<PAGE>
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
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, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________________
Commission File No. 1-7790
LA QUINTA INNS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-1724417
(State of Incorporation) (I.R.S. Employer
Identification Number)
WESTON CENTRE 78299-2636
112 EAST PECAN STREET (ZIP CODE)
P.O. BOX 2636
SAN ANTONIO, TEXAS
(Address of principal
executive office)
Registrant's telephone number, including area code: (210) 302-6000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock New York Stock Exchange, Inc.
($.10 par value)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of
registrant as of February 28, 1995 was $576,079,006. As of February 28, 1995,
there were 49,171,836 shares of registrant's Common Stock issued and
46,809,833 such shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the following document are
incorporated by reference into the designated parts of this Form 10-K:
definitive Proxy Statement, dated on or about April 14, 1995 relating to
Registrant's 1995 Annual Meeting of Shareholders (in Part III), which
Registrant intends to file not later than 120 days after the end of the
fiscal year covered by this Form 10-K.
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FORM 10-K INDEX
PART I
Page
----
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 10
Item 4. Submission of Matters to a Vote of Security Holders. . . . 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . 11
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 13
Item 8. Financial Statements and Supplementary Data. . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . 45
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . 45
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management. . . . . . . . . . . . . . . . . . . . . . . 46
Item 13. Certain Relationships and Related Transactions . . . . . . 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . . 46
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
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PART I
ITEM 1. BUSINESS
La Quinta Inns, Inc. ("La Quinta" or the "Company") is a leader in the
mid-priced segment of the lodging market. Founded in 1968, the La Quinta
chain's 228 inns, one of which is under development, are located in 29 states
and Mexico with concentrations in Texas, Florida and California. As of
December 31, 1994, the Company owned interests in and operated all but two of
its inns.
La Quinta is incorporated under the laws of Texas and maintains its executive
offices at Weston Centre, 112 East Pecan Street, P.O. Box 2636, San Antonio,
Texas 78299-2636, telephone (210) 302-6000.
PRODUCT
La Quinta inns appeal to guests who desire high-quality rooms and convenient
locations at attractive prices and whose needs generally do not include
banquet and convention facilities, in-house restaurants, cocktail lounges or
room service. As a result of the cost savings associated with the
elimination of these management intensive facilities and services, the
Company believes it is able to offer its guests an excellent value --
convenient locations and room quality comparable to full service hotels at a
lower price.
La Quinta inns contain an average of 130 spacious, quiet and comfortably
furnished rooms with an average of 300 square feet. Each inn features a
choice of rooms for non-smokers and smokers, complimentary continental
breakfast, free unlimited local telephone calls, remote-control television
with a premium movie channel, telecopy services, same day laundry and dry
cleaning service, 24-hour front desk and message service and free parking.
La Quinta inns are generally located near suburban office parks, major
traffic arteries or destination areas such as airports and convention
centers. Food service to La Quinta guests generally is provided by adjacent
free-standing restaurants.
La Quinta's strategy is to continue its growth as a high-quality provider in
the mid-priced segment of the hotel industry, focusing on enhancing revenues,
cash flow and profitability. Specifically, the Company's strategy centers
upon:
CONTINUED FOCUS ON MID-PRICED SEGMENT - Hotels in this price category
provide cost-conscious business travelers with high-quality rooms and
convenient locations at a moderate price. Because the Company competes
primarily in the mid-priced segment, management's attention is totally
focused on meeting the needs of La Quinta's target customers.
LA QUINTA OWNERSHIP AND MANAGEMENT OF INNS - In contrast to many of its
competitors, La Quinta manages and has ownership interests in virtually
all of its inns. La Quinta manages all but two of the 228 inns in the
chain. At December 31, 1994, the Company owned 100% of 176 inns and 40%
or more of an additional 50. 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 primarily owner-operated chains enables La Quinta to offer new
services, direct expansion, effect pricing and to make other marketing
decisions on a system-wide or local basis as conditions dictate, usually
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.
IMAGE ENHANCEMENT PROGRAM - In 1994, La Quinta completed a comprehensive
chainwide image enhancement program intended to give its properties a new,
fresh, crisp appearance while preserving their unique character. The
program featured new signage displaying a new logo as
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well as exterior and lobby upgrades including brighter colors, more
extensive lighting, additional landscaping, enhanced guest entry and a
full lobby renovation with contemporary furnishings and seating area for
continental breakfast.
REGIONALLY FOCUSED GROWTH - La Quinta acquired its partners' ownership
interest in ten La Quinta inns and additionally purchased six existing
lodging facilities in 1994 and is converting each of them to a La Quinta.
Although most inns remain open during conversion, one of the six inns
purchased was closed for development and is expected to re-open during the
second quarter of 1995. It is anticipated that the Company's growth in
1995 will continue to include acquisition and conversion of existing
lodging facilities and selected new development in strategic markets.
COMPETITION
Inns operated and licensed by La Quinta are in competition with other major
lodging brands. Each La Quinta inn competes in its market area with numerous
full service lodging brands, especially in the mid-priced range, and with
numerous other hotels, motels and other lodging establishments. Chains such
as Hampton Inns, Red Roof Inns, Fairfield Inns and Drury Inns are direct
competitors of La Quinta. Other well-known competitors include Holiday Inns,
Ramada Inns and Comfort Inns. There is no single competitor or group of
competitors of La Quinta that is dominant in the lodging industry.
Competitive factors in the industry include reasonableness of room rates,
quality of accommodations, degree of service and convenience of locations.
The lodging industry in general, including La Quinta, may be adversely
affected by national and regional economic conditions and government
regulations. The demand for accommodations at a particular inn may be
adversely affected by many factors including changes in travel patterns,
local and regional economic conditions and the degree of competition with
other inns in the area.
STRUCTURE AND OWNERSHIP
The Company is a combined entity comprised of La Quinta Inns, Inc., which
owns and operates 226 inns, eight subsidiaries, nine wholly-owned unincorporated
partnerships and joint ventures and nine combined unincorporated partnerships
and joint ventures. Of these 226 inns, 50 inns are owned by the combined
unincorporated partnerships and joint ventures, one of which is under
development.
On January 24, 1994, the Company concluded the acquisition of La Quinta Motor
Inns Limited Partnership ("the Partnership" or "LQP"), which owned 31 La
Quinta inns managed by the Company in 15 states. The operations of LQP were
accounted for under the equity method until December 1, 1993, and were
included in the combined financial statements of the Company thereafter. In
July 1994, the Company purchased nine La Quinta inns previously held in two
unincorporated joint ventures with CIGNA Investments, Inc. ("CIGNA") in
which the Company held a 1% interest and also managed. Also, during the
second quarter of 1994, the Company purchased the limited partners' interest
in one of the Company's combined unincorporated joint ventures which owned
one inn. The aggregate purchase price of these transactions was $53,255,000
of which a portion was financed through the Company's amended Secured Line of
Credit and Secured Term Credit Facility (See note 2 of Notes to Combined
Financial Statements).
During 1993, the Company acquired, in separately negotiated transactions,
limited partners' interests in 14 of the Company's combined unincorporated
partnerships and joint ventures which owned 44 La Quinta inns. The Company
purchased the ownership interests for an aggregate purchase price of
$87,897,000 which included cash at closing, the assumption of $22,824,000 of
existing debt attributable to certain limited partners' interests, and
$29,878,000 in notes to certain sellers.
The Board of Directors of the Company authorized three-for-two stock splits
effective in October 1994, March 1994 and October 1993. References to the
Company's common stock prior to the October 1993 split are
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described herein as "pre-split" and references to the Company's common stock
after the October 1994 split are described herein as "post-split".
The following table describes the composition of inns in the La Quinta chain
at:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993 (5)
------------------------ -----------------------
La Quinta La Quinta
Equivalent Equivalent
Inns Rooms Rooms (1) Inns Rooms Rooms (1)
---- ----- --------- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Owned 100% (2) . . . . . . 176 22,296 22,296 166 21,001 21,001
Owned 40-82% (3) . . . . . 49 6,675 2,803 45 6,077 2,588
--- ------ ------ --- ------ ------
Total Company owned and
operated . . . . . . . . 225 28,971 25,099 211 27,078 23,589
Under Development (owned
40%) (6) . . . . . . . . 1 100 40 - - -
Managed Inns. . . . . . . - - - 9 1,176 12
Licensed Inns (4) . . . . 2 268 - 1 120 -
--- ------ ------ --- ------ ------
228 29,339 25,139 221 28,374 23,601
--- ------ ------ --- ------ ------
--- ------ ------ --- ------ ------
<FN>
(1) Represents the Company's proportionate ownership interest in system
rooms.
(2) Two inns are operated under brands other than La Quinta.
(3) One inn is operated under a brand other than La Quinta.
(4) One inn located in the United States is licensed to an unrelated third
party and one inn located in Saltillo, Coahuila, Mexico is licensed to
an unrelated third party and was managed by the Company through March 8,
1995 (See discussion in Licensing) under a separate management agreement.
(5) Includes 100% of the rooms owned by LQP as though the acquisition were
completed on December 31, 1993.
(6) Represents an inn acquired in November 1994 which has been closed for
conversion and is expected to re-open in the second quarter of 1995.
</TABLE>
JOINT VENTURES AND PARTNERSHIPS. La Quinta historically financed its
development, in part, through partnerships and joint ventures with large
insurance companies or financial institutions. Under the terms of the joint
venture and partnership agreements, available cash flow is generally used to
pay debt and provide for capital improvements, with remaining cash flow being
distributed to the partners in accordance with their respective ownership
interests. Since 1993, the Company has purchased the interests in 17
unincorporated joint ventures including CIGNA, and partnerships. In
addition, the Company successfully completed the acquisition of LQP in
January 1994 (See note 14 of Notes to the Combined Financial Statements). At
December 31, 1994, the Company had ownership interests between 40% and 67% in
nine unincorporated joint ventures and partnerships, one of whose only asset
is a note receivable which is secured by real property.
In March of 1990, the Company entered into the La Quinta Development
Partners, L.P. ("LQDP" or the "Development Partnership") with AEW
Partners, L.P. ("AEW Partners"). La Quinta Inns, Inc. is the general
partner and owns a 40% ownership interest and AEW Partners is the limited
partner and owns a 60% ownership interest. This partnership was established
for the purpose of owning, operating, acquiring and developing inns. La
Quinta originally contributed 18 inns with a deemed value of $44,000,000 (net
of existing debt assumed by LQDP) and $4,000,000 in cash. AEW Partners
contributed $3,000,000 and a promissory note ("the AEW Note") to the
Development Partnership in the amount of $69,000,000. Under the terms of the
agreement, proceeds from the AEW Note were used for the construction of inns
or for the acquisition and conversion of existing inns into the La Quinta
brand. In 1993, the AEW Partners fully paid the balance of the AEW Note.
At December 31, 1994, the Development Partnership had acquired and converted
25 inns (six during 1994 with conversion to be completed during the first
half of 1995). Under the terms of the Development Partnership agreement,
AEW Partners
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currently has the ability to convert 66 2/3% of its ownership interest in
the Development Partnership to 5,289,801 (post-split) shares of the Company's
common stock. Such number of shares is reduced as distributions are made out
of the Development Partnership to AEW Partners. The partnership units may be
converted at any time prior to December 31, 1998. As of December 31, 1994, no
partnership units had been converted. Shares of the Company's common stock
issuable upon conversion are antidilutive at December 31, 1994.
On June 1, 1994, the Development Partnership entered into a $35,000,000
Bank Unsecured Line of Credit Agreement, under which $21,850,000 was
available at December 31, 1994. Borrowings under the Bank Unsecured Line of
Credit, which matures January 31, 1997, may be made at varying interest rates
of the prime rate, LIBOR, or certificate of deposit rate plus the Development
Partnership's Applicable Margin, as defined in the related credit agreement.
At December 31, 1994, borrowings under the Bank Unsecured Line of Credit bear
interest at the prime rate, LIBOR plus 1% or certificate of deposit rate plus
1 1/8%. The Development Partnership's Applicable Margin is determined
quarterly based upon predetermined levels of the Partnership's indebtedness
to cash flows, as defined in the related credit agreement.
Under the terms of a management agreement between the Company and the
Development Partnership, La Quinta earns management, national advertising,
chain services and licensing fees for the use of its name and services.
La Quinta is also entitled to receive acquisition and conversion fees for
its services in finding inns suitable for acquisition and in managing the
conversion of such inns. La Quinta is also entitled to receive fees on
project costs of inns constructed for the Development Partnership.
LICENSING
The Company selectively licensed the name "La Quinta" to others for
operations in the United States until February 1977, at which time La Quinta
discontinued its domestic licensing program to unrelated third parties. One
inn remains in operation under a licensing agreement.
During 1990, the Company entered into a development agreement with
Desarrollos Turisticos Vanguardia S.A. de C.V. ("Desarrollos") for
expansion of the La Quinta chain into Saltillo, Coahuila, Mexico. In
February 1994, one inn developed under this agreement opened for operation.
Under the arrangement, the inn is owned by the licensee and was managed by
La Quinta under a separate management agreement through March 8, 1995.
During 1994, the Company entered into agreements with four Mexican
investor groups (the "Development Accord") for the purpose of developing
22 La Quinta inns in 15 cities in Mexico. Each of the inns developed will
be owned by the Mexican investor groups and managed by the Company under
long-term management agreements.
On December 20, 1994, the Mexican government allowed the peso to trade freely
against the U.S. dollar. As a result, the peso suffered an immediate
devaluation against the U.S. dollar. These economic conditions have resulted
in a delay of the start of construction of additional La Quinta inns in
Mexico. The construction of the first La Quinta inn under the Development
Accord is anticipated to begin when economic conditions in Mexico stabilize.
"La Quinta -R-" and "teLQuik -R-" have been registered as service marks by
La Quinta with the U.S. Patent and Trademark Office and in Mexico, Canada and
the United Kingdom.
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, 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 12 inns. Regional Managers are responsible for the
service, cleanliness and profitability of the inns in their regions.
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Individual inns are typically managed by resident managers who live on
the premises. Managers receive inn management training which includes an
emphasis on service, cleanliness, cost controls, sales and basic repair
skills. Because La Quinta's professionally trained managers are
substantially relieved of responsibility for food service, they are able to
devote their attention to assuring friendly guest service and quality
facilities, consistent with chain-wide standards. On a typical day shift,
they will supervise one housekeeping supervisor, eight room attendants, two
laundry workers, two general maintenance persons and three front desk service
representatives.
At February 28, 1995, La Quinta employed approximately 5,800 persons, of
whom approximately 86% were compensated on an hourly basis. Approximately 260
individuals were employed at corporate and 5,540 were employed in inn
management and services. The Company's employees are not currently
represented by labor unions. Management believes its ongoing labor relations
are good.
MARKETING
La Quinta's primary media focus is on business travelers, who account for
over half of La Quinta's rooms rented. The Company's core market consists of
business travelers who visit a given area several times per year. For
example, typical customers include salespersons covering a regional
territory, government and military personnel and technicians. The profile of
a typical La Quinta customer is a college educated business traveler, age 25
to 54 who has a middle management, white collar occupation or upper level
blue collar occupation. In addition, the Company's target markets include
vacation travelers and retired travelers. The Company focuses on reaching
its target markets by utilizing advertising, direct sales, programs which
provide incentives to repeat travelers, and other marketing programs targeted
at specific customer segments.
The Company advertises primarily through network and local radio, cable
television networks and print advertisements which focus on value. The
Company utilizes the same campaign concept throughout the country with minor
modifications made to address regional differences. The Company also utilizes
billboard advertisements along major highways which announce a La Quinta
inn's presence in upcoming towns.
The Company markets directly to companies and other organizations through
its direct sales force of 27 sales representatives and managers as well as 19
specific property sales persons. 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.
La Quinta enjoys a large amount of repeat business. Based on internal
surveys conducted since 1990, management estimates the average customer spent
approximately 16 nights per year in a La Quinta inn. The Company focuses a
number of marketing programs on maintaining the high number of repeat visits.
La Quinta promotes a "Returns Club" for repeat guests. This club provides
its members with preferred status and rates when checking into a La Quinta
inn and offers rewards for frequent stays. The Returns Club currently has
over 180,000 members.
The Company provides a reservation system, "teLQuik"-R-, which currently
accounts for advance reservations for approximately 71% of room occupancy.
The teLQuik system allows customers to make reservations toll free or from
special reservations phones placed in all La Quinta inns. The teLQuik system
enables guests to make their next night's reservations from their previous
night's La Quinta inn. In 1994, the Company completed a new reservation
center which is a part of its program to improve operating results by
providing state-of-the-art technology in processing reservations more
efficiently. La Quinta, through its national sales managers, markets its
reservation services to travel agents and corporate travel planners who may
access teLQuik through the five major airline reservation systems.
ASSET MANAGEMENT
La Quinta's asset management strategy is founded on the importance of
ownership of all or a significant portion of each of its inns. See
"Structure and Ownership" on this Form 10-K. Management believes that
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Company ownership and management of La Quinta inns enables the Company to
achieve more consistency in quality and service than its competitors.
Historically, the Company financed a large part of its development through
partnerships and joint ventures with large insurance companies and other
financial institutions, while managing the inns. However, since 1993, the
Company has acquired in separately negotiated transactions limited partners'
interests in 15 of the Company's combined unincorporated partnerships and
joint ventures that owned 45 La Quinta inns. The Company also completed the
acquisition of 100% of the limited partners' interests in an additional 31 La
Quinta inns owned by a subsidiary of LQP in January of 1994, after acquiring
82% of LQP during December of 1993, and purchased CIGNA joint ventures which
owned nine La Quinta inns. In addition, the Company acquired six existing
lodging facilities during 1994, one of which is under development, and eleven
existing lodging facilities during 1993 for conversion to a La Quinta.
