations as
incurred. Expenditures for improvements are capitalized.
At December 31, 1995 and 1994, land and leasehold improvements includes
$2,664,000 for properties held for sale stated at the lower of cost or
estimated net realizable value. Charges to reduce the carrying amounts of
properties held for sale to net realizable value are recognized in income.
The Company launched its Gold Medal rooms program during the third
quarter of 1995. During implementation of this program, the Company will be
replacing certain furniture and fixtures before the end of their normal
useful life and has therefore, made adjustments to reflect shorter remaining
lives. As a result, the Company will record non-cash provisions for premature
retirement of assets totaling approximately $17.0 million, of which $12.6
million was reported in 1995, with the remainder to be recorded in 1996.
The Company recognizes impairment losses on property and equipment
whenever events or changes in circumstances indicate that the carrying
amount of long-lived assets may not be recoverable. Such losses are
determined by comparing the sum of the expected future undiscounted net cash
flows to the carrying amount of the asset. Impairment losses are recognized
in operating income as they are determined.
In March 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
statement, which is effective for fiscal years beginning after December 15,
1995, requires that an entity evaluate long-lived assets and certain other
identifiable intangible assets for impairment whenever events
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
28
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
or changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. An impairment loss meeting the recognition criteria
is to be measured as the amount by which the carrying amount for financial
reporting purposes exceeds the fair value of the asset. The Company plans to
adopt this statement in 1996 and does not expect adoption of the statement to
have a material effect, if any on the Company's financial position or results
of operations.
(3) LONG-TERM DEBT
DECEMBER 31
---------------------
1995 1994
--------- --------
(IN THOUSANDS)
Mortgage loans maturing 1996-2001 (9.09% weighted average effective
interest rate)............................................................ $ 76,108 $100,275
Industrial Development Revenue Bonds, maturing 1996-2012
(6.33% weighted average effective interest rate).......................... 58,837 65,959
Bank unsecured line of credit, maturing
August 31, 2000 (7.07% effective interest rate at December 31, 1995)...... 177,000 -
Senior unsecured notes, due 2005 (7.43% effective interest rate)........... 99,793 -
Bank secured term credit facility.......................................... - 171,500
Bank secured line of credit................................................ - 17,350
Bank unsecured line of credit.............................................. - 13,150
Senior unsecured subordinated notes, due 2003 (9.58% effective
interest rate)............................................................ 120,000 120,000
-------- --------
Total................................................................... 531,738 488,234
Less current installments.................................................. 13,322 39,976
-------- --------
Net long-term debt...................................................... $518,416 $448,258
-------- --------
-------- --------
At December 31, 1995, the Company had a $200 million Bank Unsecured Line of
Credit and a $50 million 364-Day Bank Unsecured Line of Credit (the "Bank
Unsecured Credit Facilities"). The $200 million Bank Unsecured Line of Credit
matures August 2000 and the $50 million 364-Day Bank Unsecured Line of Credit
matures September 1996. At December 31, 1995, the Company had $66,319,000
available on its Bank Unsecured Credit Facilities, net of $6,681,000 of letters
of credit collateralizing its insurance programs and certain mortgages. The
Bank Unsecured Credit Facilities bear interest at the prime rate or LIBOR,
adjusted for an applicable margin, as defined under the related credit
agreements. The applicable margin is based upon predetermined levels of cash
flow to indebtedness or credit ratings received from specified credit rating
agencies, also, as defined in the related credit agreements. At December 31,
1995, borrowings under the Bank Unsecured Credit Facilities bear interest at
LIBOR plus 45 basis points on $172,000,000 of outstanding borrowings and the
prime rate less 50 basis points on $5,000,000 of outstanding borrowings. The
Credit Facilities require an annual commitment fee of 20 basis points on the
$200 million Bank Unsecured Line of Credit and 15 basis points on the $50
million 364-Day Bank Unsecured Line of Credit.
Annual maturities for the four years subsequent to December 31, 1996 are as
follows:
(IN THOUSANDS)
1997............................ $ 14,307
1998............................ 14,513
1999............................ 13,475
2000............................ 230,316
Maturities for the year ended December 31, 2000 include the $177,000,000
balance on the Bank Unsecured Credit Facilities.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
29
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Interest paid during the years ended December 31, 1995, 1994 and 1993
amounted to $39,912,000, $40,105,000 and $27,913,000, respectively.
In September 1995, the Company completed an offering of $100,000,000 in
principal amount of 7.40% Senior Unsecured Notes due 2005. The proceeds of the
financing were used to repay outstanding amounts on the Company's Bank Credit
Facilities.
In 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 recognizes gains and losses on extinguishments of debt as
extraordinary items in the period in which the debt is extinguished. The
Company reported extraordinary items, net of income taxes, of $717,000, and
$3,664,000 in 1995 and 1993, respectively, related to these refinancings and
retirements. The 1993 amount is offset by an extraordinary gain of $3,045,000
as described above.
The Company is obligated by agreements relating to eighteen issues of IRBs
in an aggregate amount of $49,800,000 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, 1995 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, 1996
and the remarketing agents are unable to resell such bonds, the maturities of
long-term debt shown above would increase by $33,960,000 for the year ending
December 31, 1997.
