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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, 1996
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. /X/
The aggregate market value of the voting stock held by non-affiliates
of registrant as of January 31, 1997 was approximately $1,375,535,000. As of
January 31, 1997, there were 77,577,017 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, 1997 relating to
Registrant's 1997 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....................................................... 12
Item 3. Legal Proceedings................................................ 14
Item 4. Submission of Matters to a Vote of Security Holders.............. 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 15
Item 6. Selected Financial Data.......................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 18
Item 8. Financial Statements and Supplementary Data...................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 48
PART III
Item 10. Directors and Executive Officers of the Registrant............... 48
Item 11. Executive Compensation........................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and Management... 49
Item 13. Certain Relationships and Related Transactions................... 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 49
Signatures................................................................. 52
This Annual Report on Form 10-K for the year ended December 31, 1996,
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.
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. La Quinta operates primarily
in the mid-priced segment of the lodging industry. La Quinta achieved an
occupancy percentage of 68.9% and an average daily room rate ("ADR") of
$53.83 for the year ended December 31, 1996. The Company has inns located in
29 states, concentrated in the Western and Southern United States. At
December 31, 1996, La Quinta owned a 100% interest in 245 of its inns and a
50% or greater interest in an additional three inns, totaling approximately
32,000 rooms. 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
which includes cereal and fresh 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 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
123 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, 1996, the Company owned 100% of
245 inns and 50% or more of an additional three 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.
NEW CONSTRUCTION PROGRAM - The Company's growth plan focuses on the
construction of new inns in strong economic and travel markets.
During 1996, La Quinta opened eleven new Inn & Suites hotels and
expects to open a total of 36 by the end of 1997, a rate of
approximately one new opening every two weeks. The new Inn &
Suites offer rooms designed to accommodate the needs of the guest
irrespective of the purpose of the trip. The standard two-bedded
room accommodates most short business trips or family travel. The
King Plus-Registered Trademark- Extra rooms feature a king size
bed, refrigerator and microwave which may be desirable for longer
stays. The Inn & Suites also offer a select number of deluxe
two-room suites with separate sitting and sleeping areas, double
vanities, a sleeper sofa, and two closets, all of which are in
addition to the amenities provided in the King Plus Extra rooms.
GOLD MEDAL ROOMS PROGRAM - 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, which is expected to be
substantially complete by April 1997, 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. At January
31, 1997, over 185 inns had either been completed or were
undergoing construction related to this program.
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.
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
owned and operated 245 inns through wholly-owned subsidiaries and
partnerships and three inns through combined unincorporated partnerships and
joint ventures, at December 31, 1996.
4
The Board of Directors of the Company authorized three-for-two stock
splits effected in the form of stock dividends effective in July 1996,
October 1994 and March 1994. References to the Company's common stock prior
to the July 1996 split are described herein as "pre-split" and references to
the Company's common stock after the July 1996 split are described herein as
"post-split".
During 1996, the Company purchased the limited partners' interests in
four of its combined unincorporated partnerships and joint ventures, each
owning one inn. At December 31, 1996, the Company had three remaining
unincorporated partnerships and joint ventures, which each owned one inn.
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 (pre-split) 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 (pre-split) 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 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 ("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 have
been 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.
The following table describes the composition of inns in the La Quinta
chain at:
December 31, 1996 December 31, 1995
-------------------------- ---------------------------
La Quinta La Quinta
Equivalent Equivalent
Inns Rooms Rooms (1) Inns Rooms Rooms (1)
---- ----- --------- ---- ----- ---------
Owned 100% (2)......... 245 31,720 31,720 230 29,522 29,522
Owned 50-67%........... 3 376 203 7 836 467
--- ------ ------ --- ------ ------
Total Company owned.... 248 32,096 31,923 237 30,358 29,989
--- ------ ------ --- ------ ------
--- ------ ------ --- ------ ------
(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-Registered Trademark- brand
and re-opened during 1996.
UNINCORPORATED PARTNERSHIPS AND JOINT VENTURES - Prior to 1993, La
Quinta financed its development, in part, through unincorporated
partnerships and joint ventures with large insurance companies or
financial institutions. Under the terms of the unincorporated
partnership and joint venture agreements, available cash flow
5
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 22 unincorporated partnerships and joint ventures, including
LQDP and the CIGNA partnerships. In addition, the Company successfully
completed the acquisition of LQP in January 1994. At December 31, 1996, the
Company had ownership interests between 50% and 60% in three unincorporated
partnerships and joint ventures.
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, 1997, La Quinta employed approximately 6,800 persons, of
whom approximately 90% were compensated on an hourly basis. Approximately
360 individuals were employed at the corporate headquarters and 6,440 were
employed directly in inn operations. 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 more than 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. An
external industry survey shows La Quinta's heavy users are the most loyal of
the mid-priced segment. 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. Over 10% of Returns Club members spend 30 nights or more per year in
a La Quinta inn. The Returns Club had approximately 270,000 members as of
December 31, 1996.
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 through television, 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.
6
The Company markets directly to companies and other organizations through
its direct sales force of 56 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 30% 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. These phones enable guests to make their
next night's reservation from their previous night's La Quinta inn. Effective
March 1997, guests will also be able to access the teLQuik system by dialing
1-800-NUROOMS (1-800-687-6667). 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 75% of room nights. In May 1996, La Quinta opened
a second reservation center to support the growth of the chain and to provide
uninterrupted service in times of peak demand. Both reservation centers
provide state-of-the-art technology in processing reservations as one virtual
center. La Quinta, through its national sales managers, markets its
reservation services to travel agents and corporate travel planners who may
access teLQuik through five major airline reservation systems.
Information regarding inn locations, services and amenities, as well as
reservation capabilities and a virtual reality tour of the new Gold Medal
rooms, is available on the Company's Travel Web site at http://www.laquinta.com.
7
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
La Quinta desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "Act"). Many of
the following important factors discussed below have been discussed in the
Company's prior filings with the Securities and Exchange Commission.
The Company wishes to caution readers that the following important
factors, among others, could in the future cause the Company's actual results
to differ materially from those expressed in any forward-looking statements
made by, or on behalf of, the Company.
COMPETITION
The profitability of inns operated by the Company is subject to
general economic conditions, competition, the desirability of particular
locations, the relationship between supply of and demand for hotel rooms
and other factors. The Company generally operates inns in markets that
contain numerous competitors, and the continued success of its inns will
be dependent, in large part, upon the ability of these facilities to
compete in such areas as reasonableness of room rates, quality of
accommodations, service level and convenience of locations. There can
be no assurance that demographic, geographic or other changes in markets
will not adversely affect the convenience or desirability of the
locations of the Company's inns. Furthermore, there can be no assurance
that, in the markets in which the Company's inns operate, competing
hotels will not provide greater competition for guests than currently
exists, and that new hotels will not enter such markets.
SEASONALITY
The lodging industry is seasonal in nature. Generally, the Company's inn
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in the revenue, profit margins and net earnings of the Company.
SUPPLY AND DEMAND
In some years, construction of lodging facilities in the United
States resulted in an excess supply of available rooms, and the
oversupply had an adverse effect on occupancy levels and room rates in
the industry. Although the relationship between supply and demand has
been favorable in recent years, the lodging industry may be adversely
affected in the future by (i) an oversupply of available rooms, (ii)
national and regional economic conditions, (iii) changes in travel
patterns, (iv) taxes and government regulations which influence or
determine wages, prices, interest rates, construction procedures and
costs, and (v) the availability of credit.
EMPLOYMENT AND OTHER GOVERNMENTAL REGULATION
The Company's business is subject to extensive federal, state and local
regulatory requirements, including building and zoning requirements, all of
which can prevent, delay, make uneconomic or significantly increase the cost
of developing additional lodging facilities. In addition, the Company is
subject to laws governing its relationship with employees, including minimum
wage requirements, overtime pay, working conditions, work permit requirements
and discrimination claims. An increase in the minimum wage rate, employee
benefit costs or other costs associated with employees could adversely
affect the Company. Under the Americans with Disabilities Act of 1990 (the
"ADA"), all public accommodations are required to meet certain federal
requirements related to access and use by disabled persons. While the
Company believes that its inns are substantially in compliance with these
requirements, a determination that the Company is not in compliance with the
ADA could result in the imposition of fines or an award of damages to private
litigants. These and other initiatives could adversely affect the Company as
well as the lodging industry in general.
8
ENVIRONMENTAL REGULATION
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Certain environmental laws
and common law principles could be used to impose liability for release of
asbestos-containing materials ("ACMs") into the air, and third parties may
seek recovery from owners or operators of real property for personal injury
associated with exposure to released ACMs. Environmental laws also may
impose restrictions on the manner in which property may be used or businesses
may be operated, and these restrictions may require substantial expenditures.
In connection with the ownership or operation of its inns, the Company may
be potentially liable for any such costs. No assurance can be given that a
material environmental claim will not be asserted against the Company. The
cost of defending against claims of liability or of remediating a
contaminated property could have a material adverse effect on the results of
operations of the Company.
EMPLOYEES
The Company's future success will depend, in part, on its continuing
ability to attract, retain and motivate highly qualified personnel, who are
in great demand.
LEGAL PROCEEDINGS
The Company is, and is likely in the future to be, subject to certain
types of litigation, including negligence and other tort claims. The costs
and effects of such legal and administrative cases and proceedings (whether
civil or criminal), settlements and investigations are indeterminate. There
can be no assurance that such costs and effects would not be material to the
Company's operations.
LODGING INDUSTRY OPERATING RISKS
The Company is subject to all operating risks common to the lodging
industry. These risks include, among other things, (i) competition for
guests from other hotels, a number of which may have greater marketing and
financial resources than the Company, (ii) increases in operating costs due
to inflation and other factors, which increases may not have been offset in
recent years, and may not be offset in the future by increased room rates,
(iii) dependence on business and commercial travelers and tourism, which
business may fluctuate and be seasonal, (iv) increases in energy costs and
other expenses of travel, which may deter travelers, and (v) adverse effects
of general and local economic conditions. The Company is also subject to the
risk that in connection with the acquisition of inns, it may not be possible
to transfer certain operating licenses or to obtain new licenses in a timely
manner in the event such licenses cannot be transferred. The failure to
obtain these licenses could adversely affect the Company's operations.