Currently, the Company owns 100% of 176 inns and between 40% and 67% of 50
other inns.
La Quinta's current development program focuses on the acquisition of
existing lodging facilities. At current prices, acquisition and conversion
of existing properties is more cost effective than new construction.
However, the Company is currently considering new construction in those
markets where acquisition and conversion of existing inns at a discount to
replacement cost is not available.
ITEM 2. PROPERTIES
La Quinta inns appeal to guests who desire high-quality rooms and whose needs
generally do not include banquet and convention facilities, in-house
restaurants, cocktail lounges or room service. La Quinta inns contain an
average of 130 rooms and provide spacious, quiet and comfortably furnished
rooms with an average of 300 square feet, a choice of rooms for non-smokers
and smokers, complimentary continental breakfast, free unlimited local
telephone calls, remote-control television with a premium movie channel,
telecopy services, same-day laundry and dry cleaning service, 24-hour front
desk and message service and free parking.
To maintain the overall quality of La Quinta's inns and to remain competitive
in its service-oriented environment, each inn undergoes refurbishments and
capital improvements as needed. Typically, refurbishing has been provided at
intervals of between five and seven years, based on an annual review of the
condition of each inn. In each of the years ended December 31, 1994, 1993
and 1992, the Company spent approximately $75,200,000, $32,600,000 and
$15,500,000, respectively, on capital improvements to existing inns. The
amounts for 1994 and 1993 include expenditures related to the Company's
image enhancement program. As a result of these expenditures, the Company
believes it has been able to maintain a chainwide quality of rooms and common
areas at its properties unmatched by any other national mid-priced hotel
chain.
In 1994, the Company completed an image enhancement program which gave its
properties a new, fresh, crisp appearance while preserving their unique
character. It features new signage displaying a new logo as well as exterior
and lobby upgrades including brighter colors, additional landscaping,
enhanced guest entry and a full lobby renovation with contemporary
furnishings and seating area for continental breakfast.
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At December 31, 1994, there were 228 inns located in 29 states and Mexico,
with concentrations in Texas, Florida and California. The states and cities
in which the inns are located are set forth in the following table:
<TABLE>
<S> <C> <C> <C>
ALABAMA KANSAS TENNESSEE WYOMING
Birmingham Lenexa Knoxville Casper
Huntsville (2) Wichita Memphis (3) Cheyenne
Mobile Nashville (3) Rock Springs
Montgomery KENTUCKY
Tuscaloosa Lexington TEXAS LICENSED
Abilene LA QUINTA INNS
ARIZONA LOUISIANA Amarillo (2)
Phoenix (3) Baton Rouge Arlington TEXAS
Tucson (2) Bossier City Austin (5) McAllen
Kenner Beaumont
ARKANSAS Lafayette Bedford MEXICO
Little Rock (5) Monroe Brownsville Saltillo, Coahuila
New Orleans (5) Clute
CALIFORNIA Slidell College Station OTHER
Bakersfield Sulphur Corpus Christi (2) OWNED INNS
Costa Mesa Dallas Metro Area (12) (operated under other
Fresno MICHIGAN Del Rio brands)
Irvine Kalamazoo Denton
La Palma Eagle Pass TEXAS
Redding MISSISSIPPI El Paso (3) El Paso
Sacramento (2) Jackson (2) Fort Stockton La Marque
San Bernardino Fort Worth (2) San Antonio
San Diego (3) MISSOURI Galveston
San Francisco St. Louis Georgetown
Stockton Harlingen
Ventura NEBRASKA Houston Metro Area (17)
Omaha Killeen
COLORADO Laredo
Colorado Springs NEVADA Longview
Denver (7) Las Vegas (2) Lubbock
Reno Lufkin
FLORIDA Midland
Coral Springs New Mexico Nacogdoches
Daytona Beach Albuquerque (3) Odessa
Deerfield Beach Farmington Round Rock
Ft. Myers Las Cruces San Angelo
Gainesville Santa Fe San Antonio (11)
Jacksonville (3) Temple
Miami NORTH CAROLINA Texarkana
Orlando (3) Charlotte (2) Tyler
Pensacola Victoria
Tallahassee (2) OHIO Waco
Tampa (5) Columbus Wichita Falls
GEORGIA OKLAHOMA UTAH
Atlanta (7) Oklahoma City (2) Layton
Augusta Tulsa (3) Salt Lake City
Columbus
Savannah PENNSYLVANIA VIRGINIA
Pittsburgh Hampton
ILLINOIS Richmond
Champaign SOUTH CAROLINA Virginia Beach
Chicago Metro Area (5) Anderson*
Moline Charleston WASHINGTON
Columbia Seattle (2)
INDIANA Greenville Tacoma
Indianapolis (2)
Merrillville *Under Development
</TABLE>
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Typically, food service for La Quinta guests is provided by adjacent, free
standing restaurants. At December 31, 1994, the Company had an ownership
interest in 126 restaurant buildings adjacent to its inns. The 126
restaurant facilities are owned by the Company or its partnerships and joint
ventures, which own the related inn. These restaurants generally are leased
pursuant to build-to-suit leases that require the operator to pay, in
addition to minimum and percentage rentals, all expenses, including building
maintenance, taxes and insurance. At December 31, 1994, the Company's
ownership interests in such restaurants were as follows:
<TABLE>
<CAPTION>
Number of Restaurants
---------------------
<S> <C>
Owned 100% 105
Owned 50-67% 5
Owned 40% 16
---
126
---
---
</TABLE>
The Company's inns and restaurants were substantially pledged to secure all
long-term debt maturing in various years from 1995 to 2015 (See note 2 of Notes
to Combined Financial Statements).
ITEM 3. LEGAL PROCEEDINGS
In September 1993, a former officer of the Company filed suit against the
Company and certain of its directors and their affiliate companies (the
"La Quinta Defendants"). The suit alleges breach of an employment agreement,
misrepresentation, wrongful termination, self-dealing, breach of fiduciary
duty, usurpation of corporate opportunity and tortious interference with
contractual relations. Compensatory damages of $2,500,000 and exemplary
damages of $5,000,000 are sought in the action. The Court has pending before
it the La Quinta Defendants' motion for summary judgment. The parties
subsequently filed a required, joint Pre Trial Order, in which the plaintiff
has conceded a number of his claims. Currently, no trial date has been set for
this action. The Company is vigorously defending against this suit.
Actions for negligence or other tort claims occur routinely as an ordinary
incident to the Company's business. Several lawsuits are pending against the
Company which have arisen in the ordinary course of the business, but none of
these proceedings involves a claim for damages (in excess of applicable
excess umbrella insurance coverages) involving more than 10% of current
assets of the Company. The Company does not anticipate any amounts which it
may be required to pay as a result of an adverse determination of such legal
proceedings and the matter discussed above, individually or in the aggregate,
or any other relief granted by reason thereof, will have a material adverse
effect on the Company's financial position or results of operations.
The Company has established a paid loss program (the "Paid Loss Program")
for inns owned and managed by the Company for commercial general liability
insurance, automobile liability insurance and workers' compensation and
employer's liability insurance. 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 matter of
$500,000 for general liability, $500,000 for workers' compensation and
$250,000 for automobile coverage. All pro rata expenses and premiums under
the Paid Loss Program and such other insurance as is customarily obtained
with respect to inns owned by persons other than the Company constitute
direct operating expenses of said inns under the terms of the respective
management agreements. General liability is allocated pro rata based on the
number of rooms at each respective inn. Worker's Compensation is allocated
based on the amount of payroll and auto liability is allocated based on the
number of vehicles at each respective inn.
10
<PAGE>
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on The New York Stock Exchange. The
range of the high and low sale prices, as adjusted for the three-for-two
stock splits in October 1994, March 1994, and October 1993, of the Company's
Common Stock for each of the quarters during the years ended December 31,
1994 and 1993 is set forth below:
<TABLE>
<CAPTION>
1994 1993
-------------------------- ------------------------
Per Share Per Share
High Low Dividend High Low Dividend
---- --- -------- ---- --- --------
<S> <C> <C> <C> <C> <C> <C>
First Quarter . . . . . $20 7/8 $12 7/8 $.025 $ 9 1/8 $ 6 $ -
Second Quarter. . . . . 21 5/8 16 7/8 .025 9 5/8 8 -
Third Quarter . . . . . 24 3/8 17 .025 12 7/8 8 3/8 .025
Fourth Quarter. . . . . 25 3/4 19 1/8 .025 15 7/8 12 3/8 .025
</TABLE>
The Company paid cash dividends in all four quarters of 1994 and in both the
third and fourth quarters of 1993 in the amount of $.025 per share under its
quarterly dividend policy as authorized by the Board of Directors. For
restrictions on the Company's present or future ability to pay cash
dividends, see note 2 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 February 28, 1995, the approximate number of holders of record of the
Company's Common stock was 971.
11
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(in thousands, except per share amounts,
ratios, and inn statistics)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total revenues . . . . . . $362,242 $271,850 $254,122 $240,888 $226,830
Direct and corporate
operating costs and
expenses (3). . . . . . . 213,508 168,021 156,529 154,846 147,560
Depreciation, amortization
and fixed asset
retirements . . . . . . . 37,977 24,055 24,793 35,201 34,660
Performance stock option . - 4,407 - - -
Non-recurring cash and
non-cash charges (3). . . - - 38,225 7,952 503
Operating income . . . . . 110,757 75,367 34,575 42,889 44,107
Net interest expense . . . 37,439 26,219 27,046 30,271 32,304
Earnings (loss) before
extraordinary items
and cumulative effect of
accounting change . . . . 37,815 19,420 (7,796) 1,398 2,175
Net earnings (loss). . . . 37,815 20,301 (8,754) 129 2,175
Earnings (loss) per share
before extraordinary
items and cumulative
effect of accounting
change (2). . . . . . . . .78 .41 (.17) .03 .05
Net earnings (loss) per
share (2) . . . . . . . . .78 .43 (.19) - .05
OTHER DATA
Capital expenditures other
than acquisitions (4) . . 75,248 32,623 15,529 13,803 17,696
Purchase and conversion of
inns. . . . . . . . . . . 34,690 38,858 4,060 15,487 18,574
Purchase of partners'
equity interests (5). . . 53,255 78,169 - 3,546 -
Net cash provided by
operating activities. . . 94,233 78,043 60,853 54,270 42,306
Net cash used by investing
activities. . . . . . . . (156,492) (145,027) (15,166) (35,083) (40,061)
Net cash provided (used)
by financing activities . 41,000 77,971 (40,781) (24,642) (301)
Cash dividends declared
per common share. . . . . .10 .05 - - -
EBITDA (6) . . . . . . . . 148,734 103,829 97,593 86,042 79,270
BALANCE SHEET DATA
Total assets . . . . . . . 845,781 749,495 539,183 574,687 586,969
Shareholders' equity . . . 189,231 149,057 124,321 130,175 129,167
Partners' capital. . . . . 92,099 85,976 62,060 50,471 37,270
Current installments of
long-term debt. . . . . . 39,976 22,491 21,711 22,116 24,002
Long-term debt, excluding
current installments. . . 448,258 414,004 274,824 316,014 341,902
Combined effective
debt-to-equity ratio (1). 1.59 1.76 1.47 1.75 2.05
OPERATING DATA
Inns owned . . . . . . . . 225 211 169 168 164
Under development. . . . . 1 - - - -
Inns managed . . . . . . . - 9 40 40 40
Inns licensed. . . . . . . 2 1 3 4 6
------- ------- ------- ------- -------
Number of inns . . . . . . 228 221 212 212 210
Occupancy percentage . . . 70.1% 65.1% 65.6% 64.8% 66.0%
Average daily room rate. . $ 47.65 $ 46.36 $ 44.33 $ 43.11 $ 40.93
<FN>
- ----------
(1) Ratio of long-term debt, excluding current installments, to partners'
capital plus shareholders' equity at year end.
(2) Earnings (loss) per share are computed on the basis of the weighted
average number of common and common equivalent shares outstanding in each
year after giving effect to the three-for-two stock splits.
(3) Non-recurring cash and non-cash charges include charges related to the
write-down of certain joint venture interests carried on the equity method,
land and computer equipment, severance and other employee-related costs and
charges associated with a series of studies to improve operating results.
For the year ended December 31, 1992, these charges also include a $2,696,000
increase in the allowance for certain notes
12
<PAGE>
receivable related to inns sold by the Company, prior to 1985, and $210,000
related to other corporate expense items.
(4) The December 31, 1994 and 1993 capital expenditures include costs related
to the Company's image enhancement program.
(5) Purchase of partners' equity interests in 1994 and 1993 includes
approximately $9,672,000 and $42,091,000, respectively, related to the
acquisition of LQP.
(6) EBITDA, as defined by the covenants to the Company's public debt
securities of $120,000,000, 9 1/4% Senior Subordinated notes due 2003, is
earnings before net interest expense, income taxes, depreciation,
amortization and fixed asset retirements, extraordinary items, partners'
equity in earnings and losses, gain or loss on property and investment
transactions and other non-recurring cash and non-cash charges. This
definition differs from the traditional EBITDA definition which does not
include adjustments for extraordinary items, partners' equity in earnings and
losses, gain or loss on property transactions and other non-recurring cash
and non-cash charges as follows:
</TABLE>
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Extraordinary items . . . . . . $ - $ 619 $ 958 $ 1,269 $ -
Partners' equity in earnings
and losses . . . . . . . . . . 11,406 12,965 15,081 9,421 8,408
(Gain) loss on property
transactions . . . . . . . . . (79) 4,347 (282) 1,012 (3)
Non-recurring cash and non-cash
charges and performance stock
option . . . . . . . . . . . . - 4,407 38,225 7,952 503
<FN>
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.
</TABLE>
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, wholly-owned partnerships and joint ventures and
unincorporated partnerships and joint ventures in which the Company has at
least a 40% interest and over which it exercises substantial legal, financial
and operational control.
On January 24, 1994, the Company concluded the acquisition of LQP which
owned 31 inns in 15 states managed by the Company. The operations of LQP
were accounted for under the equity method until December 1, 1993, and were
included in the Combined Financial Statements of the Company thereafter.
During the second quarter of 1994, the Company purchased the limited
partners' interest in one of the Company's combined unincorporated joint
ventures which owned one inn. Additionally, in July 1994, the Company
purchased nine inns previously held by CIGNA.
In 1994, the Company completed the acquisition of six inns and began
renovating and converting them to the La Quinta brand. All of these inns
were purchased through the Development Partnership. Although most of these
inns remained open for business during conversion construction, hotel
operations are disrupted during the typical three-to-four month construction
period. Conversion of these inns will be completed during the first half of
1995.
References to "Company Inns" are to inns owned by the Company or by
unincorporated partnerships and joint ventures in which the Company owns at
least a 40% interest. References to "Managed Inns" are to those inns in
which the Company owns less than a 40% interest and which are managed by the
Company under long-term management contracts. "Managed Inns" include nine
inns held by CIGNA through July 1994 accounted for using the cost method and
the 31 inns of the LQP through November 30, 1993 accounted for using the
equity method.
13
<PAGE>
The following chart shows certain historical operating statistics and
revenue data. References to the percentages of occupancy and the average
daily rate refer to Company Inns. Managed Inns and the La Quinta licensed
inns are excluded from occupancy and average daily rate statistics for all
periods for purposes of comparability. All financial data is related to
Company Inns unless otherwise specified.
<TABLE>
<CAPTION>
Comparative Operating Statistics and Revenue Data
-------------------------------------------------
Years Ended December 31
-----------------------
1994 1993 1992
---- ---- ----
(in thousands, except rates and percentages)
<S> <C> <C> <C>
Room revenue $340,230 $248,459 $230,072
Other inn revenue 13,118 10,070 9,754
------- ------- -------
Total inn revenue $353,348 $258,529 $239,826
======= ======= =======
Percentage of occupancy 70.1% 65.1% 65.6%
Average room rate $ 47.65 $ 46.36 $ 44.33
Available rooms (1) 10,188 8,226 7,916
<FN>
(1) Available rooms represent the number of rooms available for sale
multiplied by the number of days in the period reported.
</TABLE>
YEAR ENDED DECEMBER 31, 1994
COMPARED TO YEAR ENDED DECEMBER 31, 1993
TOTAL REVENUES increased to $362,242,000 in 1994 from $271,850,000 in 1993,
an increase of $90,392,000, or 33.3%. Of the total revenues reported in
1994, 97.6% were revenues from inns, 2.1% were revenues from restaurant
rentals and other revenue and 0.3% were revenues from management services.
INN REVENUES are derived from room rentals and other sources such as charges
to guests for long-distance telephone calls, fax machine use and laundry
services. Inn revenues increased to $353,348,000 in 1994 from $258,529,000
in 1993, an increase of $94,819,000, or 36.7%. The increase in inn revenues
was due primarily to the acquisitions of LQP and CIGNA, an increase in
average room rate and occupancy and an increase in the number of available
rooms. The average room rate increased to $47.65 in 1994 from $46.36 in
1993, an increase of $1.29 or 2.8%, while occupancy increased 5 percentage
points. The completion of the Company's image enhancement program
contributed to the increases in average room rate and occupancy. Available
rooms for 1994 were 10,188,000 as compared to 8,226,000 for 1993, an increase
of 1,962,000 available rooms, or 23.9%. The increase in the number of
available rooms was due to the acquisitions of five operating inns and CIGNA
during 1994 and LQP in December of 1993.
