Filed pursuant to Rule 424(b)(2)
Registration Statement No. 333-00309
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JANUARY 25, 1996)
$100,000,000
LA QUINTA INNS, INC.
7 1/4% SENIOR NOTES DUE 2004
-----------------
INTEREST PAYABLE MARCH 15 AND SEPTEMBER 15
-------------------
THE SENIOR NOTES WILL BE REDEEMABLE IN WHOLE OR IN PART, AT THE OPTION OF
LA QUINTA INNS, INC. AT ANY TIME, AT A REDEMPTION PRICE EQUAL TO THE GREATER OF
(I) 100% OF THEIR PRINCIPAL AMOUNT AND (II) THE SUM OF THE PRESENT VALUES
OF THE REMAINING SCHEDULED PAYMENTS OF PRINCIPAL AND INTEREST THEREON
DISCOUNTED TO THE DATE OF REDEMPTION ON A SEMIANNUAL BASIS (ASSUMING A
360-DAY YEAR CONSISTING OF TWELVE 30-DAY MONTHS) AT THE TREASURY
YIELD (AS DEFINED HEREIN) PLUS 12.5 BASIS POINTS, PLUS IN EACH
CASE ACCRUED INTEREST TO THE DATE OF REDEMPTION. THE SENIOR
NOTES WILL BE REPRESENTED BY ONE OR MORE GLOBAL SECURITIES
REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY
(THE "DEPOSITORY") OR ITS NOMINEE. BENEFICIAL INTERESTS
IN THE GLOBAL SECURITIES WILL BE SHOWN ON, AND
TRANSFERS THEREOF WILL BE EFFECTED THROUGH,
RECORDS MAINTAINED BY THE DEPOSITARY OR ITS
PARTICIPANTS. EXCEPT AS DESCRIBED HEREIN,
SENIOR NOTES IN DEFINITIVE FORM WILL NOT BE
ISSUED. SEE "DESCRIPTION OF SENIOR NOTES
AND "DESCRIPTION OF DEBT SECURITIES".
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------------
PRICE 99.4900% AND ACCRUED INTEREST, IF ANY
-------------------
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC (1) AND COMMISSIONS (2) COMPANY (1)(3)
----------------------- ----------------------- -----------------------
PER SENIOR NOTE....................... 99.4900% .6375% 98.8525%
TOTAL................................. $99,490,000 $637,500 $98,852,500
- ---------
(1) PLUS ACCRUED INTEREST, IF ANY, FROM MARCH 11, 1996.
(2) THE COMPANY HAS AGREED TO INDEMNIFY THE UNDERWRITERS AGAINST CERTAIN
LIABILITIES, INCLUDING LIABILITIES UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. SEE "UNDERWRITERS."
(3) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $225,000.
------------------------
THE SENIOR NOTES ARE OFFERED, SUBJECT TO PRIOR SALE, WHEN, AS AND IF
ACCEPTED BY THE UNDERWRITERS NAMED HEREIN AND SUBJECT TO APPROVAL OF CERTAIN
LEGAL MATTERS BY DAVIS POLK & WARDWELL, COUNSEL FOR THE UNDERWRITERS. IT IS
EXPECTED THAT DELIVERY OF THE SENIOR NOTES WILL BE MADE ON OR ABOUT MARCH 11,
1996 THROUGH THE BOOK-ENTRY FACILITIES OF THE DEPOSITORY TRUST COMPANY, AGAINST
PAYMENT THEREFOR IN IMMEDIATELY AVAILABLE FUNDS.
-------------------
MORGAN STANLEY & CO.
INCORPORATED
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
MARCH 6, 1996
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY (THE
"OFFERING") TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND
THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SENIOR NOTES OFFERED HEREBY TO
ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT
OR THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREBY SHALL UNDER ANY
CIRCUMSTANCES IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
The Company............................................................... S-3
Use of Proceeds........................................................... S-4
Capitalization............................................................ S-5
Selected Financial Data................................................... S-6
Pro Forma Financial Data.................................................. S-9
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-10
Description of Senior Notes............................................... S-16
Underwriters.............................................................. S-18
Legal Matters............................................................. S-18
PROSPECTUS
Available Information..................................................... 2
Incorporation of Certain Information by Reference......................... 2
The Company............................................................... 3
Ratio of Earnings to Fixed Charges........................................ 3
Use of Proceeds........................................................... 3
Description of Debt Securities............................................ 3
Plan of Distribution...................................................... 16
Legal Matters............................................................. 17
Experts................................................................... 17
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SENIOR NOTES
OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
S-2
THE COMPANY
La Quinta 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 average
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.