On January 23, 1992, with the approval of the Company's Board of Directors,
the Company entered into two interest rate swap agreements (the "Agreements")
which exchanged the Company's variable rate interest payments for the fixed rate
interest payments with a major financial institution (the "Counterparty"). The
debts ("Notional Amounts") underlying the Agreements were $16,890,000 and
$44,420,000. Under the Agreements, the Company effectively pays a fixed rate of
interest at 6.50% and 5.26% and the Counterparty pays a percentage of prime
interest rate and the variable rate demand note interest rate ("VRDN"). In the
event the VRDN rate exceeds the fixed interest rate of 5.26% or the percentage
of prime interest rate exceed 6.50%, the Counterparty pays to the Company that
difference times the Notional Amount, on a monthly basis. Should the fixed
interest rate of 5.26% exceed the VRDN interest rate or the fixed interest rate
of 6.50% exceeds the percentage of prime interest rate, the Company pays the
difference times the Notional Amount to the Counterparty, on a monthly basis.
These Agreements resulted in net payments to the Counterparty of $442,000,
$1,040,000 and $1,427,000 in the years ended December 31, 1995, 1994 and 1993,
respectively. The Agreements expire on February 1, 1997, and the Notional
Amounts are reduced over the life of the Agreements by scheduled amortization
payments. At December 31, 1995, the Notional Amounts of debt remaining under
the Agreements are $8,896,000 and $33,250,000 which bear interest at a weighted
average variable interest rate of 6.54% and 4.55%, respectively.
The Company is exposed to market risk associated with fluctuations in
interest rates. By entering the interest rate swap agreements, described above,
the Company reduced its exposure to rising interest rates on the aforementioned
variable interest rate debt and has effectively fixed the rate on such debt at a
level acceptable to the Company given the length of the Agreements and the risk
of interest rate changes. The Company is exposed to credit risk to the extent
that the Counterparty fails to perform under the Agreements. The Company has
mitigated its credit risk by entering the Agreements with a major financial
institution, which has received an "A" rating from
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
30
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Standard and Poor's Corporation and an "A2" rating from Moody's Investors
Service on senior unsecured debt. The Company regularly monitors the credit
ratings of the Counterparty and considers the risk of default remote.
As a result of the VRDN rate increasing to 4.37% at December 31, 1995 from
4.32% at December 31, 1994 and the fluctuation in the prime rate during the
year, the estimated fair value of the interest rate swap agreements changed to a
net payable position of $402,000 at December 31, 1995 from a net receivable
position of $494,000 at December 31, 1994 (See note 14).
The Bank Unsecured Credit Facilities and certain agreements associated with
IRBs are governed by a uniform covenant agreement. The most restrictive
covenants provide for the following: minimum net worth, 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 Company's 9 1/4% Senior Unsecured Subordinated Notes due 2003 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.
The Company's 7.4% Senior Unsecured Notes due 2005 are governed by a Trust
Indenture dated September 15, 1995. The Trust Indenture contains covenants
which places limitations on certain liens on assets, sale and leaseback
transactions, mergers and the sale of substantially all the assets of the
Company.
At December 31, 1995, the Company was in compliance with all restrictions
and covenants.
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At December 31, 1995 and 1994, accounts payable and accrued expenses
consisted of the following:
DECEMBER 31
-------------------------
1995 1994
---------- ----------
Accounts payable:
Trade . . . . . . . . . . . . . . . . . $13,695 $10,292
Construction. . . . . . . . . . . . . . 9,666 2,197
Other . . . . . . . . . . . . . . . . . 6,437 4,189
Income taxes. . . . . . . . . . . . . . 2,960 3,641
------- -------
$32,758 $20,319
------- -------
------- -------
Accrued expenses:
Payroll and employee benefits . . . . $25,201 $21,238
Interest. . . . . . . . . . . . . . . 4,845 3,023
Property taxes. . . . . . . . . . . . 9,640 8,387
Other . . . . . . . . . . . . . . . . 1,229 1,125
------- -------
$40,915 $33,773
------- -------
------- -------
(5) UNINCORPORATED VENTURES AND PARTNERSHIPS
At December 31, 1995, the Company had an ownership interest between 50% and
67% in seven unincorporated joint ventures and partnerships. Summary financial
information with respect to unincorporated ventures and partnerships included in
the combined financial statements is provided below in order to provide further
understanding of the Company's structure and to present the financial position
and results of operations of
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
31
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
the partnerships and joint ventures included in the combined financial
statements. Cost and equity investments are not included in other summarized
data as such investments are not considered significant.
The following financial information includes the activity of the acquired
unincorporated joint ventures and partnerships through the date of acquisition
(See note 15).