CONSTRUCTION
The Company may from time to time experience shortages of materials or
qualified tradespeople or volatile increases in the cost of certain
construction materials, resulting in longer than normal construction and
remodeling periods, loss of revenue and increased costs. The Company relies
heavily on local contractors, who may be inadequately capitalized or
understaffed. The inability or failure of one or more local contractors to
perform may result in construction or remodeling delays, increased cost and
loss of revenue.
CAPITAL REQUIREMENTS AND AVAILABILITY OF FINANCING
The Company's business is capital intensive, and it will have significant
capital requirements in the future. The Company's leverage could affect its
ability to obtain financing in the future or to undertake refinancings on
terms and subject to conditions deemed acceptable by the Company. In the
event that the
9
Company's cash flow and working capital are not sufficient to fund the
Company's expenditures or to service its indebtedness, it would be required
to raise additional funds through the sale of additional equity securities,
the refinancing of all or part of its indebtedness, the incurrence of
additional permitted indebtedness or the sale of assets. There can be no
assurance that any of these sources of funds would be available in amounts
sufficient for the Company to meet its obligations. Moreover, even if the
Company were able to meet its obligations, its leveraged capital structure
could significantly limit its ability to finance its expansion program and
other capital expenditures, to compete effectively or to operate successfully
under adverse economic conditions. Additionally, financial and operating
restrictions contained in the Company's existing indebtedness may limit the
Company's ability to secure additional financing, and may prevent the Company
from engaging in transactions that might otherwise be beneficial to the
Company and to holders of the Company's common stock. The Company's ability
to satisfy its obligations will also be dependent upon its future
performance, which is subject to prevailing economic conditions and
financial, business and other factors beyond the Company's control.
GENERAL REAL ESTATE INVESTMENT RISKS
The Company's ownership of real property, including inns, is substantial.
The Company's investments are subject to varying degrees of risk generally
incident to the ownership of real property. Real estate values and income
from the Company's inns may be adversely affected by changes in national
economic conditions, changes in local market conditions due to changes in
general or local economic conditions and neighborhood characteristics,
changes in interest rates and in the availability, cost and terms of mortgage
funds, the impact of present or future environmental legislation and
compliance with environmental laws, the ongoing need for capital
improvements, changes in real estate tax rates and other operating expenses,
adverse changes in governmental rules and fiscal policies, civil unrest, acts
of God, including earthquakes and other natural disasters (which may result
in uninsured losses), acts of war, adverse changes in zoning laws and other
factors which are beyond the control of the Company.
VALUE AND ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. The ability of the
Company to vary its portfolio in response to changes in economic and other
conditions is limited. If the Company must sell an investment, there can be
no assurance that the Company will be able to dispose of it in the time
period it desires or that the sales price of any investment will recoup or
exceed the amount of the Company's investment.
PROPERTY TAXES
Each of the Company's inns is subject to real property taxes. The real
property taxes on the Company's inns may increase or decrease as property tax
rates change and as the properties are assessed or reassessed by taxing
authorities. If property taxes increase, the Company's operations could be
adversely affected.
RENOVATION PROGRAM
Hotels in general, including the Company's inns, have an ongoing need for
renovations and other capital improvements, particularly in older structures,
including periodic replacement or refurbishment of furniture, fixtures and
equipment. The Company is in the process of renovating and upgrading guest
rooms through its Gold Medal rooms program. This program is designed to
strengthen the Company's ability to gain market share and pricing advantage
relative to its competitors through decor and service enhancements. There
can be no assurance that the program will be successful in generating
revenues commensurate with the significant costs required for such
enhancements. Additionally, implementation of the program results in a
significant disruption of business as 20-30 rooms are taken out of available
supply at an inn on any given night during the construction period.
Construction activities at each inn are essentially completed in ten to
twelve weeks. This disruption of business may continue for an indeterminate
period of time after completion of the program at an inn.
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RISKS OF EXPANSION STRATEGY
The Company intends to pursue a strategy of growth through both the
construction of new lodging facilities and the opportunistic acquisition
of existing lodging facilities. There can be no assurance that the
Company will find suitable sites for construction or suitable properties
for acquisition or that these sites and properties will not be acquired
by competitors of the Company. The Company incurs certain costs in
connection with the acquisition of new properties and may be required to
provide significant capital expenditures for conversions and upgrades
when acquiring a property operating under a brand other than La Quinta.
There can be no assurance that any of the properties the Company may
construct or acquire will be profitable following such construction or
acquisition. The construction or acquisition of a property that is not
profitable, or the acquisition of a property that results in significant
unanticipated conversion costs, could adversely affect the Company's
profitability. The Company may in the future require additional
financing in order to continue to make acquisitions. There is no
assurance that such additional financing, if any, will be available to
the Company on acceptable terms.
INVESTMENT IN SINGLE INDUSTRY
The Company is subject to risks inherent in investments in a single
industry. The effects on the Company's revenues resulting from a downturn in
the lodging industry would be more pronounced than if the Company had
diversified its investments outside of the hotel industry.
POSSIBLE VOLATILITY OF COMMON STOCK PRICE
The trading price of the Company's common stock may be influenced by the
performance of, and investor expectations for, the Company, the trading
volume of the Company's common stock and general economic and market
conditions. Accordingly, there can be no assurance as to the price at which
the Company's common stock will trade in the future.
Additional information on factors which could affect the Company's
financial results may be included in subsequent reports filed with the
Securities and Exchange Commission.
11
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.
During 1996, La Quinta opened eleven new Inn & Suites hotels and
expects to open a total of 36 by the end of 1997, a rate of approximately
one new opening every two weeks. The new Inn & Suites offer rooms designed to
accommodate the needs of the guest irrespective of the purpose of the trip.
The standard two-bedded room accommodates most short business trips or family
travel. The King Plus Extra rooms feature a king-size bed, refrigerator and
microwave which may be desirable for longer stays. The Inn & Suites also
offer a select number of deluxe two-room suites with separate sitting and
sleeping areas, double vanities, a sleeper sofa, and two closets, all of
which are in addition to the amenities provided in the King Plus Extra rooms.
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, 1996, 1995 and 1994, the Company spent approximately
$116,600,000, $40,000,000 and $75,200,000, respectively, on capital
improvements to existing inns. The amounts for 1996 and 1995 include
expenditures related to the Company's Gold Medal rooms program, while the
amount for 1994 includes 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, which is
expected to be substantially complete by April 1997, 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. At January 31,
1997, over 185 inns had either been completed or were undergoing construction
related to this program.
In 1994, La Quinta completed a comprehensive chainwide image
enhancement program which gave its properties 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.
Typically, food service for La Quinta guests is provided by adjacent,
free standing restaurants. At December 31, 1996, the Company owned 123
restaurant buildings adjacent to its inns. These restaurants generally are
leased pursuant to build-to-suit leases that require the operator to pay, in
addition to minimum and percentage rentals, all expenses, including building
maintenance, taxes and insurance.
12
At December 31, 1996, there were 248 inns located in 29 states,
concentrated in the Western and Southern United States. The Company had an
additional 16 inns under construction, which are scheduled to open between
February and August 1997. The states and cities in which the inns are located
are set forth in the following table:
ALABAMA ILLINOIS PENNSYLVANIA UTAH INNS UNDER
Birmingham (2) Champaign Pittsburgh Layton CONSTRUCTION
Huntsville (2) Chicago Metro (5) Salt Lake City
Mobile Moline SOUTH CAROLINA ALABAMA
Montgomery Anderson VIRGINIA Birmingham
Tuscaloosa INDIANA Charleston Bristol
Indianapolis (2) Columbia Hampton COLORADO
ARIZONA Merrillville Greenville Richmond Boulder
Phoenix (3) Virginia Beach
Flagstaff KANSAS TENNESSEE FLORIDA
Scottsdale Lenexa Chattanooga WASHINGTON Tampa
Tucson (3) Wichita Kingsport Seattle(2)
Knoxville (2) Tacoma GEORGIA
ARKANSAS KENTUCKY Memphis (3) Atlanta
Little Rock (5) Lexington Nashville (3) WYOMING
Casper LOUISIANA
CALIFORNIA LOUISIANA TEXAS Cheyenne Alexandria
Bakersfield Baton Rouge Abilene Rock Springs Shreveport
Costa Mesa Bossier City Amarillo (2)
Fresno Kenner Arlington OTHER MISSOURI
Irvine Lafayette Austin (6) OWNED INNS St. Louis
La Palma Monroe Beaumont (operated under
Redding New Orleans (5) Bedford other brands) NORTH CAROLINA
Sacramento (2) Slidell Brownsville Raleigh (2)
San Bernardino Sulphur Clute GEORGIA
San Diego (3) College Station Columbus SOUTH CAROLINA
San Francisco MICHIGAN Corpus Christi (2) Myrtle Beach
Stockton Kalamazoo Dallas Metro (15) TEXAS
Ventura Del Rio El Paso TEXAS
MISSISSIPPI Denton La Marque Dallas Metro (3)
COLORADO Jackson (2) Eagle Pass San Antonio Houston
Colorado Springs El Paso (3)
Denver (8) MISSOURI Fort Stockton UTAH
St. Louis Fort Worth (2) Salt Lake City (2)
FLORIDA Galveston
Coral Springs NEBRASKA Georgetown
Cypress Creek Omaha Harlingen
Daytona Beach Houston Metro (17)
Deerfield Beach NEVADA Huntsville
Ft. Myers Las Vegas (2) Killeen
Gainesville Reno Laredo
Jacksonville (3) Longview
Miami NEW MEXICO Lubbock (2)
Orlando (3) Albuquerque (3) Lufkin
Pensacola Farmington Midland
Tallahassee (2) Las Cruces Nacogdoches
Tampa (5) Santa Fe Odessa
Round Rock
GEORGIA NORTH CAROLINA San Angelo
Atlanta (7) Charlotte (2) San Antonio (11)
Augusta Raleigh San Marcos
Columbus Temple
Macon OHIO Texarkana
Savannah (2) Columbus Tyler
Victoria
OKLAHOMA Waco
Oklahoma City (3) Wichita Falls
Tulsa (3)
13
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
suit alleged 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 were
sought in the action. The Court granted the Company's motion for summary
judgment in September 1996, while allowing plaintiff the opportunity to
re-file on a limited basis. On December 4, 1996, the case was dismissed with
prejudice, thereby resulting in a final disposition of the case in the
Company's favor.