La Quinta 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 E. Pecan Street, San Antonio, Texas
78205, telephone (210) 302-6000.
FOCUSED STRATEGY
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 and leisure 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 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.
BRAND ENHANCEMENT PROGRAMS. La Quinta has taken major steps to assure
uniform high quality at its inns. During 1995, La Quinta launched its Gold
Medal-TM- 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-Registered Trademark-,
dataport telephones for computer connections and greatly expanded free
television channel choices.
In 1994, the Company completed a comprehensive chainwide image enhancement
program which gave the inns a new, fresh, crisp appearance while preserving
their unique character. The program featured newly designed signage displaying a
new logo, as well as exterior and lobby upgrades including brighter colors, more
extensive lighting, additional landscaping, enhanced guest entry and full lobby
renovation with contemporary furnishings and seating area for the complimentary
First Light-Registered Trademark- breakfast program.
REGIONALLY FOCUSED GROWTH. During 1995, La Quinta purchased eleven lodging
facilities for conversion to the La Quinta-Registered Trademark- brand and
approved the construction of ten new inns, which will open between April and
December 1996. 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.
S-3
As a result of its ability to provide consistently high-quality, convenient
accommodations and excellent value, the Company believes that it has established
La Quinta as a strong, well-regarded mid-priced brand. The Company believes that
its brand recognition and reputation have enhanced the performance of its
existing inns and should provide an advantage for inns added in the future.
FACILITIES AND SERVICES
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 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 rooms program include new 25 inch remote control televisions with
greatly expanded free television channel choices, movies-on-demand, interactive
video games from Nintendo 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.
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 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.
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.
USE OF PROCEEDS
The net proceeds from the sale of the Debt Securities in the Offering are
estimated to be approximately $99 million. The Company intends to use the net
proceeds of the Offering to repay indebtedness under the Bank Unsecured Credit
Facilities (as defined below).
The Company's current credit facilities consist of a $200 million Bank
Unsecured Line of Credit and a $50 million 364-Day Bank Unsecured Line of Credit
(the "Bank Unsecured Credit Facilities"), with maturities of August 2000 and
September 1996, respectively. Borrowings under the Bank Unsecured Credit
Facilities bear interest at the prime rate or LIBOR, adjusted for an applicable
margin, as defined in the related credit agreements. The applicable margin is
based on predetermined levels of cash flow to indebtedness or credit ratings
received from specified credit rating agencies, as defined in the related credit
S-4
agreements. The Bank Unsecured 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 Unsecured Line of Credit. The weighted
average interest rate, including commitment fees, on the Bank Unsecured Credit
Facilities was 6.40% at January 31, 1996.
During the twelve month period ended January 31, 1996, borrowings under the
Bank Unsecured Credit Facilities other than short-term borrowings used for
working capital have been made (i) in the amount of $127.0 million for capital
expenditures, including the purchase and conversion of inns, construction and
Gold Medal rooms program and (ii) in the amount of $26.7 million for the
repurchase of the Company's common stock.
CAPITALIZATION
The following table sets forth current installments of long-term debt and
the capitalization of the Company as of December 31, 1995, and as adjusted to
reflect the sale of the Senior Notes and the anticipated application of the
estimated net proceeds therefrom as if such transactions occurred on December
31, 1995. For additional information, see "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the combined financial statements, the notes thereto, and other financial, pro
forma and statistical information included or incorporated by reference in this
Prospectus Supplement and the Prospectus.
