<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 033-60295
P R O S P E C T U S
4,850,000 Shares
[LOGO]
La Quinta Inns, Inc.
Common Stock
---------
All of the shares of Common Stock, par value $0.10 per share, of La Quinta
Inns, Inc. ("La Quinta" or the "Company") offered hereby are being sold by the
Selling Shareholder (as defined herein). Of the 4,850,000 shares of Common Stock
offered hereby, 3,880,000 shares are being offered for sale in the United States
and Canada by the U.S. Underwriters (as defined herein) and 970,000 shares are
being offered in a concurrent international offering outside the United States
and Canada by the Managers (as defined herein) (collectively, the "Offering").
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "LQI." On July 31, 1995, the closing sale price of the Common Stock
as reported by the New York Stock Exchange was $28 1/8.
SEE "RISK FACTORS" ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS (1) SHAREHOLDER (2)
<S> <C> <C> <C>
Per Share.......................................... $28.125 $1.12 $27.005
Total (3).......................................... $136,406,250 $5,432,000 $130,974,250
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses of $1,100,000 payable by the Selling
Shareholder.
(3) The Selling Shareholder has granted the several U.S. Underwriters a 30-day
option to purchase up to 470,071 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Selling Shareholder will be $149,626,997,
$5,958,480, and $143,668,517, respectively.
The Shares of Common Stock are being offered by the several U.S.
Underwriters named herein, subject to prior sale, when, as and if accepted by
them and subject to certain conditions. It is expected that the certificates for
the shares of Common Stock offered hereby will be available for delivery on or
about August 4, 1995 at the offices of Smith Barney Inc., 388 Greenwich Street,
New York, New York 10013.
----------------
Smith Barney Inc.
Alex. Brown & Sons
Incorporated
Montgomery Securities
July 31, 1995
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
P R O S P E C T U S
4,850,000 Shares
[LOGO]
La Quinta Inns, Inc.
Common Stock
---------
All of the shares of Common Stock, par value $0.10 per share, of La Quinta
Inns, Inc. ("La Quinta" or the "Company") offered hereby are being sold by the
Selling Shareholder. Of the 4,850,000 shares of Common Stock offered hereby,
970,000 shares are being offered outside the United States and Canada by the
Managers (as defined herein) and 3,880,000 shares are being offered for sale in
the United States and Canada by the U.S. Underwriters (as defined herein)
(collectively, the "Offering").
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "LQI." On July 31, 1995, the closing sale price of the Common Stock
as reported by the New York Stock Exchange was $28 1/8.
SEE "RISK FACTORS" ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS (1) SHAREHOLDER (2)
<S> <C> <C> <C>
Per Share.......................................... $28.125 $1.12 $27.005
Total (3).......................................... $136,406,250 $5,432,000 $130,974,250
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting estimated expenses of $1,100,000 payable by the Selling
Shareholder.
(3) The Selling Shareholder has granted the several U.S. Underwriters a 30-day
option to purchase up to 470,071 additional shares of Common Stock solely to
cover over-allotments, if any. See "Underwriting." If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Selling Shareholder will be $149,626,997,
$5,958,480, and $143,668,517, respectively.
The Shares of Common Stock are being offered by the several Managers named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that the certificates for the shares of
Common Stock offered hereby will be available for delivery on or about August 4,
1995 at the offices of Smith Barney Inc., 388 Greenwich Street, New York, New
York 10013.
----------------
Smith Barney Inc.
Alex. Brown & Sons
International
Montgomery Securities
July 31, 1995
<PAGE>
BECAUSE LA QUINTA OWNS AND OPERATES VIRTUALLY ALL OF ITS INNS, IT IS ABLE TO
ASSURE ITS CUSTOMERS A CONSISTENTLY HIGH-QUALITY GUEST EXPERIENCE. EACH INN
HAS LA QUINTA'S DISTINCTIVE EXTERIOR, AN ATTRACTIVE LOBBY AND BREAKFAST AREA
AND COMFORTABLE, WELL-APPOINTED GUEST ROOMS. THIS CONSISTENT QUALITY HAS MADE
LA QUINTA A WELL-REGARDED BRAND IN THE MID-PRICED SEGMENT OF THE LODGING
INDUSTRY.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY INFORMATION IS QUALIFIED IN ITS ENTIRETY BY THE
DETAILED INFORMATION AND FINANCIAL STATEMENTS (INCLUDING NOTES THERETO)
APPEARING ELSEWHERE, OR INCORPORATED BY REFERENCE, IN THIS PROSPECTUS. UNLESS
THE CONTEXT OTHERWISE REQUIRES, THE "COMPANY" OR "LA QUINTA" REFERS TO LA QUINTA
INNS, INC., TOGETHER WITH ITS COMBINED SUBSIDIARIES, AND UNINCORPORATED JOINT
VENTURES AND PARTNERSHIPS. LA QUINTA-REGISTERED TRADEMARK- IS A REGISTERED
TRADEMARK OF LA QUINTA INNS, INC.