RESTAURANT RENTAL AND OTHER REVENUES includes rental payments from
restaurants owned by the Company and leased to and operated by third parties.
Restaurant rental and other revenues also include the Company's interest in
the earnings (accounted for using the equity method) of LQP through December
1, 1993, and miscellaneous other revenues, such as third party rental revenue
from an office building which also housed the Company's corporate offices
through May 1993. Restaurant rental and other increased to $7,675,000 in
1994 from $6,464,000 in 1993, an increase of $1,211,000, or 18.7%. This
increase is primarily the result of an increase in the number of wholly-owned
restaurants leased to and operated by third parties due to the acquisition of
LQP.
MANAGEMENT SERVICES revenue is primarily related to fees earned by the
Company for services rendered in conjunction with Managed Inns. Management
service revenue decreased to $1,219,000 in 1994 from $6,857,000 in 1993.
Management fees decreased due to the consolidation of LQP in December 1993
and the acquisition of the CIGNA in July 1994 eliminating the related
management fees earned by the Company.
DIRECT EXPENSES include costs directly associated with the operation of
Company Inns. In 1994, approximately 41.9% of direct expenses were
represented by salaries, wages, and related costs. Other major categories of
direct expenses include utilities, property taxes, repairs and maintenance
and room supplies.
14
<PAGE>
Direct expenses increased to $194,894,000 ($27.30 per occupied room) in 1994
compared to $148,571,000 ($27.72 per occupied room) in 1993, an increase of
$46,323,000, or 31.2%. Direct expenses decreased to 53.8% in 1994 from 54.7%
in 1993 as a percentage of total revenue primarily from a decrease in
salaries and related benefit costs and property taxes. The acquisitions of
LQP and CIGNA caused the increase of direct expense in total year over year .
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 and information systems. Corporate
expenses decreased to $18,614,000 ($1.79 per available room, including
Managed Inns) in 1994 from $19,450,000 ($1.96 per available room, including
Managed Inns) in 1993, a decrease of $836,000, or 4.3%. As a percent of
total revenues, corporate expenses decreased to 5.1% in 1994 from 7.2% in
1993.
PERFORMANCE STOCK OPTION relates to the costs of stock options which became
exercisable when the average price of the Company's stock reached $30 per
share (pre-split) for twenty consecutive days. In 1993, performance stock
option expense and certain other options were accelerated as a result of this
condition being met (See note 5 of Notes to the Combined Financial
Statements). Currently, the Company has no options outstanding that require
recognition of additional compensation expense.
DEPRECIATION, AMORTIZATION AND FIXED ASSET RETIREMENTS increased to
$37,977,000 in 1994 from $24,055,000 in 1993 an increase of $13,992,000, or
57.9%. The increase in depreciation, amortization and fixed asset
retirements is primarily due to the increase in depreciable assets resulting
from the acquisitions of LQP, CIGNA, five existing inns in 1994 and 11
existing inns in the latter part of 1993 and the Company's image enhancement
program. Depreciation, amortization and fixed asset retirements also
includes asset retirements associated with the Company's refurbishment
program and other capital improvements.
OPERATING INCOME increased to $110,757,000 in 1994 from $75,367,000 in 1993,
an increase of $35,390,000, or 47.0%.
INTEREST INCOME primarily represents earnings on notes receivable and on the
short-term investment of Company funds in money market instruments prior to
their use in operations or acquiring inns. Interest income decreased to
$1,421,000 in 1994 from $5,147,000 in 1993, a decrease of $3,726,000, or
72.4%. The decrease in interest income is primarily attributable to a
decrease in interest earned on a note receivable from AEW Partners (the"AEW
Note") due to the collection of the entire principal balance in December
1993.
INTEREST ON LONG-TERM DEBT increased to $38,860,000 in 1994 from $31,366,000
in 1993, an increase of $7,494,000, or 23.9%. The increase in interest
expense is attributable to the debt incurred to acquire the LQP, CIGNA and
certain of the limited partners' interests and debt assumed with the
acquisition of LQP.
PARTNERS' EQUITY IN EARNINGS AND LOSSES reflects the interests of partners
in the earnings and losses of the combined joint ventures and partnerships
which are owned at least 40% and controlled by the Company. Partners' equity
in earnings and losses decreased to $11,406,000 in 1994 from $12,965,000 in
1993, a decrease of $1,559,000, or 12.0%. The decrease in partners' equity
in earnings and losses is attributable to the acquisition of various limited
partners' interests in unincorporated partnerships and joint ventures
partially offset by increases in the earnings of the Development Partnership.
As of December 31, 1994, the Development Partnership operated 42 inns
compared to 37 inns as of December 31, 1993.
NET (GAIN) LOSS ON PROPERTY TRANSACTIONS increased to a gain of ($79,000) in
1994 from a loss of $4,347,000 in 1993. The loss in 1993 includes a
$4,900,000 loss related to the Company's conveyance to the mortgagee of the
title on the property in which the Company's headquarters were located.
INCOME TAXES for 1994 were calculated using an estimated effective tax rate
of 39%.
For the reasons discussed above, the Company reported EARNINGS BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE of $37,815,000
in 1994 compared with $19,420,000 in 1993, an increase of $18,395,000, or
94.7%.
15
<PAGE>
The Company reported EXTRAORDINARY ITEMS, NET OF INCOME TAXES of ($619,000)
in 1993. The 1993 extraordinary loss consisted of ($6,007,000), ($3,664,000)
net of income taxes, related to the early extinguishment and refinancing of
certain debt partially offset by an extraordinary gain of $4,991,000,
$3,045,000 net of income taxes, resulting from the Company's transfer of
ownership to the mortgagee of property in which the Company's headquarters
were located.
The CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR INCOME TAXES of
$1,500,000, or $.03 per share in 1993 was the result of the implementation of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes."
For the reasons discussed above, the Company reported NET EARNINGS of
$37,815,000 in 1994 compared with $20,301,000 in 1993, an increase of
$17,514,000, or 86.3%.
YEAR ENDED DECEMBER 31, 1993
COMPARED TO YEAR ENDED DECEMBER 31, 1992
TOTAL REVENUES increased to $271,850,000 in 1993 from $254,122,000 in 1992,
an increase of $17,728,000, or 7.0%. Of the total revenues reported in 1993,
95.1% were revenues from inns, 2.4% were revenues from restaurant rentals and
other revenue and 2.5% were revenues from management services.
INN REVENUES increased to $258,529,000 in 1993 from $239,826,000 in 1992, an
increase of $18,703,000, or 7.8%. The increase in inn revenues was due
primarily to an increase in average room rate, an increase in the number of
available rooms and the acquisition of LQP. The average room rate increased
to $46.36 in 1993 from $44.33 in 1992, an increase of $2.03, or 4.6%, while
occupancy declined .5 percentage points. As anticipated, the Company's image
enhancement program caused temporary construction related disruption in
normal business operations and occupancies at properties which underwent the
process. Also, management's decision to discontinue a coupon promotion used
in 1992 had a positive impact on room rate and had the effect of reducing
occupancy in 1993. Available rooms for 1993 were 8,226,000 as compared to
7,916,000 for 1992, an increase of 310,000 available rooms, or 3.9%. The
increase in the number of available rooms was due to the acquisition of 11
inns during the year ended December 31, 1993 and the acquisition of LQP in
December of 1993.
RESTAURANT RENTAL AND OTHER REVENUES decreased to $6,464,000 in 1993 from
$7,208,000 in 1992, a decrease of $744,000, or 10.3%, primarily due to a
reduction in earnings related to investments accounted for on the equity
method.
MANAGEMENT SERVICES revenue decreased to $6,857,000 in 1993 from $7,088,000
in 1992, a decrease of $231,000, or 3.2%. Management fees decreased due to
there being two less licensees and the consolidation of LQP in December 1993
eliminating the related management fees charged by the Company to LQP for
that month.
DIRECT EXPENSES in 1993 primarily consisted of salaries, wages, and related
costs. These costs accounted for approximately 42.4% of direct expenses.
Other major categories of direct expenses include utilities, repairs and
maintenance, property taxes, advertising and room supplies.
Direct expenses increased to $148,571,000 ($27.72 per occupied room) in 1993
compared to $135,474,000 ($26.11 per occupied room) in 1992, an increase of
$13,097,000, or 9.7%. As a percentage of total revenues, direct expenses
increased to 54.7% in 1993 from 53.3% in 1992. The increase in direct
expense resulted primarily from the Company's implementation of a
complimentary continental breakfast at all La Quinta inns during the first
quarter of 1993, (which amounted to $1.08 per occupied room). The Company
acquired 11 inns during 1993 and did not acquire or convert any inns during
1992.
CORPORATE EXPENSES decreased to $19,450,000 ($1.96 per available room,
including Managed Inns) in 1993 from $23,961,000 ($2.46 per available room,
including Managed Inns) in 1992 a decrease of $4,511,000, or 18.8%. As a
percent of total revenues, corporate expenses decreased to 7.2% in 1993 from
9.4% in 1992. The 1992 corporate expenses included non-recurring charges to
increase the allowance for certain notes receivable of $2,696,000 based upon
estimates of the value of the real estate held as collateral for such notes
and evaluations of the financial condition of certain borrowers and $210,000
related to other corporate expense items. The 1992 corporate expenses also
include a provision related to the settlement of certain litigation of
$775,000. The 1992
16
<PAGE>
Corporate expenses, before non-recurring charges were $21,055,000 ($2.16 per
available room, including Managed Inns). As a percent of total revenues,
corporate expenses in 1992, before non-recurring charges, was 8.3%.
The PROVISION FOR WRITE-DOWN OF PARTNERSHIP INVESTMENTS, LAND AND OTHER in
1992 includes charges related to the write-down of certain joint venture
interests, land previously held for future development, computer equipment
and other assets (See note 8 of Notes to Combined Financial Statements).
SEVERANCE AND OTHER EMPLOYEE RELATED COSTS in 1992 consisted of costs related
to the severance of certain executive officers and other employees, executive
search fees and relocation costs for new officers.
PERFORMANCE STOCK OPTION relates to the costs of stock options which became
exercisable when the average price of the Company's stock reached $30 per
share (pre-split) for twenty consecutive days. Performance stock option
expense and certain other options were accelerated as a result of this
condition being met (See note 5 of Notes to Combined Financial Statements).
DEPRECIATION, AMORTIZATION AND FIXED ASSET RETIREMENTS decreased to
$24,055,000 in 1993 from $24,793,000 in 1992, a decrease of $738,000 or 3.0%.
The decrease in depreciation, amortization and fixed asset retirements was
due to assets which became fully depreciated during 1993 and the write-off of
computer equipment and signage in the prior year. Replacement and
installation of new computer equipment and signs was substantially completed
in the latter part of 1993.
OPERATING INCOME increased to $75,367,000 in 1993 from $34,575,000 in 1992,
an increase of $40,792,000. Operating income before a non-recurring,
non-cash charge of approximately $4,407,000 to recognize compensation expense
related to the vesting of performance stock options, increased to $79,774,000
in 1993 from $73,112,000 in 1992 before write-downs, severance and employee
related costs and other non-recurring charges, an increase of $6,662,000, or
9.1%.
INTEREST INCOME decreased to $5,147,000 in 1993 from $6,041,000 in 1992, a
decrease of $894,000, or 14.8%. The decrease in interest income is primarily
attributable to principal reductions on the AEW Note of $16,700,000 and
$19,300,000 in September and December 1993 respectively, and the
corresponding reduction in interest earned thereon. As of December 31, 1993,
the AEW Note had been fully collected.
INTEREST ON LONG-TERM DEBT decreased to $31,366,000 in 1993 from $33,087,000
in 1992, a decrease of $1,721,000, or 5.2%. The decrease in interest
expense is attributable to the early extinguishment of approximately
$117,000,000 of certain high interest rate debt with proceeds from the 9 1/4%
Senior Subordinated Notes due 2003 and bank financing which more than offset
interest on borrowings to purchase limited partners' interests. In addition,
certain Industrial Revenue Bond issues were refinanced to obtain more
favorable interest rates.
PARTNERS' EQUITY IN EARNINGS AND LOSSES decreased to $12,965,000 in 1993 from
$15,081,000 in 1992, a decrease of $2,116,000, or 14.0%. The decrease in
partners' equity in earnings and losses is attributable to the acquisition of
limited partners' interests in 14 combined unincorporated partnerships and
joint ventures partially offset by increases in the earnings of the
Development Partnership. As of December 31, 1993, the Development
Partnership operated 37 inns compared to 28 inns as of December 31, 1992.
NET (GAIN) LOSS ON PROPERTY TRANSACTIONS decreased to a loss of $4,347,000 in
1993 from a gain of ($282,000) in 1992. The loss in 1993 includes a
$4,900,000 loss related to the Company's conveyance to the mortgagee of the
title on the property in which the Company's headquarters were located.
INCOME TAXES for 1993 were calculated using an estimated effective tax rate
of 39%.
For the reasons discussed above, the Company reported EARNINGS (LOSS) BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE of $19,420,000
in 1993 compared with ($7,796,000) in 1992, an increase of $27,216,000.
The Company reported EXTRAORDINARY ITEMS, NET OF INCOME TAXES of ($619,000)
in 1993 compared with ($958,000) in 1992. The 1993 extraordinary loss
consisted of ($6,007,000), ($3,664,0000) net of income taxes, related to the
early extinguishment and refinancing of certain debt partially offset by an
extraordinary gain of
17
<PAGE>
$4,991,000, $3,045,000 net of income taxes, resulting from the Company's
transfer of ownership to the mortgagee of property in which the Company's
headquarters were located. The 1992 extraordinary loss was primarily a
result of the refinancing of three industrial revenue bond issues totaling
$12,910,000 in principal. In addition, the Company retired its 10%
Convertible Subordinated Debentures due in 2002.
The CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR INCOME TAXES of
$1,500,000, or $.03 per share in 1993 was the result of the implementation of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes."
For the reasons discussed above, the Company reported NET EARNINGS of
$20,301,000 in 1993 compared with a net loss of ($8,754,000) in 1992, an
increase of $29,055,000.
CAPITAL RESOURCES AND LIQUIDITY
The Company has historically financed its development program through
partnerships with financial institutions, a public debt offering and
borrowings under the Company's Credit Facilities. During the years ended
December 31, 1994 and 1993, the Company funded a majority of its development
program through the Development Partnership. The Company's inns and adjacent
restaurant land and buildings are substantially pledged to secure long-term
debt of the Company. Distributions of cash, if any, from the Company's joint
ventures and partnerships are made from cash available after payment of
operating expenses, debt service, capital expenditures and acquisition and
development of new inns.
At December 31, 1994, the Company had $2,589,000 of cash and cash
equivalents, a decrease of $21,259,000 from December 31, 1993. The decrease
primarily was due to capital expenditures for the image enhancement program,
purchase and conversion of inns, the acquisition of the remaining Units of
LQP during January of 1994 and the acquisition of CIGNA.
At December 31, 1994, the Company had a $45,000,000 Secured Line of Credit
and a $171,500,000 Secured Term Credit Facility with participating banks. At
December 31, 1994, the Company had $21,300,000 available on its Secured Line
of Credit, net of $6,350,000 of letters of credit collateralizing the
Company's insurance programs, and was fully drawn on the Secured Term Credit
Facility. Borrowings under the $45,000,000 Secured Line of Credit, which will
expire May 30, 1997, bear interest at LIBOR, the prime rate, or certificate of
deposit rate plus an Applicable Margin, as defined in the related credit agree-
ment. At December 31, 1994, borrowings under the Secured Line of Credit bear
interest at LIBOR plus 1 1/2%, the prime rate or the certificate of deposit
rate plus 1 5/8%. Borrowings under the $171,500,000 Secured Term Credit
Facility, which matures May 31, 2000 and bear interest at LIBOR, the prime
rate, or certificate of deposit rate plus an Applicable Margin, as defined in
the related credit agreement. At December 31, 1994, borrowings under the
Secured Term Credit Facility bear interest at LIBOR plus 1 3/4%, the prime rate
or certificate of deposit rate plus 1 7/8%. The Applicable Margin is
determined quarterly based upon predetermined levels of indebtedness to cash
flows, as defined in the related credit agreements. Amounts borrowed under the
Secured Term Credit Facility require semi-annual principal payments through
May 31, 2000.
On June 1, 1994, the Development Partnership entered a $35,000,000 Bank
Unsecured Line of Credit of which $21,850,000 was available at December 31,
1994. Borrowings under the Bank Unsecured Line of Credit, which matures
January 31, 1997, may be made at varying interest rates of the prime rate,
LIBOR, or certificate of deposit rate plus the Development Partnership's
Applicable Margin, as defined in the related credit agreement. At December 31,
1994, borrowings under the Bank Unsecured Line of Credit bear interest at the
prime rate, LIBOR plus 1% or certificate of deposit rate plus 1 1/8%. The
Development Partnership's Applicable Margin is determined quarterly based
upon predetermined levels of the Partnership's indebtedness to cash flows,
as defined in the related credit agreement.