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, 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.
14
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 of the Company's Common Stock for each
of the quarters during the years ended December 31, 1996 and 1995, as
adjusted for the three-for-two stock split effected in the form of a stock
dividend in July 1996, is set forth below:
1996 1995
-------------------------- ------------------------
Per Share Per Share
High Low Dividend High Low Dividend
---- --- -------- ---- --- -----
First Quarter........... $19 3/4 $15 5/8 $.025 $19 3/8 $13 1/8 $.025
Second Quarter.......... 24 17 5/8 .025 20 1/8 16 7/8 .025
Third Quarter........... 23 5/8 16 3/8 .0175 20 1/2 17 1/2 .025
Fourth Quarter.......... 21 7/8 17 3/4 .0175 19 5/8 16 3/8 .025
During 1995 and the first two quarters of 1996, 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. As a result of the
stock split in July 1996, the Board of Directors reduced the annual dividend
rate to $.07 per share and paid quarterly cash dividends in the amount of
$.0175 per share for the third and fourth quarters of 1996. 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, 1997, the approximate number of holders of record of
the Company's Common Stock was 993.
15
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31
---------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share amounts,
ratios and inn statistics)
STATEMENT OF OPERATIONS DATA
Total revenues...................... $ 443,059 $413,919 $362,242 $271,850 $254,122
Direct and corporate operating
costs and expenses................. 237,188 227,675 213,405 168,021 156,529
Depreciation, amortization and
asset retirements.................. 48,105 40,951 38,080 24,055 24,793
Provision for premature retirement
of assets.......................... 18,076 12,630 -- -- --
Performance stock option............ -- -- -- 4,407 --
Non-recurring cash and non-cash
charges (1)........................ -- -- -- -- 38,225
Operating income.................... 139,690 132,663 110,757 75,367 34,575
Net interest expense................ 41,812 39,442 37,439 26,219 27,046
Earnings (loss) before extraordinary
items and cumulative effect of
accounting change.................. 60,719 51,374 37,815 19,420 (7,796)
Net earnings (loss)................. 60,195 50,657 37,815 20,301 (8,754)
Conversion of partner's interest
into common stock (2).............. -- 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 (3).... .75 .07 .52 .28 (.12)
Net earnings (loss) available to
shareholders per share (3)......... .74 .06 .52 .29 (.13)
OTHER DATA
Construction, purchase and
conversion of inns................. 148,977 77,502 34,690 38,858 4,060
Other capital expenditures (4)...... 116,598 39,962 75,248 32,623 15,529
Purchase of partners' equity
interests (5)...................... 9,232 48,200 53,255 78,169 --
Net cash provided by operating
activities......................... 148,262 128,798 94,233 78,043 60,853
Net cash used by investing
activities......................... 275,179 158,828 156,492 145,027 15,166
Net cash provided (used) by
financing activities............... 125,835 30,031 41,000 77,971 (40,781)
Cash dividends declared per common
share.............................. .09 .10 .10 .05 --
Cash dividends paid................. 5,330 4,957 3,465 1,015 --
EBITDA (6).......................... 205,871 186,244 148,837 103,829 97,593
BALANCE SHEET DATA
Total assets........................ 1,199,800 964,115 845,781 749,495 539,183
Shareholders' equity................ 365,576 331,713 189,231 149,057 124,321
Partners' capital................... 3,293 6,309 92,099 85,976 62,060
Current installments of long-term
debt............................... 33,299 13,322 39,976 22,491 21,711
Long-term debt, excluding current
installments....................... 659,369 518,416 448,258 414,004 274,824
Ratio of earnings to fixed
charges (7)........................ 2.9x 3.1x 2.8x 2.4x 1.2x
Combined effective debt-to-equity
ratio (8).......................... 1.79 1.53 1.59 1.76 1.47
OPERATING DATA
Inns owned (9)...................... 248 237 226 211 169
Inns managed........................ -- -- -- 9 40
---------- -------- -------- -------- --------
Number of inns...................... 248 237 226 220 209
Occupancy percentage................ 68.9% 70.8% 70.1% 65.1% 65.6%
Average daily room rate............. $53.83 $ 51.07 $ 47.65 $ 46.36 $ 44.33
16
- ------------------
(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.
(2) Conversion of partner's interest into common stock is a non-recurring,
non-cash charge related to the AEW Transaction. (See note 15 of Notes
to Combined Financial Statements.)
(3) Earnings (loss) per share are computed on the basis of the weighted
average number of common and common equivalent shares outstanding in
each year after giving effect to the three-for-two stock splits.
(4) The December 31, 1996 and 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, 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:
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Extraordinary items......... $ 524 $ 717 $ -- $ 619 $ 958
Partners' equity in
earnings................... 1,499 10,227 11,406 12,965 15,081
(Gain) loss on property
transactions............... -- -- (79) 4,347 (282)
Provision for premature
retirement of assets....... 18,076 12,630 -- -- --
Non-recurring cash and
non-cash charges and
performance stock option... -- -- -- 4,407 38,225
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) 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 of combined
unincorporated partnerships and joint 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 (before capitalized interest) and the portion of rental
expense allocated to interest.
(8) Ratio of long-term debt, excluding current installments, to partners'
capital plus shareholders' equity at year end.
(9) As of December 31, 1996, the Company owns and operates 245 inns through
wholly-owned subsidiaries and partnerships and three inns through
combined unincorporated partnerships and joint ventures.
17
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 50% interest, and in one case a 40%
interest through July 3, 1995, and over which it exercises substantial legal,
financial and operational control. References to "Managed Inns" are to those
inns in which the Company owned less than a 40% interest and which were
managed by the Company under long-term management contracts through July 1994.
The Board of Directors of the Company authorized three-for-two stock
splits effected in the form of stock dividends effective in July 1996,
October 1994 and March 1994. References to the Company's common stock prior
to the July 1996 split are described herein as "pre-split" and references to
the Company's common stock after the July 1996 split are described herein as
"post-split".
During 1996, La Quinta opened eleven new Inn & Suites hotels and expects
to open a total of 36 by the end of 1997, a rate of approximately one new
opening every two weeks. The new Inn & Suites offer rooms designed to
accommodate the needs of the guest irrespective of the purpose of the trip.
The standard two-bedded room accommodates most short business trips or family
travel. The King Plus-Registered Trademark- Extra rooms feature a king-size
bed, refrigerator and microwave which may be desirable for longer stays. The
Inn & Suites also offer a select number of deluxe two-room suites with
separate sitting and sleeping areas, double vanities, a sleeper sofa, and two
closets, all of which are in addition to the amenities provided in the King
Plus Extra rooms.
During 1996, the Company purchased the limited partners' interests in
four of its combined unincorporated partnerships and joint ventures, each
owning one inn. At December 31, 1996, the Company had three remaining
unincorporated partnerships and joint ventures, which each owned one inn.
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-Registered Trademark- brand.
During 1995, the Company 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, which is
expected to be substantially complete by April 1997, 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-Registered Trademark-, dataport
telephones for computer connections and greatly expanded free television
channel choices.
As of January 31, 1997, over 185 inns had either been completed or were
undergoing construction related to the Gold Medal rooms program. This
extensive construction effort 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 disruption as a result of this program.
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 (pre-split) 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 (pre-split) 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
18
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 La Quinta
Motor Inns Limited Partnership ("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 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
-----------------------
1996 1995 1994
-------- -------- --------
(in thousands, except rates and percentages)
Room revenue $416,969 $390,449 $340,230
Other inn revenue 17,895 15,245 13,118
-------- -------- --------
Total inn revenue 434,864 405,694 353,348
Restaurant rental and other 8,105 8,071 7,675
Management services 90 154 1,219
-------- -------- --------
Total revenue $443,059 $413,919 $362,242
-------- -------- --------
-------- -------- --------
Percentage of occupancy 68.9% 70.8% 70.1%
ADR $ 53.83 $ 51.07 $ 47.65
Available rooms (1) 11,251 10,793 10,188
________________________
(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, 1996
COMPARED TO YEAR ENDED DECEMBER 31, 1995
TOTAL REVENUES increased to $443,059,000 in 1996 from $413,919,000 in
1995, an increase of $29,140,000, or 7.0%. Of the total revenues reported in
1996, 98.2% were revenues from inns and 1.8% 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 $434,864,000 in 1996 from $405,694,000 in 1995, an increase of
$29,170,000, or 7.2%. The increase in inn revenues was due primarily to an
increase in ADR along with the revenues associated with the opening of inns
in 1996. ADR increased to $53.83 in 1996 from $51.07 in 1995. The increase
in inn revenues is partially offset by a decrease in occupancy percentage
from 70.8% in 1995 to 68.9% in 1996. The decrease in occupancy percentage
primarily resulted from a significant number of rooms that were unavailable
to rent because of construction related to the Gold Medal rooms program.
Revenue per available room ("REVPAR", which is the product of occupancy
percentage and ADR) increased 2.5% over 1995. Improvements in ADR and REVPAR
are due, in part, to the completion of the Gold Medal rooms program in most
of the Company's major markets.
19
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 $8,105,000 in 1996 from $8,071,000
in 1995, an increase of $34,000.
DIRECT EXPENSES include costs directly associated with the operation of
Company Inns. In 1996, approximately 39.7% 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 $218,738,000 ($28.24 per
occupied room) in 1996 compared to $209,153,000 ($27.36 per occupied room) in
1995, an increase of $9,585,000, or 4.6%. 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 49.4% in 1996
from 50.5% in 1995.