MARKET DATA USED THROUGHOUT THIS PROSPECTUS WERE OBTAINED FROM INDUSTRY
PUBLICATIONS AND INTERNAL GUEST SURVEYS. INDUSTRY PUBLICATIONS GENERALLY STATE
THAT THE INFORMATION CONTAINED THEREIN HAS BEEN OBTAINED FROM SOURCES BELIEVED
TO BE RELIABLE, BUT THAT THE ACCURACY AND COMPLETENESS OF SUCH INFORMATION IS
NOT GUARANTEED. SIMILARLY, INTERNAL GUEST SURVEYS, WHILE BELIEVED TO BE
RELIABLE, HAVE NOT BEEN INDEPENDENTLY VERIFIED. NONE OF THE COMPANY, THE SELLING
SHAREHOLDER AND THE UNDERWRITERS HAS INDEPENDENTLY VERIFIED THIS MARKET DATA AND
NONE OF THEM MAKES ANY REPRESENTATION AS TO ITS ACCURACY.
THE COMPANY
La Quinta is the second largest owner/operator of hotels in the United
States, with 236 inns and more than 30,000 rooms. La Quinta, which operates
primarily in the mid-priced segment of the lodging industry, achieved an average
occupancy percentage of 70.1% and an average daily room rate ("ADR") of $47.65
for the year ended December 31, 1994. Founded in 1968, the Company has inns
located in 29 states, with strategic concentrations in Texas, Florida and
California. La Quinta currently owns a 100% interest in 228 of its inns and a
50% or greater interest in an additional seven inns. La Quinta operates all of
its inns other than one licensed inn. La Quinta's business strategy is to
continue to expand its successful core business as an owner/operator in the
mid-priced segment of the lodging industry.
OWNERSHIP AND MANAGEMENT CONTROL
Unlike most major chains in the lodging industry, La Quinta owns and manages
all but one of the inns that carry its brand. The Company believes that much of
its success is attributable to this operating control, which allows the Company
to achieve a higher level of consistency in both product quality and service
than its competitors. In addition, its operating control gives La Quinta the
ability to offer new services, determine expansion strategies, set pricing and
make other marketing decisions on a system-wide or local basis as conditions
dictate, without consulting third-party owners, management companies or
franchisees as required of most other lodging chains.
BRAND IMAGE
La Quinta has taken major steps to assure uniform high quality at its inns.
In 1993 and 1994, the Company invested approximately $65 million in a
comprehensive chainwide image enhancement program designed to give all of its
inns a new, fresh appearance while preserving their unique character. The
program, which was substantially completed in mid-1994, featured new signage
displaying a distinctive new logo, along with 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 areas for continental breakfast.
As a result of its ability to provide consistently high-quality, convenient
accommodations and excellent value, the Company believes that it has established
La Quinta as a strong, well-regarded mid-priced brand. The Company believes that
its brand recognition and reputation have enhanced the performance of its
existing inns and should provide an advantage for inns added in the future.
FOCUSED GROWTH STRATEGY
La Quinta attributes its strong operating performance in large part to the
successful implementation of the strategic plan formulated by the Company's
senior management team after their arrival at the Company in 1992. Under this
plan, management has (i) substantially restructured the Company, purchasing its
partners' interests in 19 unincorporated joint ventures and partnerships since
1993 (including the AEW Transaction described below), refinancing a majority of
its outstanding debt, and instituting corporate and
3
<PAGE>
operating-level cost controls, (ii) reimaged all La Quinta inns through the
system-wide image enhancement program, and (iii) demonstrated its ability to
grow the number of inns -- acquiring 11 inns in 1993, 15 inns in 1994 and nine
inns in the first six months of 1995 -- while increasing profitability.
The Company intends to focus both on INTERNAL GROWTH -- enhancing revenues,
cash flow and profitability at its current portfolio of inns, and EXTERNAL
GROWTH -- adding new inns through opportunistic acquisitions and conversions of
existing properties and selective new construction. The Company's external
growth strategy is to reinforce its presence in existing markets and expand
selectively into new markets. For the twelve months ended June 30, 1995, the
Company generated $79.6 million of cash flow after required interest payments,
maintenance capital expenditures (assumed to be 5% of room revenues), dividends,
taxes and partner distributions, providing an internal source of funding to
support its growth plan.
FACILITIES AND SERVICES
The typical La Quinta inn contains approximately 130 spacious, quiet and
comfortably furnished guest rooms averaging 300 square feet in size. Guests at a
La Quinta inn are offered a wide range of amenities and services, including
complimentary continental breakfast, free unlimited local telephone calls,
remote-control televisions with a premium movie channel, a swimming pool,
same-day laundry and dry cleaning, fax services, 24-hour front desk and message
service, smoking/non-smoking rooms and free parking. La Quinta guests typically
have convenient access to food service at adjacent free-standing restaurants,
including national chains such as Cracker Barrel, IHOP, Denny's and Perkins. La
Quinta has an ownership interest in 126 of these adjacent restaurant buildings,
which it leases to restaurant operators.
La Quinta inns appeal to guests who desire high-quality rooms, convenient
locations and attractive prices, but who do not require banquet and convention
facilities, in-house restaurants, cocktail lounges or room service. By
eliminating the costs of these management-intensive facilities and services, La
Quinta believes it offers its customers exceptional value by providing rooms
that are comparable in quality to full-service hotels at lower prices.