DECEMBER 31
-------------------
1995 1994
------- --------
(IN THOUSANDS)
ASSETS
Total current assets................................................. $ 2,598 $ 6,241
Notes receivable, excluding current installments of $51 in 1994...... - 2,542
Investments and other assets......................................... 13 2,483
Property and equipment, net.......................................... 13,559 175,734
------- --------
$16,170 $187,000
------- --------
------- --------
LIABILITIES AND OWNERS' EQUITY
Total current liabilities............................................ $ 1,194 $ 15,533
Long-term debt, excluding current installments of $475 and $2,707.... 1,251 28,576
Owners' equity:
Company's........................................................... 7,416 50,792
Partners'........................................................... 6,309 92,099
------- --------
$16,170 $187,000
------- --------
------- --------
YEARS ENDED DECEMBER 31
----------------------------
1995 1994 1993
------- ------- --------
(IN THOUSANDS)
Revenues............................................ $58,265 $85,600 $104,394
Operating costs and expenses........................ 38,434 62,775 75,661
------- ------- --------
Operating income.................................... 19,831 22,825 28,733
Other deductions, principally interest.............. (1,019) (2,065) (5,690)
(Loss) gain on property transactions................ - (1) 324
------- ------- --------
Earnings before extraordinary items................. 18,812 20,759 23,367
Extraordinary items................................. - (75) (133)
------- ------- --------
Pretax earnings................................... $18,812 $20,684 $ 23,234
------- ------- --------
------- ------- --------
Equity in pretax earnings:
Company's......................................... $ 8,585 $ 9,278 $ 10,269
Partners'......................................... 10,227 11,406 12,965
------- ------- --------
$18,812 $20,684 $ 23,234
------- ------- --------
------- ------- --------
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- ------------------------------------------------------------------------------
32
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(6) INCOME TAXES
Income tax expense attributable to income from continuing operations
consists of:
YEARS ENDED DECEMBER 31
---------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Federal
Current..................................... $26,992 $16,038 $ 8,752
Deferred.................................... 1,015 4,984 1,918
------- ------- -------
28,007 21,022 10,670
------- ------- -------
State
Current...................................... 3,447 2,871 974
Deferred..................................... 166 283 772
------- ------- -------
3,613 3,154 1,746
------- ------- -------
Total....................................... $31,620 $24,176 $12,416
------- ------- -------
------- ------- -------
The effective tax rate varies from the statutory rate for the following
reasons:
YEARS ENDED DECEMBER 31
----------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Tax expense at statutory rate................. $29,048 $21,697 $11,143
State income taxes, net of Federal benefit.... 2,482 1,948 1,157
Other, net.................................... 90 531 116
------- ------- -------
Provision for income taxes.................. $31,620 $24,176 $12,416
------- ------- -------
------- ------- -------
The following are cash transactions relating to the Company's income taxes:
YEARS ENDED DECEMBER 31
--------------------------
1995 1994 1993
------- ------- ------
(IN THOUSANDS)
Income taxes paid.......................... $24,777 $ 9,716 $5,953
------- ------- ------
------- ------- ------
Income tax refund.......................... $ 111 $ 99 $ 71
------- ------- ------
------- ------- ------
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- ------------------------------------------------------------------------------
33
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
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, 1995
and 1994 are presented below:
YEARS ENDED DECEMBER 31
-----------------------
1995 1994
------- -------
(IN THOUSANDS)
Deferred tax assets:
Notes receivable and land, principally due to allowance and write-downs for
financial reporting purposes................................................... $ 3,447 $ 3,913
Property and equipment, principally due to acquisitions of
partnership interests.......................................................... 14,046 13,450
Expense provisions and deferred gains........................................... 12,414 10,275
Minimum pension liability....................................................... - 943
------- -------
Total gross deferred tax assets.............................................. 29,907 28,581
------- -------
Deferred tax liabilities:
Investments in partnerships, principally due to differences in
depreciation and capitalized interest.......................................... (352) (3,356)
Property and equipment, principally due to differences in
depreciation and capitalized interest.......................................... (34,365) (30,367)
Other........................................................................... (1,701) (1,340)
------- -------
Total gross deferred tax liabilities......................................... (36,418) (35,063)
------- -------
Net deferred tax liability...................................................... $(6,511) $(6,482)
------- -------
------- -------
The Company anticipates that the reversal of existing taxable temporary
differences will more likely than not provide sufficient taxable income to
realize the tax benefits of the remaining deferred tax assets.
(7) SHAREHOLDERS' EQUITY
The Board of Directors authorized three-for-two stock splits effected in
the form of stock dividends effective in October 1994, March 1994 and October
1993. 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.
During 1995 and 1994, the Board of Directors authorized a series of plans
for the repurchase of up to a total of $30,000,000 of the Company's common
stock. Repurchases of 482,000 shares for approximately $7,115,000 and 373,200
shares (post-split) for approximately $12,244,000 were made under these plans
during 1995 and 1994, respectively. Additional repurchases will be made from
time to time as deemed appropriate by the Company. During January 1996, the
Board of Directors, through a resolution independent of the $30,000,000 series
of repurchase plans, approved a private transaction for the repurchase of
$11,500,000 of the Company's common stock from a related party (see note 16).
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
34
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
The Company's stock option plans cover the granting of options to purchase
an aggregate of 7,212,024 common shares. Options granted under the plans are
issuable to certain officers, employees and Board of Directors 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. A summary of the
status of the Company's stock option plans at December 31, 1993, 1994 and 1995
is presented in the table below.