On January 23, 1992 with the approval of the Company's Board of Directors,
the Company entered two interest rate swap agreements (the "Agreements")
which exchanged the Company's variable rate interest payments for the fixed
rate interest payments of a major financial institution (the
"Counterparty"). The debt ("Notional Amount") underlying the Agreements
is $16,890,000 and $44,420,000. Under the Agreements, the Company
effectively pays a fixed rate of interest at 6.50% and 5.26% and the
Counterparty pays a percentage of prime interest rate and the variable rate
demand note interest rate ("VRDN"). In the event the VRDN rate exceeds the
fixed interest rate of 5.26% or the percentage of prime interest rate exceeds
6.5%, the Counterparty pays to the Company that difference times the Notional
Amount, on a monthly basis. Should the fixed interest rate of 5.26% exceed
the VRDN interest rate or the fixed interest rate of 6.5% exceeds the
percentage of prime interest rate, the Company pays the difference times the
Notional Amount to the Counterparty, on a monthly basis. These Agreements
resulted in net payments to the Counterparty of $1,040,000, $1,427,000 and
$1,184,000 in the years ended December 31, 1994, 1993 and 1992, respectively.
The Agreements expire on February 1, 1997, and the Notional Amounts are
reduced over the life of the Agreements by scheduled amortization payments.
At December
18
<PAGE>
31, 1994, the Notional Amounts of debt remaining under the Agreements are
$11,107,000 and $36,150,000 which bear interest at a weighted average
variable interest rate of 6.46% and 4.48%, respectively.
The Company is exposed to market risk associated with fluctuations in
interest rates. By entering the interest rate swap agreements, described
above, the Company reduced its exposure to rising interest rates on the
aforementioned variable interest rate debt and has effectively fixed the rate
on such debt at a level acceptable to the Company given the length of the
Agreements and the risk of interest rate changes. The Company is exposed to
credit risk to the extent that the Counterparty fails to perform under the
Agreements. The Company has mitigated its credit risk by entering the
Agreements with a major financial institution, which has received an "A"
rating from Standard and Poor's Corporation and an "A2" rating from Moody's
Investors Service on senior unsecured debt. The Company regularly monitors
the credit ratings of the Counterparty and considers the risk of default
remote.
As a result of the VRDN rate increasing from 2.55% at December 31, 1993 to
4.32% at December 31, 1994 and the increase in the prime rate during the
year, the estimated fair value of the interest rate swap agreements changed
from a net payable position of $2,276,000 at December 31, 1993, to a net
receivable position of $494,000 at December 31, 1994.
Net cash provided by operating activities increased to $94,233,000 in 1994
from $78,043,000 in 1993, an increase of $16,190,000, or 20.7%. The increase
was primarily due to increased inn revenues and an increase in accrued
expenses due to the timing of payment. Net cash provided by operating
activities increased to $78,043,000 in 1993 from $60,853,000 in 1992, an
increase of $17,190,000, or 28.2%. The majority of the increase was due to
an increase in inn revenues as a result of increased occupancy and average
room rates.
Net cash used by investing activities increased to $156,492,000 in 1994 from
$145,027,000 in 1993, an increase of $11,465,000. The increase was related
to capital expenditures related to the image enhancement, purchase and
conversion of inns, the purchase of the remaining units of LQP and the
acquisition of CIGNA. Net cash used by investing activities increased to
$145,027,000 in 1993 from $15,166,000 in 1992, an increase of $129,861,000.
The increase was related to the acquisition of 82% of LQP, the acquisition of
the partners' interest in 14 unincorporated joint ventures and partnerships,
the acquisition of 11 inns and capital expenditures related to the Company's
image enhancement program.
Net cash provided by financing activities was $41,000,000 in 1994 compared
to $77,971,000 in 1993. The decrease in cash provided by financing
activities was the result of the payments on the secured line of credit and
long-term borrowings, dividends to shareholders and purchase of treasury
stock. Net cash provided by financing activities in 1993 was $77,971,000 in
1993 compared to net cash used by financing activities of ($40,781,000) in
1992. The increase was a result of the issuance of the 9 1/4% Senior
Subordinated Notes due 2003, the collection of the AEW Note and the decrease
in distributions to partners partially offset by payments on long-term debt.
During 1994, the Company repurchased a total of 373,000 shares (post-split)
of its common stock for approximately $7,115,000 under a plan approved by
the Board of Directors to repurchase up to $10,000,000 of its common stock.
Additional purchases will be made from time to time in the open market as
deemed appropriate by the Company.
COMMITMENTS
In accordance with the unincorporated partnership or joint venture
agreements executed by the Company, La Quinta is committed to advance funds
necessary to cover operating expenses of joint ventures. Three
unincorporated partnerships and joint ventures executed promissory notes in
which the Company guaranteed to fund amounts not to exceed $740,000 in the
aggregate.
The estimated additional cost to complete the conversion and renovation of
inns for which commitments have been made is $4,000,000 at December 31, 1994.
Funds on hand, committed and anticipated from cash flow are sufficient to
complete these projects.
Under the terms of a Partnership agreement between the Company and AEW
Partners, the Company maintains a reserve for renovating, remodeling and
conversion of the inns in the Development Partnership based
19
<PAGE>
on 5% of gross room revenue of the Partnership which includes certain amounts
required by loan agreements. At December 31, 1994 and 1993 the Company had
$900,000 and $3,833,000, respectively, of restricted cash which is classified
as investments.
In accordance with the requirements of an escrow agreement related to a pool
of mortgage notes executed by the Company and a third party lender, the
Company is required to make annual deposits into an escrow account for the
purpose of establishing a reserve for the replacement of furnishings,
fixtures and equipment used on or incorporated into the mortgaged properties.
The Company shall be relieved of its obligation to make such annual deposits
for any year in which the escrow account has an aggregate balance of
$2,431,000. At December 31, 1994 and 1993, the Company had reserved the
full amount.
In 1993, the Company entered into a ten year operating lease for its
corporate headquarters in San Antonio. In addition, the Company entered into
a ten year lease in December 1993 to house the Company's reservation
facilities.
Funds on hand, anticipated from future cash flows and available on the
Company's Credit Facilities are sufficient to fund operating expenses, debt
service and other capital requirements through at least the end of 1995. The
Company will evaluate from time to time the necessity of other financing
alternatives.
SEASONALITY
Demand, and thus room occupancy, is affected by normally recurring seasonal
patterns and, in most La Quinta inns, is higher in the spring and summer
months (March through August) than in the balance of the year.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes".
This Statement requires the use of the asset and liability method of
accounting for deferred income taxes and was implemented in 1993. The impact
of the Statement's implementation has been disclosed in note 4 of Notes to
Combined Financial Statements.
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 (loss) of
the Company in the three most recent years.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LA QUINTA INNS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1993
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $ 2,589 $ 23,848
Receivables (net of allowance of $441
and $421):
Trade . . . . . . . . . . . . . . . . . . 10,185 6,744
Other . . . . . . . . . . . . . . . . . . 2,363 3,191
Supplies. . . . . . . . . . . . . . . . . . 7,474 5,921
Prepaid expenses. . . . . . . . . . . . . . 1,202 581
Deferred income taxes (note 4). . . . . . . 7,223 5,254
---------- --------
Total current assets. . . . . . . . . . . 31,036 45,539
---------- --------
Notes receivable, excluding current
installments (net of allowance of
$3,351 and $3,167). . . . . . . . . . . . . . 7,320 7,683
---------- --------
Investments (notes 6, 9, 12 and 14). . . . . . 2,647 6,583
---------- --------
Properties held for sale, at estimated net
realizable value. . . . . . . . . . . . . . . 2,664 3,401
---------- --------
Land held for future development, at cost. . . 1,324 1,452
---------- --------
Property and equipment, at cost,
substantially all pledged (notes 2, 7 and
14):
Buildings . . . . . . . . . . . . . . . . . 767,665 660,278
Furniture, fixtures and equipment . . . . . 124,336 114,113
Land and leasehold improvements . . . . . . 150,311 129,862
---------- --------
Total property and equipment. . . . . . . 1,042,312 904,253
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . 252,372 230,917
---------- --------
Net property and equipment. . . . . . . . 789,940 673,336
---------- --------
Deferred charges and other assets, at cost
less applicable amortization. . . . . . . . . 10,850 11,501
---------- --------
Total assets. . . . . . . . . . . . . . . $ 845,781 $749,495
---------- --------
---------- --------
</TABLE>
See accompanying notes to combined financial statements.
21
<PAGE>
LA QUINTA INNS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1993
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt
(notes 2 and 14). . . . . . . . . . . . . $ 39,976 $ 22,491
Accounts payable:
Trade. . . . . . . . . . . . . . . . . . 10,292 14,282
Other. . . . . . . . . . . . . . . . . . 6,386 9,584
Income taxes . . . . . . . . . . . . . . 3,641 1,830
Accrued expenses:
Payroll and employee benefits. . . . . . 21,238 17,620
Interest . . . . . . . . . . . . . . . . 3,023 3,379
Property taxes . . . . . . . . . . . . . 8,387 7,994
Other. . . . . . . . . . . . . . . . . . 1,125 1,870
-------- --------
Total current liabilities. . . . . . . 94,068 79,050
-------- --------
Long term debt, excluding current
installments (notes 2 and 14). . . . . . . . 448,258 414,004
-------- --------
Deferred income taxes, pension and
other (notes 4 and 6). . . . . . . . . . . . 22,125 21,408
-------- --------
Partners' capital (notes 3 and 14). . . . . . 92,099 85,976
-------- --------
Shareholders' equity (notes 2, 5 and 6):
Common stock ($.10 par value; 100,000,000
and 40,000,000 shares authorized;
48,758,528 and 32,111,364 shares issued). 4,876 3,211
Additional paid-in capital . . . . . . . . 68,759 60,573
Retained earnings. . . . . . . . . . . . . 134,409 100,059
Minimum pension liability. . . . . . . . . (1,474) (1,458)
-------- --------
206,570 162,385
Less treasury stock, at cost (2,361,366
and 1,732,867 shares) . . . . . . . . . . 17,339 13,328
-------- --------
Total shareholders' equity . . . . . . 189,231 149,057
-------- --------
Commitments and contingencies (notes 7, 9
and 10)
Total liabilities and shareholders'
equity. . . . . . . . . . . . . . . . $845,781 $749,495
-------- --------
-------- --------
</TABLE>
See accompanying notes to combined financial statements.
22
<PAGE>
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Revenues:
Inn . . . . . . . . . . . . . . . . . . . . . $353,348 $258,529 $239,826
Restaurant rental and other . . . . . . . . . 7,675 6,464 7,208
Management services (notes 12 and 14) . . . . 1,219 6,857 7,088
-------- -------- --------
Total revenues. . . . . . . . . . . . . . 362,242 271,850 254,122
-------- -------- --------
Operating costs and expenses:
Direct. . . . . . . . . . . . . . . . . . . . 194,894 148,571 135,474
Corporate . . . . . . . . . . . . . . . . . . 18,614 19,450 23,961
Provision for write-down of partnership
investments, land and other (note 8) . . . . - - 28,383
Severance and other employee related
costs (note 8) . . . . . . . . . . . . . . . - - 6,936
Performance stock option (note 5) . . . . . . - 4,407 -
Depreciation, amortization and fixed asset
retirements (note 1) . . . . . . . . . . . . 37,977 24,055 24,793
-------- -------- --------
Total operating costs and expenses. . . . 251,485 196,483 219,547
-------- -------- --------
Operating income. . . . . . . . . . . . . 110,757 75,367 34,575
-------- -------- --------
Other (income) expense:
Interest income . . . . . . . . . . . . . . . (1,421) (5,147) (6,041)
Interest on long-term debt. . . . . . . . . . 38,860 31,366 33,087
Partners' equity in earnings and losses
(note 3) . . . . . . . . . . . . . . . . . . 11,406 12,965 15,081
Net (gain) loss on property transactions
(note 2) . . . . . . . . . . . . . . . . . . (79) 4,347 (282)
-------- -------- --------
Earnings (loss) before income taxes,
extraordinary items and cumulative
effect of accounting change . . . . . . 61,991 31,836 (7,270)
Income taxes (note 4). . . . . . . . . . . . . . 24,176 12,416 526
-------- -------- --------
Earnings (loss) before extraordinary
items and cumulative effect of
accounting change. . . . . . . . . . . . 37,815 19,420 (7,796)
Extraordinary items, net of income taxes
(note 2). . . . . . . . . . . . . . . . . . . . - (619) (958)
-------- -------- --------
Earnings (loss) before cumulative
effect of accounting change. . . . . . . 37,815 18,801 (8,754)
Cumulative effect of accounting change
(note 4). . . . . . . . . . . . . . . . . . . . - 1,500 -
-------- -------- --------
Net earnings (loss) . . . . . . . . . . . $ 37,815 $ 20,301 $ (8,754)
-------- -------- --------
-------- -------- --------
Earnings (loss) per common and common
equivalent share:
Earnings (loss) before extraordinary
items and cumulative effect of
accounting change. . . . . . . . . . . . $ .78 $ .41 $ (.17)
Extraordinary items, net of income taxes. - (.01) (.02)
Cumulative effect of accounting change. . - .03 -
-------- -------- --------
Net earnings (loss) . . . . . . . . . . . $ .78 $ .43 $ (.19)
-------- -------- --------
-------- -------- --------
Weighted average number of common and
common equivalent shares outstanding, as
restated (note 5) . . . . . . . . . . . . . . . 48,624 47,306 45,302
-------- -------- --------
-------- -------- --------
</TABLE>
See accompanying notes to combined financial statements.
23
<PAGE>
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL MINIMUM
--------------- ---------------- PAID-IN RETAINED PENSION
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS LIABILITY TOTAL
------ ------ ------ ------ ------- -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1991 . . 14,668 $1,467 (1,458) $(16,773) $55,954 $ 89,527 $ - $130,175
Stock options . . . . . . . . . - - 206 2,439 795 - - 3,234
Purchase of treasury stock. . . - - (21) (334) - - - (334)
Net loss . . . . . . . . . . . - - - - - (8,754) - (8,754)
------ ------ ------ -------- ------- -------- ------- --------
Balances at December 31, 1992 . . 14,668 1,467 (1,273) (14,668) 56,749 80,773 - 124,321
Effect of stock split at
October 1, 1993. . . . . . . . 6,740 674 - - (674) - - -
Effect of stock split at
March 15, 1994 . . . . . . . . 10,703 1,070 (578) - (1,070) - - -
Stock options . . . . . . . . . - - 118 1,340 5,568 - - 6,908
Dividends paid ($.05 per
share) . . . . . . . . . . . . - - - - - (1,015) - (1,015)
Net earnings. . . . . . . . . . - - - - - 20,301 - 20,301
Minimum pension liability . . . - - - - - - (1,458) (1,458)
------ ------ ------ -------- ------- -------- ------- --------
Balances at December 31, 1993 . . 32,111 3,211 (1,733) (13,328) 60,573 100,059 (1,458) 149,057
Effect of stock split at
October 25, 1994 . . . . . . . 16,163 1,616 (717) - (1,616) - - -
Stock options . . . . . . . . . 485 49 412 3,104 9,802 - - 12,955
Purchase of treasury stock. . . - - (323) (7,115) - - - (7,115)
Dividends paid ($.10 per
share) . . . . . . . . . . . . - - - - - (3,465) - (3,465)
Net earnings . . . . . . . . . - - - - - 37,815 - 37,815
Minimum pension liability . . . - - - - - - (16) (16)
------ ------ ------ -------- ------- -------- ------- --------
Balances at December 31, 1994 . . 48,759 $4,876 (2,361) $(17,339) $68,759 $134,409 $(1,474) $189,231
------ ------ ------ -------- ------- -------- ------- --------
------ ------ ------ -------- ------- -------- ------- --------
</TABLE>
See accompanying notes to combined financial statements.
