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UNITED STATES
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, 1997
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__________ to ___________
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
the registrant as of January 31, 1998 was approximately $1,477,453,000. As of
January 31, 1998, there were 77,137,118 shares of registrant's Common Stock
issued and outstanding.
Documents Incorporated by Reference:
None
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FORM 10-K INDEX
PART I
Page
----
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 11
Item 3. Legal Proceedings................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders.............. 13
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.......................................................... 14
Item 6. Selected Financial Data.......................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 17
Item 8. Financial Statements and Supplementary Data...................... 25
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................... 51
PART III
Item 10. Directors and Executive Officers of the Registrant............... 51
Item 11. Executive Compensation........................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management... 58
Item 13. Certain Relationships and Related Transactions................... 61
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 62
Signatures ................................................................. 66
This Annual Report on Form 10-K for the year ended December 31, 1997, 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 largest
owner/operator of hotels in the mid-priced segment of the lodging industry in
the United States. La Quinta achieved an occupancy percentage of 69.4% and an
average daily room rate ("ADR") of $56.83 for the year ended December 31, 1997.
The Company has inns located in 28 states, concentrated in the Western and
Southern United States. At February 13, 1998, La Quinta owned and operated 234
inns and 36 Inn & Suites hotels with a combined total of approximately 35,000
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.
On January 3, 1998, La Quinta, Meditrust Corporation ("Meditrust REIT") and
Meditrust Operating Company ("Meditrust Operating Company" and together with
Meditrust REIT, the "Meditrust Companies") entered into an agreement and plan of
merger (the "Merger Agreement"), pursuant to which the Company will merge with
and into Meditrust REIT with Meditrust REIT being the surviving corporation (the
"Merger"). As a result of the Merger, Meditrust REIT will acquire all of the
assets and liabilities of the Company and Meditrust REIT will assume the
Company's existing indebtedness. The transaction is expected to close in the
second quarter of 1998. For further discussion of the Merger, see note 16 of
Notes to Combined Financial Statements.
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, 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(R) rooms
program include new 25 inch remote control televisions with greatly expanded
free television channel choices, movies-on-demand, interactive video games from
Nintendo(R), in room coffee makers and dataport telephones for computer
connections. Additional amenities available at La Quinta Inn & Suites include
two room suites with microwaves and refrigerators, fitness centers and
courtyards with gazebos and spas. 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 120 of these adjacent buildings,
which are generally 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:
3
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 February 13, 1998, the Company owned 100% of 268 inns
and 50% or more of an additional two inns. As a result, the Company
believes it is able to achieve a higher level of consistency in both
product quality and service than its competition. In addition, La
Quinta's position as one of the few owner-operated chains enables La
Quinta to offer new services, direct expansion, establish pricing
strategy and to make other marketing decisions on a system-wide or
local basis as conditions dictate, without consulting third-party
owners, management companies or franchisees as required of most other
lodging chains. The Company's management of the inns also enables it
to control costs and allocate resources effectively to provide
excellent value to the consumer.
Unit Growth Program - The Company's unit growth program is based
primarily on the construction on new Inn & Suites hotels. At February
13, 1998, the Company had opened 36 new Inn & Suites hotels and
anticipates having a total of 65-70 Inn & Suites hotels open by the
end of 1998 and 100 at the end of 1999. The new Inn & Suites hotels
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(R) Extra rooms feature a king size bed, refrigerator and
microwave which may be desirable for longer stays. The Inn & Suites
hotels 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. In addition, the Inn & Suites
hotels offer fitness centers and courtyards with gazebos and spas.
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 improved 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 included movies-on-demand, interactive video
games from Nintendo(R), in room coffee makers, dataport telephones for
computer connections and greatly expanded free television channel
choices. The Company completed the program during 1997.
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, service level 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.
4
Structure and Ownership
The Company is a combined entity comprised of La Quinta Inns, Inc., which
owned and operated 268 inns through wholly-owned subsidiaries and partnerships
and two inns through combined unincorporated partnerships and joint ventures at
February 13, 1998.
The Board of Directors authorized a three-for-two stock split effected in
the form of a stock dividend effective in July 1996. Earnings per share and the
weighted average number of shares outstanding have been adjusted to give effect
to this distribution.
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 7,949,732 shares of the Company's Common Stock. AEW also
agreed to sell the remaining one-third of its ownership interest in LQDP to the
Company for a negotiated price of $48.2 million in cash (collectively, the "AEW
Transaction"). The AEW Transaction was consummated on July 3, 1995. Upon
conversion of the partnership interest into La Quinta Common Stock, the Company
issued 7,949,732 shares of the Company's Common Stock having a fair market value
of $142.8 million based on the July 3, 1995 New York Stock Exchange closing
price. The conversion was accounted for by increasing shareholders' equity by
the $46.4 million value of the option and recording a $46.4 million non-cash
adjustment entitled Conversion of Partner's Interest into Common Stock below net
earnings in the Statement of Operations. There was 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.
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 14 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.
At December 31, 1997, La Quinta employed approximately 7,400 persons, of
whom approximately 90% were compensated on an hourly basis. Approximately 350
individuals were employed at the corporate headquarters and 7,050 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
5
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 among 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(R) Club" offering members preferred status and rates at La Quinta inns,
along with rewards for frequent stays. The Returns Club had approximately
300,000 members as of December 31, 1997.
The Company focuses on reaching its target markets through 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 uses the same campaign concept throughout the country with minor
modifications made to address regional differences. The Company also uses
billboard advertisements posted along major highways to advertise the existence
and location of La Quinta inns or Inn & Suites hotels in the proximity.
The Company markets directly to companies and other organizations through
its direct sales force of over 60 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(R)," which
currently accounts for advance reservations for approximately 32% of room
nights. The teLQuik system allows customers to make reservations by dialing
1-800-NUROOMS (1-800-687-6667) or 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. In addition,
approximately 44% 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 76% 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.
6
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995. Certain statements in this
Annual Report that are not historical fact constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The word "believes," "anticipates," "expects" and similar expressions,
when used in this Annual Report, are intended to identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements as a result of the factors listed below and the
matters set forth in this Annual Report generally. The Company undertakes no
obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
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
constructing 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.
7
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. For further discussion of these issues see Item 3, "Legal
Proceedings".
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.
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 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 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
8
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 construction 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.
Risks of Expansion Strategy
The Company intends to pursue a strategy of growth through the construction
of new lodging facilities. There can be no assurance that the Company will find
suitable sites for construction or that these sites will not be acquired by
competitors of the Company. There can be no assurance that any of the properties
the Company may construct will be profitable following such construction. The
construction of a property that is not profitable could adversely affect the
Company's profitability. The Company may in the future require additional
financing in order to continue to construct new lodging facilities. 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.
9
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.
Risk of Non-consummation of the Merger
The closing of the Merger is subject to certain significant conditions
contained in the Merger Agreement. Many of these conditions will be beyond the
control of the Company. Although the Company currently expects that such
conditions will be satisfied or waived, there can be no assurance that the
closing of the Merger will occur. Such conditions include, among others, the
receipt of various consents and approvals, including approval by the
shareholders of the Company and the Meditrust Companies, the receipt of certain
opinions regarding the federal income tax treatment of the Merger, the receipt
of an opinion from the Company's independent public accountants with respect to
the Company's earnings and profit and the absence of any material adverse change
in the business, assets, prospects, financial condition or results of operations
of the Company or Meditrust.
10
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.
At February 13, 1998, La Quinta had opened a total of 36 new Inn & Suites
hotels and anticipates having a total of 65-70 Inn & Suites hotels open by the
end of 1998 and 100 at the end of 1999. The new Inn & Suites hotels 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 hotels
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. In
addition, the Inn & Suites hotels offer fitness centers and courtyards with
gazebos and spas.
To maintain the overall quality of La Quinta's inns, each inn undergoes
refurbishments and capital improvements as needed. Historically, 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, 1997, 1996 and 1995, the Company spent approximately $110,900,000,
$116,800,000 and $40,000,000, respectively, on capital improvements to existing
inns. These amounts include expenditures related to the Company's Gold Medal
rooms 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, improved 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 included movies-on-demand, interactive video games from
Nintendo(R), in room coffee makers, dataport telephones for computer connections
and greatly expanded free television channel choices. The program was completed
during 1997.
Typically, food service for La Quinta guests is provided by adjacent, free
standing restaurants. At December 31, 1997, the Company owned 120 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.
11
At February 13, 1998, the Company owned and operated 270 inns, including 36
La Quinta Inn & Suites hotels, located in 28 states, concentrated in the Western
and Southern United States. The Company had an additional 28 La Quinta Inn &
Suites hotels under construction, which are scheduled to open between February
1998 and December 1998. The states and cities in which the inns are located are
set forth in the following table:
Alabama Macon* Ohio Midland INN & SUITES
Birmingham (3)* Savannah (2) Columbus Nacogdoches UNDER
Huntsville (2) Odessa CONSTRUCTION
Mobile Illinois Oklahoma Round Rock
Montgomery Champaign Norman* San Angelo Arizona
Tuscaloosa Chicago Metro (5) Oklahoma City (3) San Antonio (11) Phoenix (2)
Moline Tulsa (3) San Marcos
Arizona Sherman* California
Phoenix (6)* Indiana Pennsylvania Temple Fremont
Flagstaff* Indianapolis (2) Pittsburgh Texarkana Ontario
Tucson (3)* Merrillville Tyler
South Carolina Victoria Colorado
Arkansas Kansas Anderson Waco Colorado Springs
Little Rock (5) Lenexa Charleston Wichita Falls Denver (2)
Wichita Columbia Pueblo
California Greenville Utah
Bakersfield Kentucky Myrtle Beach* Layton Florida
Costa Mesa Lexington Provo* Ft. Lauderdale
Fresno Tennessee Salt Lake City (2)* Lake Mary
Irvine Louisiana Chattanooga Miami
La Palma Alexandria* Kingsport Virginia Ocala
Redding Baton Rouge Knoxville (2) Bristol Orlando (2)
Sacramento (2) Bossier City Memphis (3) Hampton Plantation
San Bernardino Kenner Nashville (3) Richmond
San Diego (3) Lafayette Virginia Beach Georgia
San Francisco Monroe Texas Atlanta (3)
Stockton New Orleans (5) Abilene Washington
Ventura Shreveport* Amarillo (2) Seattle (2) Louisiana
Slidell Arlington (2)* Tacoma New Orleans
Colorado Sulphur Austin (6)*
Colorado Springs Beaumont Wyoming Nevada
Denver (9)* Mississippi Bedford Cheyenne Las Vegas
Grand Junction* Jackson (2) Brownsville
Clute OTHER North Carolina
Florida Missouri College Station OWNED INNS Charlotte
Coral Springs St. Louis (2)* Corpus Christi (2) (operated under Raleigh
Cypress Creek Dallas Metro (16)* other brands)
Daytona Beach Nebraska Del Rio Oklahoma
Deerfield Beach Omaha Denton Georgia Oklahoma City
Ft. Myers Eagle Pass Columbus
Gainesville Nevada El Paso (3) South Carolina
Jacksonville (4)* Las Vegas (2) Fort Stockton Texas Greenville
Lakeland* Reno Fort Worth (3)* El Paso
Miami Galveston La Marque Tennessee
Orlando (3) New Mexico Georgetown San Antonio Memphis
Panama City* Albuquerque (4)* Harlingen
Pensacola Farmington Houston Metro (18)* Texas
Tallahassee (2) Las Cruces Huntsville Austin
Tampa (7)* Santa Fe Killeen Houston (2)
Laredo
Georgia North Carolina Longview
Atlanta (8)* Charlotte (2) Lubbock (2)
Augusta Raleigh (2)* Lufkin
Columbus
* Indicates at least one La Quinta Inn & Suites location.
12
ITEM 3. LEGAL PROCEEDINGS
In January 1998, two lawsuits were filed in the District Court of Bexar
County, Texas on behalf of stockholders of the Company against the Company,
certain directors and officers of the Company, and Meditrust Corporation
(collectively, the "Defendants"). The lawsuits are captioned Robbins v. Razzouk,
et al, Cause No. 98CI-00192, and Brody v. Razzouk, et al, Cause No. 98CI-00456
(the "Actions"). The complaints in the Actions allege, among other things, that
Defendants (other than Meditrust) have breached their fiduciary duties to
stockholders by agreeing in the Merger Agreement to Merger Consideration which
is "grossly inadequate", by failing to solicit competing bids or to provide a
"market check", by failing to conduct a full and thorough investigation, and by
failing to make adequate public disclosure regarding the transaction. The
independence of the directors of the Company is also questioned. The complaints
allege that Meditrust aided and abetted the alleged breaches of duty by the
other Defendants. The complaints in the Actions seek, among other things, (i) a
declaration that Defendants have breached their fiduciary duties to members of
the alleged class, (ii) a declaration that the proposed transaction is a legal
nullity, (iii) an order preliminarily and permanently enjoining consummation of
the proposed transaction, (iv) if the proposed transaction is consummated, an
order to rescind it, (v) the award of compensatory damages, and (vi) the award
of costs, disbursements and attorneys fees.
La Quinta believes that each of these lawsuits is without merit and intends
to defend them vigorously.
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 its 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.
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.
13
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 and per
share dividend amounts paid for each of the quarters during the years ended
December 31, 1997 and 1996, as adjusted for the three-for-two stock split
effected in the form of a stock dividend in July 1996, is set forth below:
1997 1996
--------------------------------------------- -------------------------------------------
Per Share Per Share
High Low Dividend High Low Dividend
----------- ----------- --------------- ---------- ------------ ------------
First Quarter....................... $23 $16 5/8 $ .0175 $19 3/4 $15 5/8 $ .0167
Second Quarter...................... 24 3/8 20 1/8 .0175 24 17 5/8 .0167
Third Quarter....................... 23 9/16 19 7/8 .0175 23 5/8 16 3/8 .0175
Fourth Quarter...................... 23 15/16 17 1/8 .0175 21 7/8 17 3/4 .0175
During the first two quarters of 1996, the Company paid quarterly cash
dividends in the amount of $.0167 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 changed 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 and for each quarter during 1997. 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, 1998, the approximate number of holders of record of the
Company's Common Stock was 976.