OPTION TOTAL
NUMBER PRICE RANGE OPTION PRICE
OF SHARES PER SHARE (IN THOUSANDS)
---------- -------------------- -------------
Outstanding December 31, 1993...... 6,301,233 $ 3.09 - $ 9.04 $30,599
Granted.......................... 1,305,377 17.42 - 24.00 23,762
Canceled or expired.............. (82,712) 3.50 - 17.94 (955)
Exercised........................ (1,197,429) 3.19 - 9.04 (5,472)
---------- -------
Outstanding December 31, 1994...... 6,326,469 $ 3.35 - $24.00 $47,934
Granted.......................... 448,875 20.00 - 28.94 12,113
Canceled or expired.............. (215,738) 3.93 - 17.58 (1,386)
Exercised........................ (824,541) 3.35 - 20.08 (5,214)
---------- -------
Outstanding December 31, 1995...... 5,735,065 $ 3.46 - $28.94 $53,447
---------- -------
---------- -------
Exercisable at:
December 31, 1994................ 3,872,597 $ 3.35 - $ 9.04 $18,576
---------- -------
---------- -------
December 31, 1995................ 4,603,713 $ 3.46 - $24.00 $34,836
---------- -------
---------- -------
Available for future grants at:
December 31, 1994............... 1,710,096
----------
----------
December 31, 1995............... 1,476,959
----------
----------
Upon exercise, the excess of the option price received over the par value
of the shares issued, net of expenses, is credited to additional paid-in
capital.
The exercise of non-qualified stock options results in state and federal
income tax benefits to the Company related to the difference between market
price at the date of exercise and the option price. During 1995, 1994 and 1993,
approximately $6,027,000, $7,480,000 and $679,000, respectively, was credited to
additional paid-in capital for the tax benefits of options exercised.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," effective for fiscal years beginning after December 15, 1995.
This statement defines a fair value method of accounting for employee stock
options and encourages entities to adopt that method of accounting for its
stock compensation plans. Statement 123 allows an entity to continue to measure
compensation costs for those plans using the intrinsic value based method of
accounting prescribed by Accounting Pronouncement Bulletin Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has elected to continue
to account for its employee stock compensation plans as prescribed under Opinion
25 and will make the pro forma disclosures of net income and earnings per share
required by Statement 123 beginning with its financial statements for the year
ended December 31, 1996. The Company, therefore, does not anticipate the
implementation of Statement 123 to have a material adverse impact on the
Company's financial position or results of operations.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
35
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 of $30 per share (pre-split) when it
became probable that the Company's stock would trade at that predetermined
level. Currently, the Company has no options outstanding that require
recognition of additional compensation expense.
Under the terms of the La Quinta Development Partners, L.P. ("LQDP" or the
"Development Partnership") partnership agreement, AEW Partners, L.P. ("AEW
Partners") had the ability to convert 66 2/3% of its 60% ownership in the
Development Partnership into a specified number of shares of the Company's
Common Stock (adjusted for stock splits, cash dividends, and distributions from
LQDP to AEW). As further discussed in note 15, AEW exercised its conversion
option during 1995 and 5,299,821 shares of the Company's common stock were
issued to AEW. These shares were registered with the Securities and Exchange
Commission and were sold, together with 20,250 shares of the Company's Common
Stock owned by AEW prior to the conversion, in an underwritten secondary public
offering.
(8) PENSION PLAN AND OTHER
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 Accounting
Standards No. 87 "Employer's Accounting for Pensions", the Company has recorded
an additional minimum liability of $1,056,000 and an intangible asset of equal
amount at December 31, 1995. This liability represents the excess of the
accumulated benefit obligation over the fair value of plan assets and accrued
pension liability at the measurement date.
The following table sets forth the funded status and amounts recognized in
the Company's combined financial statements for the Plan at December 31, 1995
and 1994.
DECEMBER 31
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $9,273 and $7,067 ..................................... $(10,209) $(10,936)
-------- --------
-------- --------
Projected benefit obligation for services rendered to date .......... $(13,589) $(12,961)
Plan assets at fair value, primarily marketable stocks and CDs ...... 8,923 6,846
-------- --------
Projected benefit obligation in excess of plan assets ............... (4,666) (6,115)
Unrecognized net loss from past experiences different from
those assumed ..................................................... 3,083 4,443
Prior service costs ................................................. 1,354 1,528
Additional minimum liability ........................................ (1,056) (3,945)
-------- --------
Accrued pension costs ........................................... $ (1,285) $ (4,089)
-------- --------
-------- --------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
36
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
--------------------
1995 1994
------- -------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$1,287 and $1,188 ................................................. $(1,867) $(1,273)
------- -------
------- -------
Projected benefit obligation for services rendered to date .......... $(4,836) $(3,428)
Unrecognized net loss (gain) from past experiences different from
those assumed ..................................................... 769 (78)
Prior service costs ................................................. (60) -
Unrecognized net loss from modifications ............................ - 117
------- -------
Accrued pension costs ............................................... $(4,127) $(3,389)
------- -------
------- -------
The Company maintains a trust account intended for use in settling benefits
due under the SERP. The Company had no funds accumulated in the trust account
at December 31, 1995 and 1994.