24
<PAGE>
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) . . . . . . . . . . $ 37,815 $ 20,301 $ (8,754)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation and amortization of
property and equipment . . . . . . . 35,929 21,905 21,957
Amortization of deferred charges. . . 1,326 1,994 1,762
Loss on retirement of fixed assets. . 722 156 1,074
Non-recurring, non-cash charges . . . - - 32,913
Performance stock options . . . . . . - 4,407 -
Gain on sale of assets . . . . . . . (79) (616) (282)
Undistributed earnings of
affiliates . . . . . . . . . . . . . - 50 72
Partners' equity in earnings and
losses . . . . . . . . . . . . . . . 11,406 12,965 15,081
Cumulative effect of change in
accounting for income taxes. . . . . - (1,500) -
Changes in operating assets and
liabilities:
Receivables . . . . . . . . . . . . (2,013) (1,832) 410
Income taxes. . . . . . . . . . . . 9,291 3,585 (934)
Supplies and prepaid expenses . . . (2,622) (1,334) 268
Accounts payable and accrued
expenses . . . . . . . . . . . . . (1,291) 14,774 1,690
Deferred charges and other
assets . . . . . . . . . . . . . . 1,573 460 (969)
Deferred credits and other. . . . . 2,176 2,728 (3,435)
--------- --------- ---------
Net cash provided by operating
activities . . . . . . . . . . 94,233 78,043 60,853
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures other than
acquisitions . . . . . . . . . . . . . (75,248) (32,623) (15,529)
Proceeds from property transactions . . 2,565 982 1,998
Purchase and conversion of inns . . . . (34,690) (38,858) (4,060)
Purchase of partners' equity
interests. . . . . . . . . . . . . . . (53,255) (78,169) -
Decrease in notes receivable and
investments. . . . . . . . . . . . . . 4,136 3,641 2,425
--------- --------- ---------
Net cash used by investing
activities . . . . . . . . . . (156,492) (145,027) (15,166)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from secured line of
credit and long-term borrowings. . . . 417,102 223,198 61,275
Principal payments on secured line
of credit and long-term borrowings . . (369,955) (178,528) (101,156)
Capital contributions by partners . . . - 35,908 15,216
Capital distributions to partners . . . (1,144) (3,414) (18,706)
Dividends to shareholders . . . . . . . (3,465) (1,015) -
Purchase of treasury stock. . . . . . . (7,013) - (334)
Net proceeds from stock transactions. . 5,475 1,822 2,924
--------- --------- ---------
Net cash provided (used) by
financing activities . . . . . 41,000 77,971 (40,781)
--------- --------- ---------
(Decrease) increase in cash and cash
equivalents . . . . . . . . . . . . . . . (21,259) 10,987 4,906
Cash and cash equivalents at beginning
of year . . . . . . . . . . . . . . . . . 23,848 12,861 7,955
--------- --------- ---------
Cash and cash equivalents at end of year . $ 2,589 $ 23,848 $ 12,861
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
25
<PAGE>
LA QUINTA INNS, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Supplemental schedule of non-cash investing
and financing activities
Tax benefit from stock options exercised
(note 5) . . . . . . . . . . . . . . . . . $7,480 $ 679 $ 310
Effect of stock splits (note 5) . . . . . . 1,616 1,744 -
Additional minimum pension liability
(note 6) . . . . . . . . . . . . . . . . . 147 4,092 -
Liabilities assumed in connection with
acquisition of LQP (notes 2 and 14). . . . - 65,962 -
Liabilities assumed in connection with
acquisitions of unincorporated
partnerships and joint ventures
(note 14). . . . . . . . . . . . . . . . . - 29,878 -
Conveyance of title of property to
mortgagor (note 2) . . . . . . . . . . . . - 10,117 -
Reduction in debt in connection with
property sale. . . . . . . . . . . . . . . - - 1,915
Property acquired by foreclosure on notes
receivable . . . . . . . . . . . . . . . . - - 1,672
</TABLE>
See accompanying notes to combined financial statements.
26
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND BASIS OF PRESENTATION
The Company develops, owns and operates inns. The combined financial
statements include the accounts of subsidiaries (all wholly-owned) and
unincorporated partnerships and joint ventures in which the Company has at
least a 50% interest and in one case a 40% interest and exercises substantial
legal, financial and operational control. All significant intercompany
accounts and transactions have been eliminated in combination. Certain
reclassifications of prior period amounts have been made to conform with the
current period presentation.
PROPERTY AND EQUIPMENT
Depreciation and amortization of property and equipment is computed using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Buildings . . . . . . . . . . . . . . . . 40 years
Furniture, fixtures and equipment . . . . 4-10 years
Leasehold and land improvements . . . . . 10-20 years
</TABLE>
Maintenance and repairs are charged to operations as incurred.
Expenditures for improvements are capitalized.
The Company recognizes impairment losses on property and equipment
whenever events or changes in circumstances indicate that the carrying amount
of long-lived assets may not be recoverable. Such losses are determined by
comparing the sum of the expected future undiscounted net cash flows to the
carrying amount of the asset. Impairment losses are recognized in operating
income as they are determined.
CASH EQUIVALENTS
All highly liquid investments with a maturity of three months or less at
the date of acquisition are considered cash equivalents.
DEFERRED CHARGES
Deferred charges consist primarily of issuance costs related to Senior
Subordinated Notes due 2003, Industrial Development Revenue Bonds ("IRB"),
loan fees, closing fees and organizational costs. Issuance costs are
amortized over the life of the related debt using the interest method.
Organizational costs are amortized over five years. Loan fees and closing
fees are amortized over the respective terms of the loans using the
straight-line method.
SELF-INSURANCE PROGRAMS
The Company uses a paid loss retrospective self-insurance plan for general
and auto liability and workers' compensation. Predetermined loss limits have
been arranged with insurance companies to limit the Company's per occurrence
cash outlay.
The Company maintains a self-insurance program for major medical and
hospitalization coverage for employees and dependents which is partially
funded by payroll deductions. Payments for major medical and hospitalization
to individual participants less than specified amounts are self-insured by
the Company. Claims for benefits in excess of these amounts are covered by
insurance purchased by the Company.
Provisions have been made in the combined financial statements which
represent the expected future payments based on estimated ultimate cost for
incidents incurred through the balance sheet date.
27
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
currently enacted tax rates in effect for the years in which the differences
are expected to reverse. In 1993, the Company recorded an adjustment to
income of $1,500,000 which represents the net decrease of the deferred tax
liability at January 1, 1993. Such amount has been reflected in the combined
statement of operations for the year ended December 31, 1993 as the
cumulative effect of an accounting change. Prior years' financial statements
have not been restated to apply the provisions of SFAS 109. The deferred
method under APB Opinion 11 was applied in 1992 and prior years.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share are computed on the basis of the weighted
average number of common and common equivalent (dilutive stock options)
shares outstanding in each year after giving retroactive effect to the stock
splits effected as stock dividends as discussed in note 5 of these Combined
Financial Statements. Shares of the Company's common stock issuable upon
conversion of the La Quinta Development Partners, L.P. (the "Development
Partners") units are antidilutive at December 31, 1994 and prior years.
Primary and fully diluted earnings (loss) per share are not significantly
different.
PROPERTIES HELD FOR SALE
Properties held for sale are stated at the lower of cost or estimated net
realizable value. Charges to reduce the carrying amounts of properties held
for sale to estimated net realizable value are recognized in income. The
Company recorded in the statements of operations charges of $9,926,000 in
1992 related to the write-down of properties held for sale.
LICENSING AGREEMENTS
Initial licensing fees related to development are recognized as revenue
when the related property opens and all obligations with respect to
development have been satisfied by the Company. Monthly licensing fees are
based on gross room sales and are accrued as earned.
ADVERTISING
The costs of advertising, promotion and marketing programs are charged to
operations in the year incurred. These costs were $8,859,000, $7,025,000 and
$5,233,000 for the years ended December 31, 1994, 1993 and 1992,
respectively.
INTEREST RATE SWAPS
The accounting treatment for the Company's off balance sheet interest rate
swaps is to record net interest received or paid as an adjustment to interest
expense.
28
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(2) LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1993
---- ----
(IN THOUSANDS)
<S> <C> <C>
Mortgage loans maturing 1995-2015 (9.35%
weighted average). . . . . . . . . . . . . $100,275 $179,418
Industrial Development Revenue Bonds,
maturing 1995-2012 (7.24% weighted
average) . . . . . . . . . . . . . . . . . 65,959 72,682
Senior subordinated notes, due 2003
(9.63%). . . . . . . . . . . . . . . . . . 120,000 120,000
Bank secured term credit facility,
maturing May 31, 2000 (7.30%). . . . . . . 171,500 28,620
Bank secured line of credit, maturing
May 30, 1997 (8.26%) . . . . . . . . . . . 17,350 35,775
Bank unsecured line of credit, maturing
January 31, 1997 (7.29%) . . . . . . . . . 13,150 -
-------- --------
Total . . . . . . . . . . . . . . . . . 488,234 436,495
Less current installments . . . . . . . . . 39,976 22,491
-------- --------
Net long-term debt. . . . . . . . . . . $448,258 $414,004
-------- --------
-------- --------
</TABLE>
At December 31, 1994, the Company had a $45,000,000 Secured Line of Credit
and a $171,500,000 Secured Term Credit Facility with participating banks. At
December 31, 1994, the Company had $21,300,000 available on its Secured Line
of Credit, net of $6,350,000 of letters of credit which collateralize the
Company's insurance programs, and was fully drawn on the Secured Term Credit
Facility. Borrowings under the $45,000,000 Secured Line of Credit, which
will expire May 30, 1997 will be made at LIBOR, the prime rate, or certificate
of deposit rate plus an Applicable Margin, as defined in the related credit
agreement. At December 31, 1994, borrowings under the Secured Line of Credit
bear interest at LIBOR plus 1 1/2%, the prime rate or the certificate of
deposit rate plus 1 5/8%. Borrowings under the $171,500,000 Secured Term Credit
Facility require semi-annual principal payments through May 31, 2000 and bear
interest at varying interest rates of LIBOR, the prime rate, or certificate of
deposit rate plus an Applicable Margin, as defined in the related credit
agreement. At December 31, 1994, borrowings under the Secured Term Credit
Facility bear interest at LIBOR plus 1 3/4%, the prime rate or certificate of
deposit rate plus 1 7/8%. The Applicable Margin is determined quarterly based
upon predetermined levels of indebtedness to cash flows, as defined in the
related credit agreements. The Company pays a commitment fee of .375% per annum
on the undrawn portion of the line of credit. Commitment fees totaled $95,000,
$164,000 and $105,000 for the years ended December 31, 1994, 1993 and
1992, respectively.
On June 1, 1994, La Quinta Development Partners, L.P. (the "Development
Partnership") entered a $35,000,000 Bank Unsecured Line of Credit of which
$21,850,000 was available at December 31, 1994. Borrowings under the Bank
Unsecured Line of Credit, which expires January 31, 1997, may be made at
varying interest rates of the prime rate, LIBOR, or certificate of deposit
rate plus the Development Partnership's Applicable Margin, as defined in the
related credit agreement. At December 31, 1994, borrowings under the Bank
Unsecured Line of Credit bear interest at LIBOR plus 1%, the prime rate or
certificate of deposit rate plus 1 1/8%. The Development Partnership's
Applicable Margin is determined quarterly based upon predetermined levels of
the Partnership's indebtedness to cash flows, as defined in the related credit
agreement. The Development Partnership pays a commitment fee of .375% per annum
on the undrawn portion of the Bank Unsecured Line of Credit. Commitment fees
totaled $56,000 for the year ended December 31, 1994.
Annual maturities for the four years subsequent to December 31, 1995 are
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996 . . . . . . . . . $40,996
1997 . . . . . . . . . 72,724
1998 . . . . . . . . . 49,774
1999 . . . . . . . . . 47,163
</TABLE>
Interest paid during the years ended December 31, 1994, 1993 and 1992
amounted to $40,105,000, $27,913,000 and $32,523,000, respectively.
In May 1993, the Company conveyed title to the property in which its
corporate headquarters was located to the lender holding a $10.1 million
non-recourse mortgage on the property. Completion of this transaction
resulted in the elimination of the liability for the non-recourse mortgage on
the Company's balance sheet. The Company recognized a loss on property
transactions of $4,900,000 related to the write-down of the property to its
estimated fair value and an extraordinary gain of $4,991,000, $3,045,000 net
of income taxes, for the difference between the carrying amount of the debt
and the estimated fair value of the building.
29
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company recognizes gains and losses on extinguishments of debt as
extraordinary items in the period in which the debt is extinguished. The
Company reported extraordinary items, net of income taxes, of $3,664,000, and
$958,000 in 1993 and 1992, respectively, related to these refinancings and
retirements.
The Company is obligated by agreements relating to eighteen issues of IRBs
in an aggregate amount of $54,375,000 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, 1994 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, 1995 and the remarketing agents are unable to resell such bonds, the
maturities of long-term debt shown above would increase by $39,340,000 for
the year ending December 31, 1996.
On January 23, 1992 with the approval of the Company's Board of Directors,
the Company entered two interest rate swap agreements (the "Agreements")
which exchanged the Company's variable rate interest payments for the fixed
rate interest payments with a major financial institution (the
"Counterparty"). The debt ("Notional Amounts") underlying the Agreements is
$16,890,000 and $44,420,000. Under the Agreements, the Company effectively
pays a fixed rate of interest at 6.50% and 5.26% and the Counterparty pays a
percentage of prime interest rate and the variable rate demand note interest
rate ("VRDN"). In the event the VRDN rate exceeds the fixed interest rate of
5.26% or the percentage of prime interest rate exceed 6.5%, the Counterparty
pays to the Company that difference times the Notional Amount, on a monthly
basis. Should the fixed interest rate of 5.26% exceed the VRDN interest rate
or the fixed interest rate of 6.5% exceeds the percentage of prime interest
rate, the Company pays the difference times the Notional Amount to the
Counterparty, on a monthly basis. These Agreements resulted in net payments
to the Counterparty of $1,040,000, $1,427,000 and $1,184,000 in the years
ended December 31, 1994, 1993 and 1992, respectively. The Agreements expire
on February 1, 1997, and the Notional Amounts are reduced over the life of
the Agreements by scheduled amortization payments. At December 31, 1994, the
Notional Amounts of debt remaining under the Agreements are $11,107,000 and
$36,150,000 which bear interest at a weighted average variable interest rate
of 6.46% and 4.48%, respectively.
The Company is exposed to market risk associated with fluctuations in
interest rates. By entering the interest rate swap agreements, described
above, the Company reduced its exposure to rising interest rates on the
aforementioned variable interest rate debt and has effectively fixed the rate
on such debt at a level acceptable to the Company given the length of the
Agreements and the risk of interest rate changes. The Company is exposed to
credit risk to the extent that the Counterparty fails to perform under the
Agreements. The Company has mitigated its credit risk by entering the
Agreements with a major financial institution, which has received an "A"
rating from Standard and Poor's Corporation and an "A2" rating from Moody's
Investors Service on senior unsecured debt. The Company regularly monitors
the credit ratings of the Counterparty and considers the risk of default
remote.
As a result of the VRDN rate increasing from 2.55% at December 31, 1993,
to 4.32% at December 31, 1994 and the increase in the prime rate during the
year, the estimated fair value of the interest rate swap agreements changed
from a net payable position of $2,276,000 at December 31, 1993, to a net
receivable position of $494,000 at December 31, 1994 (See Note 13).
The Secured Line of Credit, Secured Term Credit Facility and certain
agreements associated with IRBs are governed by a uniform covenant agreement.
The most restrictive covenants preclude the following: payment of cash
dividends in excess of defined limits, 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 agreement contains
provisions to limit the total dollar amounts of certain investments and
capital expenditures.
30
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Development Partnership's $35,000,000 Bank Unsecured Line of Credit
agreement contains certain covenants including limitations on the incurrence
of debt by the Development Partnership, certain investments, mergers or
disposition of assets and distributions to partners in excess of certain
limits. The agreement also requires maintenance of certain financial ratios.
The Company's 9 1/4% Senior Subordinated Notes 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, 1994, the Company was in compliance with all restrictions
and covenants.
(3) UNINCORPORATED VENTURES AND PARTNERSHIPS
At December 31, 1994, the Company had an ownership interest between 40%
and 67% in nine unincorporated joint ventures and partnerships. Summary
financial information with respect to unincorporated ventures and
partnerships included in the combined financial statements is provided below
in order to provide further understanding of the Company's structure and to
present the financial position and results of operations of the partnerships
and joint ventures included in the combined financial statements. Cost and
equity investments are not included in other summarized data as such
investments are not considered significant.
The following financial information includes the activity of the acquired
unincorporated joint ventures and partnerships through the date of
acquisition (See Note 14).