14
ITEM 6. SELECTED FINANCIAL DATA
Years Ended December 31
------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts, ratios and inn statistics)
STATEMENT OF OPERATIONS DATA
Total revenues ............................................. $ 502,569 $ 443,059 $ 413,919 $ 362,242 $ 271,850
Direct and corporate operating costs and
expenses .................................................. 263,025 237,188 227,675 213,405 168,021
Depreciation, amortization and asset retirements ........... 60,817 48,105 40,951 38,080 24,055
Provision for premature retirement of assets ............... -- 18,076 12,630 -- --
Performance stock option ................................... -- -- -- -- 4,407
Operating income ........................................... 178,727 139,690 132,663 110,757 75,367
Net interest expense ....................................... 49,186 41,812 39,442 37,439 26,219
Earnings before extraordinary items and
cumulative effect of accounting change .................... 87,304 60,719 51,374 37,815 19,420
Net earnings ............................................... 87,266 60,195 50,657 37,815 20,301
Conversion of partner's interest into common
stock (1) ................................................. -- -- 46,364 -- --
Basic earnings per share after conversion of
partner's interest into common stock and before
extraordinary items and cumulative effect of
accounting change (2) ..................................... 1.13 .78 .07 .55 .29
Basic net earnings available to shareholders per
share (2) ................................................. 1.13 .77 .06 .55 .30
Diluted earnings per share after conversion of
partner's interest into common stock and before
extraordinary items and cumulative effect of
accounting change (2) ..................................... 1.09 .75 .07 .52 .27
Diluted net earnings available to shareholders per
share (2) ................................................. 1.09 .74 .06 .52 .29
OTHER DATA
Construction, purchase and conversion of inns .............. 251,516 148,977 77,502 34,690 38,858
Other capital expenditures (3) ............................. 110,891 116,799 39,976 75,248 32,623
Purchase of partners' equity interests (4) ................. 81 9,232 48,200 53,255 78,169
Net cash provided by operating activities .................. 161,768 148,262 128,798 94,233 78,043
Net cash used by investing activities ...................... 339,109 275,179 158,828 156,492 145,027
Net cash provided by financing activities .................. 177,943 125,835 30,031 41,000 77,971
Cash dividends declared per common share (5) ............... .07 .07 .07 .05 .01
Cash dividends paid ........................................ 5,414 5,330 4,957 3,465 1,015
EBITDA (6) ................................................. 239,544 205,871 186,244 148,837 103,829
BALANCE SHEET DATA
Total assets ............................................... 1,502,024 1,199,800 964,115 845,781 749,495
Shareholders' equity ....................................... 432,526 365,576 331,713 189,231 149,057
Partners' capital .......................................... 2,667 3,293 6,309 92,099 85,976
Current installments of long-term debt ..................... 29,400 33,299 13,322 39,976 22,491
Long-term debt, excluding current installments ............. 872,285 659,369 518,416 448,258 414,004
Ratio of earnings to fixed charges (7) ..................... 3.1x 2.9x 3.1x 2.8x 2.4x
Combined effective debt-to-equity ratio (8) ................ 2.00 1.79 1.53 1.59 1.76
OPERATING DATA
Number of inns (9) ......................................... 267 248 237 226 220
Occupancy percentage ....................................... 69.4% 68.9% 70.8% 70.1% 65.1%
Average daily room rate .................................... $ 56.83 $ 53.83 $ 51.07 $ 47.65 $ 46.36
- ----------
15
(1) 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.)
(2) Basic earnings per share reflects the earnings available to each share of
common stock outstanding during the reporting period. Diluted earnings per
share reflects the earnings available to each share of common stock
outstanding during the reporting period and to each share that would have
been outstanding assuming the issuance of common shares for all dilutive
potential common shares outstanding during the reporting period. All
earnings per share disclosures have been adjusted to give effect to the
Company's stock splits effected in the form of stock dividends.
(3) Capital expenditures for the years ended December 31, 1997, 1996 and 1995
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.
(4) 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.
(5) Cash dividends declared per common share have been adjusted to give effect
to the Company's stock splits effected in the form of stock dividends.
(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 performance stock option. This
definition differs from the traditional EBITDA definition which does not
include adjustments for extraordinary items, partners' equity in earnings,
gain or loss on property transactions, provision for premature retirement
of assets and performance stock option as follows:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Extraordinary items ........................ $ 38 $ 524 $ 717 $ -- $ 619
Partners' equity in earnings ............... 860 1,499 10,227 11,406 12,965
(Gain) loss on property transactions ....... (8,808) -- -- (79) 4,347
Provision for premature retirement of assets -- 18,076 12,630 -- --
Performance stock option ................... -- -- -- -- 4,407
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
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, 1997, the Company owned and operated 267 inns through
wholly-owned subsidiaries and partnerships, one inn through an
unincorporated partnership and one inn through an unincorporated joint
venture.
16
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.
On January 3, 1998, La Quinta, Meditrust Corporation ("Meditrust REIT") and
Meditrust Operating Company ("Meditrust Operating Company" and together with
Meditrust REIT, the "Meditrust Companies") entered into an agreement and plan of
merger (the "Merger Agreement"), pursuant to which the Company will merge with
and into Meditrust REIT with Meditrust REIT being the surviving corporation (the
"Merger"). In the Merger, La Quinta shares will be converted into Paired Shares
of The Meditrust Companies, or converted into cash. As a result of the Merger,
Meditrust REIT will acquire all of the assets and liabilities of the Company and
Meditrust REIT will assume approximately $900 million of the Company's existing
indebtedness.
Under the terms of the Merger Agreement, shareholders of the Company will
have the option to elect to receive either (i) common stock of the Meditrust
Companies (the "Paired Shares"), or (ii) cash. The stock consideration will be
payable in Paired Shares under an exchange ratio based on the average closing
price of the Paired Shares for 20 randomly determined trading days in a 30-day
period ending the eighth day prior to the Company's shareholder meeting called
to consider the Merger (the "Meeting Date Price"). The Paired Shares issued in
the Merger will be entitled to receive a cash earnings and profit distribution
from Meditrust REIT.
The Merger Agreement provides that Company shareholders receiving stock
consideration will receive Paired Shares in an amount, based on the Meeting Date
Price, equal to the difference between $26.00 and the earnings and profit
distribution to be received per Company share, so long as the Meeting Date Price
is between $34.20 and $41.80. Company shareholders electing to receive stock
consideration will also receive the earnings and profit distribution so long as
they hold the Paired Shares on the applicable record date. The earnings and
profit distribution is expected to be declared immediately prior to the Merger,
payable to all shareholders of record of the Meditrust Companies on a date to be
determined by Meditrust between the fifteenth and the forty-fifth day following
the Merger and payable within fifteen days of such record date.
If the Meeting Date Price is greater than or equal to $41.80 but less than
or equal to $45.60, the exchange ratio for each share of Company common stock
exchanged into Paired Shares will be 0.6220, reduced by the consideration to be
received in the earnings and profit distribution per Company share (resulting in
total consideration based on the Meeting Date Price ranging from $26.00 to
$28.36 per share of Company common stock, including the earnings and profit
distribution, as the Meeting Date Price increases from $41.80 to $45.60). If the
Meeting Date Price is greater than $45.60, then each Company share will be
entitled to receive $28.36 in total consideration based on the Meeting Date
Price, comprised of Paired Shares and the earnings and profit distribution
referred to above.
If the Meeting Date Price is less than $34.20 but greater than or equal to
$30.40, the exchange ratio for each share of Company common stock exchanged into
Paired Shares will be 0.7602, reduced by the amount to be received in the
earnings and profit distribution per Company share (resulting in total
consideration based on the Meeting Date Price ranging from $26.00 to $23.11 per
share of Company common stock, including the earnings and profit distribution,
as the Meeting Date Price decreases from $34.20 to $30.40). If the Meeting Date
Price is below $30.40, the Company will have the right to terminate the Merger
Agreement under certain circumstances, subject to a "top-up" right exercisable
by Meditrust REIT which is designed to return total consideration per Company
share based on the Meeting Date Price to at least $23.11, inclusive of the
earnings and profit distribution. If the Meeting Date Price is below $28.50, the
Company will have the unilateral right to terminate the Merger Agreement.
All Company shareholders will have the right to elect cash consideration in
the Merger for each of their shares of Company common stock. The Merger
Agreement provides that Company shareholders electing to
17
receive cash in the Merger will receive, subject to the maximum cash
limitations, $26.00 per exchanged share of Company common stock. In the event
that the amount to be paid both pursuant to cash elections in the Merger and in
the earnings and profit distribution paid with respect to Paired Shares received
by Company shareholders in the Merger exceeds approximately $521 million, the
cash merger consideration will be distributed pro rata among those shares
electing cash and all other Company shares will receive Paired Shares in the
Merger. The maximum cash limitation of approximately $521 million (which
includes the cash merger consideration and the earnings and profit distribution
payable on Paired Shares issued in the Merger is not subject to adjustment based
on the Meeting Date Price.
The Merger is subject to various conditions including, without limitation,
approval of the Merger by two-thirds of the outstanding shares of the Company
common stock, by a majority of the outstanding shares of each of the Meditrust
Companies, and regulatory agencies. Subject to the terms of a shareholders
agreement, Gary L. Mead, Thomas M. Taylor & Co. and entities and individuals
associated with certain members of the Bass family have agreed with the
Meditrust Companies to vote approximately 29% of the outstanding shares of the
Company common stock in favor of the Merger. These shareholders have also agreed
to select cash consideration for all of their shares of Company common stock. It
is currently anticipated that the Merger will be consummated in the second
quarter of 1998.
The Board of Directors authorized a three-for-two stock split effected in
the form of a stock dividend effective in July 1996. Earnings per share and the
weighted average number of shares outstanding have been adjusted to give effect
to this distribution.
At February 13, 1998, La Quinta had opened a total of 36 new Inn & Suites
hotels and anticipates having a total of 65-70 Inn & Suites hotels open by the
end of 1998 and 100 at the end of 1999. The new Inn & Suites hotels 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(R) Extra rooms feature a king-size bed,
refrigerator and microwave which may be desirable for longer stays. The Inn &
Suites hotels 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. In addition, the Inn & Suites hotels offer fitness centers and courtyards
with gazebos and spas.
During 1997 and 1996, the Company acquired the limited partners' interest
in one and four, respectively of its combined unincorporated partnerships and
joint ventures, which each owned one inn. The Company now has remaining one
unincorporated partnership and one unincorporated joint venture, each owning one
inn.
The Company acquired eleven inns during the year ended December 31, 1995
for conversion to the La Quinta(R) brand.
During 1995, the Company launched its Gold Medal(R) rooms program designed
to strengthen the Company's ability to gain additional market share and pricing
advantage relative to its competitors. The program improved 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(R), in room coffee makers, dataport telephones for computer connections
and greatly expanded free television channel choices. The program required 20-30
rooms at a time to be taken out of available supply at an inn during the typical
10-12 week construction period. The Company did not adjust its available rooms
or occupancy percentage for rooms unavailable due to construction as a result of
this program. The Company completed the program during 1997.
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
7,949,732 shares of the Company's Common Stock. AEW also agreed to sell the
remaining one-third of its ownership interest in LQDP to the Company for a
negotiated price of $48.2 million in cash
18
(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 7,949,732 shares of the Company's Common Stock having
a fair market value of $142.8 million based on the July 3, 1995 New York Stock
Exchange closing price. The conversion was accounted for by increasing
shareholders' equity by the $46.4 million value of the option and recording a
$46.4 million non-recurring, non-cash adjustment entitled Conversion of
Partner's Interest into Common Stock below net earnings in the Statement of
Operations. There was 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 following chart shows certain historical operating statistics and
revenue data. References to occupancy percentage, average daily rate ("ADR") and
revenue per available room ("REVPAR") 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). All financial data is related to Company
Inns unless otherwise specified.
Comparative Operating Statistics and Revenue Data
-------------------------------------------------------------------------
Years Ended December 31
-------------------------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
(in thousands, except rates and percentages)
Room revenue $473,717 $416,969 $390,449
Other inn revenue 20,777 17,895 15,245
------------- ------------- -------------
Total inn revenue 494,494 434,864 405,694
Restaurant rental and other 7,965 8,105 8,071
Management services 110 90 154
------------- ------------- -------------
Total revenue $502,569 $443,059 $413,919
============= ============= =============
Occupancy percentage 69.4% 68.9% 70.8%
ADR $ 56.83 $ 53.83 $ 51.07
REVPAR $ 39.45 $ 37.06 $ 36.17
Available rooms 12,008 11,251 10,793
Year Ended December 31, 1997
Compared to Year Ended December 31, 1996
Total revenues increased to $502,569,000 in 1997 from $443,059,000 in 1996,
an increase of $59,510,000, or 13.4%. Of the total revenues reported in 1997,
98.4% were revenues from inns and 1.6% 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, phone,
movie and vending commissions, meeting room and banquet revenues and laundry
services. Inn revenues increased to $494,494,000 in 1997 from $434,864,000 in
1996, an increase of $59,630,000, or 13.7%. The increase in inn revenues was due
primarily to an increase in ADR and occupancy along with the revenues associated
with the opening of new Inn & Suites hotels. ADR increased to $56.83 in 1997
from $53.83 in 1996, an increase of $3.00, or 5.6%. Occupancy percentage
increased .5 percentage points to 69.4% in 1997 from 68.9% in 1996. REVPAR,
which is the product of occupancy percentage and ADR, increased 6.4% over 1996.
Improvements in ADR and REVPAR are due, in part, to the completion of the Gold
Medal rooms program during 1997.
Restaurant rental and other revenues primarily include rental payments from
restaurants owned by the Company and leased to and operated by third parties.
Restaurant rental and other decreased to $8,075,000 in 1997 from $8,195,000 in
1996, a decrease of $120,000, or 1.5%.
Direct expenses include costs directly associated with the operation of
inns. In 1997, approximately 38.2% of direct expenses were represented by
salaries, wages, and related costs. Other major categories of direct
19
expenses include utilities, property taxes, repairs and maintenance, credit card
discounts and room supplies. Direct expenses increased to $244,501,000 ($29.33
per occupied room) in 1997 compared to $218,738,000 ($28.24 per occupied room)
in 1996, an increase of $25,763,000, or 11.8%. 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 48.7% in 1997 from
49.4% in 1996.