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 decreased to
$18,450,000 ($1.64 per available room) in 1996 from $18,522,000 ($1.72 per
available room) in 1995. As a percent of total revenues, corporate expenses
decreased to 4.2% in 1996 from 4.5% in 1995.
DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS increased to $48,105,000
in 1996 from $40,951,000 in 1995, an increase of $7,154,000, or 17.5%. This
is due primarily to the increase in fixed assets resulting from the increase
in number of inns, acquisition of unincorporated partnerships and joint
ventures and additions from the Gold Medal rooms program.
A PROVISION FOR PREMATURE RETIREMENT OF ASSETS totaling $18,076,000 was
recorded during 1996. 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 made adjustments to reflect shorter remaining lives. As
a result, the Company recorded non-cash provisions for premature retirement
of assets of $18,076,000 and $12,630,000 in 1996 and 1995, respectively. The
Company does not expect to record any additional provision for premature
retirement of assets during 1997 related to this program.
As a result of the above, OPERATING INCOME increased to $139,690,000 in
1996 from $132,663,000 in 1995, an increase of $7,027,000, or 5.3%.
Operating income before the provision for premature retirement of assets
increased to $157,766,000 in 1996 from $145,293,000 in 1995, an increase of
$12,473,000, or 8.6%.
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 $656,000 in 1996 from $979,000 in 1995, a decrease of $323,000.
INTEREST ON LONG-TERM DEBT, NET increased to $42,468,000 in 1996 from
$40,421,000 in 1995, an increase of $2,047,000, or 5.1%. The increase in
interest on long-term debt, net is primarily attributable to the increase in
borrowings used for capital expenditures related to the Gold Medal rooms
program, new inn construction and the purchase of treasury stock. This
increase is partially offset by an increase in capitalized interest. Interest
on long-term debt, net includes capitalized interest of $5,429,000 and
$1,313,000 in 1996 and 1995, respectively. The increase in capitalized
interest is primarily due to the construction of inns.
PARTNERS' EQUITY IN EARNINGS reflects the interests of partners in the
earnings of the combined unincorporated partnerships and joint ventures which
are owned at least 50%, and in one case a 40% interest through July 31, 1995,
and controlled by the Company. Partners' equity in earnings decreased to
$1,499,000 in 1996 from $10,227,000 in 1995, a decrease of $8,728,000. This
decrease is primarily attributable to the elimination of LQDP's equity in
earnings since July 1995.
20
INCOME TAXES for 1996 were calculated using an effective tax rate of 37%
compared to an effective income tax rate of 38.1% for 1995. The reduction in
the annual effective income tax rate resulted from the full year impact of
the AEW Transaction.
For the reasons discussed above, the Company reported EARNINGS BEFORE
EXTRAORDINARY ITEMS of $60,719,000 in 1996 compared with $51,374,000 in 1995,
an increase of $9,345,000, or 18.2%. Earnings before extraordinary items and
the provision for premature retirement of assets, net of tax, increased
$12,915,000, or 21.8% to $72,107,000 in 1996 from $59,192,000 in 1995.
EXTRAORDINARY ITEMS, NET OF TAX, of ($524,000) or ($.01) per share, were
recorded during 1996 and resulted primarily from prepayment fees related to
the early extinguishment of approximately $16,707,000 of long-term mortgage
debt and industrial development revenue bonds.
For the reasons discussed above, the Company reported NET EARNINGS of
$60,195,000 in 1996 compared with $50,657,000 in 1995, an increase of
$9,538,000, or 18.8%.
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 $.06 per share.
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 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. REVPAR 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 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.
In 1995, approximately 42.0% of DIRECT EXPENSES were represented by
salaries, wages, and related costs. 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.
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.
21
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, acquisition of unincorporated partnerships and joint
ventures 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 made adjustments to reflect shorter remaining lives.
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 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, NET 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 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 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 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 the provision for premature retirement of assets, net of tax, 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) 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 $.06 per share, in 1995
from $37,815,000, or $.52 per share in 1994.
22
CAPITAL RESOURCES AND LIQUIDITY
During the year ended December 31, 1996, the Company's capital needs
were met primarily through operating cash flows and through the issuance of
$100 million of 7.25% Senior Unsecured Notes due 2004, the issuance of $50
million of 7.11% Medium-Term Notes due 2001 and borrowings under its $250
million Bank Unsecured Credit Facilities, as defined below. During the year
ended December 31, 1995, the Company funded its capital needs primarily
through operating cash flows, the issuance of $100 million of 7.4% Senior
Unsecured Notes due 2005 and borrowings under its $250 million Bank Unsecured
Credit Facilities.
At December 31, 1996, 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 1997. At December 31, 1996, the Company had
$32,411,000 available on its Bank Unsecured Credit Facilities, net of
$7,489,000 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, 1996, borrowings under the Bank Unsecured Credit Facilities
bear interest at LIBOR plus 45 basis points on $185,000,000 of outstanding
borrowings, the prime rate less 50 basis points on $6,800,000 of outstanding
borrowings, LIBOR plus 50 basis points on $15,000,000 of outstanding
borrowings and the prime rate on $3,300,000 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.
On February 7, 1997, the Company completed negotiations to amend and
restate its existing credit facilities. The amended credit facility will
provide the Company with a $325,000,000 Unsecured Line of Credit with a
consortium of banks and will mature in February 2002. Borrowings under the
$325,000,000 Unsecured Line of Credit will bear interest at the prime rate or
LIBOR plus an applicable margin, which is currently 33.75 basis points, as
defined in the related credit agreement. The applicable margin is determined
quarterly based upon predetermined levels of indebtedness to cash flows or
ratings received by specified credit rating agencies as defined in the
related credit agreement. The $325,000,000 Unsecured Line of Credit requires
an annual commitment fee of 18.75 basis points.
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. During 1996, the
Company issued $100 million of 7.25% Senior Unsecured Notes due 2004 and $50
million of 7.11% Medium-Term Notes due 2001 under this registration
statement. In February 1997, the Company issued an additional $50 million of
7.27% Medium-Term Notes due 2007 under this registration statement.
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 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% exceed 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 $585,000, $442,000 and $1,040,000 in the
years ended December 31, 1996, 1995 and 1994, respectively. The Notional
Amounts are reduced over the life of the Agreements by scheduled amortization
payments. At December 31, 1996, the Notional Amounts of debt
23
remaining under the Agreements were $6,585,000 and $30,350,000 which bear
interest at a weighted average variable interest rate of 6.18% and 3.87%,
respectively. The Agreements expired on February 1, 1997 and were not
renewed or replaced by the Company.
As a result of the VRDN rate decreasing to 3.77% at December 31, 1996
from 4.37% at December 31, 1995, the estimated fair value of the interest
rate swap agreements net payable position decreased to $84,000 at December
31, 1996 from $402,000 at December 31, 1995.
At December 31, 1996, the Company had $1,508,000 of cash and cash
equivalents, compared to $2,590,000 at December 31, 1995.
Net cash provided by operating activities increased to $148,262,000 in
1996 from $128,798,000 in 1995, an increase of $19,464,000 or 15.1%. In
1995, net cash provided by operating activities increased by $34,565,000 or
36.7% from $94,233,000 in 1994. The increase in net cash provided by
operating activities in both 1996 and 1995 was the result of improved REVPAR,
which increased by 2.5% in 1996 and 8.3% in 1995, increases in deferred
credits for 1996 and increases in accrued expenses for 1995.
Net cash used by investing activities of $275,179,000 in 1996 reflects
expenditures related to the new inn construction projects and the Gold Medal
rooms program. Net cash used in investing activities of $158,828,000 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 provided by financing activities was $125,835,000 in 1996
compared with $30,031,000 in 1995. The net increase is primarily the result
of increased borrowings. These borrowings were primarily used for capital
expenditures related to the Gold Medal rooms program, new inn construction
and the purchase of treasury stock. Net cash provided by financing
activities was $30,031,000 in 1995 compared to $41,000,000 in 1994. The
decrease was due to improvement in net cash provided by operating activities
and a stabilization of cash used by investing activities.
During 1996, 1995 and 1994, the Board of Directors authorized a series
of plans for the repurchase of up to a total of $50,000,000 of the Company's
common stock. During January 1996, the Board of Directors, through a
resolution independent of the $50,000,000 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 13 of Notes to Combined
Financial Statements). Repurchases of $42,094,000, $12,244,000 and
$7,115,000 were made under these plans, including the private transaction,
during 1996, 1995 and 1994, respectively. Additional repurchases will be
made from time to time in the open market or private transactions as deemed
appropriate by the Company.
COMMITTMENTS
The estimated additional cost to complete the Gold Medal rooms program
and the construction of new inns for which commitments have been made is
approximately $105,665,000 at December 31, 1996, of which approximately
$34,603,000 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. 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, at most La Quinta inns, is higher in the spring and
summer months (March through August) than in the balance of the year.