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1993
---- ----
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Total current assets. . . . . . . . . . . . . $ 6,241 $ 27,956
Notes receivable, excluding current
installments of $51 and $77. . . . . . . . . 2,542 2,668
Investments and other assets. . . . . . . . . 2,483 5,883
Property and equipment, net . . . . . . . . . 175,734 250,729
-------- --------
$187,000 $287,236
-------- --------
-------- --------
LIABILITIES AND OWNERS' EQUITY
Total current liabilities . . . . . . . . . . $ 15,533 $ 28,552
Long-term debt, excluding current
installments of $2,707 and $3,625. . . . . . 28,576 97,465
Owners' equity:
Company's. . . . . . . . . . . . . . . . 50,792 75,243
Partners'. . . . . . . . . . . . . . . . 92,099 85,976
-------- --------
$187,000 $287,236
-------- --------
-------- --------
</TABLE>
31
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION> YEARS ENDED DECEMBER 31
----------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues. . . . . . . . . . . . . . . . . . . $85,600 $104,394 $119,040
Operating costs and expenses. . . . . . . . . 62,775 75,661 85,127
------- -------- --------
Operating income. . . . . . . . . . . . . . . 22,825 28,733 33,913
Other deductions, principally interest. . . . (2,065) (5,690) (7,794)
(Loss) gain on property transactions. . . . . (1) 324 73
------- -------- --------
Earnings before extraordinary items . . . . . 20,759 23,367 26,192
Extraordinary items . . . . . . . . . . . . . (75) (133) (280)
------- -------- ---------
Pretax earnings . . . . . . . . . . . . . $20,684 $ 23,234 $ 25,912
------- -------- --------
------- -------- --------
Equity in pretax earnings:
Company's. . . . . . . . . . . . . . . . . $ 9,278 $ 10,269 $ 10,831
Partners'. . . . . . . . . . . . . . . . . 11,406 12,965 15,081
------- -------- --------
$20,684 $ 23,234 $ 25,912
------- -------- --------
------- -------- --------
</TABLE>
(4) INCOME TAXES
As discussed in note 1, the Company adopted SFAS 109 effective January 1,
1993. Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Federal
Current. . . . . . . . . . . . . . . $16,038 $ 8,752 $ 3,818
Deferred . . . . . . . . . . . . . . 4,984 1,918 (3,759)
------- ------- -------
21,022 10,670 59
------- ------- -------
State
Current . . . . . . . . . . . . . . 2,871 974 937
Deferred . . . . . . . . . . . . . . 283 772 (470)
------- ------- -------
3,154 1,746 467
------- ------- -------
Total. . . . . . . . . . . . . . . . . $24,176 $12,416 $ 526
------- ------- -------
------- ------- -------
</TABLE>
The effective tax rate varies from the statutory rate for the following
reasons:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
---------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense (benefit) at statutory
rate . . . . . . . . . . . . . . . . $21,697 $11,143 $(2,472)
Unrecognized tax benefits of write-
downs of partnerships, investments
and other. . . . . . . . . . . . . . -- -- 2,856
Targeted jobs tax credit. . . . . . . (11) (39) (109)
Capital gains . . . . . . . . . . . . -- -- (13)
State income taxes, net of Federal
benefit. . . . . . . . . . . . . . . 1,948 1,157 491
Other, net. . . . . . . . . . . . . . 542 155 (227)
------- ------- -------
Provision for income taxes. . . . . $24,176 $12,416 $ 526
------- ------- -------
------- ------- -------
</TABLE>
32
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following are cash transactions relating to the Company's income taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------
1994 1993 1992
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Income taxes paid . . . . . . . . . . $9,716 $5,953 $5,459
------ ------ ------
------ ------ ------
Income tax refund . . . . . . . . . . $ 99 $ 71 $ 99
------ ------ ------
------ ------ ------
</TABLE>
For the year ended December 31, 1992, deferred income tax expense resulted
from timing differences in the recognition of income and expense for income
tax and financial reporting purposes. The sources and tax effects of those
timing differences are presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1992
----
(IN THOUSANDS)
<S> <C>
Depreciation and asset write-downs. . . . . . $ 1,101
Capitalized loan interest . . . . . . . . . . 335
State income taxes. . . . . . . . . . . . . . (208)
Installment sales . . . . . . . . . . . . . . (124)
Deferred gain . . . . . . . . . . . . . . . . 24
Partners' losses recognized by Company. . . . (398)
Expense provisions, including non-recurring
charges. . . . . . . . . . . . . . . . . . . (4,017)
Preopening costs. . . . . . . . . . . . . . . (33)
Minimum tax . . . . . . . . . . . . . . . . . (658)
Targeted jobs tax credit. . . . . . . . . . . (26)
Special partnership allocations . . . . . . . 347
Other, net. . . . . . . . . . . . . . . . . . (572)
--------
$(4,229)
--------
--------
</TABLE>
33
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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, 1994 and 1993 are presented below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1994 1993
---- ----
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Notes receivable, principally due to
allowance for financial reporting
purposes . . . . . . . . . . . . . . . $ 1,268 $ 1,529
Land, principally due to write-downs for
financial reporting purposes . . . . . 2,645 2,991
Property and equipment, principally due
to acquisitions of partnership
interests . . . . . . . . . . . . . . . 13,450 8,307
Expense provisions . . . . . . . . . . . 9,959 8,785
Deferred gain for financial reporting
purposes . . . . . . . . . . . . . . . 316 82
Targeted jobs tax credit carryforwards. . -- 411
Minimum pension liability . . . . . . . . 943 932
Alternative minimum tax credit
carryforwards. . . . . . . . . . . . . . -- 2,781
Other . . . . . . . . . . . . . . . . . . -- 97
------- -------
Total gross deferred tax assets . . . . 28,581 25,915
Less valuation allowance. . . . . . . . -- (277)
------- -------
Net deferred tax assets . . . . . . . . 28,581 25,638
------- -------
Deferred tax liabilities:
Investments in partnerships, principally
due to differences in depreciation and
capitalized interest . . . . . . . . . . (3,356) (3,439)
Property and equipment, principally due
to differences in depreciation and
capitalized interest . . . . . . . . . . (30,367) (25,899)
Deferred gains for tax purposes . . . . . (1,270) (1,251)
Other . . . . . . . . . . . . . . . . . . (70) (5)
------- -------
Total gross deferred tax liabilities. . (35,063) (30,594)
-------- --------
Net deferred tax liability. . . . . . . $ (6,482) $ (4,956)
-------- --------
-------- --------
</TABLE>
In 1994, the valuation allowance decreased $277,000 and in 1993, it decreased
$6,816,000 as a result of partnership acquisitions. 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.
At December 31, 1993, the Company had targeted jobs tax credit carryforwards
for Federal income tax purposes of approximately $411,000 and alternative
minimum tax credit carryforwards of approximately $2,781,000. These credits
have been fully utilized during 1994.
(5) SHAREHOLDERS' EQUITY
The Board of Directors authorized three-for-two stock splits effective in
October 1994, March 1994 and October 1993. Earnings per share, the weighted
average number of shares outstanding, shareholders' equity and the following
information have been adjusted to give effect to each of these distributions.
During 1994, the Company repurchased a total of 373,000 shares (post-split)
of its common stock for approximately $7,115,000 under a plan approved by the
Board of Directors to repurchase up to $10,000,000 of its common stock.
Additional purchases will be made from time to time in the open market as
deemed appropriate by the Company.
The Company's stock option plans cover the granting of options to purchase an
aggregate of 8,036,565 common shares. Options granted under the plans are
issuable to certain officers, employees and Board Members
34
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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.
<TABLE>
<CAPTION>
OPTION TOTAL
NUMBER PRICE RANGE OPTION PRICE
OF SHARES PER SHARE (IN THOUSANDS)
--------- ----------------- ---------------
<S> <C> <C> <C>
Outstanding December 31, 1992 . . . . . . 6,571,433 $ 3.09 -- $ 7.23 $30,547
Granted . . . . . . . . . . . . . . . . 246,375 8.59 -- 9.04 2,189
Canceled or expired . . . . . . . . . . (150,168) 3.50 -- 5.78 (581)
Exercised . . . . . . . . . . . . . . . (366,407) 3.19 -- 7.22 (1,556)
--------- -------
Outstanding December 31, 1993 . . . . . . 6,301,233 $ 3.09 -- $ 9.04 $30,599
Granted . . . . . . . . . . . . . . . . 1,305,377 17.42 -- 24.00 23,762
Canceled or expired . . . . . . . . . . (82,712) 3.50 -- 17.94 (955)
Exercised . . . . . . . . . . . . . . . (1,197,429) 3.19 -- 9.04 (5,472)
---------- -------
Outstanding December 31, 1994 . . . . . . 6,326,469 $ 3.35 -- $24.00 $47,934
========== =======
Exercisable at:
December 31, 1993 . . . . . . . . . . . 3,845,618 $ 3.19 -- $ 5.85 $17,397
========== =======
December 31, 1994 . . . . . . . . . . . 3,872,597 $ 3.35 -- $ 9.04 $18,576
========== =======
Available for future grants at:
December 31, 1993 . . . . . . . . . . . 2,932,761
==========
December 31, 1994 . . . . . . . . . . . 1,710,096
==========
</TABLE>
Upon exercise, the excess of the option price received over the par value of
the shares issued, net of expenses, is credited to additional paid-in capital.
The exercise of non-qualified stock options results in state and federal
income tax benefits to the Company related to the difference between market
price at the date of exercise and the option price. During 1994, 1993 and
1992, $7,480,000, $679,000 and $310,000, respectively was credited to
additional paid-in capital for the tax benefits of options exercised.
In 1993, the Company recognized compensation expense of $4,407,000 related to
performance stock options for the difference between the option price at the
date of grant and a predetermined level of $30 per share (pre-split) when it
became probable that the Company's stock would trade at that predetermined
level. During 1992, the Company recognized $367,000 in compensation expense
for the difference between the market price and option price on date of grant
related to a portion of these options which vested in annual increments.
Currently, the Company has no options outstanding that require recognition of
additional compensation expense.
Under the terms of the La Quinta Development Partners, L.P. ("LQDP" or the
"Development Partnership") partnership agreement, AEW Partners, L.P. ("AEW
Partners") has the ability to convert 66 2/3% of its 60% ownership in the
Development Partnership currently to 5,289,801 shares of the Company's common
stock after giving retroactive effect to the stock splits effected as stock
dividends. Such number of shares is reduced as distributions are made out of
the Development Partnership to AEW Partners. Shares of the Company's common
stock issuable upon conversion of the Development Partnership Units are
antidilutive at December 31, 1994. AEW partner's units in LQDP may be
converted over the seven year period beginning December 31, 1991. As of
December 31, 1994, AEW Partners had not converted any of its ownership in the
Development Partnership into the Company's common stock.
35
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(6) PENSION PLAN AND OTHER
The Retirement Plan and Trust of La Quinta Inns, Inc. (the "Plan") is a
defined benefit pension plan covering all employees. The Plan was amended in
1993 to allow highly compensated employees to rejoin the Retirement Plan as
active participants. Benefits accruing under the Plan are determined
according to a career average benefit formula which is integrated with Social
Security benefits. For each year of service as a participant in the Plan, an
employee accrues a benefit equal to one percent of his or her annual
compensation plus .65 percent of compensation in excess of the Social
Security covered compensation amount. The Company's funding policy for the
Retirement Plan is to annually contribute the minimum amount required by
federal law.
The Supplemental Executive Retirement Plan and Trust ("SERP") continues to
cover a select group of management employees. Benefits under the SERP are
determined by a formula which considers service and total compensation; the
results of the formula-derived benefit are then reduced by the participant's
pension entitlement from the qualified Retirement Plan.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 87 - Employer's Accounting for Pensions, the Company has
recorded an additional minimum liability of $3,945,000 at December 31, 1994.
This liability represents the excess of the accumulated benefit obligation
over the fair value of plan assets and accrued pension liability at the
measurement date. An amount of $1,528,000 was recognized as an intangible
asset to the extent of unrecognized prior service cost and the balance of
$2,417,000 ($1,474,000 net of income tax) is recorded as a reduction of
shareholders' equity.
The following table sets forth the funded status and amounts recognized in
the Company's combined financial statements for the Plan at December 31, 1994
and 1993.
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1993
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $7,067 and $7,947 . . . . . . . . . . . $(10,936) $(12,298)
======== ========
Projected benefit obligation for services rendered
to date . . . . . . . . . . . . . . . . . . . . . . $(12,961) $(15,585)
Plan assets at fair value, primarily marketable
stocks and CDs . . . . . . . . . . . . . . . . . . 6,846 6,727
-------- --------
Projected benefit obligation in excess of plan
assets . . . . . . . . . . . . . . . . . . . . . . (6,115) (8,858)
Unrecognized net loss from past experiences
different from that assumed . . . . . . . . . . . . 4,443 5,677
Prior service costs . . . . . . . . . . . . . . . . 1,528 1,702
Additional minimum liability . . . . . . . . . . . . (3,945) (4,092)
-------- --------
Accrued pension costs . . . . . . . . . . . . . . $ (4,089) $ (5,571)
======== ========
</TABLE>
36
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the funded status of the SERP and amounts
recognized in the Company's financial statements for the SERP:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,188 and $1,851 . . . . . . . . . . . $(1,273) $(1,983)
======== ========
Projected benefit obligation for services rendered
to date . . . . . . . . . . . . . . . . . . . . . . $(3,428) $(3,868)
Unrecognized net gain from past experiences
different from that assumed . . . . . . . . . . . . (78) (208)
Unrecognized net loss from modifications . . . . . . 117 294
------- -------
Accrued pension costs . . . . . . . . . . . . . . $(3,389) $(3,782)
======= =======
</TABLE>
The Company maintains a trust account intended for use in settling
benefits due under the SERP. The SERP funds are invested primarily in equity
investments. At December 31, 1994, the Company had no funds accumulated in
the trust account and at December 31, 1993, the balance was $1,144,000.
Net pension cost includes the following components:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------
1994 1993 1992
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost (benefits earned during the period) . $1,604 $1,564 $1,769
Interest cost on projected benefit obligation . . 1,258 1,207 1,255
Actual return on plan assets . . . . . . . . . . . 228 (38) (72)
Net amortization and deferral . . . . . . . . . . (96) 134 (160)
------ ------ ------
Net periodic pension cost before allocation to
Managed Inns (See note 12) . . . . . . . . . . . 2,994 2,867 2,792
Cost allocated to Managed Inns . . . . . . . . . . (30) (238) (222)
------ ------ ------
Net periodic pension cost . . . . . . . . . . . $2,964 $2,629 $2,570
====== ====== ======
</TABLE>
The assumptions used in the calculations shown above were:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Discount rate (post-termination). . . . 8.50% 7.50% 4.00%-7.50%
Discount rate (pre-termination) . . . . 8.50% 7.50% 8.00%
Expected long-term rate of return
on assets . . . . . . . . . . . . . . 8.00% 8.00% 9.00%
Rate of increase in compensation
levels . . . . . . . . . . . . . . . . 5.00%-6.00% 5.00%-6.00% 5.50%-7.50%
</TABLE>
In addition, to providing pension benefits, the Company has established
a 401(K) Savings Plan and Trust (the "Savings Plan") effective January 1,
1994. The Savings Plan is designed to be a qualified plan under sections 401
and 410 through 417 of the Internal Revenue Code. Under the Savings Plan,
eligible employees are allowed to defer income on a pre-tax basis through
contributions to the Savings Plan and the Company matches a portion of such
contributions. The Company's matching contributions totaled $131,000 in 1994.
37
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(7) 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 in San Antonio and its reservation facilities.
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, 1994 follow:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . $ 2,439
1996 . . . . . . . . . . . . . . . . . . . 2,263
1997 . . . . . . . . . . . . . . . . . . . 2,033
1998 . . . . . . . . . . . . . . . . . . . 1,781
1999 . . . . . . . . . . . . . . . . . . . 1,873
Later years . . . . . . . . . . . . . . . 9,113
-------
Total minimum payments required . . . . . $19,502
=======
</TABLE>
Total rental expense for operating leases was $3,196,000, $2,840,000 and
$1,976,000 for the years ended December 31, 1994, 1993 and 1992, respectively.
LESSOR
The Company leases 114 restaurants it owns to third parties. The leases
are accounted for as operating leases expiring during a period from 1995 to
2016 and provide for minimum rentals and contingent rentals based on a
percentage of annual sales in excess of stipulated amounts. The following is
a summary of restaurant property leased at December 31, 1994.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Buildings . . . . . . . . . . . . . . . . . $33,008
Less: accumulated depreciation . . . . . . 10,189
-------
22,819
Land . . . . . . . . . . . . . . . . . . . 18,171
-------
Total leased property . . . . . . . . . . $40,990
=======
</TABLE>
Minimum future rentals to be received under the noncancelable restaurant
leases in effect at December 31, 1994 follow:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1995 . . . . . . . . . . . . . . . . . . . $ 6,328
1996 . . . . . . . . . . . . . . . . . . . 6,275
1997 . . . . . . . . . . . . . . . . . . . 6,171
1998 . . . . . . . . . . . . . . . . . . . 6,006
1999 . . . . . . . . . . . . . . . . . . . 5,593
Later years . . . . . . . . . . . . . . . 25,046
-------
$55,419
=======
</TABLE>
Contingent rental income amounted to $1,025,000, $811,000 and $854,000
for the years ended December 31, 1994, 1993 and 1992, respectively.
38
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(8) NON-RECURRING, CASH AND NON-CASH CHARGES
During 1992, the Company recognized charges of $39,751,000 ($27,946,000 net
of income taxes and partners' equity) resulting from certain changes made in
the Company's operations and organization based on a review by the Company's
senior management team.
Of those charges, $28,383,000 related to the write-down of certain joint
venture interests, land, computer equipment, and other assets. During the
third quarter of 1992, the senior management team re-evaluated the Company's
investments in joint venture arrangements and shortly thereafter completed
negotiations that resulted in amendments to the agreements related to certain
joint venture arrangements and the write-down of the Company's investments in
those ventures. The write-down of the land, computer equipment and other
assets resulted primarily from the Company's decisions to sell certain land
that had previously been held for future development and to replace the
Company's existing computer systems and certain other assets.
In addition, the Company recognized $6,936,000 in the year ended December
31, 1992, in severance and other employee related charges. Those charges
related to severance benefits for certain terminated employees, costs of hiring
and relocating new management and other employee related costs resulting from
personnel changes.
The remaining $4,432,000 of the charges recognized in 1992 consisted of a
$2,696,000 increase in the allowance for certain notes receivable related to
inns sold by the Company prior to 1985, a $1,214,000 adjustment to reallocate
losses of a joint venture to the Company as a result of settlement
negotiations, a $312,000 write-off of equipment and $210,000 related to other
corporate expense items.
(9) COMMITMENTS
In accordance with the unincorporated partnership or joint venture
agreements executed by the Company, La Quinta is committed to advance funds
necessary to cover operating expenses of joint ventures. Three unincorporated
partnerships and joint ventures executed promissory notes in which the
Company guaranteed to fund amounts not to exceed $740,000 in aggregate.
The estimated additional cost to complete the conversion and renovation of
inns for which commitments have been made is $4,000,000 at December 31, 1994.
Funds on hand, committed and anticipated from cash flow are sufficient to
complete these projects.
Under the terms of a Partnership agreement between the Company and AEW
Partners, the Company maintains a reserve for renovating, remodeling and
conversion of the inns in the Development Partnership based on 5% of gross
room revenue of the Partnership which includes certain amounts required by
loan agreements. At December 31, 1994 and 1993 the Company had $900,000 and
$3,833,000, respectively, of restricted cash which is classified as
investments.