Corporate expenses include the costs of general management, office rent,
training and field supervision of inn managers and other marketing and
administrative expenses. The major components of corporate expenses are
salaries, wages and related expenses. Corporate expenses increased to
$18,524,000 ($1.54 per available room) in 1997 from $18,450,000 ($1.64 per
available room) in 1996. As a percent of total revenues, corporate expenses
decreased to 3.7% in 1997 from 4.2% in 1996.
Depreciation, amortization and asset retirements increased to $60,817,000
in 1997 from $48,105,000 in 1996, an increase of $12,712,000, or 26.4%. This is
due primarily to the increase in number of inns and increased depreciation for
inns due to the completion of 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 replaced
certain furniture and fixtures before the end of their normal useful lives and
therefore made adjustments to reflect shorter remaining lives.
As a result of the above, operating income increased to $178,727,000 in
1997 from $139,690,000 in 1996, an increase of $39,037,000, or 27.9%. Operating
income before the provision for premature retirement of assets increased to
$178,727,000 in 1997 from $157,766,000 in 1996, an increase of $20,961,000, or
13.3%.
Interest, net increased to $49,186,000 in 1997 from $41,812,000 in 1996, an
increase of $7,374,000, or 17.6%. The increase in interest, net is primarily
attributable to an increase in long-term borrowings and is partially offset by
an increase in capitalized interest of $4,216,000. Interest, net includes
capitalized interest of $9,645,000 and $5,429,000 in 1997 and 1996,
respectively. The increase in capitalized interest is primarily due to the
construction of new Inn & Suites hotels.
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 controlled by the Company. Partners' equity in
earnings decreased to $860,000 in 1997 from $1,499,000 in 1996, a decrease of
$639,000. This decrease reflects the Company's acquisition of the limited
partner's interest in two of its combined unincorporated partnerships and joint
ventures since September 1996.
The gain on property transactions of $8,808,000 in 1997 is related to the
disposition of certain properties. After a short transition period, these
properties will not be operated by the Company or branded as La Quinta(R)Inns.
Income taxes for 1997 were calculated using an effective income tax rate of
36.5% compared to an effective income tax rate of 37% for 1996. The reduction in
the tax rate from 1996 to 1997 resulted from the successful resolution in the
fourth quarter of 1997 of certain income tax issues for which tax expense had
previously been provided.
For the reasons discussed above, the Company reported earnings before
extraordinary items of $87,304,000 in 1997 compared with $60,719,000 in 1996, an
increase of $26,585,000, or 43.8%. Earnings before extraordinary items and the
provision for premature retirement of assets, net of tax, increased $15,197,000,
or 21.1% to $87,304,000 in 1997 from $72,107,000 in 1996.
Extraordinary items, net of tax decreased to $38,000 in 1997 from $524,000
in 1996, and resulted primarily from prepayment fees related to the early
extinguishment of approximately $1,740,000 and $16,707,000 of industrial
development revenue bonds and long-term mortgage debt in 1997 and 1996,
respectively.
20
For the reasons discussed above, the Company reported net earnings of
$87,266,000 in 1997 compared with $60,195,000 in 1996, an increase of
$27,071,000, or 45.0%.
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 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. REVPAR 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.
Restaurant rental and other revenues decreased to $8,195,000 in 1996 from
$8,225,000 in 1995, a decrease of $30,000.
In 1996, approximately 39.7% of direct expenses were represented by
salaries, wages, and related costs. 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 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 replaced
certain furniture and fixtures before the end of their normal useful life and
therefore 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.
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, net increased to $41,812,000 in 1996 from $39,442,000 in 1995, an
increase of $2,370,000, or 6.0%. The increase in interest, 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 and is partially offset by an increase in capitalized interest of
$4,116,000. Interest, 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.
21
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.
Income taxes for 1996 were calculated using an effective income 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 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.
22
Capital Resources and Liquidity
During the year ended December 31, 1997, the Company's capital needs were
met primarily through operating cash flows and through the issuance of $50
million of 7.27% Medium-Term Notes due 2007, the issuance of $50 million of
7.33% Medium-Term Notes due 2008 and borrowings under its $325 million Unsecured
Line of Credit and its $75 million Bank Unsecured Line of Credit, as defined
below. During the year ended December 31, 1996, the Company funded its capital
needs primarily through operating cash flows, 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.
At December 31, 1997, the Company had a $325 million Unsecured Line of
Credit with a consortium of banks and a $75 million Bank Unsecured Line of
Credit (together, the "Unsecured Credit Facilities"). The $325 million Unsecured
Line of Credit matures February 2002 and the $75 million Bank Unsecured Line of
Credit matures March 1998. At December 31, 1997, the Company had $64,694,000
available on its Unsecured Credit Facilities, net of $1,306,000 of letters of
credit collateralizing certain mortgages. The Unsecured Credit Facilities bear
interest at the prime rate or LIBOR, adjusted for an applicable margin, as
defined in the related credit agreements. The applicable margin is determined
quarterly based upon predetermined levels of cash flow to indebtedness or credit
ratings received by specified credit rating agencies, as defined in the related
credit agreements. At December 31, 1997, borrowings under the Unsecured Credit
Facilities bear interest at LIBOR plus 33.75 basis points on $315,000,000 of
outstanding borrowings and LIBOR plus 38.75 basis points on $19,000,000 of
outstanding borrowings. The $325 million Unsecured Line of Credit requires a
facility fee of 18.75 basis points on the average amount of the commitment.
On February 12, 1998, the Company amended its $75 million Bank Unsecured
Line of Credit. The amendment increased the Bank Unsecured Line of Credit to
$125 million, extended its term to July 1998 and increased the applicable margin
over LIBOR to 50 basis points.
On August 15, 1997, La Quinta filed a shelf registration statement with the
Securities and Exchange Commission which would allow the Company to issue up to
$300,000,000 principal amount of Debt Securities. The registration statement
became effective on August 25, 1997. The Company has not issued any Debt
Securities under this registration statement.
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. In February 1997, the Company issued $50
million of 7.27% Medium-Term Notes due 2007 and in July 1997, the Company issued
$50 million of 7.33% Medium-Term Notes due 2008. 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.
At December 31, 1997, the Company had $2,110,000 of cash and cash
equivalents, compared to $1,508,000 at December 31, 1996.
Net cash provided by operating activities increased to $161,768,000 in 1997
from $148,262,000 in 1996, an increase of $13,506,000 or 9.1%. In 1996, net cash
provided by operating activities increased by $19,464,000 or 15.1% from
$128,798,000 in 1995. The increase in net cash provided by operating activities
in both 1997 and 1996 was the result of improved REVPAR, which increased by 6.4%
in 1997 and 2.5% in 1996 and increases in deferred income taxes.
Net cash used by investing activities of $339,109,000 in 1997 and
$275,179,000 in 1996 reflects expenditures related to the new Inn & Suites hotel
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 & Suites hotel construction projects and the Gold Medal rooms program.
23
Net cash provided by financing activities was $177,943,000 in 1997 compared
with $125,835,000 in 1996. The increase is primarily the result of increased
borrowings to fund capital expenditures related to the Gold Medal rooms program,
new Inn & Suites hotel construction and the purchase of treasury stock.
The Board of Directors has authorized a series of plans for the repurchase
of up to a total of $80,000,000 of the Company's common stock. During January
1996, the Board of Directors, through a resolution independent of the
$80,000,000 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). Total repurchases under
these plans, including the private transaction, were approximately $84,358,000,
of which approximately $22,905,000 were made during 1997.
Commitments
The Company has made commitments of approximately $177,506,000 for the
completion of Inn & Suites hotels for which construction had commenced as of
December 31, 1997. Funds on hand, anticipated future cash flows and amounts
available on the Company's Unsecured Credit Facilities as may be increased from
time to time and its $300,000,000 shelf registration statement are expected to
be sufficient to complete these projects. The Company will evaluate from time to
time the appropriateness of other financing alternatives.
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.
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.
Year 2000
In 1997, the Company began the process of identifying, evaluating and
implementing changes to computer programs necessary to address the year 2000
issue. This issue affects computer systems that have time-sensitive programs
that may not properly recognize the year 2000. This could result in system
failures or miscalculations. The Company is currently addressing its internal
year 2000 issue with modifications to existing programs and conversions to new
programs. The Company is also communicating with financial institutions,
software vendors and others with which it conducts business to help them
identify and resolve the year 2000 issue. The total cost of converting all
internal systems has not been completely quantified, but it is not expected to
be a material cost to the Company. However, no estimates can be made as to the
potential adverse impact that may result from the failure of the Company's
financial institutions, software vendors and others with which it conducts
business to become year 2000 compliant. Costs related to the year 2000 issue are
being expensed as incurred.
Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("Statement 130"), "Comprehensive
Income", which is effective for fiscal years beginning after December 15, 1997.
Statement 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general purpose financial statements. The Company will implement the statement
in the required period. Adoption of the statement is not expected to have a
material adverse effect on the Company's financial position or the results of
its operations.
24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LA QUINTA INNS, INC.
COMBINED BALANCE SHEETS
(in thousands)
================================================================================
December 31
--------------------------
ASSETS 1997 1996
----------- -----------
Current assets:
Cash and cash equivalents .......................................... $ 2,110 $ 1,508
Receivables:
Trade and other (net of allowance of $191 and $108) ................ 14,805 12,302
Income taxes ....................................................... -- 3,835
Supplies and prepayments ............................................ 14,673 10,811
Deferred income taxes ............................................... 9,813 9,277
----------- -----------
Total current assets .......................................... 41,401 37,733
----------- -----------
Notes receivable, excluding current installments (net of allowance
of $1,793 in 1996) .............................................. 1,104 3,700
Property and equipment, net ........................................... 1,449,215 1,148,190
Deferred charges and other assets, at cost less applicable amortization 10,304 10,177
----------- -----------
Total assets .................................................. $ 1,502,024 $ 1,199,800
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ............................. $ 29,400 $ 33,299
Accounts payable ................................................... 73,605 55,088
Accrued expenses ................................................... 49,521 53,584
----------- -----------
Total current liabilities ..................................... 152,526 141,971
----------- -----------
Long-term debt, excluding current installments ........................ 872,285 659,369
Deferred income taxes, pension and other .............................. 42,020 29,591
Partners' capital ..................................................... 2,667 3,293
Shareholders' equity:
Common stock ($.10 par value per share; 200,000 and 100,000 shares
authorized; 85,007 and 84,274 shares issued) .................... 8,501 8,427
Additional paid-in capital ......................................... 249,612 240,453
Unearned officer's compensation .................................... (1,016) --
Retained earnings .................................................. 270,462 188,610
Treasury stock, at cost (7,870 and 6,704 shares) ................... (95,033) (71,914)
----------- -----------
Total shareholders' equity ...................................... 432,526 365,576
----------- -----------
Total liabilities and shareholders' equity ...................... $ 1,502,024 $ 1,199,800
=========== ===========
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
-----------------------------------
1997 1996 1995
--------- --------- ---------
Revenues:
Inn ............................................................................. $ 494,494 $ 434,864 $ 405,694
Restaurant rental and other ..................................................... 8,075 8,195 8,225
--------- --------- ---------
Total revenues ............................................................... 502,569 443,059 413,919
--------- --------- ---------
Operating costs and expenses:
Direct .......................................................................... 244,501 218,738 209,153
Corporate ....................................................................... 18,524 18,450 18,522
Depreciation, amortization and asset retirements ................................ 60,817 48,105 40,951
Provision for premature retirement of assets .................................... -- 18,076 12,630
--------- --------- ---------
Total operating costs and expenses ......................................... 323,842 303,369 281,256
--------- --------- ---------
Operating income ........................................................... 178,727 139,690 132,663
--------- --------- ---------
Other (income) expense:
Interest, net ................................................................... 49,186 41,812 39,442
Partners' equity in earnings .................................................... 860 1,499 10,227
Net gain on property transactions ............................................... (8,808) -- --
--------- --------- ---------
Earnings before income taxes and extraordinary items ....................... 137,489 96,379 82,994
Income taxes ...................................................................... 50,185 35,660 31,620
--------- --------- ---------
Earnings before extraordinary items ........................................ 87,304 60,719 51,374
Extraordinary items, net of income taxes .......................................... (38) (524) (717)
--------- --------- ---------
Net earnings ............................................................... 87,266 60,195 50,657
Conversion of partner's interest into common stock ................................ -- -- (46,364)
--------- --------- ---------
Net earnings available to shareholders ..................................... $ 87,266 $ 60,195 $ 4,293
========= ========= =========
Basic earnings per share:
Earnings after conversion of partner's interest into common stock and before
extraordinary items ....................................................... $ 1.13 $ .78 $ .07
Extraordinary items, net of income taxes ................................... -- (.01) (.01)
--------- --------- ---------
Net earnings available to shareholders ..................................... $ 1.13 $ .77 $ .06
========= ========= =========
Basic weighted average number of shares outstanding ............................... 77,426 77,736 74,360
========= ========= =========
Diluted earnings per share:
Earnings after conversion of partner's interest into common
stock and before extraordinary items ....................................... $ 1.09 $ .75 $ .07
Extraordinary items, net of income taxes ..................................... -- (.01) (.01)
--------- --------- ---------
Net earnings available to shareholders ....................................... $ 1.09 $ .74 $ .06
========= ========= =========
Diluted weighted average number of shares outstanding ............................. 80,160 80,961 77,991
========= ========= =========
See accompanying notes to combined financial statements.