The assumptions used in the calculations shown above were:
1995 1994 1993
----------- ----------- -----------
Discount rate ................................... 7.25% 8.50% 7.50%
Expected long-term rate of return on assets ..... 8.00% 8.00% 8.00%
Rate of increase in compensation levels ......... 5.00%-6.00% 5.00%-6.00% 5.00%-6.00%
Net pension cost includes the following components:
YEARS ENDED DECEMBER 31
-----------------------------
1995 1994 1993
------ ------ ------
(IN THOUSANDS)
Service cost (benefits earned during the period) .......... $1,571 $1,604 $1,564
Interest cost on projected benefit obligation ............. 1,072 1,258 1,207
Actual return on plan assets .............................. (1,639) 228 (38)
Net amortization and deferral ............................. 410 (96) 134
Net deferred asset gain ................................... 1,041 - -
------ ------ ------
Net periodic pension cost before allocation to
Managed Inns (See note 13) .............................. 2,455 2,994 2,867
Cost allocated to Managed Inns ............................ - (30) (238)
------ ------ ------
Net periodic pension cost ............................... $2,455 $2,964 $2,629
------ ------ ------
------ ------ ------
In addition to providing pension benefits, the Company established a 401(k)
Savings Plan and Trust (the "Savings Plan") effective January 1, 1994. The
Savings Plan is designed to be a qualified plan under sections 401 and 410
through 417 of the Internal Revenue Code. Under the Savings Plan, eligible
employees are allowed to defer income on a pre-tax basis through contributions
to the Savings Plan and the Company matches a portion of such contributions.
The Company's matching contributions totaled approximately $157,000 and $131,000
in 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
37
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(9) 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 and
reservation facilities in San Antonio.
Future annual minimum rental payments required under operating leases that
have initial or remaining non-cancelable lease terms in excess of one year at
December 31, 1995 follow:
(IN THOUSANDS)
1996 .................................. $ 2,597
1997 .................................. 2,394
1998 .................................. 2,096
1999 .................................. 2,026
2000 .................................. 2,006
Later years ........................... 7,603
-------
Total minimum payments required ....... $18,722
-------
-------
Total rental expense for operating leases was approximately $3,188,000,
$3,196,000 and $2,840,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
LESSOR
The Company leases restaurants it owns to third parties. The leases are
accounted for as operating leases expiring during a period from 1996 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, 1995:
(IN THOUSANDS)
Buildings .......................... $32,378
Less: accumulated depreciation .... 10,877
-------
21,501
Land ............................... 17,839
-------
Total leased property ............ $39,340
-------
-------
Minimum future rentals to be received under the noncancelable restaurant
leases in effect at December 31, 1995 follow:
(IN THOUSANDS)
1996 .............................. $ 6,119
1997 .............................. 5,999
1998 .............................. 5,821
1999 .............................. 5,426
2000 .............................. 5,559
Later years ....................... 19,424
-------
$48,348
-------
Contingent rental income amounted to approximately $1,198,000, $1,025,000
and $811,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
38
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(10) COMMITMENTS
The estimated additional cost to complete the Gold Medal rooms program,
room additions of inns, conversion of acquired inns and construction of new inns
for which commitments have been made is approximately $82,134,000 at December
31, 1995, of which approximately $22,963,000 relates to the Gold Medal rooms
program. Funds on hand, anticipated future cash flows and amounts available on
the Company's Bank Unsecured Credit Facilities are sufficient to complete these
projects.
(11) CONTINGENCIES
LITIGATION
In September 1993, a former officer of the Company filed suit against the
Company and certain of its directors and their affiliate companies (the "La
Quinta Defendants"). The suit alleges breach of an employment agreement,
misrepresentation, wrongful termination, self-dealing, breach of fiduciary duty,
usurpation of corporate opportunity and tortious interference with contractual
relations. Compensatory damages of $2,500,000 and exemplary damages of
$5,000,000 are sought in the action. The Court has pending before it the La
Quinta Defendants' motion for summary judgment. The parties subsequently filed
a required, joint Pre Trial Order, in which the plaintiff has conceded a number
of his claims. Currently, no trial date has been set for this action. The
Company will 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 matter are not expected to have a material adverse effect on the
Company's financial position or results of operations.
SEVERANCE AND EMPLOYMENT AGREEMENTS
The Company has entered into a five year employment agreement which
includes a severance provision granting an executive the right to receive
certain benefits, including among others, his annual base salary and bonus if
there occurs a termination (as defined in the respective agreement) within the
five year term of the agreement, or resignation (as defined in the agreement).
As of December 31, 1995, the maximum contingent liability under the severance
provision of this agreement was approximately $1,575,000.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
39
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(12) 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, 1995:
Revenues .................................... $96,735 $110,043 $113,906 $93,235
Operating income ............................ 32,692 40,936 34,538 24,497
Earnings before extraordinary items ......... 11,070 16,691 14,932 8,681
Conversion of partner's interest into
common stock .............................. - - (46,364) -
Net earnings (loss) available to
shareholders .............................. 11,070 16,691 (32,149) 8,681
Earnings (loss) per share after conversion
of partner's interest into common stock
and before extraordinary items ............ .23 .34 (.58) .16
Earnings (loss) per share available to
shareholders .............................. $ .23 $ .34 $ (.59) $ .16
Year ended December 31, 1994:
Revenues .................................... $78,243 $ 92,563 $104,364 $87,072
Operating income ............................ 20,277 30,352 35,932 24,196
Net earnings ................................ 5,542 11,280 14,011 6,982
Earnings per share........................... $ .11 $ .23 $ .29 $ .14
Year ended December 31, 1993:
Revenues .................................... $60,607 $ 70,633 $ 76,923 $63,687
Operating income ............................ 16,491 19,446 26,887 12,543
Earnings before extraordinary items
and cumulative effect of accounting
change .................................... 4,144 2,692 10,012 2,573
Net earnings ................................ 5,644 3,634 9,711 1,312
Earnings per share before extraordinary
items and cumulative effect of
accounting change ......................... .09 .06 .21 .05
Earnings per share .......................... $ .12 $ .08 $ .20 $ .03
The decrease in net earnings (loss) available to shareholders in the
third quarter of 1995 resulted from the provision for premature retirement of
assets of $8,577,000, $5,309,000 net of tax (see note 2) and the conversion
of partner's interest into common stock of $46,364,000 (see note 15).