DECEMBER 31, 1995
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(AMOUNTS IN
THOUSANDS)
Current installments of long-term debt.................. $ 13,322 $13,322
-------- -----------
-------- -----------
Long-term debt, excluding current installments
Mortgage loans, maturing 1996-2001.................... $ 70,339 $70,339
Industrial development revenue bonds, maturing
1996-2012............................................ 51,284 51,284
7.40% Senior Notes due 2005........................... 99,793 99,793
7 1/4% Senior Notes due 2004.......................... -- 100,000(1)
Bank Unsecured Line of Credit, maturing August 2000... 177,000 78,000(1)
9 1/4% Senior Subordinated Notes due 2003............. 120,000 120,000
-------- -----------
Total long-term debt, excluding current
installments....................................... 518,416 519,416
-------- -----------
Partners' capital....................................... 6,309 6,309
Shareholders' equity.................................... 331,713 331,713
-------- -----------
Total capitalization................................ $856,438 $857,438
-------- -----------
-------- -----------
- ------------------------
(1) Adjusted to reflect the issuance of the Senior Notes and the repayment of
existing indebtedness under the Bank Unsecured Credit Facilities.
S-5
SELECTED FINANCIAL DATA
The following table sets forth certain combined financial information of the
Company, its wholly-owned subsidiaries and its combined unincorporated
partnerships and joint ventures and is qualified in its entirety by, and should
be read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements, the
notes thereto, and other financial, pro forma and statistical information
included or incorporated by reference in this Prospectus Supplement and the
Prospectus.
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 (1)......................... 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 (2).............................. 12,630 -- -- -- --
Performance stock option (3).................................................. -- -- 4,407 -- --
Non-recurring cash and non-cash charges (1)................................... -- -- -- 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
Partners' equity in earnings (1).............................................. 10,227 11,406 12,965 15,081 9,421
Net (gain) loss on property transactions...................................... -- (79) 4,347 (282) 1,012
Income taxes.................................................................. 31,620 24,176 12,416 526 787
Earnings (loss) before extraordinary items and cumulative effect of accounting
change....................................................................... 51,374 37,815 19,420 (7,796) 1,398
Net earnings (loss) (1)(4).................................................... 50,657 37,815 20,301 (8,754) 129
Conversion of partner's interest into common stock (5)........................ (46,364) -- -- -- --
OTHER DATA
EBITDA (6).................................................................... 186,244 148,837 103,829 97,593 86,042
EBITDA margin (7)............................................................. 45.0% 41.1% 38.2% 38.4% 35.7%
Construction, purchase and conversion of inns (8)............................. 77,502 34,690 38,858 4,060 15,487
Other capital expenditures (9)................................................ 39,962 75,248 32,623 15,529 13,803
Purchase of partners' equity interests (10)................................... 48,200 53,255 78,169 -- 3,546
Ratio of EBITDA to net interest expense....................................... 4.7x 4.0x 4.0x 3.6x 2.8x
Ratio of earnings to fixed charges (11)....................................... 3.1x 2.8x 2.4x 1.2x 1.3x
OPERATING DATA
Inns owned 100%............................................................... 230 176 166 89 89
Inns owned 40-82%............................................................. 7 50 45 80 79
Inns managed.................................................................. -- -- 9 40 40
-------- -------- -------- -------- --------
Number of inns................................................................ 237 226 220 209 208
Occupancy percentage (12)..................................................... 70.8% 70.1% 65.1% 65.6% 64.8%
ADR (13)...................................................................... $ 51.07 $ 47.65 $ 46.36 $ 44.33 $ 43.11
Revenue per available room ("REVPAR") (14).................................... 36.17 33.39 30.20 29.06 27.92
AT DECEMBER 31,
1995
---------------
BALANCE SHEET DATA
Total assets............................................................................................... $ 964,115
Current installments of long-term debt..................................................................... 13,322
Long-term debt, excluding current installments............................................................. 518,416
Partners' capital.......................................................................................... 6,309
Shareholders' equity....................................................................................... 331,713
S-6
- ------------------------
(1) 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. Results for the year ended December 31, 1992 were
impacted by an additional charge of $1,214,000 to partners' equity in
earnings and losses related to the reallocation of losses of a combined
unincorporated joint venture to the Company.
(2) During implementation of the Gold Medal rooms 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.
(3) Performance stock option relates to the costs of stock options which became
exercisable when the average price of the Company's common 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. Currently, the Company has no options
outstanding that require recognition of additional compensation expense.