In accordance with the requirements of an escrow agreement related to a pool
of mortgage notes executed by the Company and a third party lender, the
Company is required to make annual deposits into an escrow account for the
purpose of establishing a reserve for the replacement of furnishings,
fixtures and equipment used on or incorporated into the mortgaged properties.
The Company shall be relieved of its obligation to make such annual deposits
for any year in which the escrow account has an aggregate balance of
$2,431,000. At December 31, 1994 and 1993, the Company had reserved the
full amount.
(10) CONTINGENCIES
LITIGATION
In September 1993, a former officer of the Company filed suit against the
Company and certain of its directors and their affiliate companies (the "La
Quinta Defendants"). The suit alleges breach of an employment agreement,
misrepresentation, wrongful termination, self-dealing, breach of fiduciary
duty, usurpation of corporate opportunity and tortious interference with
contractual relations. Compensatory damages of $2,500,000 and
39
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
exemplary damages of $5,000,000 are sought in the action. The Court has pending
before it the La Quinta Defendants' motion for summary judgment. The parties
subsequently filed a required, joint Pre Trial Order, in which the plaintiff
has conceded a number of his claims. Currently, no trial date has been set
for this action. The Company is vigorously defending against this suit.
The Company is also party to various lawsuits and claims generally incidental
to its business. The ultimate disposition of these and the above discussed
matter are not expected to have a significant adverse effect on the Company's
financial position or results of operations.
SEVERANCE AND EMPLOYMENT AGREEMENTS
The Company has entered into a five year employment agreement which includes
a severance provision granting an executive the right to receive certain
benefits, including among others, his annual base salary and bonus if there
occurs a termination (as defined in the respective agreement) within the five
year term of the agreement, or resignation (as defined in the agreement).
The maximum contingent liability under the severance provision of this
agreement is approximately $1,627,000.
(11) QUARTERLY FINANCIAL DATA (UNAUDITED)
The unaudited combined results of operations by quarter are summarized below:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in Thousands, except per share data)
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Revenues . . . . . . . . . . . $78,264 $92,542 $104,364 $87,072
Operating income . . . . . . . 20,277 30,352 35,932 24,196
Net earnings . . . . . . . . . 5,542 11,280 14,011 6,982
Earning per share . . . . . . $ .12 $ .23 $ .29 $ .14
Year ended December 31, 1993:
Revenues . . . . . . . . . . . $60,607 $70,633 $ 76,923 $63,687
Operating income . . . . . . . 16,491 19,446 26,887 12,543
Net earnings before
extraordinary items and
cumulative effect of
accounting change . . . . . . 4,144 2,692 10,012 2,573
Net earnings . . . . . . . . . 5,644 3,634 9,711 1,312
Earnings per share before
extraordinary items and
cumulative effect of
accounting change . . . . . . .09 .06 .21 .05
Earnings per share . . . . . . $ .12 $ .08 $ .20 $ .03
Year Ended December 31, 1992
Revenues . . . . . . . . . . . $57,815 $66,991 $ 72,286 $57,030
Operating income (loss) . . . 12,150 17,709 (7,596) 12,312
Earnings (loss) before
extraordinary items . . . . . 1,410 4,545 (16,392) 2,641
Net earnings (loss) . . . . . 1,035 4,348 (16,392) 2,255
Earnings (loss) per share
before extraordinary items . .03 .10 (.36) .06
Earnings (loss) per share . . $ .02 $ .10 $ (.36) $ .05
</TABLE>
In the fourth quarter of 1993, the Company recorded an adjustment of
$1,273,000 ($777,000 net of income taxes) to decrease its expense related to
the self-insurance program for major medical and hospitalization coverage due
to decreases in actual claims and estimates of incurred but not reported
claims.
40
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The decrease in net earnings in the second quarter of 1993 is primarily a
result of $4,407,000 in performance stock option expense related to the
vesting of certain contingent stock options, that became exercisable in May
1993. This expense was partially offset by an increase in operating income.
The loss in the third quarter of 1992 resulted from charges of $26,908,000,
net of income taxes and partners' equity which resulted from a review of the
Company's operations and organization, as described in note 8 of these
Combined Financial Statements.
(12) RELATED PARTY TRANSACTIONS
MANAGEMENT SERVICES FEE
All inns owned by LQP (through November 30, 1993) and by the two joint
ventures ("CIGNA") between the Company and investment partnerships managed by
CIGNA Investments, Inc. (through June 30, 1994) (collectively the "Managed
Inns") operated under the La Quinta name and were managed by the Company in
accordance with long-term management agreements. The Company earned
management and licensing fees as well as fees for chain services such as
bookkeeping, national advertising and reservations.
OTHER RECURRING TRANSACTIONS
La Quinta pays all direct operating expenses on behalf of the partnerships
and joint ventures and is reimbursed for all such payments.
EMPLOYMENT AGREEMENT
In October 1991, the Company and its Chairman of the Board entered into an
Employment Agreement (the "Employment Agreement"), providing for his
employment as the Chairman of the Board of the Company for five years from
the date thereof. As a result of changes in management and reorganization of
duties, the remaining compensation of $1,760,000 related to this Employment
Agreement was included in the 1992 non-recurring cash and non-cash charges,
described in note 8 to these Combined Financial Statements. In March 1994,
the Chairman retired from the Company and resigned from the Board of
Directors and received certain compensation and benefits as defined in the
Employment Agreement.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the value of each
class of financial instruments for which it is practical to estimate that
value:
NOTES RECEIVABLE
The carrying value for notes receivable approximates the
fair value based on the estimated underlying value of the collateral.
INVESTMENTS
The fair value of some investments is estimated based on quoted
market prices for these or similar investments. For other securities, the
carrying amount is a reasonable estimate of fair value.
LONG-TERM DEBT
The fair value of the Company's long-term debt is estimated based on the
current market prices for the same or similar issues or on the current rates
available to the Company for debt of the same maturities.
INTEREST RATE SWAP AGREEMENTS
The fair value of interest rate swap agreements represents the estimated
amount the Company would receive (pay) to terminate the agreements, taking
into consideration current interest rates and the current creditworthiness of
the counterparties (See Note 2).
41
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
The estimated fair values of the Company's financial instruments are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------ -----------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
(in thousands)
Notes receivable . . . . . . . . . . . . . . . . $ 7,320 $ 7,320 $ 7,683 $ 7,683
Investments . . . . . . . . . . . . . . . . . . . 2,647 2,647 6,583 6,583
Long-term debt, including current
installments and related letters of credit. . . . (488,234) (480,758) (436,495) (447,580)
Interest rate swap agreements
in a net (payable) receivable position . . . . . (32) 494 (114) (2,276)
</TABLE>
(14) ACQUISITION OF PARTNERS' INTERESTS
On January 24, 1994, the Company concluded the acquisition of La Quinta
Motor Inns Limited Partnership ("the Partnership or LQP") as discussed below.
Additionally, in July 1994, the Company purchased nine La Quinta inns
previously held by CIGNA and during the second quarter of 1994, the Company
purchased the limited partners' interest in one of the Company's combined
unincorporated joint ventures which owned one inn. The aggregate purchase
price of these transactions was $53,255,000 of which a portion was financed
through the Company's amended Secured Line of Credit and Secured Term Credit
Facility.
On October 27, 1993, the Company entered into a definitive Partnership
Acquisition Agreement (the "Merger Agreement") with LQP and other parties,
pursuant to which the Company, through wholly-owned subsidiaries, would
acquire all units of the Partnership (the "Units") that it did not
beneficially own at a price of $13.00 net per Unit in cash. The Merger
Agreement provided for a tender offer (the "Offer") for all of the
Partnership's outstanding Units at a price of $13.00 net per Unit in cash,
which Offer commenced on November 1, 1993 and expired at midnight on November
30, 1993. The Offer resulted in the purchase of 2,805,190 Units (approximately
70.6% of the outstanding Units) by the Company through its wholly-owned
subsidiary, LQI Acquisition Corporation. As a result of a contribution of
additional units previously owned by the Company subsequent to the Offer, LQI
Acquisition Corporation beneficially owned 3,257,890 Units (approximately 82%
of the Units) at December 31, 1993. Pursuant to the Merger Agreement, a
Special Meeting of Unitholders was then held on January 24, 1994 to approve the
merger of a subsidiary of LQI Acquisition Corporation with and into the
Partnership, with the Partnership as the surviving entity. As a result of this
merger which was approved by the requisite vote of Unitholders on January 24,
1994, all of the Partnership's outstanding Units other than Units owned by the
Company or any direct or indirect subsidiary of the Company were converted into
the right to receive $13.00 net in cash without interest. The acquisition has
been accounted for as a purchase and the results of LQP's operations have been
included in the Company's combined results of operations since December 1,
1993.
LQI Acquisition Corporation obtained funds to acquire the Units as a result
of a capital contribution by La Quinta. In order to make such a capital
contribution to LQI Acquisition Corporation, the Company borrowed approximately
$45.9 million under its existing credit facility as more fully described
in Note 2.
During 1993, the Company purchased in separately negotiated transactions,
the limited partners' interests in 14 of the Company's combined unincorporated
partnerships and joint ventures, which own 44 inns, for an aggregate price of
$87,897,000 which included cash at closing, the assumption of $22,824,000 of
existing debt attributable to the limited partners' interest, and $29,878,000
of notes to the sellers. The Company was the general partner and owned the
remainder of the ownership interests in each of these partnerships and
ventures. The Company intends to continue to operate the properties as La
Quinta inns.
The following unaudited pro forma information reflects the combined results
of operations of the Company as if the 1993 acquisitions of the 82% interest in
LQP and the limited partners' interests in the 14 combined partnerships and
joint ventures had occurred at the beginning of 1993 and 1992. The pro forma
42
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
information gives effect to certain adjustments, including additional
depreciation expense on property and equipment based on their fair values,
increased interest expense on additional debt incurred, elimination of related
party revenues and expenses, and extraordinary losses on early extinguishment
of debt. The pro forma results are not necessarily indicative of operating
results that would have occurred had the acquisitions been consummated as of
the beginning of 1993 and 1992, nor are they necessarily indicative of future
operating results.
(UNAUDITED)
<TABLE>
<CAPTION>
December 31
-------------------------------------
1993 1992
---- ----
(in thousands, except per share data)
<S> <C> <C>
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $308,290 $291,477
========= =========
Earnings (loss) before extraordinary items and cumulative effect
of accounting change . . . . . . . . . . . . . . . . . . . . . . . . $ 19,448 $ (8,133)
========= =========
Net earnings (loss). . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,738 $(10,171)
========= =========
Earnings (loss) per share. . . . . . . . . . . . . . . . . . . . . . . $ 0.44 $ (0.22)
========= =========
</TABLE>
43
<PAGE>
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, 1994 and 1993 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, 1994. 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, 1994 and 1993 and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1994, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the combined financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 109
in 1993.
KPMG PEAT MARWICK LLP
San Antonio, Texas
January 23, 1995
44
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) DIRECTORS OF REGISTRANT
There is incorporated in this Item 10 by reference that portion of the
Company's definitive Proxy Statement, dated on or about April 14, 1995, which
Registrant intends to file not later than 120 days after the end of the
fiscal year covered by this Form 10-K, appearing under the captions
"Election of Directors," and "Meetings and Committees of the Board of
Directors."
(B) EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information is set forth below concerning the executive officers of
the Company, each of whom has been elected to serve until the regular annual
meeting of the Board of Directors following the next Annual Meeting of
Shareholders and until his/her successor is duly elected and qualified.
<TABLE>
<S> <C> <C>
Gary L. Mead 47 President and Chief Executive Officer and Director
Michael A. Depatie 38 Sr. Vice President - Finance, Chief Financing Officer
William C. Hammett, Jr. 48 Sr. Vice President - Accounting & Administration
Thomas W. Higgins 47 Sr. Vice President - Operations
R. John Kaegi 46 Sr. Vice President - Marketing
Steven T. Schultz 48 Sr. Vice President - Development
John F. Schmutz 47 Vice President - General Counsel and Secretary
</TABLE>
Gary L. Mead has been Director, President and Chief Executive Officer of
the Company since March 1992. He served as Executive Vice President - Finance
of Motel 6 G.P., Inc., the managing general partner of Motel 6, L.P., from
October 1987 to January 1991.
Michael A. Depatie has been Senior Vice President - Finance, Chief
Financing Officer of the Company since July 1992. He served as Senior Vice
President, Summerfield Hotel from May 1989 to July 1992. He served as
Managing General Partner of PacWest Capital Partners from April 1988 to April
1989. He served as Vice President - Finance of The Residence Inn Company from
July 1984 to July 1986 and Senior Vice President - Finance from July 1986 to
March 1988.
William C. Hammett, Jr. has been Senior Vice President - Accounting and
Administration since June 1992. He served as Executive Vice President -
Finance of Motel 6 G.P., Inc., from February 1991 to June 1992. He served as
Vice President-Controller of Motel 6 G.P., Inc. from September 1988 to
February 1991. He served as Controller of Spartan Food Systems from August
1973 to September 1988.
Thomas W. Higgins has been Senior Vice President - Operations of the
Company since September 1992. He served as Vice President - Human Resources
of the Company from June 1992 to September 1992. He served as Vice President
- - Human Resources of Motel 6 G.P., Inc. from May 1988 to June 1992. He served
as Director of Training/Employment of General Mills from October 1986 to May
1988.
R. John Kaegi has been Senior Vice President - Marketing of the Company
since July 1992. He served as Senior Vice President - Marketing and Strategic
Planning of KinderCare Learning Centers, Inc. from December 1989 to July 1992.
He served as Vice President - Marketing of KinderCare Learning Centers, Inc.
from July 1987 to December 1989. He served as Director Field Marketing of
Holiday Inns, Inc. from November 1985 to July 1987.
Steven T. Schultz has been Senior Vice President - Development of the
Company since June 1992. He served as Senior Vice President - Development of
Embassy Suites from October 1986 to June 1992.
John F. Schmutz has been Vice President - General Counsel and Secretary
of the Company since June 1992. He served as Vice President - General Counsel
of Sbarro, Inc. from May 1991 to June 1992. He served as Vice President -
Legal of Hardee's Food Systems, Inc. from April 1983 to May 1991.
45
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
There are incorporated in this Item 11 by reference those portions of
the Company's definitive Proxy Statement, dated on or about April 14, 1995,
which Registrant intends to file not later than 120 days after the end of the
fiscal year covered by this Form 10-K, appearing under the captions
"Executive Compensation," "Compensation Pursuant to Plans," "Other
Compensation," "Compensation of Directors," and "Termination of
Employment and Change of Control Arrangements."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are incorporated in this Item 12 by reference those portions of
the Company's definitive Proxy Statement, dated on or about April 14, 1995,
which Registrant intends to file not later than 120 days after the end of the
fiscal year covered by this Form 10-K, appearing under the captions
"Principal Shareholders" and "Security Ownership of Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated in this Item 13 by reference that portion of the
Company's definitive Proxy Statement, dated on or about April 14, 1995, which
Registrant intends to file not later than 120 days after the end of the
fiscal year covered by this Form 10-K, appearing under the caption "Certain
Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<S> <C>
(1) Financial Statements
The Combined Financial Statements of the Company appearing in Item 8
are as follows:
Combined Balance Sheets at December 31, 1994 and 1993
Combined Statements of Operations for the years ended December 31,
1994, 1993 and 1992
Combined Statements of Shareholders' Equity for
the years ended December 31, 1994, 1993 and 1992
Combined Statements of Cash Flows for the years ended December 31,
1994, 1993 and 1992
Notes to Combined Financial Statements
Independent Auditors' Report on financial statements
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
regulation to the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and have been
omitted.
(3) The following exhibits are filed as a part of this Report:
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc., as
amended on May 21, 1993. (8)
(3)(b) Amended and Restated By-Laws of La Quinta Inns, Inc. (1)
(10)(a) La Quinta Inns, Inc. 1978 Non-Qualified Stock Option Plan, as
amended. (2)
(10)(b) La Quinta Inns, Inc. 1984 Stock Option Plan. (3)
(10)(c) Amendment No. 1 to La Quinta Inns, Inc. 1984 Stock Option Plan. (4)
(10)(d) Amendment No. 2 to La Quinta Inns, Inc. 1984 Stock Option Plan. (5)
46
<PAGE>
<S> <C>
(10)(e) Amended and Restated La Quinta Inns, Inc. 1984 Stock Option Plan, as
of November 21, 1991. (1)
(10)(f) La Quinta Development Partners, L.P. Amended and Restated Agreement
of Limited Partnership, dated March 21, 1990, by and between
Registrant and AEW Partners, L.P. (6)
(10)(g) La Quinta Development Partners, L.P. Contribution Agreement, dated
March 21, 1990, by and between Registrant and AEW Partners, L.P. (6)
(10)(h) Management and Development Agreement by and between Registrant and
La Quinta Development Partners, L.P., dated March 21, 1990. (6)
(10)(i) Supplemental Executive Retirement Plan and Trust Agreement of
Registrant, dated April 20, 1990, by and between Registrant and Frost
National Bank. (7)
(10)(j) La Quinta Inns, Inc. Deferred Compensation Plan, effective June 1,
1987. (7)
(10)(k) Form of Bonus Agreement dated February 22, 1991, by and between
Registrant and each of Messrs. Sam Barshop, David B. Daviss, Alan L.