================================================================================
26
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
================================================================================
Additional Unearned Minimum
Common Stock Treasury Stock Paid-In Officer's Retained Pension
Shares Amount Shares Amount Capital Compensation Earnings Liability Total
------ ------ ------ ------ ------- ------------ -------- --------- -----
Balances at December 31, 1994 .. 48,759 $4,876 (2,361) $(17,339) $68,759 $ -- $134,409 $(1,474) $189,231
Exercise of 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) -- -- -- --
Exercise of 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
Exercise of stock options .... 708 71 (10) (214) 8,075 -- -- -- 7,932
Issuance of restricted stock
and stock options .......... 25 3 -- -- 1,084 (1,084) -- -- 3
Purchase of treasury stock ... -- -- (1,156) (22,905) -- -- -- -- (22,905)
Dividends paid ............... -- -- -- -- -- -- (5,414) -- (5,414)
Amortization of unearned
officer's compensation .... -- -- -- -- -- 68 -- -- 68
Net earnings ................. -- -- -- -- -- -- 87,266 -- 87,266
------ ------- ------- --------- ------- -------- --------- -------- --------
Balances at December 31, 1997 85,007 $8,501 (7,870) $(95,033) 249,612 $(1,016) $270,462 $ -- $432,526
====== ======= ======= ========= ======= ======== ========= ======== ========
See accompanying notes to combined financial statements.
================================================================================
27
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
================================================================================
Years Ended December 31
-------------------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Net earnings ............................................................ $ 87,266 $ 60,195 $ 50,657
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization of property and equipment
and asset retirements .............................................. 60,817 48,105 40,951
Amortization of unearned officer's compensation ..................... 68 -- --
Provision for premature retirement of assets ........................ -- 18,076 12,630
Provision for deferred taxes ........................................ 12,259 8,490 1,181
Gain on property transactions ....................................... (8,808) -- --
Partners' equity in earnings ........................................ 860 1,499 10,227
Changes in operating assets and liabilities:
Receivables ....................................................... (856) 349 (537)
Income taxes ...................................................... 13,068 3,535 5,346
Supplies and prepayments .......................................... (4,321) (2,431) (1,818)
Accounts payable and accrued expenses ............................. 2,415 8,517 9,704
Deferred charges and other assets ................................. (634) 1,804 656
Deferred credits .................................................. (366) 123 (199)
----------- ----------- -----------
Net cash provided by operating activities ........................ 161,768 148,262 128,798
----------- ----------- -----------
Cash flows from investing activities:
Construction, purchase and conversion of inns ........................... (251,516) (148,977) (77,502)
Other capital expenditures .............................................. (110,891) (116,799) (39,976)
Proceeds from property transactions ..................................... 21,026 201 14
Purchase of partners' equity interests .................................. (81) (9,232) (48,200)
Decrease (increase) in notes receivable and investments ................. 2,353 (372) 6,836
----------- ----------- -----------
Net cash used by investing activities ............................ (339,109) (275,179) (158,828)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from line of credit and long-term borrowings ................... 1,047,122 651,149 645,723
Principal payments on line of credit and long-term borrowings ........... (837,172) (494,105) (601,121)
Capital distributions to partners ....................................... (722) (1,129) (2,495)
Dividends to shareholders ............................................... (5,414) (5,330) (4,957)
Purchase of treasury stock .............................................. (29,487) (24,012) (12,346)
Purchase of treasury stock from related party ........................... -- (11,500) --
Net proceeds from stock transactions .................................... 3,616 10,762 5,227
----------- ----------- -----------
Net cash provided by financing activities ........................ 177,943 125,835 30,031
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents .......................... 602 (1,082) 1
Cash and cash equivalents at beginning of year ............................ 1,508 2,590 2,589
----------- ----------- -----------
Cash and cash equivalents at end of year .................................. $ 2,110 $ 1,508 $ 2,590
=========== =========== ===========
See accompanying notes to combined financial statements.
================================================================================
28
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
================================================================================
Years Ended December 31
----------------------------------------
1997 1996 1995
---------- --------- --------
Supplemental schedule of non-cash investing and financing activities:
Tax benefit from stock options exercised ........................................... $ 4,319 $10,330 $ 6,027
Debt incurred in connection with acquisitions of unincorporated
partnerships and joint ventures ............................................... 2,500 3,700 --
Accrual for purchase of treasury stock ............................................. -- 6,582 --
Effect of stock split .............................................................. -- 2,768 --
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
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 hotels. At December 31, 1997, the
Company owned and operated 267 hotels in 28 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 whereby the Company is effectively
self-insured. 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.
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. Accrued self-insurance
liabilities totaled approximately $16,413,000 and $20,762,000 at December 31,
1997 and 1996, respectively.
Advertising
Substantially all costs of advertising, promotion and marketing programs
are charged to operations in the year incurred. These costs were approximately
$24,773,000, $19,370,000 and $17,523,000 for the years ended December 31, 1997,
1996 and 1995, respectively.
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.
================================================================================
30
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
Accounting Pronouncement
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("Statement 130"), "Comprehensive
Income", which is effective for fiscal years beginning after December 15, 1997.
Statement 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general purpose financial statements. The Company will implement the statement
in the required period. Adoption of the statement is not expected to have a
material adverse effect on the Company's financial position or the results of
its operations.
(2) PROPERTY AND EQUIPMENT
At December 31, 1997 and 1996, property and equipment, net consisted of the
following:
December 31
------------------------
1997 1996
---------- ----------
(in thousands)
Buildings .......................................... $1,172,119 $ 988,711
Furniture, fixtures and equipment .................. 197,453 148,691
Land and leasehold improvements .................... 206,039 183,207
Construction in progress ........................... 209,346 120,286
---------- ----------
Total property and equipment .................... 1,784,957 1,440,895
Less accumulated depreciation and amortization ..... 335,742 292,705
---------- ----------
Property and equipment, net ..................... $1,449,215 $1,148,190
========== ==========
At December 31, 1997, approximately $209,392,000 of the net property and
equipment shown above is 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 improvements to
land and leaseholds. Maintenance and repairs are charged to operations as
incurred. Expenditures for improvements are capitalized.
Property and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Losses on impairment are determined by comparing the sum of the
expected future undiscounted cash flows to the carrying amount of the asset.
Impairment losses are recognized in operating income as they are determined.
At December 31, 1997 and 1996, land and leasehold improvements includes
$1,315,000 for properties held for sale stated at the lower of cost or estimated
net realizable value. Charges to reduce the carrying amounts of properties held
for sale to net realizable value are recognized in income.
The Company launched its Gold Medal rooms program during the third quarter
of 1995. During this program, the Company replaced certain furniture and
fixtures before the end of their normal useful life and therefore 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 during 1996 and 1995, respectively. The Company completed the
program during 1997.
================================================================================
31
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
(3) LONG-TERM DEBT
At December 31, 1997 and 1996, long-term debt consisted of the following:
December 31
-------------------
1997 1996
-------- --------
(in thousands)
Mortgage loans maturing 1998-2001 (8.85% weighted average effective
interest rate) .................................................... $ 54,291 $ 58,337
Industrial development revenue bonds, maturing 1998-2012
(5.41% weighted average effective interest rate) .................. 39,917 49,394
Unsecured line of credit, maturing February 28, 2002
(6.83% effective interest rate at December 31, 1997) .............. 315,000 --
Bank unsecured line of credit, maturing March 15, 1998 (6.36%
effective interest rate at December 31, 1997) ..................... 19,000 --
Bank unsecured line of credit ........................................ -- 210,100
7.40% Senior unsecured notes, due 2005 (7.55% effective interest rate) 99,927 99,917
7.25% Senior unsecured notes, due 2004 (7.13% effective interest rate) 101,050 101,220
7.11% Medium-Term notes, due 2001 (7.25% effective interest rate) .... 50,000 50,000
7.27% Medium-Term notes, due 2007 (7.36% effective interest rate) .... 50,000 --
7.33% Medium-Term notes, due 2008 (7.36% effective interest rate) .... 50,000 --
9.25% Senior unsecured subordinated notes, due 2003 (9.58% effective
interest rate) .................................................... 120,000 120,000
Other ................................................................ 2,500 3,700
-------- --------
Total long-term debt ............................................ 901,685 692,668
Less current installments ............................................ 29,400 33,299
-------- --------
Long-term debt, excluding current installments .................. $872,285 $659,369
======== ========
At December 31, 1997, the Company had a $325 million Unsecured Line of
Credit with a consortium of banks and a $75 million Bank Unsecured Line of
Credit (together, the "Unsecured Credit Facilities"). The $325 million Unsecured
Line of Credit matures February 2002 and the $75 million Bank Unsecured Line of
Credit matures March 1998. At December 31, 1997, the Company had $64,694,000
available on its Unsecured Credit Facilities, net of $1,306,000 of letters of
credit collateralizing certain mortgages. The Unsecured Credit Facilities bear
interest at the prime rate or LIBOR, adjusted for an applicable margin, as
defined in the related credit agreements. The applicable margin is determined
quarterly based upon predetermined levels of cash flow to indebtedness or credit
ratings received by specified credit rating agencies, as defined in the related
credit agreements. At December 31, 1997, borrowings under the Unsecured Credit
Facilities bear interest at LIBOR plus 33.75 basis points on $315,000,000 of
outstanding borrowings and LIBOR plus 38.75 basis points on $19,000,000 of
outstanding borrowings. The $325 million Unsecured Line of Credit requires a
facility fee of 18.75 basis points on the average amount of the commitment.
Annual maturities for the five years subsequent to December 31, 1997 and
thereafter are as follows:
(in thousands)
1998 .............................................. $ 29,400
1999 .............................................. 10,736
2000 .............................................. 50,284
2001 .............................................. 64,598
2002 .............................................. 317,141
Thereafter ........................................ 429,526
--------
$901,685
========
================================================================================
32
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
Maturities for the years ended December 31, 1998 and 2002 include the
$19,000,000 and $315,000,000 balances on the $75 million Bank Unsecured Line of
Credit and the $325 million Unsecured Line of Credit, respectively.
Interest paid during the years ended December 31, 1997, 1996 and 1995
amounted to $56,358,000, $44,501,000 and $39,912,000, respectively.
On August 15, 1997, La Quinta filed a shelf registration statement with the
Securities and Exchange Commission which would allow the Company to issue up to
$300,000,000 principal amount of Debt Securities. The registration statement
became effective on August 25, 1997. The Company has not issued any Debt
Securities under this registration statement.
The Company recognizes losses on early extinguishments of long-term debt as
extraordinary items in the period in which the debt is extinguished. The Company
reported extraordinary items, net of income taxes, of $38,000, $524,000 and
$717,000 in 1997, 1996 and 1995, respectively, related to the early
extinguishment of long-term debt.
The Company is obligated by agreements relating to sixteen issues of IRBs
in an aggregate amount of $37,600,000 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, 1997
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, 1998 and the remarketing agents are
unable to resell such bonds, the maturities of long-term debt shown above would
increase by $20,610,000 for the year ending December 31, 2000.
The 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 7.4% Senior Unsecured Notes due 2005, 7.25% Senior Unsecured
Notes due 2004, 7.11% Medium-Term Notes due 2001, 7.27% Medium-Term Notes due
2007 and 7.33% Medium-Term Notes due 2008 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.
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.
At December 31, 1997, the Company was in compliance with all restrictions
and covenants.
================================================================================
33
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
(4) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
At December 31, 1997 and 1996, accounts payable and accrued expenses
consisted of the following:
December 31
----------------------
1997 1996
------- -------
(in thousands)
Accounts payable:
Construction ................................ $40,059 $30,920
Trade ....................................... 16,224 16,125
Cash overdrafts ............................. 11,405 7,043
Income taxes ................................ 4,914 --
Other ....................................... 1,003 1,000
------- -------
$73,605 $55,088
======= =======
Accrued expenses:
Payroll and employee benefits ............... $22,282 $25,570
Property taxes .............................. 12,485 10,607
Interest .................................... 11,676 8,241
Other ....................................... 3,078 2,584
Treasury stock purchase ..................... -- 6,582
------- -------
$49,521 $53,584
======= =======
================================================================================
34
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
(5) UNINCORPORATED PARTNERSHIPS AND JOINT VENTURES
At December 31, 1997, the Company had a 50% ownership interest in one
unincorporated partnership and a 60% ownership interest in one unincorporated
joint venture. 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
---------------
1997 1996
------ ------
(in thousands)
ASSETS
Total current assets .......................................... $ 442 $ 827
Property and equipment, net ................................... 5,868 7,335
Deferred charges and other assets ............................. 5 9
------ ------
$6,315 $8,171
====== ======
LIABILITIES AND OWNERS' EQUITY
Total current liabilities ..................................... $ 549 $ 766
Long-term debt, excluding current installments of $412 and $488 351 763
Owners' equity:
Company's ................................................ 2,748 3,349
Partners' ................................................ 2,667 3,293
------ ------
$6,315 $8,171
====== ======
Years Ended December 31
---------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
Revenues ................................... $ 5,066 $ 9,625 $ 58,265
Operating costs and expenses ............... 3,019 6,124 38,434
-------- -------- --------
Operating income ........................... 2,047 3,501 19,831
Other deductions, principally interest ..... (51) (70) (1,019)
-------- -------- --------
Pretax earnings ....................... $ 1,996 $ 3,431 $ 18,812
======== ======== ========
Equity in pretax earnings:
Company's ............................. $ 1,136 $ 1,932 $ 8,585
Partners' ............................. 860 1,499 10,227
-------- -------- --------
$ 1,996 $ 3,431 $ 18,812
======== ======== ========
================================================================================
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
-----------------------------------------
1997 1996 1995
------- ------- -------
Federal ..................... (in thousands)
Current ................... $33,554 $24,540 $26,992
Deferred .................. 10,850 7,393 1,015
------- ------- -------
44,404 31,933 28,007
------- ------- -------
State
Current ................... 4,372 2,630 3,447
Deferred .................. 1,409 1,097 166
------- ------- -------
5,781 3,727 3,613
------- ------- -------
Total ....................... $50,185 $35,660 $31,620
======= ======= =======
The effective tax rate varies from the statutory rate for the following reasons:
Years Ended December 31
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
Tax expense at statutory rate ............... $ 48,121 $ 33,732 $ 29,048
State income taxes, net of Federal benefit .. 3,757 2,512 2,482
Other, net .................................. (1,693) (584) 90
-------- -------- --------
Provision for income taxes ............... $ 50,185 $ 35,660 $ 31,620
======== ======== ========
The following are cash transactions relating to the Company's income taxes:
Years Ended December 31
---------------------------------------
1997 1996 1995
------- ------- -------
(in thousands)
Income taxes paid .............. $27,417 $23,326 $24,777
======= ======= =======
Income tax refund .............. $ 2,577 $ 5 $ 111
======= ======= =======
================================================================================
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, 1997
and 1996 are presented below:
December 31
--------------------
1997 1996
-------- --------
(in thousands)
Deferred tax assets:
Notes receivable and land, principally due to allowance and write-downs for
financial reporting purposes ........................................... $ 1,311 $ 1,983
Property and equipment, principally due to acquisitions of
partnership interests .................................................. 11,788 13,627
Expense provisions and deferred gains ..................................... 12,128 12,592
-------- --------
Total gross deferred tax assets ........................................... 25,227 28,202
-------- --------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation and capitalized interest .................................. (50,219) (40,156)
Other ..................................................................... (2,268) (3,047)
-------- --------
Total gross deferred tax liabilities ...................................... (52,487) (43,203)
-------- --------
Net deferred tax liability ................................................ $(27,260) $(15,001)
======== ========
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 Company adopted Statement of Financial Accounting Standards No. 128,
("FAS 128") during 1997. FAS 128 specifies computation, presentation and
disclosure requirements for earnings per share for entities with publicly held
common stock or potential common stock. All prior period earnings per share
amounts have been restated in accordance with FAS 128.