(4) Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the use of the asset and liability method of
accounting for deferred income taxes. The Company recorded the impact of
SFAS 109's implementation, an increase in net income of $1,500,000, as the
cumulative effect of an accounting change in the combined statement of
operations for the year ended December 31, 1993. Prior years' financial
statements were not restated to apply the provisions of SFAS 109.
(5) Conversion of partner's interest into common stock is a non-recurring,
non-cash item directly related to the AEW Transaction, as defined in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
(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,
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, 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:
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- --------- ---------
Extraordinary items............................................ $ 717 $ -- $ 619 $ 958 $ 1,269
Partners' equity in earnings................................... 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.
S-7
(7) EBITDA margin represents EBITDA divided by total revenues.
(8) Included in years ended December 31, 1995, 1994, 1993, 1992 and 1991 were
conversion costs of $15,611,000, $8,891,000, $7,231,000, $4,060,000 and
$3,977,000, respectively.
(9) Represents capital expenditures other than those for construction, purchase
and conversion of inns. Capital expenditures for the year ended December 31,
1995 include costs related to the Gold Medal rooms program, while capital
expenditures for the years ended December 31, 1994 and 1993 include costs
related to the Company's image enhancement program.
(10) Purchase of partners' equity interests in 1995 is related to the
acquisition of La Quinta Development Partners ("LQDP"), while purchase of
partners' equity interests for the years ended December 31, 1994 and 1993
includes approximately $9,672,000 and $42,091,000, respectively, related to
the acquisition of the La Quinta Motor Inns Limited Partnership ("LQP").
(11) For purposes of calculating this ratio, earnings include net earnings
(loss) before income taxes, extraordinary items, and the cumulative effect
of accounting change, partners' equity in earnings and losses of combined
unincorporated ventures that have fixed charges, fixed charges net of
interest capitalized, and amortization of capitalized interest. Fixed
charges include interest expense on long-term debt and the portion of rental
expense allocated to interest.
(12) The occupancy percentage represents total rooms occupied divided by total
available rooms. Total available rooms represents the number of La Quinta
rooms available for rent multiplied by the number of days in the reported
period.
(13) ADR represents total room revenues divided by the total number of rooms
occupied.
(14) REVPAR represents the product of occupancy percentage and ADR.
S-8
PRO FORMA FINANCIAL DATA
The following tables are qualified in their entirety by, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements, the
notes thereto, and other financial, pro forma and statistical information
included or incorporated by reference in this Prospectus Supplement.
The unaudited pro forma combined condensed statement of operations presented
below includes the statement of operations for the year ended December 31, 1995,
and as adjusted to reflect the AEW Transaction (as defined in "Management's
Discussion and Analysis of Financial Condition and Results of Operations") as if
the transaction had occurred on January 1, 1995. The AEW Transaction was
consummated on July 3, 1995. 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, nor are they necessarily
indicative of future operating results.
PRO FORMA ADJUSTMENTS PRO FORMA
YEAR ENDED YEAR ENDED
DECEMBER 31, -------------------------- DECEMBER 31,
1995 DEBIT CREDIT 1995 (F)
------------ ----------- ----------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
Total revenues........................................................ $413,919 $413,919
Operating costs and expenses:
Direct and Corporate................................................ 227,675 227,675
Depreciation, amortization, and asset retirements................... 40,951 $ 548(A) 41,499
Provision for premature retirement of assets........................ 12,630 12,630
------------ ------------
Total operating costs and expenses................................ 281,256 281,804
------------ ------------
Operating income.................................................. 132,663 132,115
------------ ------------
Other (income) expenses:
Net interest expense................................................ 39,442 1,658(B) 41,100
Partners' equity in earnings........................................ 10,227 $ 7,576(C) 2,651
------------ ------------
Earnings before income taxes and extraordinary items................ 82,994 88,364
Income taxes........................................................ 31,620 2,046(D) 33,666
------------ ----------- ----------- ------------
Earnings before extraordinary items............................... $ 51,374 $ 4,252 $ 7,576 $ 54,698
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Earnings per common and common equivalent share:
Earnings before extraordinary items per share..................... $ 0.99 $ 1.00
------------ ------------
------------ ------------
Weighted average number of common and common equivalent shares
outstanding.......................................................... 51,977 2,650(E) 54,627
------------ ----------- ------------
------------ ----------- ------------
The accompanying notes are an integral part of the unaudited pro forma combined
condensed statement of operations.