Tallis and Francis P. Bissaillon. (7)
(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. (7)
(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. (7)
(10)(n) Registration Rights Agreement, dated as of July 31, 1991 by and
between Registrant and Sam Barshop and his wife, Ann Barshop. (1)
(10)(o) Employment Agreement, dated as of October 1, 1991, by and between
Registrant and Sam Barshop. (1)
(10)(p) Employment Agreement, dated as of March 3, 1992, by and between
Registrant and Gary L. Mead. (1)
(10)(q) Non-Qualified Stock Option Agreement, dated as of March 3, 1992,
between Registrant and Gary L. Mead. (1)
(10)(r) Registration Rights Agreement, dated as of March 3, 1992, between
Registrant and Gary L. Mead. (1)
(10)(s) Second Amended and Restated Master Convenant Agreement dated June 15,
1993. (8)
(10)(t) $126,795,786.64 Credit Agreement dated June 15, 1993. (8)
(10)(u) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4% Senior
Subordinated Notes due 2003. (8)
(10)(v) Partnership Acquisition Agreement dated October 27, 1993, among the
Partnership, the General Partner, La Quinta, LQI Acquisition Corpora-
tion and LQI Merger Corporation. (9)
(10)(w) $241,844,955.21 Amended and Restated Credit Agreement Among La Quinta
Inns, Inc. Certain lenders and NationsBank of Texas, N.A. as Adminis-
trative Lender dated January 25, 1994. (10)
(10)(x) Third Amended and Restated Master Covenant Agreement dated as of
January 25, 1994. (10)
(11) Statement regarding computation of per share earnings filed herewith.
(21) Subsidiaries of La Quinta Inns, Inc. as of February 28, 1995 filed
herewith.
47
<PAGE>
<S> <C>
(22) Registrant's definitive Proxy Statement, dated on or about April 14,
1995, to be filed by Registrant within 120 days after the end of the
fiscal year covered by the Registrant's Form 10-K.
(23) Consent by KPMG Peat Marwick LLP dated March 10, 1995 to incorpor-
ation by reference of their reports dated January 23, 1995, in
various Registration Statements filed herewith.
(24) Powers of Attorney filed herewith.
(27) Financial Data Schedule filed herewith.
<FN>
(1) Previously filed as an exhibit to the Registrant's Registration Statement
on Form 10-K for the year ended December 31, 1991 and incorporated herein
by reference.
(2) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 2-65645) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Registration Statement
on Form 10-K for the year ended May 31, 1984 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 2-97266) and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Registration Statement
and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Registration Statement
for the Transition Period Report on Form 10-K for the seven months ended
December 31, 1989 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, 1990 and incorporated herein
by reference.
(8) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10-Q for the period ended June 30, 1993.
(9) Previously filed to the Registrant's Schedule 14D-1 filed November 1,
1993.
(10) 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.
</TABLE>
(b) Reports on Form 8-K.
Not applicable.
48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
LA QUINTA INNS, INC.
(Registrant)
By: /s/ William C. Hammett, Jr.
------------------------------------
William C. Hammett, Jr.
Senior Vice President
Chief Accounting Officer
By: /s/ Michael A. Depatie
------------------------------------
Michael A. Depatie
Senior Vice President
Chief Financing Officer
Date: March 15, 1995
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GARY L. MEAD*
- ------------------------------- President and Chief Executive Officer,
Gary L. Mead Director
/s/ WILLIAM C. HAMMETT, JR.
- ------------------------------- Sr. Vice President - Accounting and
William C. Hammett, Jr . Administration
/s/ MICHAEL A. DEPATIE
- ------------------------------- Sr. Vice President - Finance, Chief
Michael A. Depatie Financing Officer
/s/ THOMAS M. TAYLOR*
- ------------------------------- Chairman of the Board
Thomas M. Taylor
/s/ JOSEPH F. AZRACK*
- ------------------------------- Director
Joseph F. Azrack
/s/ WILLIAM H. CUNNINGHAM*
- ------------------------------- Director
William H. Cunningham
/s/ BARRY K. FINGERHUT*
- ------------------------------- Director
Barry K. Fingerhut
/s/ DONALD J. MCNAMARA*
- ------------------------------- Director
Donald J. McNamara
/s/ PETER STERLING*
- ------------------------------- Director
Peter Sterling
*By: /s/ WILLIAM C. HAMMETT, JR.
----------------------------
William C. Hammett, Jr.
ATTORNEY-IN-FACT
</TABLE>
Date: March 15, 1995
49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc., as
amended on May 21, 1993. (8)
(3)(b) Amended and Restated By-Laws of La Quinta Inns, Inc. (1)
(10)(a) La Quinta Inns, Inc. 1978 Non-Qualified Stock Option Plan, as
amended. (2)
(10)(b) La Quinta Inns, Inc. 1984 Stock Option Plan. (3)
(10)(c) Amendment No. 1 to La Quinta Inns, Inc. 1984 Stock Option Plan. (4)
(10)(d) Amendment No. 2 to La Quinta Inns, Inc. 1984 Stock Option Plan. (5)
(10)(e) Amended and Restated La Quinta Inns, Inc. 1984 Stock Option Plan, as
of November 21, 1991. (1)
(10)(f) La Quinta Development Partners, L.P. Amended and Restated Agreement
of Limited Partnership, dated March 21, 1990, by and between
Registrant and AEW Partners, L.P. (6)
(10)(g) La Quinta Development Partners, L.P. Contribution Agreement, dated
March 21, 1990, by and between Registrant and AEW Partners, L.P. (6)
(10)(h) Management and Development Agreement by and between Registrant and
La Quinta Development Partners, L.P., dated March 21, 1990. (6)
(10)(i) Supplemental Executive Retirement Plan and Trust Agreement of
Registrant, dated April 20, 1990, by and between Registrant and Frost
National Bank. (7)
(10)(j) La Quinta Inns, Inc. Deferred Compensation Plan, effective June 1,
1987. (7)
(10)(k) Form of Bonus Agreement dated February 22, 1991, by and between
Registrant and each of Messrs. Sam Barshop, David B. Daviss, Alan L.
Tallis and Francis P. Bissaillon. (7)
(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. (7)
(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. (7)
(10)(n) Registration Rights Agreement, dated as of July 31, 1991 by and
between Registrant and Sam Barshop and his wife, Ann Barshop. (1)
(10)(o) Employment Agreement, dated as of October 1, 1991, by and between
Registrant and Sam Barshop. (1)
(10)(p) Employment Agreement, dated as of March 3, 1992, by and between
Registrant and Gary L. Mead. (1)
(10)(q) Non-Qualified Stock Option Agreement, dated as of March 3, 1992,
between Registrant and Gary L. Mead. (1)
(10)(r) Registration Rights Agreement, dated as of March 3, 1992, between
Registrant and Gary L. Mead. (1)
(10)(s) Second Amended and Restated Master Convenant Agreement dated June 15,
1993. (8)
(10)(t) $126,795,786.64 Credit Agreement dated June 15, 1993. (8)
(10)(u) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4% Senior
Subordinated Notes due 2003. (8)
(10)(v) Partnership Acquisition Agreement dated October 27, 1993, among the
Partnership, the General Partner, La Quinta, LQI Acquisition Corpora-
tion and LQI Merger Corporation. (9)
<PAGE>
Exhibit
Number Description of Exhibit
- ------ ----------------------
<S> <C>
(10)(w) $241,844,955.21 Amended and Restated Credit Agreement Among La Quinta
Inns, Inc. Certain lenders and NationsBank of Texas, N.A. as Adminis-
trative Lender dated January 25, 1994. (10)
(10)(x) Third Amended and Restated Master Covenant Agreement dated as of
January 25, 1994. (10)
(11) Statement regarding computation of per share earnings filed herewith.
(21) Subsidiaries of La Quinta Inns, Inc. as of February 28, 1995 filed
herewith.
(22) Registrant's definitive Proxy Statement, dated on or about April 14,
1995, to be filed by Registrant within 120 days after the end of the
fiscal year covered by the Registrant's Form 10-K.
(23) Consent by KPMG Peat Marwick LLP dated March 10, 1995 to incorpor-
ation by reference of their reports dated January 23, 1995, in
various Registration Statements filed herewith.
(24) Powers of Attorney filed herewith.
(27) Financial Data Schedule filed herewith.
<FN>
(1) Previously filed as an exhibit to the Registrant's Registration Statement
on Form 10-K for the year ended December 31, 1991 and incorporated herein
by reference.
(2) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 2-65645) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Registration Statement
on Form 10-K for the year ended May 31, 1984 and incorporated herein by
reference.
(4) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-8 (No. 2-97266) and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Registration Statement
and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Registration Statement
for the Transition Period Report on Form 10-K for the seven months ended
December 31, 1989 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, 1990 and incorporated herein
by reference.
(8) Previously filed as an exhibit to Registrant's Registration Statement on
Form 10-Q for the period ended June 30, 1993.
(9) Previously filed to the Registrant's Schedule 14D-1 filed November 1,
1993.
(10) 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.
</TABLE>
<PAGE>
EXHIBIT 11
EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Earnings (loss) before income
taxes, extraordinary items
and cumulative effect of
accounting change . . . . . . . . $61,991,000 $31,836,000 $(7,270,000)
Income taxes . . . . . . . . . . . 24,176,000 12,416,000 526,000
---------- ---------- ----------
Earnings (loss) before
extraordinary items and
cumulative effect of
accounting change . . . . . . . . . 37,815,000 19,420,000 (7,796,000)
Extraordinary items, net of
income taxes . . . . . . . . . . . . - (619,000) (958,000)
Cumulative effect of accounting
change . . . . . . . . . . . . . . . - 1,500,000 -
---------- ---------- -----------
Net earnings (loss) . . . . . . . . . . $37,815,000 $20,301,000 $(8,754,000)
========== ========== ==========
Weighted average common and common
equivalent shares . . . . . . . . . . 48,624,000 47,306,000 45,302,000
========== ========== ==========
Earnings (loss) per common and
common equivalent share:
Earnings (loss) before extraordinary
items and cumulative effect of
accounting change . . . . . . . . . $.78 $.41 $(.17)
Extraordinary items, net of
income taxes . . . . . . . . . . . - (.01) (.02)
Cumulative effect of accounting
change . . . . . . . . . . . . . . - .03 -
----- ----- ------
Net earnings (loss) . . . . . . . . $.78 $.43 $(.19)
===== ===== =======
Weighted average common shares-
assuming full dilution . . . . . . . 48,687,000 47,480,000 45,377,000
========== ========== ==========
Earnings (loss) before
extraordinary items and
cumulative effect of
accounting change . . . . . . . . . . $.78 $.41 $(.17)
Extraordinary items, net of
income taxes . . . . . . . . . . . - (.01) (.02)
Cumulative effect of
accounting change . . . . . . . . . - .03 -
----- ----- -----
Net earnings (loss) . . . . . . . . $.78 $.43 $(.19)
===== ===== =====
</TABLE>
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF LA QUINTA INNS, INC.
("THE COMPANY")
AS OF FEBRUARY 28, 1995
The Company has eight (8) active wholly-owned corporate subsidiaries which
are:
1. La Quinta Financial Corporation, a Texas corporation;
2. La Quinta Realty Corp., a Texas corporation;
3. La Quinta Investments, Inc., a Delaware corporation;
4. LQI Acquisition Corporation, a Delaware corporation;
5. La Quinta Plaza, a Texas corporation;
6. La Quinta Inns de Mexico S.A. de C.V., a Mexico corporation;
7. La Quinta Inns of Lubbock, Inc., a Texas Corporation; and
8. LQI of Puerto Rico, a Delaware corporation.
The following are unincorporated partnerships and joint ventures (general and
limited partnerships) of the Company as of February 28, 1995.
<TABLE>
<CAPTION>
PERCENTAGE OF
OWNERSHIP OF
ENTITY THE COMPANY
- ------ ------------
<S> <C>
La Quinta Development Partners, L.P. 40.0%
La Quinta-Dallas Central Expressway, Ltd. 64.8%
La Quinta-Austin Motor Hotel, Ltd. 66.7%
La Quinta Houston I.H. 10, Ltd. 50.0%
La Quinta-San Antonio South Joint Venture 50.0%
LQ Motor Inn Venture-Austin No. 530 50.0%
La Quinta-Wichita, Kansas No. 532, Ltd. 50.0%
LQ-West Bank Joint Venture 1982 60.0%
LQ-Baton Rouge Joint Venture 100%
San Antonio Main Avenue Motel, Ltd. 66.7%
LQ-LNL Limited Partnership 100%
LQM Operating Partners, L.P. 100%
La Quinta Denver-Peoria Street, Ltd. 100%
LQ-Big Apple Joint Venture 100%
LQ-East Irvine Joint Venture 100%
La Quinta Motor Inns, Limited Partnership 100%
LQ Investments I 100%
LQ Investments II 100%
The Company is the sole general partner of managing partner of all of the
partnerships listed above.
</TABLE>
<PAGE>
EXHIBIT 23
The Board of Directors
La Quinta Inns, Inc.:
We consent to incorporation by reference in the registration statements
(No. 33-26470, No. 2-97266, No. 2-67606, No. 2-65645, No. 2-55102, and
No. 22-588666) on Form S-8 and (No. 2-65645) on Form S-16 of La Quinta Inns,
Inc. of our report dated January 23, 1995 relating to the combined balance
sheets of La Quinta Inns, Inc. as of December 31, 1994 and 1993, 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, 1994.
Our report refers to the adoption of Statement of Financial Accounting
Standards No. 109 in 1993 which report appears in the December 31, 1994
annual report on Form 10-K of La Quinta Inns, Inc.
KPMG PEAT MARWICK LLP
San Antonio, Texas
March 10, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JOHN F. SCHMUTZ, IRENE C.
PRIMERA AND WILLIAM C. HAMMETT, JR., and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and capacities, to sign the
Annual Report on Form 10-K for the fiscal year ended December 31, 1994 of
La Quinta Inns, Inc. and any or all amendments thereto and to file same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes that they might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ THOMAS M. TAYLOR
-------------------------
Thomas M. Taylor
Dated: February 23, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JOHN F. SCHMUTZ, IRENE C.
PRIMERA AND WILLIAM C. HAMMETT, JR., and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and capacities, to sign the
Annual Report on Form 10-K for the fiscal year ended December 31, 1994 of
La Quinta Inns, Inc. and any or all amendments thereto and to file same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes that they might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ JOSEPH F. AZRACK
-------------------------
Joseph F. Azrack
Dated: March 1, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JOHN F. SCHMUTZ, IRENE C.
PRIMERA AND WILLIAM C. HAMMETT, JR., and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and capacities, to sign the
Annual Report on Form 10-K for the fiscal year ended December 31, 1994 of
La Quinta Inns, Inc. and any or all amendments thereto and to file same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes that they might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ WILLIAM C. CUNNINGHAM
-------------------------
William C. Cunningham
Dated: February 23, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JOHN F. SCHMUTZ, IRENE C.
PRIMERA AND WILLIAM C. HAMMETT, JR., and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and capacities, to sign the
Annual Report on Form 10-K for the fiscal year ended December 31, 1994 of
La Quinta Inns, Inc. and any or all amendments thereto and to file same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes that they might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ BARRY K. FINGERHUT
-------------------------
Barry K. Fingerhut
Dated: February 23, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JOHN F. SCHMUTZ, IRENE C.
PRIMERA AND WILLIAM C. HAMMETT, JR., and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and capacities, to sign the
Annual Report on Form 10-K for the fiscal year ended December 31, 1994 of
La Quinta Inns, Inc. and any or all amendments thereto and to file same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes that they might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ DONALD J. MCNAMARA
-------------------------
Donald J. McNamara
Dated: February 23, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JOHN F. SCHMUTZ, IRENE C.
PRIMERA AND WILLIAM C. HAMMETT, JR., and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and capacities, to sign the
Annual Report on Form 10-K for the fiscal year ended December 31, 1994 of
La Quinta Inns, Inc. and any or all amendments thereto and to file same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes that they might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ PETER STERLING
-------------------------
Peter Sterling
Dated: February 23, 1995
<PAGE>
POWER OF ATTORNEY
The undersigned hereby constitutes and appoints JOHN F. SCHMUTZ, IRENE C.
PRIMERA AND WILLIAM C. HAMMETT, JR., and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him in his name, place and stead, in any and capacities, to sign the
Annual Report on Form 10-K for the fiscal year ended December 31, 1994 of
La Quinta Inns, Inc. and any or all amendments thereto and to file same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully
to all intents and purposes that they might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
/s/ GARY L. MEAD
-------------------------
Gary L. Mead
Dated: February 23, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the combined
financial statements for the year ended December 31, 1994 and is qualified in
its entirety by reference to such financial statement.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,589
<SECURITIES> 0
<RECEIVABLES> 23,660
<ALLOWANCES> 3,792
<INVENTORY> 0
<CURRENT-ASSETS> 31,036
<PP&E> 1,042,312
<DEPRECIATION> 252,372
<TOTAL-ASSETS> 845,781
<CURRENT-LIABILITIES> 94,068
<BONDS> 488,234
<COMMON> 4,876
0
0
<OTHER-SE> 184,355
<TOTAL-LIABILITY-AND-EQUITY> 845,781
<SALES> 0
<TOTAL-REVENUES> 362,242
<CGS> 0
<TOTAL-COSTS> 194,894
<OTHER-EXPENSES> 37,977
<LOSS-PROVISION> 906
<INTEREST-EXPENSE> 38,860
<INCOME-PRETAX> 61,991
<INCOME-TAX> 24,176
<INCOME-CONTINUING> 37,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,815
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
</TABLE>