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.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LA QUINTA INNS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
DECEMBER 31
----------------------
1996 1995
ASSETS ---------- --------
Current assets:
Cash and cash equivalents...................... $ 1,508 $ 2,590
Receivables:
Trade and other (net of allowance of $108
and $118)..................................... 12,302 12,789
Income taxes................................... 3,835 --
Supplies and prepayments........................ 10,811 9,602
Deferred income taxes........................... 9,277 8,981
---------- --------
Total current assets......................... 37,733 33,962
---------- --------
Notes receivable, excluding current installments
(net of allowance of $1,793 and $2,171)......... 3,700 3,240
Property and equipment, net...................... 1,148,190 915,750
Deferred charges and other assets, at cost less
applicable amortization......................... 10,177 11,163
---------- --------
Total assets................................ $1,199,800 $964,115
---------- --------
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt.......... $ 33,299 $ 13,322
Accounts payable................................ 55,088 32,758
Accrued expenses................................ 53,584 40,915
---------- --------
Total current liabilities.................... 141,971 86,995
---------- --------
Long-term debt, excluding current installments... 659,369 518,416
Deferred income taxes, pension and other......... 29,591 20,682
Partners' capital................................ 3,293 6,309
Shareholders' equity:
Common stock ($.10 par value; 100,000 shares
authorized; 84,274 and 54,883 shares issued).. 8,427 5,488
Additional paid-in capital..................... 240,453 222,221
Retained earnings.............................. 188,610 133,745
Treasury stock, at cost (6,704 and
2,849 shares)................................. (71,914) (29,741)
---------- --------
Total shareholders' equity................... 365,576 331,713
---------- --------
Total liabilities and shareholders' equity... $1,199,800 $964,115
---------- --------
---------- --------
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
25
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
------------------------------
1996 1995 1994
-------- -------- --------
Revenues:
Inn................................................. $434,864 $405,694 $353,348
Restaurant rental and other......................... 8,105 8,071 7,675
Management services................................. 90 154 1,219
-------- -------- --------
Total revenues.................................... 443,059 413,919 362,242
-------- -------- --------
Operating costs and expenses:
Direct.............................................. 218,738 209,153 194,894
Corporate........................................... 18,450 18,522 18,511
Depreciation, amortization and asset retirements.... 48,105 40,951 38,080
Provision for premature retirement of assets........ 18,076 12,630 -
-------- -------- --------
Total operating costs and expenses................ 303,369 281,256 251,485
-------- -------- --------
Operating income.................................. 139,690 132,663 110,757
-------- -------- --------
Other (income) expense:
Interest income..................................... (656) (979) (1,421)
Interest on long-term debt, net..................... 42,468 40,421 38,860
Partners' equity in earnings........................ 1,499 10,227 11,406
Net gain on property transactions................... - - (79)
-------- -------- --------
Earnings before income taxes and
extraordinary items.............................. 96,379 82,994 61,991
Income taxes.......................................... 35,660 31,620 24,176
-------- -------- --------
Earnings before extraordinary items............... 60,719 51,374 37,815
Extraordinary items, net of income taxes.............. (524) (717) -
-------- -------- --------
Net earnings...................................... 60,195 50,657 37,815
Conversion of partner's interest into common stock.... - (46,364) -
-------- -------- --------
Net earnings available to shareholders............ $60,195 $ 4,293 $ 37,815
-------- -------- --------
-------- -------- --------
Earnings per common and common equivalent share:
Earnings after conversion of partner's
interest into common stock and before
extraordinary items.............................. $ .75 $ .07 $ .52
Extraordinary items, net of income taxes.......... (.01) (.01) -
-------- -------- --------
Net earnings available to shareholders............ $ .74 $ .06 $ .52
-------- -------- --------
-------- -------- --------
Weighted average number of common and common
equivalent shares outstanding, as restated
for stock splits..................................... 80,949 77,966 72,936
-------- -------- --------
-------- -------- --------
See accompanying notes to combined financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
26
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL MINIMUM
COMMON STOCK TREASURY STOCK PAID-IN RETAINED PENSION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS LIABILITY TOTAL
------ ------- ------ -------- -------- -------- ------- --------
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.................. - - - - - (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...... - - (482) (12,244) - - - (12,244)
Conversion of partner's
interest into common stock..... 5,300 530 - - 142,234 (46,364) - 96,400
Dividends paid.................. - - - - - (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
Effect of stock split at
July 15, 1996.................. 27,678 2,768 (1,735) - (2,768) - - -
Stock options................... 1,713 171 (3) (79) 21,000 - - 21,092
Purchase of treasury stock...... - - (2,117) (42,094) - - - (42,094)
Dividends paid.................. - - - - - (5,330) - (5,330)
Net earnings.................... - - - - - 60,195 - 60,195
------ ------- ------ -------- -------- -------- ------- --------
Balances at December 31, 1996..... 84,274 $ 8,427 (6,704) $(71,914) $240,453 $188,610 $ - $365,576
------ ------- ------ -------- -------- -------- ------- --------
------ ------- ------ -------- -------- -------- ------- --------
See accompanying notes to combined financial statements.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
27
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
-----------------------------
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net earnings....................................$ 60,195 $ 50,657 $ 37,815
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization of property and
equipment and asset retirements................ 48,105 40,951 38,080
Provision for premature retirement of assets.... 18,076 12,630 --
Gain on sale of assets.......................... -- -- (79)
Partners' equity in earnings.................... 1,499 10,227 11,406
Changes in operating assets and liabilities:
Receivables.................................... 349 (537) (2,013)
Income taxes................................... 3,239 2,646 9,291
Supplies and prepayments....................... (2,431) (1,818) (2,622)
Accounts payable and accrued expenses.......... 8,517 9,704 (1,291)
Deferred charges and other assets.............. 1,804 656 1,470
Deferred credits and other..................... 8,909 3,682 2,176
-------- -------- --------
Net cash provided by operating activities..... 148,262 128,798 94,233
-------- -------- --------
Cash flows from investing activities:
Construction, purchase and conversion of inns... (148,977) (77,502) (34,690)
Other capital expenditures...................... (116,598) (39,962) (75,248)
Proceeds from property transactions............. -- -- 2,565
Purchase of partners' equity interests.......... (9,232) (48,200) (53,255)
Decrease in notes receivable and investments.... (372) 6,836 4,136
-------- -------- --------
Net cash used by investing activities......... (275,179) (158,828) (156,492)
-------- -------- --------
Cash flows from financing activities:
Proceeds from line of credit and long-term
borrowings..................................... 651,149 645,723 417,102
Principal payments on line of credit and
long-term borrowings........................... (494,105) (601,121) (369,955)
Capital distributions to partners............... (1,129) (2,495) (1,144)
Dividends to shareholders....................... (5,330) (4,957) (3,465)
Purchase of treasury stock...................... (24,012) (12,346) (7,013)
Purchase of treasury stock from related party... (11,500) -- --
Net proceeds from stock transactions............ 10,762 5,227 5,475
-------- -------- --------
Net cash provided by financing activities..... 125,835 30,031 41,000
-------- -------- --------
(Decrease) increase in cash and cash
equivalents..................................... (1,082) 1 (21,259)
Cash and cash equivalents at beginning of year... 2,590 2,589 23,848
-------- -------- --------
Cash and cash equivalents at end of year......... $ 1,508 $ 2,590 $ 2,589
-------- -------- --------
-------- -------- --------
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
28
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31
-----------------------------
1996 1995 1994
--------- --------- ---------
Supplemental schedule of non-cash investing
and financing activities:
Tax benefit from stock options exercised......... $10,330 $ 6,027 $7,480
Accrual for purchase of treasury stock........... 6,582 -- 102
Debt incurred in connection with acquisitions of
unincorporated partnerships and joint ventures.. 3,700 -- --
Effect of stock splits........................... 2,768 -- 1,616
Adjustment to carrying value of property and
equipment....................................... -- 51,081 --
Conversion of partner's interest into common
stock........................................... -- 46,364 --
Minimum pension liability........................ -- 2,889 147
See accompanying notes to combined financial statements.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
29
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. At December 31, 1996, the
Company owned and operated 248 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 through July 3, 1995, 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
long-term debt, 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 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.
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.
ADVERTISING
Substantially all costs of advertising, promotion and marketing programs
are charged to operations in the year incurred. These costs were
approximately $19,370,000, $17,523,000 and $16,167,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
30
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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
-------------------------
1996 1995
---------- ----------
(in thousands)
Buildings . . . . . . . . . . . . . . . . $ 988,711 $ 864,605
Furniture, fixtures and equipment . . . . 148,691 121,032
Land and leasehold improvements . . . . . 183,207 174,165
Construction in progress. . . . . . . . . 120,286 29,862
---------- ----------
Total property and equipment . . . . . 1,440,895 1,189,664
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . 292,705 273,914
---------- ----------
Net property and equipment . . . . . . $1,148,190 $ 915,750
---------- ----------
---------- ----------
At December 31, 1996, approximately $207,391,000 of the net property and
equipment shown above was pledged as collateral under certain mortgages and
industrial development revenue bonds (IRBs).
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, 1996 and 1995, land and leasehold improvements includes
$1,315,000 and $2,664,000, respectively 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 made adjustments to reflect shorter remaining lives. As
a result, the Company has recorded non-cash provisions for premature
retirement of assets of $18,076,000 and $12,630,000 during 1996 and 1995,
respectively. The Company does not expect to record any additional provision
for premature retirement of assets during 1997 related to this program.
The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" ("FAS
121") during 1996. FAS 121 requires the Company to recognize 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.
The adoption of FAS 121 had no material effect on the Company's financial
position or results of operations.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
31
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(3) LONG-TERM DEBT
December 31
-------------------------
1996 1995
---------- ----------
(in thousands)
Mortgage loans maturing 1998-2001 (8.81%
weighted average effective interest rate) . . . $ 58,337 $ 76,108
Industrial Development Revenue Bonds,
maturing 1997-2012 (6.34% weighted
average effective interest rate). . . . . . . . 49,394 58,837
Bank unsecured line of credit, maturing
August 31, 2000 (7.08% effective
interest rate at December 31, 1996) . . . . . . 191,800 177,000
Bank unsecured line of credit, maturing
September 8, 1997 (7.6% effective
interest rate at December 31, 1996) . . . . . . 18,300 --
Senior unsecured notes, due 2005 (7.57%
effective interest rate). . . . . . . . . . . . 99,917 99,793
Senior unsecured notes, due 2004 (7.09%
effective interest rate). . . . . . . . . . . . 101,220 --
Medium-term notes due 2001 (7.12%
effective interest rate). . . . . . . . . . . . 50,000 --
Senior unsecured subordinated notes, due
2003 (9.58% effective interest rate). . . . . . 120,000 120,000
Other. . . . . . . . . . . . . . . . . . . . . . 3,700 --
--------- ---------
Total. . . . . . . . . . . . . . . . . . . . 692,668 531,738
Less current installments. . . . . . . . . . . . 33,299 13,322
--------- ---------
Net long-term debt . . . . . . . . . . . . . $ 659,369 $ 518,416
--------- ---------
--------- ---------
At December 31, 1996, 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 1997. At December 31, 1996, the Company had
$32,411,000 available on its Bank Unsecured Credit Facilities, net of
$7,489,000 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, 1996, borrowings under the Bank Unsecured Credit Facilities bear
interest at LIBOR plus 45 basis points on $185,000,000 of outstanding
borrowings, the prime rate less 50 basis points on $6,800,000 of outstanding
borrowings, LIBOR plus 50 basis points on $15,000,000 of outstanding
borrowings and the prime rate on $3,300,000 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 five years subsequent to December 31, 1996 and
thereafter are as follows:
(in thousands)
1997 . . . . . $ 33,299
1998 . . . . . 11,194
1999 . . . . . 10,886
2000 . . . . . 242,234
2001 . . . . . 65,888
Thereafter . . 329,167
---------
$ 692,668
---------
---------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
32
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Maturities for the years ended December 31, 1997 and 2000 include the
$18,300,000 and $191,800,000 balances on the $50 million 364-Day Bank
Unsecured Line of Credit and the $200 million Bank Unsecured Line of Credit,
respectively.