In the fourth quarter of 1993, the Company recorded an adjustment of
$1,273,000, $777,000 net of tax, 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.
The decrease in net earnings in the second quarter of 1993 is primarily a
result of $4,407,000 in performance stock option expense related to the vesting
of certain contingent stock options, that became exercisable in May 1993. This
expense was partially offset by an increase in operating income.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
40
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(13) RELATED PARTY TRANSACTIONS
MANAGEMENT SERVICES FEE
All inns owned by La Quinta Motor Inns Limited Partnership ("LQP") (through
November 30, 1993) and by the two joint ventures (the "CIGNA Partnerships")
between the Company and investment partnerships managed by CIGNA Investments,
Inc. (through June 30, 1994) (collectively the "Managed Inns") operated under
the La Quinta name and were managed by the Company in accordance with long-term
management agreements. The Company earned 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 joint ventures and is reimbursed for all such payments.
(14) 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:
NOTES RECEIVABLE
The carrying value for notes receivable approximates the fair value based
on the estimated underlying value of the collateral.
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 receive (pay) to terminate the agreements, taking into
consideration current interest rates and the current creditworthiness of the
counterparties (See note 3).
The estimated fair values of the Company's financial instruments are
summarized as follows:
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------
(IN THOUSANDS)
Notes receivable ................................... $ 3,240 $ 3,240 $ 7,320 $ 7,320
Long-term debt, including current
installments and related letters of credit ....... (531,738) (548,855) (488,234) (480,758)
Interest rate swap agreements
in a net (payable) receivable position ........... (27) (402) (32) 494
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
41
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(15) ACQUISITION OF PARTNERS' INTERESTS
On June 15, 1995, AEW Partners, L. P. ("AEW") notified the Company that it
would exercise its option, subject to certain conditions, to convert two-thirds
of its ownership interest in La Quinta Development Partners, L.P. ("LQDP") into
5,299,821 shares of the Company's Common Stock and also agreed to sell its
remaining ownership interest in LQDP to the Company for a negotiated price of
$48.2 million in cash (collectively, the "AEW Transaction"). Under the terms of
the LQDP Partnership Agreement, AEW paid $3.0 million in 1990 for an option,
subject to certain vesting and other conditions, to convert two-thirds of its
ownership interest in LQDP into a specified number of shares (adjusted for stock
splits, cash dividends and distributions from LQDP to AEW) of the Company's
Common Stock. The AEW Transaction was consummated on July 3, 1995. The Company
financed the cash portion of the AEW Transaction through borrowings under its
bank credit facilities.
Upon conversion of the partnership interest into La Quinta Common Stock,
the Company issued 5,299,821 shares of Common Stock having a fair market value
of $142.8 million based on the July 3, 1995 New York Stock Exchange closing
price. The conversion was accounted for by increasing shareholders' equity by
the $46.4 million value of the option and recording a $46.4 million non-
recurring, non-cash adjustment entitled Conversion of Partner's Interest into
Common Stock below net earnings in the Statement of Operations. There was
therefore no net effect to shareholders' equity as a result of this accounting
treatment. The sale to La Quinta of AEW's remaining one-third interest in LQDP
was accounted for as an acquisition of a minority interest and purchase
accounting was applied. The carrying value of certain property and equipment
acquired in the AEW Transaction was increased by approximately $51.1 million to
reflect fair market value as of July 3, 1995.
As permitted under the LQDP Partnership Agreement, AEW requested that the
Common Stock be registered with the Securities and Exchange Commission for sale
in an underwritten secondary public offering. Pursuant to this request, the
Company filed a registration statement, which became effective July 31, 1995,
with the Securities and Exchange Commission with respect to such sale. AEW bore
all of the costs related to the registration and sale of the Common Stock in the
offering.
The following unaudited pro forma information reflects the combined results
of operations of the Company as if the AEW Transaction had occurred on January
1, 1995 and January 1, 1994. The pro forma information gives effect to certain
adjustments, including additional depreciation expense on property and equipment
based on their fair values, increased interest expense on additional debt
incurred, elimination of AEW's Partners' equity in earnings and the related
income tax effect of those adjustments. The pro forma information does not
reflect the $46.4 million non-recurring, non-cash item described above. The pro
forma per share effect of this item is ($.85) and ($.86) for the years ended
December 31, 1995 and 1994, respectively. The pro forma results are not
necessarily indicative of operating results that would have occurred had the AEW
Transaction been consummated as of the beginning of 1995 and 1994, nor are they
necessarily indicative of future operating results.