CUSTOMER BASE AND MARKETING
La Quinta's combination of consistent, high-quality accommodations and good
value is attractive to business customers, who account for more than 50% of
rooms rented. These core customers typically visit a given area several times a
year, and include salespersons covering a specific territory, government and
military personnel and technicians. The Company also targets both vacation
travelers and senior citizens. For the convenience of these targeted customer
groups, inns are generally located near suburban office parks, major traffic
arteries or destination areas such as airports and convention centers.
La Quinta has developed a strong following among its customers; internal
customer surveys show that the average customer spends 16 nights per year in a
La Quinta inn. The Company focuses a number of its marketing programs on
maintaining a high number of repeat customers. For example, La Quinta promotes a
"Returns-Registered Trademark- Club" offering members preferred status and rates
at La Quinta inns, along with rewards for frequent stays. The Returns Club had
approximately 235,000 members as of June 30, 1995.
The Company markets directly to companies and other organizations through
its direct sales force of 40 sales representatives and managers. This sales
force calls on companies which have a significant number of individuals
traveling in the regions in which La Quinta operates and which are capable of
producing a high volume of room nights. The Company also provides a central
reservation system, "teLQuik-Registered Trademark-," which currently accounts
for advance reservations for approximately 27% of room nights. The teLQuik
system allows customers to make reservations by dialing 1-800-531-5900 toll
free, or from special reservations phones placed in all La Quinta inns. In
addition, approximately 47% of room nights reflect advance reservations made
directly with individual inns and forwarded to the central reservation system.
In total, advance reservations account for approximately 74% of room nights.
LODGING INDUSTRY
La Quinta benefits from the current strength of both the lodging industry as
a whole and the mid-priced segment in which the Company primarily competes. The
industry has now experienced three consecutive years in which the growth of
demand for rooms substantially exceeded the growth in room supply. This
4
<PAGE>
supply/demand relationship has led to industry-wide increases in occupancy
percentages and ADR, with occupancy rising to 65.2% in 1994 from 63.7% in 1993,
and ADR increasing 3.8% in 1994 over 1993 levels, based on information provided
by Smith Travel Research, an independent lodging industry research firm. The
mid-priced segment of the lodging industry also performed well in 1994, with
revenue per available room ("REVPAR," which is the product of occupancy
percentage and ADR) increasing 5.5% over 1993, the largest REVPAR increase of
any lodging segment except for the luxury segment. The mid-priced segment
continued to have strong REVPAR growth in the first quarter of 1995, with REVPAR
increasing 5.9% over the comparable 1994 period.
FINANCIAL PERFORMANCE
La Quinta's financial results reflect both the improvements in the lodging
industry and the successful implementation of its business strategy. During the
five-year period from 1990 through 1994, the Company's REVPAR increased from
$27.01 per night to $33.39 per night, a compound annual growth rate of 5.4%;
revenue increased from $226.8 million to $362.2 million, a compound annual
growth rate of 12.4%; EBITDA (as defined in footnote 5 under "Summary Combined
Financial Data") increased from $79.3 million to $148.7 million, a compound
annual growth rate of 17.0%; and net income increased from $2.2 million to $37.8
million. During this same period, the Company reduced its annual corporate
overhead expense from $21.6 million in 1990 to $18.6 million in 1994, a decrease
of 13.9%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
La Quinta's operating results in the first six months of 1995 versus the
first six months of 1994 continued this positive trend: REVPAR increased 12.8%,
revenues increased 21.1%, EBITDA increased 37.8% and net income increased 65.0%.
These results illustrate the operating leverage inherent in the lodging
industry. As occupancy and ADR increase, a high percentage of the additional
revenue translates into net income due to the low marginal costs of increasing
occupancy and ADR. The operating leverage is also reflected in the Company's
EBITDA margin, which rose from 40.0% in the first six months of 1994 to 45.6% in
the first six months of 1995.
THE SELLING SHAREHOLDER
In March 1990, the Company formed a limited partnership, La Quinta
Development Partners, L.P. ("LQDP"), with AEW Partners, L.P. ("AEW" or the
"Selling Shareholder") pursuant to the LQDP Partnership Agreement (as defined
under "Principal and Selling Shareholders"). LQDP was established for the
purpose of acquiring competitors' inns and converting them to the La
Quinta-Registered Trademark- brand. La Quinta manages the inns owned by LQDP.
Prior to the transaction described below, La Quinta, the general partner of
LQDP, owned a 40% interest and AEW, the limited partner, owned a 60% interest in
LQDP. La Quinta contributed property with a fair value of approximately $44
million and $4 million in cash to LQDP, and AEW contributed cash of $3 million
and an additional $69 million in the form of a promissory note which was
subsequently funded. At June 30, 1995, LQDP owned 47 inns and 16 adjacent
restaurant buildings.