In accordance with FAS 128, the Company has presented basic earnings per
share, computed on the basis of the weighted average number of shares
outstanding during the period, and diluted earnings per share, computed on the
basis of the weighted average number of shares and all dilutive potential shares
outstanding during the period. A reconciliation between basic and diluted
weighted average number of shares outstanding and the related earnings per share
calculation is presented below.
1997 1996 1995
------- ------- -------
Earnings after conversion of partner's interest into
common stock and before extraordinary items ................................. $87,304 $60,719 $ 5,010
======= ======= =======
Basic weighted average number of shares outstanding ............................ 77,426 77,736 74,360
Dilutive effect of stock options ............................................... 2,734 3,225 3,631
------- ------- -------
Diluted weighted average number of shares outstanding .......................... 80,160 80,961 77,991
======= ======= =======
Basic earnings per share after conversion of partner's interest into common
stock and before extraordinary
items ....................................................................... $ 1.13 $ .78 $ .07
Diluted earnings per share after conversion of partner's
interest into common stock and before extraordinary
items ....................................................................... $ 1.09 $ .75 $ .07
================================================================================
37
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
Stock options with exercise prices greater than the average market price of
the Company's common stock for the applicable periods are excluded from the
computation of diluted weighted average number of shares outstanding. Such
options totaled approximately 664,000, 415,000 and 236,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. The AEW conversion option, as
described below, was also excluded from the computation of 1995 diluted number
of shares outstanding as it was antidilutive for the periods prior to its
exercise.
The Board of Directors authorized a three-for-two stock split effected in
the form of a stock dividend effective in July 1996. Earnings per share, the
weighted average number of shares outstanding and the following information have
been adjusted to give effect to this distribution.
The Board of Directors has authorized a series of plans for the repurchase
of up to a total of $80,000,000 of the Company's common stock. During January
1996, the Board of Directors, through a resolution independent of the
$80,000,000 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). Total repurchases under these plans, including the private
transaction, were approximately $84,358,000, of which approximately $22,905,000
were made during 1997.
The Company's stock option plans cover the granting of options to purchase
an aggregate of 11,966,297 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. Generally, the stock option
plan documents provide for immediate vesting of all unvested options outstanding
upon a "change in control", as defined therein. The Company accounts for these
plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). 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.
In accordance with APB 25, the Company recognized compensation cost
totaling approximately $650,000 as a charge to shareholders' equity in 1997 for
stock options granted at prices below market on the date of grant. This charge
is amortized as compensation expense ratably over the vesting period of the
stock option grants. Such compensation expense totaled approximately $41,000
during 1997.
================================================================================
38
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
A summary of the status of the Company's stock option plans at December 31,
1997, 1996 and 1995 and changes during the years then ended is presented in the
table and narrative below:
1997 1996 1995
------------------------ ---------------------- --------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
------ -------- ------ -------- ------ --------
Outstanding at beginning
of year .................................. 7,564,874 $ 8.11 8,602,598 $ 6.21 9,489,704 $ 5.05
Granted ..................................... 1,692,175 19.05 1,140,781 19.00 673,313 17.99
Canceled or expired ......................... (215,836) 18.41 (209,965) 14.40 (323,607) 4.28
Exercised ................................... (708,403) 5.35 (1,968,540) 5.47 (1,236,812) 4.22
--------- ---------- ----------
Outstanding at end of year .................. 8,332,810 10.30 7,564,874 8.11 8,602,598 6.21
========= ========== ==========
Exercisable at end of year .................. 5,892,361 4.84 5,969,894 5.52 6,905,570 5.04
========= ========== ==========
Weighted average fair value of
options granted .......................... $ 6.99 $ 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 1997, 1996 and 1995, respectively: risk-free
interest rates of 6.13, 5.70 and 6.12 percent; expected dividend yields of .35,
.45 and .50 percent; expected lives of 3.72, 3.44 and 3.97 years; and expected
volatilities of 37, 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:
1997 1996 1995
-------- ---------- ---------
Net Earnings: As Reported $ 87,266 $ 60,195 $ 50,657
Pro Forma $ 84,805 $ 58,952 $ 50,278
Basic Earnings Per Share: As Reported $ 1.13 $ .77 $ .68
Pro Forma $ 1.10 $ .76 $ .68
Diluted Earnings Per Share: As Reported $ 1.09 $ .74 $ .65
Pro Forma $ 1.06 $ .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 the above pro forma
disclosures do not reflect compensation cost attributable to options granted
prior to January 1, 1995, the pro forma amounts reflected above may not be a
representation of future results.
================================================================================
39
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
The following table summarizes information about stock options
outstanding at December 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------------------------------- -----------------------------------------
Range Number Wtd Avg Number
of Outstanding at Remaining Wtd Avg Exercisable Wtd Avg
Exercise Prices 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- ------------------- ---------------- ------------------ ------------------ ---------------- --------------
$ 2.33 to 6.02 3,987,571 4.23 Years $ 3.12 3,987,571 $ 3.12
11.70 to 15.47 1,640,996 6.92 12.73 1,212,509 12.06
16.67 to 22.63 2,704,243 8.66 19.40 692,281 19.22
-------------- ----------------
2.33 to 22.63 8,332,810 6.20 10.30 5,892,361 4.84
============== ================
During 1996, 150,000 options to purchase the Company's common stock were
granted to an officer of the Company, subject to shareholder approval. The
Company obtained shareholder approval at its Annual Meeting of Shareholders in
May 1997. These options were included in the above disclosures for 1997 stock
options granted, weighted average fair value of stock options granted, pro forma
earnings and pro forma 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 1997, 1996 and 1995,
approximately $4,319,000, $10,330,000 and $6,027,000, respectively, was credited
to additional paid-in capital for the tax benefits of options exercised.
During 1997, 25,000 shares of restricted common stock were issued to an
officer of the Company. These shares vest in four equal installments on
successive anniversary dates of the date of grant. In accordance with APB 25,
the Company recognized compensation cost totaling approximately $434,000 as a
charge to shareholders' equity in 1997 for the restricted stock grant. This
charge is amortized as compensation expense ratably over the vesting period of
the restricted stock grant. Such compensation expense totaled approximately
$27,000 during 1997.
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 7,949,732 shares of the Company's common stock were
issued to AEW. These shares were registered with the Securities and Exchange
Commission and were sold, together with 30,375 shares of the Company's Common
Stock owned by AEW prior to the conversion, in an underwritten secondary public
offering.
(8) PENSION PLAN AND OTHER
The La Quinta Retirement Plan (the "Plan") is a defined benefit pension
plan covering all employees. 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") covers 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 Plan.
================================================================================
40
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
The following table sets forth the funded status and amounts recognized in
the Company's combined financial statements for the Plan at December 31, 1997
and 1996:
December 31
--------------------
1997 1996
-------- --------
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $11,807 and $9,006 ........................ $(13,556) $(10,171)
======== ========
Projected benefit obligation for services rendered to date $(17,926) $(13,246)
Plan assets at fair value, primarily marketable securities 14,312 10,338
-------- --------
Projected benefit obligation in excess of plan assets .... (3,614) (2,908)
Unrecognized net loss from past experiences different from
those assumed ......................................... 3,096 1,702
Prior service costs ...................................... 1,006 1,180
-------- --------
Accrued pension costs .................................... $ 488 $ (26)
======== ========
The following table sets forth the funded status and amounts recognized in
the Company's combined financial statements for the SERP at December 31, 1997
and 1996:
December 31
------------------
1997 1996
------- -------
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of $1,466 and $1,065 $(2,306) $(1,743)
======= =======
Projected benefit obligation for services rendered to date ................... $(4,857) $(4,590)
Unrecognized net gain from past experiences different from those assumed ..... (599) (152)
Prior service costs .......................................................... (413) (236)
------- -------
Accrued pension costs ..................................................... $(5,869) $(4,978)
======= =======
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, 1997 and 1996. As a result of the execution of the Merger Agreement
(as further described in note 16), a "Potential Change in Control", as defined
in the SERP document, has occurred. This event requires the Company to make a
contribution to the trust sufficient to meet funding obligations as described in
the SERP document within 90 days of signing the Merger Agreement.
The assumptions used in the calculations shown above were:
1997 1996
------------- -------------
Discount rate................................ 7.00% 7.50%
Expected long-term rate of return on assets.. 8.00% 8.00%
Rate of increase in compensation levels...... 5.00% - 6.00% 5.00% - 6.00%
================================================================================
41
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
The combined net periodic pension cost for the Plan and the SERP includes
the following components:
Years Ended December 31
-----------------------------
1997 1996 1995
------- ------- -------
(in thousands)
Service cost (benefits earned during the period) $ 2,083 $ 2,144 $ 1,571
Interest cost on projected benefit obligation .. 1,283 1,298 1,072
Actual return on plan assets ................... (2,640) (963) (1,639)
Net amortization and deferral .................. 395 577 410
Net deferred asset gain ........................ 1,785 195 1,041
------- ------- -------
Net periodic pension cost ................. $ 2,906 $ 3,251 $ 2,455
======= ======= =======
In addition to providing pension benefits, the Company sponsors a 401(k)
Savings Plan and Trust (the "Savings Plan"). 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 $200,000, $170,000 and $157,000 in 1997, 1996 and 1995,
respectively.
================================================================================
42
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 noncancelable lease terms in excess of one year at
December 31, 1997 follow:
(in thousands)
1998..................................... $ 3,247
1999..................................... 3,036
2000..................................... 2,749
2001..................................... 2,120
2002..................................... 1,983
Thereafter............................... 3,720
---------
Total minimum payments required.......... $ 16,855
=========
Total rental expense for operating leases was approximately $3,735,000,
$3,258,000 and $3,188,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Lessor
The Company leases restaurants it owns to third parties. The leases are
accounted for as operating leases expiring during a period from 1998 to 2017 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, 1997:
(in thousands)
Buildings...................................... $32,229
Less: accumulated depreciation................ 12,378
----------
19,851
Land........................................... 18,140
----------
Total leased property...................... $ 37,991
==========
Minimum future rentals to be received under the noncancelable restaurant
leases in effect at December 31, 1997 follow:
(in thousands)
1998............................................. $ 6,172
1999............................................. 5,908
2000............................................. 5,472
2001............................................. 4,809
2002............................................. 4,125
Thereafter....................................... 15,786
----------
$42,272
==========
================================================================================
43
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
Contingent rental income amounted to approximately $1,149,000, $1,270,000
and $1,198,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(10 COMMITMENTS
The Company has made commitments of approximately $177,506,000 for the
completion of Inn & Suites hotels for which construction had commenced as of
December 31, 1997. Funds on hand, anticipated future cash flows and amounts
available on the Company's Unsecured Credit Facilities as may be increased from
time to time and its $300,000,000 shelf registration statement are expected to
be sufficient to complete these projects.
(11) CONTINGENCIES
In January 1998, two lawsuits were filed in the District Court of Bexar
County, Texas on behalf of stockholders of the Company against the Company,
certain directors and officers of the Company, and Meditrust Corporation
(collectively, the "Defendants"). The lawsuits are captioned Robbins v. Razzouk,
et al, Cause No. 98CI-00192, and Brody v. Razzouk, et al, Cause No. 98CI-00456
(the "Actions"). The complaints in the Actions allege, among other things, that
Defendants (other than Meditrust) have breached their fiduciary duties to
stockholders by agreeing in the Merger Agreement to Merger Consideration which
is "grossly inadequate", by failing to solicit competing bids or to provide a
"market check", by failing to conduct a full and thorough investigation, and by
failing to make adequate public disclosure regarding the transaction. The
independence of the directors of the Company is also questioned. The complaints
allege that Meditrust aided and abetted the alleged breaches of duty by the
other Defendants. The complaints in the Actions seek, among other things, (i) a
declaration that Defendants have breached their fiduciary duties to members of
the alleged class, (ii) a declaration that the proposed transaction is a legal
nullity, (iii) an order preliminarily and permanently enjoining consummation of
the proposed transaction, (iv) if the proposed transaction is consummated, an
order to rescind it, (v) the award of compensatory damages, and (vi) the award
of costs, disbursements and attorneys fees.
La Quinta believes that each of these lawsuits is without merit and intends
to defend them vigorously.
The Company is party to various other 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.
================================================================================
44
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, 1997:
Revenues ............................................ $ 113,353 $ 135,666 $ 137,898 $ 115,652
Operating income .................................... 38,032 53,502 50,002 37,191
Earnings before extraordinary items ................. 16,648 25,636 28,917 16,103
Net earnings ........................................ 16,648 25,636 28,879 16,103
Basic earnings per share before extraordinary
items ............................................. .21 .33 .37 .21
Basic earnings per share ............................ .21 .33 .37 .21
Diluted earnings per share before extraordinary
items ............................................. .21 .32 .36 .20
Diluted earnings per share .......................... $ .21 $ .32 $ .36 $ .20
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
Basic earnings per share before extraordinary
items ............................................. .14 .26 .26 .11
Basic earnings per share ............................ .14 .26 .26 .11
Diluted earnings per share before extraordinary
items ............................................. .13 .25 .25 .11
Diluted 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
Basic earnings (loss) per share after conversion of
partner's interest into common stock and before
extraordinary items .............................. .16 .24 (.40) .11
Basic earnings (loss) per share
available to shareholders ......................... .16 .24 (.41) .11
Diluted earnings (loss) per share after conversion of
partner's interest into common stock and before
extraordinary items ............................... .15 .23 (.40) .11
Diluted earnings (loss) per share available to
shareholders ...................................... $ .15 $ .23 $ (.41) $ .11
================================================================================
45
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
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 750,000 shares 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
$80,000,000 series of stock repurchase plans described in note 7.