(UNAUDITED)
PRO FORMA
DECEMBER 31,
-------------------------------------
1995 1994
-------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenues .................................... $413,919 $362,242
-------- --------
-------- --------
Earnings before extraordinary items ............... $ 54,698 $ 41,050
-------- --------
-------- --------
Earnings before extraordinary items per share ..... $ 1.00 $ .76
-------- --------
-------- --------
On January 24, 1994, the Company concluded the acquisition of LQP as
discussed below. Additionally, in July 1994, the Company purchased nine La
Quinta inns previously held by the CIGNA partnerships and during the second
quarter of 1994, the Company purchased the limited partners' interest in one
of the Company's combined unincorporated joint ventures which owned one inn.
The aggregate purchase price of these transactions
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
42
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
was $53,255,000 of which a portion was financed through the Company's credit
facilities.
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 LQP (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 LQP'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
LQP, with LQP 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 LQP'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.
(16) SUBSEQUENT EVENTS
On January 19, 1996, La Quinta filed a shelf registration statement with
the Securities and Exchange Commission which would allow the Company to issue up
to $250 million principal amount of Debt Securities. The registration statement
became effective on January 25, 1996. The Company is currently proposing to
issue up to $150 million in principal amount of Debt Securities at terms
dependent upon market conditions at the time of issuance. No assurance can be
given that these proposed transactions will be consummated.
On January 22, 1996, the Company agreed to purchase 500,000 shares of
its common stock for $11.5 million from The Airlie Group L.P. ("Airlie").
Airlie is an investment limited partnership of which a corporation owned by
an officer and director of the Company is an indirect co-general partner.
These shares were purchased at a discount to the closing stock price as of
January 19, 1996. This transaction was approved by the Board of Directors
through a resolution independent of the $30.0 million series of stock
repurchase plans described in note 7.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
43
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, 1995 and 1994 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, 1995. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of La Quinta Inns,
Inc. as of December 31, 1995 and 1994 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1995, in conformity with generally accepted accounting principles.
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 LLP
San Antonio, Texas
January 22, 1996
44
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(a) by reference that portion of the
Company's definitive Proxy Statement, 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 48 President and Chief Executive Officer and Director
Michael A. Depatie 39 Sr. Vice President - Finance, Chief Financing Officer
William C. Hammett, Jr. 49 Sr. Vice President - Accounting & Administration
Thomas W. Higgins 48 Sr. Vice President - Operations
Stephen B. Hickey 51 Sr. Vice President - Marketing
Steven T. Schultz 49 Sr. Vice President - Development
John F. Schmutz 48 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.
Stephen B. Hickey has been Senior Vice President - Marketing of the
Company since June 1995. He served as Senior Vice President - Marketing of
T.G.I Friday's, Inc. from September 1989 to June 1995. He served as Vice
President - Corporate Marketing of Wendy's International from October 1988 to
August 1989.
45
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.
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, 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, 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, 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, 1995 and 1994
Combined Statements of Operations for the years ended December 31,
1995, 1994 and 1993
Combined Statements of Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993
Combined Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993
Notes to Combined Financial Statements
Independent Auditors' Report on financial statements
(2) Financial Statement Schedules
All 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:
46
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc.,
as amended on May 21, 1993. (7)
(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)* Supplemental Executive Retirement Plan and Trust Agreement
of Registrant, dated April 20, 1990, by and between Registrant and
Frost National Bank. (6)
(10)(g)* La Quinta Inns, Inc. Deferred Compensation Plan, effective
June 1, 1987. (6)
(10)(h) 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. (6)
(10)(i) 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. (6)
(10)(j) Registration Rights Agreement, dated as of July 31, 1991 by and
between Registrant and Sam Barshop and his wife, Ann Barshop. (1)
(10)(k)* Employment Agreement, dated as of March 3, 1992, by and
between Registrant and Gary L. Mead. (1)
(10)(l)* Non-Qualified Stock Option Agreement, dated as of March 3,
1992, between Registrant and Gary L. Mead. (1)
(10)(m)* Registration Rights Agreement, dated as of March 3, 1992,
between Registrant and Gary L. Mead. (1)
(10)(n) Second Amended and Restated Master Covenant Agreement dated
June 15, 1993. (7)
(10)(o) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4% Senior
Subordinated Notes due 2003. (7)
(10)(p) $126,795,786.64 Credit Agreement Among La Quinta Inns, Inc. Certain
lenders and NationsBank of Texas, N.A. as Administrative Lender dated
June 15, 1993. (7)
(10)(q) $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. (8)
(10)(r) Third Amended and Restated Master Covenant Agreement dated
as of January 25, 1994. (8)
(10)(s) Fifth Amended and Restated Master Covenant Agreement dated
as of September 12, 1995. (9)
(10)(t) Amended and Restated Credit Agreement (Facility A), dated as
of September 12, 1995. (9)
47
(10)(u) Amended and Restated Credit Agreement (Facility B), dated as
of September 12, 1995. (9)
(10)(v) Indenture dated September 15, 1995 Re: Debt Securities. (9)
(10)(w) Officers' certificate defining terms of $100,000,000 7.4%
Senior Notes due 2005 filed herewith.
(11) Statement regarding computation of per share earnings filed
herewith.
(12) Computation of Ratio of Earnings to Fixed Charges filed
herewith.