Under the terms of the LQDP Partnership Agreement, AEW had a right to
require that any inns proposed to be acquired by the Company instead be acquired
by LQDP. This right expired by its terms in March 1995. In addition, in
connection with the formation of LQDP in 1990, AEW paid $3 million for an
option, subject to certain vesting and other conditions, to convert two-thirds
of its ownership interest in LQDP into a specified number of shares of the
Company's Common Stock (adjusted for stock splits, cash dividends, and
distributions from LQDP to AEW).
On June 15, 1995, AEW notified the Company that it would exercise, subject
to certain conditions, its option to convert two-thirds of its ownership
interest in LQDP into 5,299,821 shares of the Company's Common Stock. These
shares are being registered pursuant to a registration rights agreement, and
together with 20,250 shares of Common Stock currently owned by the Selling
Shareholder, are being sold in this Offering, assuming exercise in full of the
U.S. Underwriters' over-allotment option. AEW also agreed to sell the remaining
one-third of its ownership interest in LQDP to the Company for a negotiated
price of $48.2 million in cash (collectively, with the conversion, the "AEW
Transaction"). The AEW Transaction was consummated on July 3, 1995. The Company
financed the cash portion of the AEW Transaction through borrowings under its
and LQDP's bank credit facilities. AEW will bear all of the costs related to the
registration and sale of the Common Stock in the Offering. See "Principal and
Selling Shareholders."
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered (1)
United States and Canadian Offering....... 3,880,000 shares
International Offering.................... 970,000 shares
Total................................... 4,850,000 shares
Common Stock to be outstanding after the
Offering................................... 52,293,112 shares (2)
Use of Proceeds............................. The Company will not receive any proceeds from
the Offering. The Selling Shareholder will pay
all expenses of the Offering.
NYSE Symbol................................. "LQI"
<FN>
------------------------
(1) Assumes that the over-allotment option granted to the U.S. Underwriters is
not exercised.
(2) Excludes 5,929,707 shares reserved for issuance or delivery from treasury
upon exercise of options granted to the Company's management, as of June
30, 1995. Includes 5,299,821 shares issued in the AEW Transaction.
</TABLE>
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 described herein as
"pre-split" and references to the Company's Common Stock after the October 1994
split are described herein as "post-split." Per share data presented herein has
been restated to reflect the effect of the stock splits.
6
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The following table sets forth certain combined financial information of the
Company, its wholly-owned subsidiaries and its combined unincorporated
partnerships and joint ventures and is qualified in its entirety by, and should
be read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements, the
notes thereto, and other financial, pro forma and statistical information
included or incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- --------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total revenues.................. $ 206,778 $ 170,806 $ 362,242 $ 271,850 $ 254,122 $ 240,888 $ 226,830
Direct and corporate operating
costs and expenses (1)......... 112,520 102,405 213,508 168,021 156,529 154,846 147,560
Depreciation, amortization and
fixed asset retirements........ 20,630 17,772 37,977 24,055 24,793 35,201 34,660
Performance stock option (2).... -- -- -- 4,407 -- -- --
Non-recurring cash and non-cash
charges (1).................... -- -- -- -- 38,225 7,952 503
Operating income................ 73,628 50,629 110,757 75,367 34,575 42,889 44,107
Net interest expense............ 19,804 17,530 37,439 26,219 27,046 30,271 32,304
Partners' equity (1)............ 8,976 5,522 11,406 12,965 15,081 9,421 8,408
Net (gain) loss on property
transactions................... -- -- (79) 4,347 (282) 1,012 (3)
Income tax expense.............. 17,087 10,755 24,176 12,416 526 787 1,223
Net earnings (loss) (1) (3)..... 27,761 16,822 37,815 20,301 (8,754) 129 2,175
Net earnings (loss) per share
(3) (4)........................ 0.56 0.35 0.78 0.43 (0.19) -- 0.05
Weighted average number of
common and common equivalent
shares outstanding............. 49,256 48,415 48,624 47,306 45,302 44,557 44,398
OTHER DATA
EBITDA (5)...................... $ 94,258 $ 68,401 $ 148,734 $ 103,829 $ 97,593 $ 86,042 $ 79,270
EBITDA margin (6)............... 45.6% 40.0% 41.1% 38.2% 38.4% 35.7% 34.9 %
Capital expenditures (7)........ $ 16,417 $ 55,435 $ 75,248 $ 32,623 $ 15,529 $ 13,803 $ 17,696
Purchase and conversion of inns
(8)............................ 40,292 20,989 34,690 38,858 4,060 15,487 18,574
Purchase of partners' equity
(9)............................ -- 9,622 53,255 78,169 -- 3,546 --
Cash dividends declared per
common share................... 0.05 0.05 0.10 0.05 -- -- --
OPERATING DATA
Number of inns (10)............. 236 224 228 221 212 212 210
Occupancy percentage (11)....... 72.3% 70.0% 70.1% 65.1% 65.6% 64.8% 66.0 %
ADR (12)........................ $50.87 $46.62 $47.65 $46.36 $44.33 $43.11 $40.93
REVPAR (13)..................... 36.79 32.61 33.39 30.20 29.06 27.92 27.01
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1995
-------------------
<S> <C>
BALANCE SHEET DATA
Total assets............................................................................... $ 885,082
Current installments of long term debt..................................................... 15,242
Long term debt, excluding current installments............................................. 465,997
Partners' capital.......................................................................... 100,105
Shareholders' equity....................................................................... 222,583
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
<FN>
--------------------------
(1) Non-recurring cash and non-cash charges include charges related to the
write-down of certain joint venture interests carried on the equity method,
land and computer equipment, severance and other employee-related costs and
charges associated with a series of studies to improve operating results.