(A) Records additional depreciation expense on the addition of $37.3 million of
depreciable assets. The depreciation expense was calculated using the
straight line method based on a 34 year remaining life.
(B) Represents the interest expense on additional debt of $48.2 million relating
to the acquisition of one-third of AEW Partners, L.P.'s ("AEW") interest in
LQDP at the effective weighted average interest rate under the Company's
existing credit facilities.
(C) Represents the elimination of AEW's equity in earnings.
(D) Reflects income tax effect of pro forma adjustments assuming an effective
income tax rate of 38.1%.
(E) Reflects the increase in weighted average shares outstanding.
(F) In the third quarter of 1995, the Company recorded $46.4 million associated
with the exercise of AEW's conversion option as a deduction presented below
net earnings in the Statement of Operations (Conversion of Partner's
Interest into Common Stock) in arriving at net earnings available to common
shareholders. This non-recurring, non-cash item is directly attributable to
the AEW Transaction and is not reflected in the pro forma condensed
statement of operations above. The pro forma per share effect of this item
is ($0.85).
S-9
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 to 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 to 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 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 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.
The following chart shows certain historical operating statistics and
revenue data. References to occupancy percentages and ADR refer to Company Inns
(inns owned by the Company or by unincorporated partnerships and joint
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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 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.
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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.
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%.
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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.
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. 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.
S-13
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 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's Board of Directors has
authorized the issuance of up to $150 million in principal amount of Debt
Securities at terms dependent upon market conditions at the time of
S-14
issuance. The net proceeds from the issuance of Debt Securities will be used to
repay indebtedness under the Company's Bank Unsecured Credit Facilities. 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 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 $12,244,000 and 373,200
shares (post-split) for approximately $7,115,000 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.
S-15
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.
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 an 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.
DESCRIPTION OF SENIOR NOTES
THE FOLLOWING DESCRIPTION OF THE PARTICULAR TERMS OF THE SENIOR NOTES
OFFERED HEREBY SUPPLEMENTS AND, TO THE EXTENT INCONSISTENT THEREWITH, REPLACES
THE DESCRIPTION OF THE GENERAL TERMS AND PROVISIONS OF THE DEBT SECURITIES SET
FORTH IN THE ACCOMPANYING PROSPECTUS, TO WHICH DESCRIPTION REFERENCE IS HEREBY
MADE. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
INDENTURE REFERRED TO IN THE ACCOMPANYING PROSPECTUS.
GENERAL
The Senior Notes offered hereby constitute a series of notes under the
Indenture, which series is limited to $100 million aggregate principal amount.
The Senior Notes will mature on March 15, 2004.
Each Senior Note will bear interest from March 11, 1996 at the rate of
7 1/4% per annum, payable semi-annually (to holders of record at the close of
business on the March 1 or September 1 immediately preceding the interest
payment date) on March 15 and September 15 of each year beginning September 15,
1996.
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The Senior Notes will be issued in registered form only without coupons. The
Senior Notes will be issuable in denominations of $1,000 or multiples thereof.
The Senior Notes will be issued as book-entry notes. Subject to the limitations
provided in the Indenture, such services will be provided without charge, other
than any tax or other governmental charge payable in connection therewith.
The Senior Notes will be unsubordinated and unsecured obligations of the
Company ranking PARI PASSU with all existing and future unsubordinated and
unsecured obligations of the Company. As of January 31, 1996 after giving effect
to this Offering, the Company had approximately $207.0 million of debt that is
PARI PASSU with the Senior Notes, $118.2 million of secured debt, $15.5 million
of debt at subsidiaries and $120.0 million of debt that is, by its terms,
subordinated to the Senior Notes. Claims of Holders of Senior Notes will be
effectively subordinated to the claims of holders of the debt of the Company's
subsidiaries with respect to the assets of such subsidiaries. In addition,
claims of Holders of Senior Notes will be effectively subordinated to the claims
of holders of secured debt of the Company and its subsidiaries with respect to
the collateral securing such claims and claims of the Company as the holder of
general unsecured intercompany debt will be similarly effectively subordinated
to claims of holders of secured debt of its subsidiaries.