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 carrying value of accounts receivable, accounts payable and accrued
expenses approximates fair value due to the short-term nature of these items.
The carrying value for notes receivable approximates the fair value based on the
estimated underlying value of the collateral. The fair value of the Company's
long-term debt as 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 was approximately $921,173,000 and $699,183,000 at December 31,
1997 and 1996, respectively.
During 1997, the Company entered into two forward interest rate agreements
in anticipation of future debt issuance. These agreements fix the interest rate
at 6.44% for $120,000,000 of debt expected to be issued in May 1998. The rate
agreements will settle in cash in May 1998, based on the differential between
the agreed upon rates. Assuming market rates in effect at December 31, 1997, the
Company would pay $5,835,000 upon maturity of these agreements. Due to
fluctuation in interest rates, this amount may not be representative of the
amount the Company will actually receive or pay upon maturity of these
agreements. In accounting for such agreements, the Company recognizes the
payment received or paid on the settlement date as an adjustment to interest
expense over the term of the underlying debt. The Company is subject to credit
risk depending on the counterparties involved as cash settlements are not
required until maturity.
================================================================================
46
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
(15) ACQUISITION OF PARTNERS' INTERESTS
During 1997 and 1996, the Company acquired the limited partners' interest
in one and four, respectively, of its combined unincorporated partnerships and
joint ventures, which each owned one inn. The Company now has remaining one
unincorporated partnership and one unincorporated joint venture, each owning 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 7,949,732 shares of the Company's Common Stock. AEW also
agreed to sell the remaining one-third of its ownership interest in LQDP to the
Company for a negotiated price of $48.2 million in cash (collectively, the "AEW
Transaction"). The AEW Transaction was consummated on July 3, 1995. Upon
conversion of the partnership interest into La Quinta Common Stock, the Company
issued 7,949,732 shares of the Company's Common Stock having a fair market value
of $142.8 million based on the July 3, 1995 New York Stock Exchange closing
price. Pursuant to the provisions of the LQDP Partnership Agreement, the shares
issued upon conversion were sold in a registered underwritten secondary public
offering.
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 net effect on
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 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, after giving effect to certain adjustments. The pro forma information
does not reflect the $46.4 million non-recurring, non-cash item described above.
The pro forma basic and diluted per share effect of this item is ($.59) and
($.57), respectively, for the year ended December 31, 1995. The pro forma
results are not necessarily indicative of operating results that would have
occurred had the AEW Transaction been consummated as of the beginning of 1995,
nor are they necessarily indicative of future operating results.
(Unaudited)
Pro Forma
Year Ended December 31, 1995
------------------------------------
(in thousands, except per share data)
Total revenues ........................... $ 413,919
===========
Earnings before extraordinary items ...... $ 54,698
===========
Basic earnings before extraordinary
items per share ....................... $ .70
===========
Diluted earnings before extraordinary
items per share ....................... $ .67
===========
================================================================================
47
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
(16) MERGER AGREEMENT
On January 3, 1998, La Quinta, Meditrust Corporation ("Meditrust REIT") and
Meditrust Operating Company ("Meditrust Operating Company" and together with
Meditrust REIT, the "Meditrust Companies") entered into an agreement and plan of
merger (the "Merger Agreement"), pursuant to which the Company will merge with
and into Meditrust REIT with Meditrust REIT being the surviving corporation (the
"Merger"). In the Merger, La Quinta shares will be converted into Paired Shares
of The Meditrust Companies, or converted into cash. As a result of the Merger,
Meditrust REIT will acquire all of the assets and liabilities of the Company and
Meditrust REIT will assume approximately $900 million of the Company's existing
indebtedness.
Under the terms of the Merger Agreement, shareholders of the Company will
have the option to elect to receive either (i) common stock of the Meditrust
Companies (the "Paired Shares"), or (ii) cash. The stock consideration will be
payable in Paired Shares under an exchange ratio based on the average closing
price of the Paired Shares for 20 randomly determined trading days in a 30-day
period ending the eighth day prior to the Company's shareholder meeting called
to consider the Merger (the "Meeting Date Price"). The Paired Shares issued in
the Merger will be entitled to receive a cash earnings and profit distribution
from Meditrust REIT.
The Merger Agreement provides that Company shareholders receiving stock
consideration will receive Paired Shares in an amount, based on the Meeting Date
Price, equal to the difference between $26.00 and the earnings and profit
distribution to be received per Company share, so long as the Meeting Date Price
is between $34.20 and $41.80. Company shareholders electing to receive stock
consideration will also receive the earnings and profit distribution so long as
they hold the Paired Shares on the applicable record date. The earnings and
profit distribution is expected to be declared immediately prior to the Merger,
payable to all shareholders of record of the Meditrust Companies on a date to be
determined by Meditrust between the fifteenth and the forty-fifth day following
the Merger and payable within fifteen days of such record date.
If the Meeting Date Price is greater than or equal to $41.80 but less than
or equal to $45.60, the exchange ratio for each share of Company common stock
exchanged into Paired Shares will be 0.6220, reduced by the consideration to be
received in the earnings and profit distribution per Company share (resulting in
total consideration based on the Meeting Date Price ranging from $26.00 to
$28.36 per share of Company common stock, including the earnings and profit
distribution, as the Meeting Date Price increases from $41.80 to $45.60). If the
Meeting Date Price is greater than $45.60, then each Company share will be
entitled to receive $28.36 in total consideration based on the Meeting Date
Price, comprised of Paired Shares and the earnings and profit distribution
referred to above.
If the Meeting Date Price is less than $34.20 but greater than or equal to
$30.40, the exchange ratio for each share of Company common stock exchanged into
Paired Shares will be 0.7602, reduced by the amount to be received in the
earnings and profit distribution per Company share (resulting in total
consideration based on the Meeting Date Price ranging from $26.00 to $23.11 per
share of Company common stock, including the earnings and profit distribution,
as the Meeting Date Price decreases from $34.20 to $30.40). If the Meeting Date
Price is below $30.40, the Company will have the right to terminate the Merger
Agreement under certain circumstances, subject to a "top-up" right exercisable
by Meditrust REIT which is designed to return total consideration per Company
share based on the Meeting Date Price to at least $23.11, inclusive of the
earnings and profit distribution. If the Meeting Date Price is below $28.50, the
Company will have the unilateral right to terminate the Merger Agreement.
All Company shareholders will have the right to elect cash consideration in
the Merger for each of their shares of Company common stock. The Merger
Agreement provides that Company shareholders electing to receive cash in the
Merger will receive, subject to the maximum cash limitations, $26.00 per
exchanged share of Company common stock. In the event that the amount to be paid
both pursuant to cash elections in the Merger
================================================================================
48
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
================================================================================
and in the earnings and profit distribution paid with respect to Paired Shares
received by Company shareholders in the Merger exceeds approximately $521
million, the cash merger consideration will be distributed pro rata among those
shares electing cash and all other Company shares will receive Paired Shares in
the Merger. The maximum cash limitation of approximately $521 million (which
includes the cash merger consideration and the earnings and profit distribution
payable on Paired Shares issued in the Merger) is not subject to adjustment
based on the Meeting Date Price.
The Merger is subject to various conditions including, without limitation,
approval of the Merger by two-thirds of the outstanding shares of the Company
common stock, by a majority of the outstanding shares of each of the Meditrust
Companies, and regulatory agencies. Subject to the terms of a shareholders
agreement, Gary L. Mead, Thomas M. Taylor & Co. and entities and individuals
associated with certain members of the Bass family have agreed with the
Meditrust Companies to vote approximately 29% of the outstanding shares of the
Company common stock in favor of the Merger. These shareholders have also agreed
to select cash consideration for all of their shares of Company common stock. It
is currently anticipated that the Merger will be consummated in the second
quarter of 1998.
(17) AMENDMENT TO $75 MILLION BANK UNSECURED LINE OF CREDIT
On February 13, 1998, the Company amended its $75 million Bank Unsecured
Line of Credit. The amendment increased the Bank Unsecured Line of Credit to
$125 million, extended its term to July 1998 and increased the applicable margin
over LIBOR to 50 basis points.
================================================================================
49
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, 1997 and 1996 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, 1997. 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, 1997 and 1996 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
San Antonio, Texas
January 23, 1998, except
for note 17, which is
as of February 12, 1998
50
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
Certain information concerning current directors is set forth below:
Served as
Director
Director Since Age Principal Occupation
- -------- ----- --- --------------------
Dr. William H.
Cunningham 1985 54 Chancellor of The University
of Texas System since
September 1992; prior thereto,
President of The University of
Texas at Austin from September
1985 to September 1992; Dean
of the College of Business
Administration and Graduate
School of Business of The
University of Texas at Austin
from 1983 to August 1985;
Director of Jefferson-Pilot
Corporation, LBJ Foundation
Board, John Hancock Advisors,
Inc. and advisory director of
Texas Commerce Bank-Austin.
Gary L. Mead(1) 1992 50 Director and President and
Chief Executive Officer of the
Company since March 3, 1992;
Executive Vice President-
Finance of Motel 6 G.P., Inc.,
the sole general partner of
Motel 6, L.P., from October
1987 to January 1991.
William J. Razzouk 1996 50 President, Chief Operating
Officer and Director of
Storage USA since August 1997;
prior thereto, Director and
Chief Executive Officer of
Advanta Information Services,
Inc. since September 1996;
President & Chief Operating
Officer for America Online,
Inc. February 1996 to June
1996; Executive Vice
President, World Wide Customer
Operations for Federal Express
from 1993 to February 1996;
Senior Vice President-Sales &
Customer Service, World Wide
for Federal Express from
1990-1993; Director of Fritz
Companies Inc. since February
1998.
51
Served as
Director
Director Since Age Principal Occupation
- -------- ----- --- --------------------
Peter Sterling 1991 56 Vice President and Chief
Financial Officer of Sid R.
Bass, Inc. and Lee M. Bass,
Inc. (diversified investment
firms) since September 1,
1983.
Kenneth T. Stevens 1995 46 Chairman and Chief Executive
Officer of Banc One Retail
Group since May 1, 1996;
President of Taco Bell
Corporation from June 1994 to
April 1996; prior thereto,
Executive Vice President-
Marketing & New Concepts from
May 1993 to June 1994; Senior
Vice President-Treasurer of
PepsiCo, Inc. from August 1992
to May 1993; Senior Vice
President-Strategic Planning
from April 1991 to August
1992.
Thomas M. Taylor 1991 55 Chairman of the Board of the
Company since 1994; President
of Thomas M. Taylor & Co. (an
investment consulting firm)
since 1985; President of
TMT-FW (a diversified
investment firm) since
September 1989; director of
Kirby Corporation, MacMillan
Bloedel Limited, Moore
Corporation and John Wiley &
Sons, Inc., Chairman of the
Board of Encal Energy, Ltd.
(1) Pursuant to the terms of a five-year Employment Agreement entered into
between the Company and Mr. Mead on March 3, 1992, the Board of Directors
of the Company nominated him for election as a director of the Company as
part of management's slate of nominees at each annual meeting of
shareholders and appointed Mr. Mead to the Board's Executive Committee
during the term of such Employment Agreement. This Employment Agreement
expired by its terms on March 3, 1997.
Except as indicated above, none of the directors is a director of any other
Company which has a class of securities registered under, or is required to file
reports under, the Securities Exchange Act of 1934 or of any Company registered
under the Investment Company Act of 1940.
(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.
Name Age Position
- ---- --- --------
Gary L. Mead 50 President and Chief Executive Officer
and Director
Ezzat S. Coutry 53 Executive Vice President and Chief
Operating Officer
Steven T. Schultz 51 Executive Vice President and Chief
Development Officer
Stephen B. Hickey 53 Sr. Vice President - Marketing
William S. McCalmont 42 Sr. Vice President and Chief
Financial Officer
John F. Schmutz 50 Vice President - General Counsel
and Secretary
52
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.
Steven T. Schultz has been Executive Vice President and Chief Development
Officer of the Company since December 1997. He served as Senior Vice President -
Development of La Quinta Inns, Inc. from June 1992 to December 1997. He served
as Senior Vice President - Development of Embassy Suites from October 1986 to
June 1992.
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.
William S. McCalmont has been Senior Vice President and Chief Financial
Officer of the Company since October 1997. He served as Senior Vice President
and Chief Financial Officer of FelCor Suite Hotels from July 1996 to October
1997. He served as Vice President - Treasurer of Harrah's Entertainment from
June 1995 to July 1996. He served as Vice President - Treasurer of The Promus
Companies from November 1991 to June 1995.
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
Summary Compensation Table
The following table contains information with respect to compensation for
services rendered in all capacities to the Company during the years ended
December 31, 1997, 1996 and 1995 for each of the five most highly compensated
executive officers of the Company.