For the year ended December 31, 1992, these charges also include a
$2,696,000 increase in the allowance for certain notes receivable related
to inns sold by the Company prior to 1985, and $210,000 related to other
corporate expense items. Results for the year ended December 31, 1992 were
impacted by an additional charge of $1,214,000 to partners' equity in
earnings and losses related to the reallocation of losses of a combined
unincorporated joint venture to the Company.
(2) Performance stock option relates to the costs of stock options which became
exercisable when the average price of the Company's Common Stock reached
$30 per share (pre-split) for twenty consecutive days. In 1993, performance
stock option expense and certain other options were accelerated as a result
of this condition being met. Currently, the Company has no options
outstanding that require recognition of additional compensation expense.
(3) Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109"). SFAS 109 requires the use of the asset and liability method
of accounting for deferred income taxes. The Company recorded the impact of
SFAS 109's implementation, an increase in net income of $1,500,000, as the
cumulative effect of an accounting change in the combined statement of
operations for the year ended December 31, 1993. Prior years' financial
statements were not restated to apply the provisions of SFAS 109.
(4) Earnings (loss) per share are computed on the basis of the weighted average
number of common and common equivalent shares outstanding in each period
after giving effect to the three-for-two stock splits.
(5) EBITDA, as defined by the covenants in the Company's 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 and
investment transactions and other non-recurring cash and non-cash charges
as follows:
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------- -------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
------ ------ ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Extraordinary items.................. $ -- $ -- $ -- $ 619 $ 958 $1,269 $ --
Partners' equity in earnings and
losses............................. 8,976 5,522 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 principals
("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.
(6) EBITDA margin represents EBITDA divided by total revenues.
(7) Represents capital expenditures other than those for purchase and
conversion of inns. Capital expenditures for the six months ended June 30,
1995 and 1994 and the years ended December 31, 1994 and 1993, include costs
related to the Company's image enhancement program.
(8) Included in the six months ended June 30, 1995 and 1994 and the years ended
December 31, 1994, 1993, 1992, 1991 and 1990 were conversion costs of
$5,624,000, $5,806,000, $8,891,000, $7,231,000, $4,060,000, $3,977,000 and
$4,788,000, respectively.
(9) Purchase of partners' equity in the six months ended June 30, 1994 and the
years ended December 31, 1994 and 1993 includes approximately $9,322,000,
$9,322,000 and $42,091,000, respectively, related to the acquisition of the
La Quinta Motor Inns Limited Partnership ("LQP").
(10) Number of inns includes 40 managed inns and inns licensed to others in the
years ended December 31, 1992, 1991 and 1990 and includes nine managed inns
and inns licensed to others in the six months ended June 30, 1994 and the
year ended December 31, 1993, the results of which are not included in the
combined financial statements.
(11) The occupancy percentage represents total rooms occupied divided by total
available rooms. Total available rooms represents the number of La Quinta
rooms available for rent multiplied by the number of days in the reported
period.
(12) ADR represents total room revenues divided by the total number of rooms
occupied.
(13) REVPAR represents the product of occupancy percentage and ADR.
</TABLE>
8
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The unaudited summary pro forma combined condensed statement of operations
and balance sheet data presented below reflect the statement of operations and
balance sheet data as reported in the Company's Annual Report on Form 10-K for
the year ended December 31, 1994 and Quarterly Report on Form 10-Q for the six
months ended June 30, 1995, adjusted to reflect the AEW Transaction as if the
transaction had occurred at the beginning of the periods presented or at the
balance sheet date, respectively. The following table is qualified in its
entirety by, and should be read in conjunction with, "Pro Forma Financial Data"
and the combined financial statements, the notes thereto, and other financial,
pro forma and statistical information included or incorporated by reference in
this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA FOR THE PRO FORMA FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1995(1) 1994(1)
------------------- ------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS
Total revenues.................................................... $ 206,778 $ 362,242
-------- --------
Operating costs and expenses:
Direct and corporate............................................ 112,520 213,508
Depreciation, amortization, and fixed asset retirements......... 21,178 39,073
-------- --------
Total operating costs......................................... 133,698 252,581
-------- --------
Operating income.............................................. 73,080 109,661
-------- --------
Other (income) expenses:
Net interest expense............................................ 21,462 40,755
Partners' equity................................................ 1,400 2,128
Net gain on property transactions............................... -- (79)
-------- --------
Earnings before income taxes.................................... 50,218 66,857
Income tax expense.............................................. 19,133 25,807
-------- --------
Net earnings.................................................. $ 31,085 $ 41,050
-------- --------
-------- --------
Earnings per common and common equivalent share:
Net earnings.................................................. $ 0.57 $ 0.76
-------- --------
-------- --------
Weighted average number of common and common equivalent shares
outstanding...................................................... 54,556 53,914
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
AT
JUNE 30, 1995
------------------------
<S> <C>
BALANCE SHEET DATA
Total assets............................................................................ $ 936,163
Short term borrowings and current installments of long term debt........................ 45,242
Long term debt, excluding current installments.......................................... 484,197
Partners' capital....................................................................... 6,586
Shareholders' equity.................................................................... 318,983
<FN>
------------------------
(1) Pro forma condensed statement of operations does not reflect a
non-recurring, non-cash item directly attributable to the AEW Transaction.