Interest paid during the years ended December 31, 1996, 1995 and 1994
amounted to $44,501,000, $39,912,000 and $40,105,000, respectively.
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. Under this registration
statement, the Company has issued $100 million of 7.25% Senior Unsecured
Notes due 2004 and $50 million of 7.11% Medium-Term Notes due 2001. The
proceeds of these financings were used to repay outstanding amounts on the
Company's Bank Unsecured Credit Facilities.
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 offering were used to repay amounts outstanding on the Company's Bank
Unsecured Credit Facilities.
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 $524,000, and
$717,000 in 1996 and 1995, respectively, related to these refinancings and
retirements.
The Company is obligated by agreements relating to eighteen issues of
IRBs in an aggregate amount of $44,795,000 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, 1996 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, 1997 and the remarketing agents are unable to resell such bonds, the
maturities of long-term debt shown above would increase by $28,380,000 for
the year ending December 31, 1999.
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 of a major financial institution (the
"Counterparty"). The debt ("Notional Amounts") 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% exceed 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 $585,000, $442,000 and
$1,040,000 in the years ended December 31, 1996, 1995 and 1994, respectively.
The Notional Amounts are reduced over the life of the Agreements by scheduled
amortization payments. At December 31, 1996, the Notional Amounts of debt
remaining under the Agreements were $6,585,000 and $30,350,000 which bear
interest at a weighted average variable interest rate of 6.18% and 3.87%,
respectively. The Agreements expired on February 1, 1997 and were not
renewed or replaced by the Company.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
33
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
As a result of the VRDN rate decreasing to 3.77% at December 31, 1996
from 4.37% at December 31, 1995, the estimated fair value of the interest
rate swap agreements net payable position decreased to $84,000 at December
31, 1996 from $402,000 at December 31, 1995.
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, 7.25% Senior
Unsecured Notes due 2004 and the 7.11% Medium-Term Notes due 2001 are all
governed by a Trust Indenture dated September 15, 1995. The Trust Indenture
contains covenants which place limitations on certain liens on assets, sale
and leaseback transactions, mergers and the sale of substantially all of the
assets of the Company.
At December 31, 1996, the Company was in compliance with all
restrictions and covenants.
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At December 31, 1996 and 1995, accounts payable and accrued expenses
consisted of the following:
December 31
-----------------
1996 1995
----- ------
Accounts payable:
Construction . . . . . . . . . . . $ 30,920 $ 9,666
Trade. . . . . . . . . . . . . . . 16,125 13,695
Other. . . . . . . . . . . . . . . 8,043 6,437
Income taxes . . . . . . . . . . . -- 2,960
-------- --------
$ 55,088 $ 32,758
-------- --------
-------- --------
Accrued expenses:
Payroll and employee benefits. . . $ 25,570 $ 25,201
Property taxes . . . . . . . . . . 10,607 9,640
Interest . . . . . . . . . . . . . 8,241 4,845
Treasury stock purchase . . . . . 6,582 --
Other . . . . . . . . . . . . . . 2,584 1,229
-------- --------
$ 53,584 $ 40,915
-------- --------
-------- --------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
34
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(5) UNINCORPORATED PARTNERSHIPS AND JOINT VENTURES
At December 31, 1996, the Company had an ownership interest between
50% and 60% in three unincorporated partnerships and joint ventures.
Summary financial information with respect to unincorporated
partnerships and joint ventures 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 the unincorporated 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 partnerships and joint ventures through the date
of acquisition (see note 15).
December 31
----------------
1996 1995
----- ------
(in thousands)
ASSETS
Total current assets . . . . . . . . . . . . . . . . . $ 827 $ 2,598
Property and equipment, net. . . . . . . . . . . . . . 7,335 13,559
Deferred charges and other assets. . . . . . . . . . . 9 13
------- --------
$ 8,171 $ 16,170
------- --------
------- --------
LIABILITIES AND OWNERS' EQUITY
Total current liabilities. . . . . . . . . . . . . . . $ 766 $ 1,194
Long-term debt, excluding current
installments of $488 and $475 . . . . . . . . . . . . 763 1,251
Owners' equity:
Company's . . . . . . . . . . . . . . . . . . . . . 3,349 7,416
Partners' . . . . . . . . . . . . . . . . . . . . . 3,293 6,309
------- --------
$ 8,171 $ 16,170
------- --------
------- --------
Years Ended December 31
-----------------------------
1996 1995 1994
------ ------ ------
(in thousands)
Revenues . . . . . . . . . . . . . . . . . . . $ 9,625 $ 58,265 $ 85,600
Operating costs and expenses . . . . . . . . . 6,124 38,434 62,775
------- ------- --------
Operating income . . . . . . . . . . . . . . . 3,501 19,831 22,825
Other deductions, principally interest . . . . (70) (1,019) (2,066)
------- ------- --------
Earnings before extraordinary items. . . . . . 3,431 18,812 20,759
Extraordinary items. . . . . . . . . . . . . . -- -- (75)
------- ------- --------
------- ------- --------
Pretax earnings. . . . . . . . . . . . . . $ 3,431 $ 18,812 $ 20,684
------- ------- --------
------- ------- --------
Equity in pretax earnings:
Company's. . . . . . . . . . . . . . . . . $ 1,932 $ 8,585 $ 9,278
Partners'. . . . . . . . . . . . . . . . . 1,499 10,227 11,406
------- ------- --------
$ 3,431 $18,812 $ 20,684
------- ------- --------
------- ------- --------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
35
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
-----------------------------
1996 1995 1994
------ ------ ------
(in thousands)
Federal
Current . . . . . . . . . . . . . . . $24,540 $ 26,992 $ 16,038
Deferred. . . . . . . . . . . . . . . 7,393 1,015 4,984
------- -------- --------
31,933 28,007 21,022
------- -------- --------
State
Current . . . . . . . . . . . . . . . 2,630 3,447 2,871
Deferred. . . . . . . . . . . . . . . 1,097 166 283
------- -------- --------
3,727 3,613 3,154
------- -------- --------
Total . . . . . . . . . . . . . . . . . $35,660 $ 31,620 $ 24,176
------- -------- --------
------- -------- --------
The effective tax rate varies from the statutory rate for the following
reasons:
Years Ended December 31
-----------------------------
1996 1995 1994
------ ------ ------
(in thousands)
Tax expense at statutory rate . . . . $33,732 $ 29,048 $ 21,697
State income taxes, net of
Federal benefit. . . . . . . . . . . 2,512 2,482 1,948
Other, net. . . . . . . . . . . . . . (584) 90 531
------- -------- --------
Provision for income taxes. . . . $35,660 $ 31,620 $ 24,176
------- -------- --------
------- -------- --------
The following are cash transactions relating to the Company's income
taxes:
Years Ended December 31
-----------------------------
1996 1995 1994
------ ------ ------
(in thousands)
Income taxes paid . . . . . . . . . . . $23,326 $ 24,777 $ 9,716
------- -------- --------
------- -------- --------
Income tax refund . . . . . . . . . . . $ 5 $ 111 $ 99
------- -------- --------
------- -------- --------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
36
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, 1996 and 1995 are presented below:
Years Ended December 31
-----------------------
1996 1995
--------- --------
(in thousands)
Deferred tax assets:
Notes receivable and land, principally
due to allowance and write-downs for
financial reporting purposes . . . . . . . . $ 1,983 $ 3,447
Property and equipment, principally
due to acquisitions of partnership
interests. . . . . . . . . . . . . . . . . . 13,627 14,046
Expense provisions and deferred gains . . . . 12,592 12,414
-------- --------
Total gross deferred tax assets . . . . . . . 28,202 29,907
-------- --------
Deferred tax liabilities:
Investments in partnerships, principally
due to differences in depreciation
and capitalized interest . . . . . . . . . . (306) (352)
Property and equipment, principally
due to differences in depreciation
and capitalized interest . . . . . . . . . . (40,156) (34,365)
Other . . . . . . . . . . . . . . . . . . . . (2,741) (1,701)
-------- --------
Total gross deferred tax liabilities. . . . . (43,203) (36,418)
-------- --------
Net deferred tax liability. . . . . . . . . . $(15,001) $ (6,511)
-------- --------
-------- --------
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 July 1996, October 1994 and March
1994. Earnings per share, the weighted average number of shares outstanding,
shareholders' equity and the following information have been adjusted to give
effect to each of these distributions.
During 1996, 1995 and 1994, the Board of Directors authorized a
series of plans for the repurchase of up to a total of $50,000,000 of
the Company's common stock. During January 1996, the Board of Directors,
through a resolution independent of the $50,000,000 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 13).
Repurchases of $42,094,000, $12,244,000 and $7,115,000 were made under
these plans, including the private transaction, during 1996, 1995 and
1994, respectively. Additional repurchases will be made from time to
time in the open market or private transactions as deemed appropriate by
the Company.