Long-term
Compensation
Annual Compensation Awards
------------------- ------
Securities
Underlying All Other
Name/Position Year Salary Bonus(a) Options/SARs Compensation(b)
- ------------- ---- ------ -------- ------------ ---------------
Gary L. Mead 1997 $350,000 $100,000 250,000(c) $5,336
President and CEO 1996 350,000 95,000 281,250(c) 3,968
1995 350,000 255,000 -- 3,968
53
Long-term
Compensation
Annual Compensation Awards
------------------- ------
Securities
Underlying All Other
Name/Position Year Salary Bonus(a) Options/SARs Compensation(b)
- ------------- ---- ------ -------- ------------ ---------------
Ezzat S. Coutry 1997 $300,000 $100,000 50,000(e) $3,456
Executive Vice President 1996 28,846(d) 100,000 500,000(e) 576
Chief Operating Officer 1995 -- -- -- --
Stephen B. Hickey 1997 $215,000 $51,000 50,000(f) $3,456
Senior Vice President 1996 210,000 41,900 -- 3,456
Marketing 1995 110,385 56,400 300,000(f) 2,016
John F. Schmutz 1997 $164,000 $ 34,000 45,000(g) $2,678
Vice President 1996 159,000 29,000 15,000(g) 1,618
General Counsel 1995 155,000 63,000 -- 1,566
Steven T. Schultz 1997 $215,200 $100,000 200,000(h) $3,456
Executive Vice President 1996 210,000 44,800 52,500(h) 2,088
Chief Development Officer 1995 205,000 98,400 -- 1,827
- --------------------
(a) These amounts are the cash awards under the Company's Incentive
Compensation Plan.
(b) All Other Compensation for named individuals consists of the value of life
insurance premiums. Other Annual Compensation for Messrs. Mead, Coutry,
Hickey, Schmutz and Schultz consists of personal benefits including
automobile allowance, relocation and closing costs on the purchase of
homes, and in certain cases, income tax preparation. For the years 1995 and
1996, the amounts of Other Annual Compensation for each individual named
above aggregated less than (a) 10% of the total annual salary and bonus for
each individual or (b) $50,000, whichever was lower. Accordingly, no such
amounts are included in the Table.
(c) On February 22, 1996, Mr. Mead received options for the purchase of 281,250
shares at an option price of $18.417. Of these options, 140,626 shares have
vested, with the remaining one-half vesting in February 1999 and February
2000. On February 26, 1997, Mr. Mead received options for the purchase of
250,000 shares at an option price of $19.875. Of these options, 62,500
shares have vested, with the remaining three-fourths vesting in February
1999, February 2000 and February 2001.
(d) Mr. Coutry began employment on November 9, 1996.
(e) On October 1, 1996, Mr. Coutry received a grant to purchase 500,000 shares
of Common Stock at an option price of $19.375. Of these options, 125,000
shares have vested, with the remaining three-fourths vesting in October
1998, October 1999 and October 2000. On December 1, 1997, Mr. Coutry
received options for the purchase of 50,000 shares at an option price of
$19.063. These options shall vest in four cumulative installments of 12,500
shares in December 1998, December 1999, December 2000 and December 2001.
(f) Mr. Hickey received a grant to purchase 300,000 shares of Common Stock at
$18.917 per share on June 5, 1995. Of these options, 150,000 shares have
vested, with the remaining one-half vesting in June 1998 and June 1999. On
December 1, 1997, Mr. Hickey received options for the purchase of 50,000
shares at an option price of $19.063. These options shall vest in four
cumulative installments of 12,500 shares in December 1998, December 1999,
December 2000 and December 2001.
(g) On February 22, 1996, Mr. Schmutz received a grant to purchase 15,000
shares at an option price of $18.417. Of these options, 7,500 have vested,
with the remaining one-half vesting in February 1999 and February 2000.
54
On February 26, 1997, Mr. Schmutz received a grant to purchase 20,000
shares at an option price of $19.875. Of these options, 5,000 have vested,
with the remaining three-fourths vesting in February 1999, February 2000
and February 2001. On December 1, 1997, Mr. Schmutz received options for
the purchase of 25,000 shares at an option price of $19.063. These options
shall vest in four cumulative installments of 6,250 shares in December
1998, December 1999, December 2000 and December 2001.
(h) On February 22, 1996, Mr. Schultz received a grant to purchase 52,500
shares at an option price of $18.417. Of these options, 26,250 shares have
vested, with the remaining one-half vesting in February 1999 and February
2000. On February 26, 1997, Mr. Schultz received a grant to purchase
150,000 shares at an option price of $19.875. Of these options, 37,500 have
vested, with the remaining three-fourths vesting in February 1999, February
2000 and February 2001. On December 1, 1997, Mr. Schultz received options
for the purchase of 50,000 shares at an option price of $19.063. These
options shall vest in four cumulative installments of 12,500 shares in
December 1998, December 1999, December 2000 and December 2001.
55
Stock Options
The following table summarizes as to each of the five most highly
compensated executive officers of the Company, the number and terms of stock
options granted during the year ended December 31, 1997:
Stock Option Grants In Last Fiscal Year
---------------------------------------
Individual Grants
--------------------------
Percent of Potential Realizable Value
Total of Assumed Annual
Options Rates of Stock Price
Number of Granted to Appreciation
Securities Employees for Option Term
Underlying in Exercise -----------------------
Options Fiscal Price $/ Expiration
Name Granted Year Share Date 5% 10%
- ---- ------- ---- ----- ---- -- ---
Gary L. Mead 250,000 16.2% $19.875 02/25/2007 $3,124,820 $7,918,908
Ezzat S. Coutry 50,000 3.2% $19.063 11/30/2007 $559,431 $1,519,076
Stephen B. Hickey 50,000 3.2% $19.063 11/30/2007 $559,431 $1,519,076
John F. Schmutz 20,000 1.3% $19.875 02/25/2007 $249,986 $633,513
25,000 1.6% $19.063 11/30/2007 $299,715 $759,538
Steven T. Schultz 150,000 9.7% $19.875 02/25/2007 $1,874,892 $4,751,345
50,000 3.2% $19.063 11/30/2007 $599,431 $1,519,076
All Stockholders N/A N/A N/A N/A $922,390,417 $2,337,518,418
All Optionees 1,542,175 100.00% $19.014(1) N/A $18,441,024 $46,733,175
All Optionees as % of
All Stockholders' Gain N/A N/A N/A N/A 2.0% 2.0%
- ---------------
(1) Represents the weighted average exercise price of options granted to all
optionees.
56
Aggregated Stock Option Exercises in Last Fiscal Year
and Fiscal Year End Stock Option Values
The following table provides information concerning the exercise of stock
options during 1997, and the year-end value of unexercised options for each of
the five most highly compensated executive officers of the Company.
Number of
Shares Securities Underlying
Acquired Unexercised Value of Unexercised
on Value Stock Options In-the-Money Stock Options
Name Exercise Realized Exercisable/Unexercisable(1) Exercisable/Unexercisable(2)
---- -------- -------- ----------------------------- ----------------------------
Gary L. Mead --- --- 4,253,126/328,124 $60,686,692/$165,514
Ezzat S. Coutry --- --- 125,000/425,000 $ 27,375/$108,675
Stephen B. Hickey --- --- 150,000/200,000 $ 101,550/$128,100
John F. Schmutz 50,000 $1,015,938 173,499/47,500 $ 2,404,825/$ 22,103
Steven T. Schultz --- --- 286,749/188,750 $ 3,018,616/$ 57,446
(1) Exercisable options include those exercisable within 60 days after January
31, 1998.
(2) These amounts were calculated by subtracting the exercise price from the
market value of underlying securities at year-end based on a price per
share of $19.594, which represents an average of the high and low of the
Company's Common Stock on December 31, 1997, the last trading day of the
year.
COMPENSATION OF DIRECTORS
The Company's 1997 Equity Participation Plan permits non-employee directors
of the Company to receive stock options for 30,375 shares of the Company's
common stock annually in lieu of annual retainers and all meeting fees
previously paid by the Company to non-employee directors. These options are
granted annually following the election of directors at each Annual Meeting of
Shareholders and vest immediately upon grant. Options granted to directors are
for ten-year terms at per share exercise prices of not less than the fair market
value of the Company's stock on the date of each annual grant and are
exercisable (except under the general acceleration provisions of the 1997 Equity
Participation Plan upon an offer that results in the acquisition of 40% or more
of the Company's outstanding stock) on the anniversary date of each grant. Such
grants are in lieu of all annual retainers or directors' fees, and assist in
ensuring that directors will be closely aligned with the equity interests of
shareholders, thereby promoting the Board's continued focus on further
enhancement of shareholder value.
In the event a non-employee director ceases to be a director of the Company
for any reason, any such option granted to such a director expires one (1) year
from the date that the person ceased to be a director of the Company. The Board
of Directors may grant an option for 30,375 shares (or a pro rata portion
thereof) to any new non-employee director elected to fill a vacancy on the Board
or newly created Board seat between Annual Meetings of Shareholders in lieu of a
retainer and meeting fees.
The provisions relating to the grant of stock options to non-employee
directors may not be amended more than once every six months, except to conform
the 1997 Equity Participation Plan to any changes that may have occurred in the
Internal Revenue Code, the Employee Retirement Income Security Act, or the rules
thereunder.
57
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The Company knows of no person who, as of January 31, 1998, owned
beneficially more than five percent (5%) of the Company's outstanding voting
securities, except as indicated in the table below.
Shares of Common Stock
Name and Address Beneficially Owned Percent
of Beneficial Owner as of January 31, 1998 of Class
- ------------------- ---------------------- --------
Thomas M. Taylor & Co. 3,461,280 4.5%
Portfolio C Investors, L.P. 3,223,700 4.2%
Thomas M. Taylor 151,875(1) *
Sid R. Bass, Inc. 4,147,957 5.4%
Lee M. Bass, Inc. 4,147,957 5.4%
The Bass Management Trust 1,190,622(2) 1.5%
The Airlie Group, L.P. 487,500 *
Annie R. Bass Grandson's Trust
for Lee M. Bass 806,305 1.0%
Annie R. Bass Grandson's Trust
for Sid R. Bass 806,305 1.0%
Panther City Investment Co. 3,101,466(3) 4.0%
Thomas W. Briggs 25,312 *
Michael N. Christodolou 15,187 *
W. Forrest Tempel 5,062 *
William P. Hallman, Jr 253,125(4) *
Peter Sterling Trusts 12,655 *
Peter Sterling 491,060(5) *
Cotham Family Partners, L.P. 7,500 *
(as a Group) ----------
c/o W. Robert Cotham 22,334,868(6) 29.0%
2600 First City Bank Tower
Fort Worth, Texas 76102
Gary L. Mead 4,556,876(7) 5.6%
112 East Pecan
San Antonio, Texas 78205
- --------------
*Less than one percent (1%)
58
(1) Mr. Taylor beneficially owns 151,875 shares which he presently has the
right to acquire under the Company's 1984 Stock Option Plan. In addition,
Mr. Taylor may be deemed to beneficially own the shares beneficially owned
by Thomas M. Taylor & Co., Portfolio C Investors, L.P. and The Airlie
Group, L.P. The aggregate of all of such shares which Mr. Taylor may be
deemed to beneficially own is 7,324,355.
(2) Perry R. Bass, solely in his capacities as sole trustee and as one of two
trustees, has sole voting and dispositive power with respect to the
1,190,622 shares owned by The Bass Management Trust.
(3) Panther City Investment, solely in its capacity as Trustee has sole voting
and dispositive power with respect to 1,550,733 shares owned by The Hyatt
Anne Bass Successor Trust and has sole voting and dispositive power with
respect to the 1,550,733 shares owned by The Samantha Sims Bass Successor
Trust.
(4) A January 3, 1998 Schedule 13D amendment provided to the Company reflects
that William P. Hallman, Jr., because of his position as the trustee, also
has "sole voting power" and "sole dispositive power" with respect to the
following trusts listed in the table above: (i) Annie R. Bass Grandson's
Trust for Sid R. Bass with respect to 806,305 shares, (ii) Annie R. Bass
Grandson's Trust for Lee M. Bass with respect to 806,305 shares, (iii)
Peter Sterling Trusts with respect to 12,655 shares and (iv) Matthew
Kingston Cotham 1996 Trust, which is the sole general partner of Cotham
Family Partners, L.P., with respect to 7,500 shares.
(5) Mr. Sterling beneficially owns 151,875 shares which he presently has the
right to acquire under the Company's 1984 Stock Option Plan.
(6) Thomas M. Taylor, Sid R. Bass, Lee M. Bass and other investors, including
the persons named above, have filed a Schedule 13D Statement, amended
through January 3, 1998, with the Securities and Exchange Commission. The
persons making the Schedule 13D filing have stated that neither the fact of
such filing nor anything contained therein shall be deemed an admission by
them that a "group" exists within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934.
(7) Mr. Mead has "sole voting power" and "sole dispositive power" with respect
to (i) 303,750 shares which he beneficially owns, (ii) 3,290,625 shares
which he presently has the right to acquire pursuant to a non-qualified
stock option agreement dated March 3, 1992 (the "Mead Stock Option
Agreement") and (iii) 962,501 shares which he presently has the right to
acquire under the Company's 1984 Stock Option Plan. Shares acquirable
pursuant to stock options include options exercisable within 60 days after
January 31, 1998. Excluded from this table are the unvested portion of
stock options granted in 1996 and 1997.
The information reflected for such groups or beneficial owners is based on
statements and reports filed with the Securities and Exchange Commission and
furnished to the Company by such groups. No independent investigation concerning
the accuracy thereof has been made by the Company.
59
Based upon information received upon requests from the persons concerned,
each current director, each executive officer named in the Summary Compensation
Table and all directors and executive officers of the Company as a group owned
beneficially as of January 31, 1998, the number and percentage of outstanding
shares of Common Stock of the Company indicated in the following table:
Names of Individual Shares Beneficially Owned
or Identity of Group as of January 31, 1998 Percent of Class
- -------------------- ---------------------- ----------------
Current Directors:
William H. Cunningham 121,500(1) *
Gary L. Mead 4,556,876(2) 5.6%
William Razzouk 22,781(3) *
Peter Sterling 491,060(4) *
Kenneth T. Stevens 45,567(5) *
Thomas M. Taylor 7,324,355(6) 9.5%
Other Named
Executive Officers:
Ezzat Coutry 125,000(7) *
Stephen B. Hickey 150,000(8) *
John F. Schmutz 173,499(9) *
Steven T. Schultz 286,749(10) *
All directors and executive
officers as a group (10 persons) 13,297,387(11) 16.1%
- ----------
*Less than one percent (1%)
(1) The shares shown as beneficially owned by Dr. Cunningham represent 121,500
shares which he presently has the right to acquire under the Company's 1984
Stock Option Plan. It does not include 30,375 shares he will have the right
to acquire on May 23, 1998 under the Company's 1997 Equity Participation
Plan.