See "Pro Forma Financial Data."
</TABLE>
9
<PAGE>
RISK FACTORS
RISKS OF THE LODGING INDUSTRY
The Company's business is subject to all of the risks inherent in the
lodging industry. These risks include, among other things, adverse effects of
general and local economic conditions (particularly in geographic areas where
the Company has a high concentration of inns), changes in local market
conditions, oversupply of hotel space, a reduction in local demand for hotel
rooms, changes in travel patterns, changes in governmental regulations that
influence or determine wages, prices or construction costs, changes in interest
rates, the availability of credit and changes in real estate taxes and other
operating expenses. The Company's ownership of real property, including inns, is
substantial. Real estate values are sensitive to changes in local market and
economic conditions and to fluctuations in the economy as a whole. Due in part
to the strong correlation between the lodging industry's performance and
economic conditions, the lodging industry is subject to cyclical changes in
revenues and profits.
COMPETITION
The lodging industry is highly competitive. During the 1980's, construction
of lodging facilities in the United States at historically high levels resulted
in an excess supply of available rooms. This oversupply had an adverse effect on
occupancy levels and room rates in the industry. The oversupply has now largely
been absorbed, with growth in demand exceeding growth in supply in each of the
last three years. However, there can be no assurance that an oversupply will not
exist again in the future. Competitive factors in the industry include
reasonableness of room rates, quality of accommodations, brand recognition,
service levels and convenience of locations. The Company's inns generally
operate in areas that contain numerous other competitors, certain of which have
substantially greater financial resources than the Company. There can be no
assurance that demographic, geographic or other changes in markets will not
adversely affect the convenience or desirability of the locations of the
Company's inns. Furthermore, there can be no assurance that, in the markets in
which the Company's inns operate, competing hotels will not pose greater
competition for guests than presently exists, or that new hotels will not enter
such markets. See "Business -- Competition."
ACQUISITION AND DEVELOPMENT RISKS
The Company's growth strategy of acquiring inns for conversion and selective
development of new inns will subject the Company to pre-opening and conversion
costs. As the Company opens additional Company-owned inns, such costs may
adversely affect the Company's operating results. Newly opened inns historically
begin with lower occupancy and room rates that improve over time. While the
Company has in the past successfully opened or converted new inns, there can be
no assurance that the Company will be able to achieve its growth strategy.
Construction, acquisition and conversion of inns involves certain risks,
including the possibility of construction cost overruns and delays, site
acquisition cost and availability, uncertainties as to market potential, market
deterioration after acquisition or conversion, possible unavailability of
financing on favorable terms and the emergence of market competition from
unanticipated sources. Although the Company seeks to manage its construction,
acquisition and conversion activities so as to minimize such risks, there can be
no assurance that new inns will perform in accordance with the Company's
expectations.
SEASONALITY
The lodging industry is seasonal in nature. Generally, the Company's inn
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in the revenues, profit margins and net earnings of the Company.
USE OF PROCEEDS
The Company will not receive any proceeds from the Offering. The Offering is
being made by the Selling Shareholder pursuant to registration rights granted in
1990. The Selling Shareholder will pay all the expenses of the Offering.
10
<PAGE>
CAPITALIZATION
The following table sets forth cash and cash equivalents, short term
borrowings and current installments of long term debt and the capitalization of
the Company as of June 30, 1995, and as adjusted to give effect to the AEW
Transaction. For additional information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the combined
financial statements, the notes thereto, and other financial, pro forma and
statistical information included or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1995
-------------------------
ACTUAL AS ADJUSTED
---------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 6,694 $ 6,694
---------- -------------
---------- -------------
Short term borrowings and current installments of long term debt....................... $ 15,242 $ 45,242(1)
---------- -------------
---------- -------------
Long term debt, excluding current installments:
Mortgage loans, maturing 1995-2016................................................... $ 88,355 $ 88,355
Industrial development revenue bonds, maturing 1995-2012............................. 57,142 57,142
Bank secured term credit facility, maturing May 30, 2002............................. 141,500 141,500
Bank secured line of credit, maturing May 31, 1999................................... 34,000 42,200(1)
Bank unsecured line of credit, maturing January 31, 1997............................. 25,000 35,000(1)
9 1/4% Senior Subordinated Notes due 2003............................................ 120,000 120,000
---------- -------------
Total long term debt, excluding current installments............................... 465,997 484,197
---------- -------------
Partners' capital...................................................................... 100,105 6,586(1)(2)
Shareholders' equity................................................................... 222,583 318,983(2)
---------- -------------
Total capitalization............................................................... $ 788,685 $ 809,766
---------- -------------
---------- -------------
<FN>
------------------------
(1) Adjusted to reflect borrowings of $48.2 million for the Company's
acquisition of one-third of AEW's interest in LQDP. Approximately $30
million of the $48.2 million purchase price was drawn on LQDP's 364-day
unsecured line of credit (which the Company intends to renew annually,
subject to the consent of the lenders) and is therefore reflected as short
term borrowings. The remainder of the purchase price was borrowed under the
Company's and LQDP's bank credit facilities.