Upon issuance, the Senior Notes will be represented by one or more
Registered Global Securities that will be deposited with, or on behalf of, the
Depositary and will be registered in the name of the Depositary or a nominee of
the Depositary See "Description of Debt Securities -- Global Securities" in the
Prospectus.
OPTIONAL REDEMPTION
The Senior Notes will be redeemable as a whole or in part, at the option of
the Company at any time, at a redemption price equal to the greater of (i) 100%
of their principal amount and (ii) the sum of the present values of the
remaining scheduled payments of principal and interest thereon discounted to the
date of redemption on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the Treasury Yield plus 12.5 basis points, plus in each
case accrued interest to the date of redemption (the "Redemption Date").
"Treasury Yield" means, with respect to any Redemption Date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an independent investment banker as having a maturity comparable to
the remaining term of the Senior Notes that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of the Senior Notes. "Independent Investment Banker" means Morgan Stanley & Co.
Incorporated or, if such firm is unwilling or unable to select the Comparable
Treasury Issue, an independent investment banking institution of national
standing appointed by the Trustee.
"Comparable Treasury Price" means, with respect to any Redemption Date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such Redemption Date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such business day, (A) the average
of the Reference Treasury Dealer Quotations for such Redemption Date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations, or
(B) if the Trustee obtains fewer than four Reference Treasury Dealer Quotations,
the average of all such Quotations. "Reference Treasury Dealer Quotations"
means, with respect to each Reference Treasury Dealer and any Redemption Date,
the average, as determined by the Trustee, of the bid and asked prices for the
Comparable Treasury Issue (expressed in each case as a percentage of its
principal amount) quoted in writing to the Trustee by such Reference Treasury
Dealer at 5:00 p.m. on the third business day preceding such Redemption Date.
"Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated,
Goldman, Sachs & Co., Smith Barney Inc. and another Primary Treasury Dealer (as
defined herein) at the option of the Company, PROVIDED, HOWEVER, that if any of
the foregoing shall cease to be a primary U.S. Government securities dealer in
New York City (a "Primary Treasury Dealer"), the Company shall substitute
therefor another Primary Treasury Dealer.
Holders of Senior Notes to be redeemed will receive notice thereof by
first-class mail at least 30 and not more than 60 days prior to the date fixed
for redemption.
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UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof, the Underwriters named below have severally
agreed to purchase, and the Company has agreed to sell to them, severally, the
respective principal amounts of Senior Notes set forth opposite the names of
such Underwriters below:
PRINCIPAL AMOUNT
NAME OF SENIOR NOTES
- ------------------------------------------------------------ ------------------
Morgan Stanley & Co. Incorporated........................... $ 33,400,000
Goldman, Sachs & Co. ....................................... 33,300,000
Smith Barney Inc. .......................................... 33,300,000
------------------
Total..................................................... $100,000,000
------------------
------------------
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Senior Notes are subject to
the approval of certain legal matters by their counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all of the Senior
Notes if any are taken.
The Underwriters initially propose to offer part of the Senior Notes
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price that represents a concession not
in excess of .40% of the principal amount of the Senior Notes. Any Underwriter
may allow, and such dealers may reallow, a concession not in excess of .20% of
the principal amount of the Senior Notes to other Underwriters or to certain
other dealers. After the initial offering of the Senior Notes, the offering
price and other selling terms may from time to time be varied by the
Underwriters.
The Company does not intend to apply for listing of the Senior Notes on a
national securities exchange, but has been advised by the Underwriters that they
presently intend to make a market in the Senior Notes, as permitted by
applicable laws and regulations. The Underwriters are not obligated, however, to
make a market in the Senior Notes and any such market making may be discontinued
at any time at the sole discretion of the Underwriters. Accordingly, no
assurance can be given as to the liquidity of, or trading markets for, the
Senior Notes.
From time to time, Morgan Stanley & Co. Incorporated and Smith Barney Inc.
have provided, and continue to provide, investment banking services to the
Company.
The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
LEGAL MATTERS
Certain legal matters with respect to the Senior Notes offered hereby will
be passed upon for the Company by John F. Schmutz, Vice President -- General
Counsel of the Company and Latham & Watkins, Los Angeles, California and for the
Underwriters by Davis Polk & Wardwell.
S-18