(2) The shares shown as beneficially owned by Mr. Mead include (i) 3,290,625
shares which he presently has the right to acquire pursuant to the Mead
Stock Option Agreement and (ii) 962,501 shares which he presently has the
right to acquire under the Company's 1984 Stock Option Plan. Excluded from
this table are the unvested portion of stock options granted in 1996 and
1997.
(3) The shares shown as beneficially owned by Mr. Razzouk represent 22,781
shares which he presently has the right to acquire under the Company's 1984
Stock Option Plan. It does not include 30,375 shares which he will have the
right to acquire on May 23, 1998 under the Company's 1997 Equity
Participation Plan.
(4) The shares shown as beneficially owned by Mr. Sterling include 151,875
shares which he presently has the right to acquire under the Company's 1984
Stock Option Plan. It does not include 30,375 shares which he will have the
right to acquire on May 23, 1998 under the Company's 1997 Equity
Participation Plan.
(5) The shares shown as beneficially owned by Mr. Stevens include 45,562 shares
which he presently has the right to acquire under the Company's 1984 Stock
Option Plan. It does not include 30,375 shares which he will have the right
to acquire on May 23, 1998 under the Company's 1997 Equity Participation
Plan.
(6) The shares shown as beneficially owned by Mr. Taylor (i) include 3,461,280
shares that Mr. Taylor may be deemed to own beneficially because of his
position as the President, sole director and sole shareholder
60
of Thomas M. Taylor & Co., (ii) 3,223,700 shares that Mr. Taylor may be
deeded to own beneficially because of his position as President and sole
stockholder of Trinity Capital Management, Inc., which is the sole general
partner of TF Investors, L.P., which is the sole general partner of Trinity
I Fund, L.P., which is the sole stockholder of Portfolio Associates, Inc.,
which is the sole general partner of Portfolio C. Investors, L.P., (iii)
487,500 shares that Mr. Taylor may be deemed to own beneficially because of
his position as President and sole shareholder of TMT-FW, Inc., which is
one of two general partners of EBD L.P., which is the sole general partner
of The Airlie Group L.P., (iv) 151,875 shares which he presently has the
right to acquire under the Company's 1984 Stock Option Plan. It does not
include 30,375 shares he will have the right to acquire on May 23, 1998
under the Company's 1997 Equity Participation Plan.
(7) The shares shown beneficially owned by Mr. Coutry, Executive Vice
President-Chief Operating Officer of the Company reflect 125,000 shares
which he presently has the right to acquire under the Company's 1984 Stock
Option Plan. Excluded from this table are the unvested portion of stock
options granted in 1996 and 1997.
(8) The shares shown beneficially owned by Mr. Hickey, Senior Vice
President-Marketing of the Company reflect 150,000 shares which he
presently has the right to acquire under the Company's 1984 Stock Option
Plan. Excluded from this table are the unvested portion of stock options
granted in 1995 and 1997.
(9) The shares shown beneficially owned by Mr. Schmutz, Vice President-General
Counsel of the Company reflect 173,499 shares which he presently has the
right to acquire under the Company's 1984 Stock Option Plan. Excluded from
this table are the unvested portion of stock options granted in 1996 and
1997.
(10) The shares shown beneficially owned by Mr. Schultz, Senior Vice
President-Development of the Company reflect 286,749 shares which he
presently has the right to acquire under the Company's 1984 Stock Option
Plan. Excluded from this table are the unvested portion of stock options
granted in 1996 and 1997.
(11) The holdings shown for all directors and executive officers as a group
include 5,481,967 shares which the directors and executive officers have
the right to acquire under the Company's 1984 Stock Option Plan, 1997
Equity Participation Plan and the Mead Stock Option Agreement. Shares
acquirable pursuant to stock options, which are exercisable within sixty
(60) days after January 31, 1998 are shown as being beneficially owned by
members of each group in the above table and have been considered to be
outstanding for purposes of calculating the percentage ownership of all
directors and executive officers as a group.
All directors and executive officers as a group beneficially own a total of
7,815,420 shares (10.1%) of the Company's outstanding Common Stock excluding the
5,481,967 shares referred to in note (11) above which certain directors and
executive officers have the right to acquire under the Company's Stock Option
Plans.
Except as reflected in the notes to the preceding table, each person owns
directly the number of shares indicated in the table and has the sole power to
vote and dispose of such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
61
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, 1997 and 1996
Combined Statements of Operations for the years ended December 31,
1997, 1996 and 1995
Combined Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Combined Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
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:
(2) Agreement and Plan of Merger, dated as of January 2, 1998 by and among
La Quinta Inns, Inc., Meditrust Corporation and Meditrust Operating
Company. (13)
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc., dated as
of May 23, 1997. (11)
(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)* First Amendment to La Quinta Inns, Inc. Amended and Restated 1984
Stock Option Plan. (12)
(10)(f)* Second Amendment to La Quinta Inns, Inc. Amended and Restated 1984
Stock Option Plan. (12)
(10)(g)* Third Amendment to La Quinta Inns, Inc. Amended and Restated 1984
Stock Option Plan. (12)
(10)(h)* The 1997 Equity Participation Plan of La Quinta Inns, Inc. (12)
(10)(i)* First Amendment to The 1997 Equity Participation Plan of La Quinta
Inns, Inc. (12)
62
(10)(j)* Second Amendment to The 1997 Equity Participation Plan of La Quinta
Inns, Inc. (12)
(10)(k)* Supplemental Executive Retirement Plan and Trust Agreement of
Registrant, dated April 20, 1990, by and between Registrant and Frost
National Bank. (5)
(10)(l) Form of Indemnification Agreement, made and entered into as of
November 15, 1990 and thereafter (with respect to persons who became
directors of Registrant after such dates), by and between Registrant
and each of its directors. (5)
(10)(m) Form of Indemnification Agreement, made and entered into as of
November 15, 1990 and thereafter (with respect to persons who became
directors of Registrant after such dates), by and between Registrant
and each of its officers. (5)
(10)(n)* Employment Agreement, dated as of March 3, 1992, by and between
Registrant and Gary L. Mead. (1)
(10)(o)* Non-Qualified Stock Option Agreement, dated as of March 3, 1992,
between Registrant and Gary L. Mead. (1)
(10)(p)* Registration Rights Agreement, dated as of March 3, 1992, between
Registrant and Gary L. Mead. (1)
(10)(q) Second Amended and Restated Master Covenant Agreement dated June 15,
1993. (6)
(10)(r) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4% Senior
Subordinated Notes due 2003. (6)
(10)(s) $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)(t) $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)(u) Third Amended and Restated Master Covenant Agreement dated as of
January 25, 1994. (7)
(10)(v) Fifth Amended and Restated Master Covenant Agreement dated as of
September 12, 1995. (8)
(10)(w) Amended and Restated Credit Agreement (Facility A), dated as of
September 12, 1995. (8)
(10)(x) Amended and Restated Credit Agreement (Facility B), dated as of
September 12, 1995. (8)
(10)(y) Indenture dated September 15, 1995 Re: Debt Securities. (8)
(10)(z) Officers' certificate defining terms of $100,000,000 7.4% Senior Notes
due 2005. (9)
(10)(aa) $325,000,000 First Amended and Restated Credit Agreement among La
Quinta Inns, Inc., certain lenders and NationsBank of Texas, N.A., as
Administrative Lender, dated as of February 7, 1997. (10)
(10)(ab) $75,000,000 Credit Agreement among La Quinta Inns, Inc., certain
lenders and NationsBank of Texas, N.A., as Administrative Lender,
dated as of November 17, 1997 filed herewith.
(10)(ac) Shareholders Agreement, dated as of January 3, 1998 by and among La
Quinta Inns, Inc., Meditrust Corporation, Meditrust Operating Company
and the shareholders of La Quinta Inns, Inc. named on the signature
pages thereto. (13)
63
(10)(ad) Registration Rights Agreement, dated as of January 3, 1998 by and
among La Quinta Inns, Inc., Meditrust Corporation, Meditrust Operating
Company and the shareholders of La Quinta Inns, Inc. named on the
signature pages thereto. (13)
(10)(ae)* Restricted Stock Agreement filed herewith.
(10)(af) First Amendment to Credit Agreement among La Quinta Inns, Inc.,
certain lenders and NationsBank of Texas, N.A., as Administrative
Lender, dated as of February 12, 1998 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, 1998 filed
herewith.
(23) Consent by KPMG Peat Marwick LLP dated February 12, 1998 to
incorporation by reference of their report dated January 23, 1998,
except for note 17, which is as of February 12, 1998, 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.
64
(10) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
(11) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (No. 333-32637) and incorporated herein by
reference.
(12) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10-Q for the period ended June 30, 1997 and
incorporated herein by reference.
(13) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 8-K dated as of January 3, 1998 and incorporated
herein by reference.
(b) Reports on Form 8-K.
Not applicable.
65
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 S. McCalmont
---------------------------
William S. McCalmont
Senior Vice President and
Chief Financial Officer
/s/ Irene C. Primera
---------------------------
Irene C. Primera
Vice President - Controller
Date: February 13, 1998
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 (Principal
Executive Officer)
/s/ WILLIAM S. MCCALMONT
- -----------------------------------------
William S. McCalmont Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
/s/ IRENE C. PRIMERA
- -----------------------------------------
Irene C. Primera Vice President - Controller
(Principal Accounting 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 S. MCCALMONT
-------------------------------------
William S. McCalmont
Attorney-in-Fact
Date: February 13, 1998
66
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------ ----------------------
(2) Agreement and Plan of Merger, dated as of January 2, 1998 by and among
La Quinta Inns, Inc., Meditrust Corporation and Meditrust Operating
Company. (13)
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc., dated as
of May 23, 1997. (11)
(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)* First Amendment to La Quinta Inns, Inc. Amended and Restated 1984
Stock Option Plan. (12)
(10)(f)* Second Amendment to La Quinta Inns, Inc. Amended and Restated 1984
Stock Option Plan. (12)
(10)(g)* Third Amendment to La Quinta Inns, Inc. Amended and Restated 1984
Stock Option Plan. (12)
(10)(h)* The 1997 Equity Participation Plan of La Quinta Inns, Inc. (12)
(10)(i)* First Amendment to The 1997 Equity Participation Plan of La Quinta
Inns, Inc. (12)
(10)(j)* Second Amendment to The 1997 Equity Participation Plan of La Quinta
Inns, Inc. (12)
(10)(k)* Supplemental Executive Retirement Plan and Trust Agreement of
Registrant, dated April 20, 1990, by and between Registrant and Frost
National Bank. (5)
(10)(l) Form of Indemnification Agreement, made and entered into as of
November 15, 1990 and thereafter (with respect to persons who became
directors of Registrant after such dates), by and between Registrant
and each of its directors. (5)
(10)(m) Form of Indemnification Agreement, made and entered into as of
November 15, 1990 and thereafter (with respect to persons who became
directors of Registrant after such dates), by and between Registrant
and each of its officers. (5)
(10)(n)* Employment Agreement, dated as of March 3, 1992, by and between
Registrant and Gary L. Mead. (1)
(10)(o)* Non-Qualified Stock Option Agreement, dated as of March 3, 1992,
between Registrant and Gary L. Mead. (1)
(10)(p)* Registration Rights Agreement, dated as of March 3, 1992, between
Registrant and Gary L. Mead. (1)
(10)(q) Second Amended and Restated Master Covenant Agreement dated June 15,
1993. (6)
(10)(r) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4% Senior
Subordinated Notes due 2003. (6)
(10)(s) $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)(t) $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)(u) Third Amended and Restated Master Covenant Agreement dated as of
January 25, 1994. (7)
(10)(v) Fifth Amended and Restated Master Covenant Agreement dated as of
September 12, 1995. (8)
(10)(w) Amended and Restated Credit Agreement (Facility A), dated as of
September 12, 1995. (8)
(10)(x) Amended and Restated Credit Agreement (Facility B), dated as of
September 12, 1995. (8)
(10)(y) Indenture dated September 15, 1995 Re: Debt Securities. (8)
(10)(z) Officers' certificate defining terms of $100,000,000 7.4% Senior Notes
due 2005. (9)
(10)(aa) $325,000,000 First Amended and Restated Credit Agreement among La
Quinta Inns, Inc., certain lenders and NationsBank of Texas, N.A., as
Administrative Lender, dated as of February 7, 1997. (10)
(10)(ab) $75,000,000 Credit Agreement among La Quinta Inns, Inc., certain
lenders and NationsBank of Texas, N.A., as Administrative Lender,
dated as of November 17, 1997 filed herewith.
(10)(ac) Shareholders Agreement, dated as of January 3, 1998 by and among La
Quinta Inns, Inc., Meditrust Corporation, Meditrust Operating Company
and the shareholders of La Quinta Inns, Inc. named on the signature
pages thereto. (13)
(10)(ad) Registration Rights Agreement, dated as of January 3, 1998 by and
among La Quinta Inns, Inc., Meditrust Corporation, Meditrust Operating
Company and the shareholders of La Quinta Inns, Inc. named on the
signature pages thereto. (13)
(10)(ae)* Restricted Stock Agreement filed herewith.
(10)(af) First Amendment to Credit Agreement among La Quinta Inns, Inc.,
certain lenders and NationsBank of Texas, N.A., as Administrative
Lender, dated as of February 12, 1998 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, 1998 filed
herewith.
(23) Consent by KPMG Peat Marwick LLP dated February 12, 1998 to
incorporation by reference of their report dated January 23, 1998,
except for note 17, which is as of February 12, 1998, in various
Registration Statements filed herewith.
(24) Powers of Attorney filed herewith.
(27) Financial Data Schedule filed herewith.
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* 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.
(10) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10-K for the year ended December 31, 1996 and
incorporated herein by reference.
(11) Previously filed as an exhibit to the Registrant's Registration
Statement on Form S-8 (No. 333-32637) and incorporated herein by
reference.
(12) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 10-Q for the period ended June 30, 1997 and
incorporated herein by reference.
(13) Previously filed as an exhibit to the Registrant's Registration
Statement on Form 8-K dated as of January 3, 1998 and incorporated
herein by reference.
(b) Reports on Form 8-K.
Not applicable.