(2) Adjusted to reflect the conversion of two-thirds of AEW's interest in LQDP
and the credit to shareholders' equity for the fair market value of the
assets acquired ($96.4 million).
</TABLE>
11
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "LQI." On July 31, 1995, the closing sale price of the Company's
Common Stock as reported by the New York Stock Exchange was $28 1/8. 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, is
set forth below:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- ----------------------------- ------------------------------
PER PER PER
SHARE SHARE SHARE
HIGH LOW DIVIDEND HIGH LOW DIVIDEND HIGH LOW DIVIDEND
------- ------- ----- -------- -------- ----- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter...................... $29 $19 5/8 $0.025 $ 20 7/8 $ 12 7/8 $0.025 $ 9 1/8 $ 6 $--
Second Quarter..................... 30 1/4 25 1/4 0.025 21 5/8 16 7/8 0.025 9 5/8 8 --
Third Quarter (through July 31,
1995)............................. 29 1/2 26 1/4 24 3/8 17 0.025 12 7/8 8 3/8 0.025
Fourth Quarter..................... 25 3/4 19 1/8 0.025 15 7/8 12 3/8 0.025
</TABLE>
The Company has paid quarterly cash dividends since the third quarter of
1993 in the amount of $0.025 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 June 30, 1995, the approximate number of holders of record of the
Company's Common Stock was 949.
12
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain combined financial information of the
Company, its wholly-owned subsidiaries and its combined unincorporated
partnerships and joint ventures and is qualified in its entirety by, and should
be read in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements, the
notes thereto, and other financial, pro forma and statistical information
included or incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA, RATIOS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Total revenues..................... $ 206,778 $ 170,806 $ 362,242 $ 271,850 $ 254,122 $ 240,888 $ 226,830
Direct and corporate operating
costs and expenses (1)............ 112,520 102,405 213,508 168,021 156,529 154,846 147,560
Depreciation, amortization and
fixed asset retirements........... 20,630 17,772 37,977 24,055 24,793 35,201 34,660
Performance stock option (2)....... -- -- -- 4,407 -- -- --
Non-recurring cash and non-cash
charges (1)....................... -- -- -- -- 38,225 7,952 503
Operating income................... 73,628 50,629 110,757 75,367 34,575 42,889 44,107
Net interest expense............... 19,804 17,530 37,439 26,219 27,046 30,271 32,304
Partners' equity (1)............... 8,976 5,522 11,406 12,965 15,081 9,421 8,408
Net (gain) loss on property
transactions...................... -- -- (79) 4,347 (282) 1,012 (3)
Income tax expense................. 17,087 10,755 24,176 12,416 526 787 1,223
Earnings (loss) before
extraordinary items and cumulative
effect of accounting change....... 27,761 16,822 37,815 19,420 (7,796) 1,398 2,175
Net earnings (loss) (1) (3)........ 27,761 16,822 37,815 20,301 (8,754) 129 2,175
Earnings (loss) per share before
extraordinary items and cumulative
effect of accounting change....... 0.56 0.35 0.78 0.41 (0.17) 0.03 0.05
Net earnings (loss) per share (3)
(4)............................... 0.56 0.35 0.78 0.43 (0.19) -- 0.05
Weighted average number of common
and common equivalent shares
outstanding....................... 49,256 48,415 48,624 47,306 45,302 44,557 44,398
OTHER DATA
EBITDA (5)......................... $ 94,258 $ 68,401 $ 148,734 $ 103,829 $ 97,593 $ 86,042 $ 79,270
EBITDA Margin (6).................. 45.6% 40.0% 41.1% 38.2% 38.4% 35.7% 34.9%
Capital expenditures (7)........... $ 16,417 $ 55,435 $ 75,248 $ 32,623 $ 15,529 $ 13,803 $ 17,696
Purchase and conversion of inns
(8)............................... 40,292 20,989 34,690 38,858 4,060 15,487 18,574
Purchase of partners' equity (9)... -- 9,622 53,255 78,169 -- 3,546 --
Cash dividends declared per common
share............................. 0.05 0.05 0.10 0.05 -- -- --
OPERATING DATA
Inns owned 100%.................... 181 167 176 166 89 89 83
Inns owned 40-82%.................. 54 46 50 45 80 79 81
Inns managed (10).................. -- 10 -- 9 40 40 40
Inns licensed (10)................. 1 1 2 1 3 4 6
---------- ---------- ---------- ---------- ---------- ---------- ----------
Number of inns..................... 236 224 228 221 212 212 210
Occupancy percentage (11).......... 72.3% 70.0% 70.1% 65.1% 65.6% 64.8% 66.0%
ADR (12)........................... $ 50.87 $ 46.62 $ 47.65 $ 46.36 $ 44.33 $ 43.11 $ 40.93
REVPAR (13)........................ 36.79 32.61 33.39 30.20 29.06 27.92 27.01
BALANCE SHEET DATA
Total assets....................... 885,082 786,037 845,781 749,495 539,183 574,687 586,969
Current installments of long term
debt.............................. 15,242 32,620 39,976 22,491 21,711 22,116 24,002
Long term debt, excluding current
installments...................... 465,997 427,366 448,258 414,004 274,824 316,014 341,902
Partners' capital.................. 100,105 86,861 92,099 85,976 62,060 50,471 37,270
Shareholders' equity............... 222,583 164,857 189,231 149,057 124,321 130,175 129,167
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
<FN>
------------------------------
(1) Non-recurring cash and non-cash charges include charges related to the
write-down of certain joint venture interests carried on the equity method,
land and computer equipment, severance and other employee-related costs and
charges associated with a series of studies to improve operating results.