(21) Subsidiaries of La Quinta Inns, Inc. as of January 31, 1996
filed herewith.
(22) Registrant's definitive Proxy Statement to be filed by
Registrant within 120 days after the end of the fiscal year covered
by the Registrant's Form 10-K.
(23) Consent by KPMG Peat Marwick LLP dated February 21, 1996 to
incorporation by reference of their report dated January 22, 1996,
in various Registration Statements filed herewith.
(24) Powers of Attorney filed herewith.
(27) Financial Data Schedule filed herewith.
___________
* Indicates management compensation agreement.
(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 on Form S-8 (No. 33-26470) and incorporated herein
by reference.
(6) 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.
(7) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10-Q for the period ended June 30, 1993.
(8) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-3 (No. 2-61755) and incorporated herein by
reference.
(b) Reports on Form 8-K.
Not applicable.
48
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: /s/ William C. Hammett, Jr.
-----------------------------------
William C. Hammett, Jr.
Senior Vice President
Chief Accounting Officer
By: /s/ Michael A. Depatie
-----------------------------------
Michael A. Depatie
Senior Vice President
Chief Financing Officer
Date: February 21, 1996
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
--------- -----
/s/ GARY L. MEAD*
- ----------------------------------- President and Chief Executive
Gary L. Mead Officer, Director
/s/ WILLIAM C. HAMMETT, JR.
- ----------------------------------- Sr. Vice President - Accounting
William C. Hammett, Jr. and Administration
/s/ MICHAEL A. DEPATIE
- ----------------------------------- Sr. Vice President - Finance,
Michael A. Depatie Chief Financing Officer
/s/ THOMAS M. TAYLOR*
- ----------------------------------- Chairman of the Board
Thomas M. Taylor
/s/ WILLIAM H. CUNNINGHAM*
- ----------------------------------- Director
William H. Cunningham
/s/ KENNETH T. STEVENS*
- ----------------------------------- Director
Kenneth T. Stevens
/s/ PETER STERLING*
- ----------------------------------- Director
Peter Sterling
*By: /s/ WILLIAM C. HAMMETT, JR.
- -----------------------------------
William C. Hammett, Jr.
ATTORNEY-IN-FACT
Date: February 21, 1996
49
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc.,
as amended on May 21, 1993. (7)
(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)* Supplemental Executive Retirement Plan and Trust Agreement
of Registrant, dated April 20, 1990, by and between Registrant and
Frost National Bank. (6)
(10)(g)* La Quinta Inns, Inc. Deferred Compensation Plan, effective
June 1, 1987. (6)
(10)(h) 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. (6)
(10)(i) 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. (6)
(10)(j) Registration Rights Agreement, dated as of July 31, 1991 by
and between Registrant and Sam Barshop and his wife, Ann Barshop. (1)
(10)(k)* Employment Agreement, dated as of March 3, 1992, by and
between Registrant and Gary L. Mead. (1)
(10)(l)* Non-Qualified Stock Option Agreement, dated as of March 3,
1992, between Registrant and Gary L. Mead. (1)
(10)(m)* Registration Rights Agreement, dated as of March 3, 1992,
between Registrant and Gary L. Mead. (1)
(10)(n) Second Amended and Restated Master Covenant Agreement dated
June 15, 1993. (7)
(10)(o) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4% Senior
Subordinated Notes due 2003. (7)
(10)(p) $126,795,786.64 Credit Agreement Among La Quinta Inns, Inc. Certain
lenders and NationsBank of Texas, N.A. as Administrative Lender dated
June 15, 1993. (7)
(10)(q) $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. (8)
(10)(r) Third Amended and Restated Master Covenant Agreement dated
as of January 25, 1994. (8)
(10)(s) Fifth Amended and Restated Master Covenant Agreement dated
as of September 12, 1995. (9)
(10)(t) Amended and Restated Credit Agreement (Facility A), dated as
of September 12, 1995. (9)
(10)(u) Amended and Restated Credit Agreement (Facility B), dated as
of September 12, 1995. (9)
(10)(v) Indenture dated September 15, 1995 Re: Debt Securities. (9)
(10)(w) Officers' certificate defining terms of $100,000,000 7.4%
Senior Notes due 2005 filed herewith.
(11) Statement regarding computation of per share earnings filed
herewith.
(12) Computation of Ratio of Earnings to Fixed Charges filed
herewith.
(21) Subsidiaries of La Quinta Inns, Inc. as of January 31, 1996
filed herewith.
(22) Registrant's definitive Proxy Statement to be filed by
Registrant within 120 days after the end of the fiscal year covered
by the Registrant's Form 10-K.
(23) Consent by KPMG Peat Marwick LLP dated February 21, 1996 to
incorporation by reference of their report dated January 22, 1996,
in various Registration Statements filed herewith.
(24) Powers of Attorney filed herewith.
(27) Financial Data Schedule filed herewith.
___________
* Indicates management compensation agreement.
(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 on Form S-8 (No. 33-26470) and incorporated herein
by reference.
(6) 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.
(7) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10-Q for the period ended June 30, 1993.
(8) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10-K for the year ended December 31, 1993 and
incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-3 (No. 2-61755) and incorporated herein by
reference.
(b) Reports on Form 8-K.
Not applicable.