The Company's stock option plans cover the granting of options to
purchase an aggregate of 8,849,474 common shares. Options granted under the
plans are issuable to certain officers, employees and 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. The Company accounts for these plans under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," under which
no compensation cost has been recognized. 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
37
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
A summary of the status of the Company's stock option plans at December
31, 1996, 1995 and 1994 and changes during the years then ended is presented
in the table and narrative below:
1996 1995 1994
------------------ ------------------ ------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
--------- -------- --------- -------- --------- --------
Outstanding at beg. of year.. 8,602,598 $ 6.21 9,489,704 $ 5.05 9,451,850 $ 3.24
Granted...................... 1,140,781 19.00 673,313 17.99 1,958,066 12.14
Canceled or expired.......... (209,965) 14.40 (323,607) 4.28 (124,068) 7.70
Exercised....................(1,968,540) 5.47 (1,236,812) 4.22 (1,796,144) 3.04
---------- ---------- ----------
Outstanding at end of year... 7,564,874 8.11 8,602,598 6.21 9,489,704 5.05
---------- ---------- ----------
---------- ---------- ----------
Exercisable at end of year... 5,969,894 5.52 6,905,570 5.04 5,808,896 3.20
---------- ---------- ----------
---------- ---------- ----------
Weighted average fair
value of options granted.... $ 6.18 $ 6.23
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
risk-free interest rates of 5.70 and 6.12 percent; expected dividend yields
of .45 and .50 percent; expected lives of 3.44 and 3.97 years; and expected
volatilities of 37 and 36 percent.
Had the compensation cost for these plans been determined consistent
with Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation" (Statement 123), the Company's net earnings and
earnings per share would have been reduced to the following pro forma amounts:
1996 1995
------- -------
Net Earnings: As Reported $60,195 $50,657
Pro Forma $58,952 $50,278
Earnings Per Share: As Reported $ .74 $ .65
Pro Forma $ .73 $ .64
The net earnings and earnings per share information for 1995 shown above
does not reflect the $46,364,000 non-recurring, non-cash item related to the
AEW Transaction as further discussed in note 15.
The Company is not required to apply the Statement 123 method of
accounting to stock options granted prior to January 1, 1995. As such, the
pro forma compensation cost reflected above may not be a representation of
future results.
The following table summarizes information about stock options
outstanding at December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------------- ---------------------------
Range Number Wtd Avg Number
of Outstanding Remaining Wtd Avg Exercisable Wtd Avg
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 2.33 to 6.02 4,555,545 5.25 Years $ 3.16 4,542,890 $ 3.15
11.70 to 14.06 1,476,486 7.25 12.11 1,219,442 12.06
16.67 to 21.13 1,532,843 9.10 18.95 207,562 18.87
--------- ---------
2.33 to 21.13 7,564,874 6.42 8.11 5,969,894 5.52
--------- ---------
--------- ---------
During 1996, 150,000 options of the Company's common stock were granted
to an officer of the Company, subject to shareholder approval. The Company
expects to obtain shareholder approval at its Annual
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
38
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Meeting of Shareholders in May 1997. These options were not included in the
above disclosures for 1996 stock options granted, weighted average fair value
of stock options granted or pro forma earnings and earnings per share.
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 1996, 1995
and 1994, approximately $10,330,000, $6,027,000 and $7,480,000, respectively,
was credited to additional paid-in capital for the tax benefits of options
exercised.
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 (pre-split)
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 (pre-split) 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 (the "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.
The following table sets forth the funded status and amounts recognized
in the Company's combined financial statements for the Plan at December 31,
1996 and 1995.
December 31
------------------
1996 1995
-------- --------
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $9,006 and $9,273...................................... $(10,171) $(10,209)
-------- --------
-------- --------
Projected benefit obligation for services rendered to date. $(13,246) $(13,589)
Plan assets at fair value, primarily marketable stocks
and CDs................................................... 10,338 8,923
-------- --------
Projected benefit obligation in excess of plan assets...... (2,908) (4,666)
Unrecognized net loss from past experiences different from
those assumed............................................. 1,702 3,083
Prior service costs........................................ 1,180 1,354
Additional minimum liability............................... -- (1,056)
-------- --------
Accrued pension costs...................................... $ (26) $(1,285)
-------- --------
-------- --------
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39
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
--------------
1996 1995
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $1,065 and $1,287....... $(1,743) $(1,867)
------- -------
------- -------
Projected benefit obligation for services
rendered to date............................ $(4,590) $(4,836)
Unrecognized net (gain) loss from past
experiences different from those assumed.. (152) 769
Prior service costs........................ (236) (60)
------- -------
Accrued pension costs.................... $(4,978) $(4,127)
------- -------
------- -------
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, 1996 and 1995.
The assumptions used in the calculations shown above were:
1996 1995 1994
----------- ----------- -----------
Discount rate................. 7.50% 7.25% 8.50%
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%
The combined net periodic pension cost for the Plan and the SERP
includes the following components:
Years Ended December 31
------------------------
1996 1995 1994
------ ------ ------
(in thousands)
Service cost (benefits earned during the period).. $2,144 $1,571 $1,604
Interest cost on projected benefit obligation..... 1,298 1,072 1,258
Actual return on plan assets...................... (963) (1,639) 228
Net amortization and deferral..................... 577 410 (96)
Net deferred asset gain........................... 195 1,041 --
------ ------ ------
Net periodic pension cost before allocation to
Managed Inns (See note 13)...................... 3,251 2,455 2,994
Cost allocated to Managed Inns.................... -- -- (30)
------ ------ ------
Net periodic pension cost....................... $3,251 $2,455 $2,964
------ ------ ------
------ ------ ------
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
$170,000, $157,000 and $131,000 in 1996, 1995 and 1994, respectively.
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- -----------------------------------------------------------------------------
40
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, 1996 follow:
(in thousands)
1997.................................. $ 3,091
1998.................................. 2,852
1999.................................. 2,694
2000.................................. 2,460
2001.................................. 2,115
Later years........................... 5,785
-------
Total minimum payments required....... $18,997
-------
-------
Total rental expense for operating leases was approximately $3,258,000,
$3,188,000 and $3,196,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
LESSOR
The Company leases restaurants it owns to third parties. The leases are
accounted for as operating leases expiring during a period from 1997 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, 1996:
(in thousands)
Buildings............................. $32,378
Less: accumulated depreciation........ 11,505
-------
20,873
Land.................................. 17,839
-------
Total leased property............... $38,712
-------
-------
Minimum future rentals to be received under the noncancelable
restaurant leases in effect at December 31, 1996 follow:
(in thousands)
1997.................................. $ 6,515
1998.................................. 6,260
1999.................................. 5,906
2000.................................. 5,438
2001.................................. 4,834
Later years........................... 17,402
-------
$46,355
-------
-------
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41
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Contingent rental income amounted to approximately $1,270,000,
$1,198,000 and $1,025,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
(10) COMMITMENTS
The estimated additional cost to complete the Gold Medal rooms program
and the construction of new inns for which commitments have been made is
approximately $105,665,000 at December 31, 1996, of which approximately
$34,603,000 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
suit alleged 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 were
sought in the action. The Court granted the Company's motion for summary
judgment in September 1996, while allowing plaintiff the opportunity to
re-file on a limited basis. On December 4, 1996, the case was dismissed with
prejudice, thereby resulting in a final disposition of the case in the
Company's favor.
The Company is also party to various lawsuits and claims generally
incidental to its business. The Company does not anticipate any amounts
which it may be required to pay as a result of an adverse determination of
such legal proceedings, individually or in the aggregate, or any other relief
granted by reason, thereof, will have a material adverse effect on the
Company's financial position or results of operations.
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, 1996, the maximum contingent liability under
the severance provision of this agreement was approximately $1,680,000.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
42
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, 1996:
Revenues.............................. $102,758 $116,022 $121,902 $102,377
Operating income...................... 27,857 42,676 43,796 25,361
Earnings before extraordinary items... 10,867 20,157 20,649 9,046
Net earnings.......................... 10,867 19,913 20,484 8,931
Earnings per share before
extraordinary items.................. .13 .25 .25 .11
Earnings per share.................... $ .13 $ .25 $ .25 $ .11
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.................. .15 .23 (.38) .11
Earnings (loss) per share available to
shareholders......................... $ .15 $ .23 $ (.39) $ .11
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.................... $ .08 $ .15 $ .19 $ .09
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).
(13) RELATED PARTY TRANSACTIONS
STOCK REPURCHASE
On January 22, 1996, the Company agreed to purchase 500,000 shares
(pre-split) of its common stock for $11,500,000 from The Airlie Group
L.P. ("Airlie"). Airlie is an investment limited partnership of which a
corporation owned by a 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 $50,000,000 series
of stock repurchase plans described in note 7.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
43
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MANAGEMENT SERVICES FEE
The Company earned management and licensing fees as well as fees for
chain services such as bookkeeping, national advertising and reservations
through June 30, 1994 from all inns owned by the two joint ventures (the
"CIGNA Partnerships") between the Company and investments partnerships
managed by CIGNA Investments, Inc. The inns operated under the La Quinta
name and were managed by the Company in accordance with long-term management
agreements.
OTHER RECURRING TRANSACTIONS
La Quinta pays all direct operating expenses on behalf of the
unincorporated 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
while taking into consideration current interest rates.
The estimated fair values of the Company's financial instruments are
summarized as follows:
December 31, 1996 December 31, 1995
--------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(in thousands)
Notes receivable................ $ 3,700 $ 3,700 $ 3,240 $ 3,240
Long-term debt, including
current installments and
related letters of credit...... (692,668) (699,227) (531,738) (548,855)
Interest rate swap agreements
in a net (payable) receivable
position....................... (42) (84) (27) (402)
The carrying value of accounts receivable, accounts payable and accrued
expenses approximates fair value due to the short-term nature of these items.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
44
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(15) ACQUISITION OF PARTNERS' INTERESTS
During 1996, the Company purchased the limited partners' interests in
four of the Company's combined unincorporated partnerships and joint
ventures, which each owned one inn.
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 (pre-split) 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 (pre-split) 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 $46.4 million non-recurring, non-cash
item described above. The pro forma per share effect of this item is ($.57)
for both the years ended December 31, 1995 and 1994. 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 ........................... $ .67 $ .51
-------- --------
-------- --------
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- -------------------------------------------------------------------------------
45
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
On January 24, 1994, the Company concluded the acquisition La Quinta
Motor Inns Limited Partnership ("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 have been included in the
combined financial statements of the Company thereafter. 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 was $53,255,000 of which a portion was financed
through the Company's credit facilities.
(16) SUBSEQUENT EVENTS
On February 7, 1997, the Company completed negotiations to amend and
restate its existing credit facilities. The amended credit facility will
provide the Company with a $325,000,000 Unsecured Line of Credit with a
consortium of banks and will mature in February 2002. Borrowings under the
$325,000,000 Unsecured Line of Credit will bear interest at the prime rate or
LIBOR plus an applicable margin, which is currently 33.75 basis points, as
defined in the related credit agreement. The applicable margin is determined
quarterly based upon predetermined levels of indebtedness to cash flows or
ratings received by specified credit rating agencies as defined in the
related credit agreement. The $325,000,000 Unsecured Line of Credit requires
an annual commitment fee of 18.75 basis points.
On February 24, 1997, the Company issued $50,000,000 in 7.27%
Medium-Term Notes due 2007, with an effective interest rate of 7.33%.
These Medium-Term Notes were issued under the shelf registration statement
described in note 3.
On February 26, 1997, the Board of Directors authorized a plan for the
repurchase of up to $10,000,000 of the Company's common stock under its stock
repurchase program (see note 7). Purchases will be made from time to time in
the open market or private transactions as deemed appropriate by the Company.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
46
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, 1996 and 1995 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, 1996. 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, 1996 and 1995 and the results of its operations
and its cash flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
January 31, 1997, except
for note 16, which is as
of February 26, 1997
47
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 49 President and Chief Executive Officer and Director
Ezzat S. Coutry 52 Executive Vice President and Chief Operating
Officer
William C. Hammett, Jr. 50 Sr. Vice President - Chief Financial Officer
Stephen B. Hickey 52 Sr. Vice President - Marketing
Steven T. Schultz 50 Sr. Vice President - Development
John F. Schmutz 49 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.
Ezzat S. Coutry has been Executive Vice President and Chief Operating
Officer of the Company since November 1996. He served as Regional Vice
President of the Midwest Region for Marriott Hotels, Resorts & Suites from
July 1990 to October 1996. He served as Senior Vice President of Sales for
Marriott Hotels, Resorts & Suites from July 1989 to June 1990 and Senior Vice
President of Rooms Operations for Marriott Hotels, Resorts & Suites from
January 1989 to June 1989.
William C. Hammett, Jr. has been Senior Vice President - Chief
Financial Officer of the Company since August 1996. He served as Senior Vice
President - Accounting and Administration from June 1992 to August 1996. 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.
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.
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.
48
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, 1996 and 1995
Combined Statements of Operations for the years ended December 31,
1996, 1995 and 1994
Combined Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994
Combined Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994
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:
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc., as
amended on May 21, 1993. (6)
(3)(b) Amended and Restated By-Laws of La Quinta Inns, Inc. (1)
49
(10)(a)* La Quinta Inns, Inc. 1984 Stock Option Plan. (2)
(10)(b)* Amendment No. 1 to La Quinta Inns, Inc. 1984 Stock Option
Plan. (3)
(10)(c)* Amendment No. 2 to La Quinta Inns, Inc. 1984 Stock Option Plan. (4)
(10)(d)* Amended and Restated La Quinta Inns, Inc. 1984 Stock Option
Plan, as of November 21, 1991. (1)
(10)(e)* Supplemental Executive Retirement Plan and Trust Agreement
of Registrant, dated April 20, 1990, by and between Registrant
and Frost National Bank. (5)
(10)(f) 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. (5)
(10)(g) 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. (5)
(10)(h)* Employment Agreement, dated as of March 3, 1992, by and between
Registrant and Gary L. Mead. (1)
(10)(i)* Non-Qualified Stock Option Agreement, dated as of March 3, 1992,
between Registrant and Gary L. Mead. (1)
(10)(j)* Registration Rights Agreement, dated as of March 3, 1992, between
Registrant and Gary L. Mead. (1)
(10)(k) Second Amended and Restated Master Covenant Agreement dated
June 15, 1993. (6)
(10)(l) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4% Senior
Subordinated Notes due 2003. (6)
(10)(m) $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. (6)
(10)(n) $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. (7)
(10)(o) Third Amended and Restated Master Covenant Agreement dated as
of January 25, 1994. (7)
(10)(p) Fifth Amended and Restated Master Covenant Agreement dated as
of September 12, 1995. (8)
(10)(q) Amended and Restated Credit Agreement (Facility A), dated as of
September 12, 1995. (8)
(10)(r) Amended and Restated Credit Agreement (Facility B), dated as of
September 12, 1995. (8)
(10)(s) Indenture dated September 15, 1995 Re: Debt Securities. (8)
(10)(t) Officers' certificate defining terms of $100,000,000 7.4% Senior
Notes due 2005. (9)
(10)(u) $325,000,000 First Amended and Restated Credit Agreement among
La Quinta Inns, Inc., certain lenders and NationsBank, N.A. as
Administrative Lender, dated as of February 7, 1997 filed herewith.
50
(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, 1997 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 27, 1997 to
incorporation by reference of their report dated January 31, 1997,
except for note 16, which is as of February 26, 1997, 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 10-K for the year ended May 31, 1984 and
incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (No. 2-97266) and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (No. 33-26470) and incorporated herein by
reference.
(5) 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.
(6) Previously filed as an exhibit to Registrant's Registration
Statement on Form 10-Q for the period ended June 30, 1993 and
incorporated herein by reference.
(7) 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.
(8) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-3 (No. 2-61755) and incorporated herein by
reference.
(9) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
(b) Reports on Form 8-K.
Not applicable.
51
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/ GARY L. MEAD
----------------------------------
Gary L. Mead
President and
Chief Executive Officer
/s/ WILLIAM C. HAMMETT, JR.
----------------------------------
William C.Hammett, Jr.
Senior Vice President
Chief Financial Officer
Date: February 28, 1997
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
- -------------------------------
Gary L. Mead President and Chief Executive Officer, Director
/s/ WILLIAM C. HAMMETT, JR.
- -------------------------------
William C. Hammett, Jr. Senior Vice President - Chief Financial Officer
/s/ THOMAS M. TAYLOR*
- -------------------------------
Thomas M. Taylor Chairman of the Board
/s/ WILLIAM H. CUNNINGHAM*
- -------------------------------
William H. Cunningham Director
/s/ WILLIAM RAZZOUK*
- -------------------------------
William Razzouk Director
/s/ PETER STERLING*
- -------------------------------
Peter Sterling Director
/s/ KENNETH T. STEVENS*
- -------------------------------
Kenneth T. Stevens Director
*By: /s/ WILLIAM C. HAMMETT, JR.
-------------------------------
William C. Hammett, Jr.
ATTORNEY-IN-FACT
Date: February 28, 1997
52
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc., as
amended on May 21, 1993. (6)
(3)(b) Amended and Restated By-Laws of La Quinta Inns, Inc. (1)
(10)(a)* La Quinta Inns, Inc. 1984 Stock Option Plan. (2)
(10)(b)* Amendment No. 1 to La Quinta
Inns, Inc. 1984 Stock Option Plan. (3)
(10)(c)* Amendment No. 2 to La Quinta Inns, Inc. 1984 Stock Option Plan. (4)
(10)(d)* Amended and Restated La Quinta Inns, Inc. 1984 Stock Option Plan,
as of November 21, 1991. (1)
(10)(e)* Supplemental Executive Retirement Plan and Trust Agreement of
Registrant, dated April 20, 1990, by and between Registrant and
Frost National Bank. (5)
(10)(f) 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. (5)
(10)(g) 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. (5)
(10)(h)* Employment Agreement, dated as of March 3, 1992, by and between
Registrant and Gary L. Mead. (1)
(10)(i)* Non-Qualified Stock Option Agreement, dated as of March 3, 1992,
between Registrant and Gary L. Mead. (1)
(10)(j)* Registration Rights Agreement, dated as of March 3, 1992, between
Registrant and Gary L. Mead. (1)
(10)(k) Second Amended and Restated Master Covenant Agreement dated June
15, 1993. (6)
(10)(l) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4% Senior
Subordinated Notes due 2003. (6)
(10)(m) $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. (6)
(10)(n) $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. (7)
(10)(o) Third Amended and Restated Master Covenant Agreement dated as of
January 25, 1994. (7)
(10)(p) Fifth Amended and Restated Master Covenant Agreement dated as of
September 12, 1995. (8)
(10)(q) Amended and Restated Credit Agreement (Facility A), dated as of
September 12, 1995. (8)
(10)(r) Amended and Restated Credit Agreement (Facility B), dated as of
September 12, 1995. (8)
(10)(s) Indenture dated September 15, 1995 Re: Debt Securities. (8)
(10)(t) Officers' certificate defining terms of $100,000,000 7.4% Senior
Notes due 2005. (9)
(10)(u) $325,000,000 First Amended and Restated Credit Agreement among La
Quinta Inns, Inc., certain lenders and NationsBank, N.A. as
Administrative Lender, dated as of February 7, 1997 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, 1997 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 27, 1997 to
incorporation by reference of their report dated Januay 31, 1997,
except for note 16, which is as of February 26, 1997, 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 10-K for the year ended May 31, 1984 and incorporated
herein by reference.
(3) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (No. 2-97266) and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (No. 33-26470) and incorporated herein by
reference.
(5) 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.
(6) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10-Q for the period ended June 30, 1993 and incorporated herein by
reference.
(7) 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.
(8) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-3 (No. 2-61755) and incorporated herein by reference.
(9) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10-K for the year ended December 31, 1995 and
incorporated herein by reference.
(b) Reports on Form 8-K.
Not applicable.