For the year ended December 31, 1992, these charges also include a
$2,696,000 increase in the allowance for certain notes receivable related
to inns sold by the Company prior to 1985, and $210,000 related to other
corporate expense items. Results for the year ended December 31, 1992 were
impacted by an additional charge of $1,214,000 to partners' equity in
earnings and losses related to the reallocation of losses of a combined
unincorporated joint venture to the Company.
(2) Performance stock option relates to the costs of stock options which became
exercisable when the average price of the Company's Common Stock reached
$30 per share (pre-split) for twenty consecutive days. In 1993, performance
stock option expense and certain other options were accelerated as a result
of this condition being met. Currently, the Company has no options
outstanding that require recognition of additional compensation expense.
(3) Effective January 1, 1993, the Company adopted the provisions of SFAS 109.
SFAS 109 requires the use of the asset and liability method of accounting
for deferred income taxes. The Company recorded the impact of SFAS 109's
implementation, an increase in net income of $1,500,000, as the cumulative
effect of an accounting change in the combined statement of operations for
the year ended December 31, 1993. Prior years' financial statements were
not restated to apply the provisions of SFAS 109.
(4) Earnings (loss) per share are computed on the basis of the weighted average
number of common and common equivalent shares outstanding in each period
after giving effect to the three-for-two stock splits.
(5) EBITDA, as defined by the covenants in the Company's 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 and
investment transactions and other non-recurring cash and non-cash charges
as follows:
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Extraordinary items............................ $ -- $ -- $ -- $ 619 $ 958 $ 1,269 $ --
Partners' equity in earnings and losses........ 8,976 5,522 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 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.
(6) EBITDA margin represents EBITDA divided by total revenues.
(7) Represents capital expenditures other than those for purchase and
conversion of inns. Capital expenditures for the six months ended June 30,
1995 and the years ended December 31, 1994 and 1993, include costs related
to the Company's image enhancement program.
(8) Included in the six months ended June 30, 1995 and 1994 and the years ended
December 31, 1994, 1993, 1992, 1991 and 1990 were conversion costs of
$5,624,000, $5,806,000, $8,891,000, $7,231,000, $4,060,000, $3,977,000 and
$4,788,000, respectively.
(9) Purchase of partners' equity in the six months ended June 30, 1994 and the
years ended December 31, 1994 and 1993 includes approximately $9,322,000,
$9,322,000 and $42,091,000, respectively, related to the acquisition of
LQP.
(10) The operating results of managed inns and licensed inns are not included in
the combined financial statements.
(11) The occupancy percentage represents total rooms occupied divided by total
available rooms. Total available rooms represents the number of La Quinta
rooms available for rent multiplied by the number of days in the reported
period.
(12) ADR represents total room revenues divided by the total number of rooms
occupied.
(13) REVPAR represents the product of occupancy percentage and ADR.
</TABLE>
14
<PAGE>
PRO FORMA FINANCIAL DATA
The following tables are qualified in their entirety by, and should be read
in conjunction with, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the combined financial statements, the
notes thereto, and other financial, pro forma and statistical information
included or incorporated by reference in this Prospectus.
The unaudited pro forma combined condensed statement of operations presented
below includes the statement of operations as reported in the Company's
Quarterly Report on Form 10-Q for the six months ended June 30, 1995, and as
adjusted to reflect the AEW Transaction as if the transaction had occurred on
January 1, 1995.
<TABLE>
<CAPTION>
PRO FORMA
SIX
SIX MONTHS PRO FORMA MONTHS
ENDED ADJUSTMENTS ENDED
JUNE 30, --------------- JUNE 30,
1995 DEBIT CREDIT 1995(F)
----------- ----- ------ ---------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Total revenues.............................................. $206,778 $206,778
----------- ---------
Operating costs and expenses:
Direct and corporate...................................... 112,520 112,520
Depreciation, amortization, and fixed asset retirements... 20,630 $ 548(A) 21,178
----------- ---------
Total operating costs................................... 133,150 133,698
----------- ---------
Operating income........................................ 73,628 73,080
----------- ---------
Other (income) expenses:
Net interest expense...................................... 19,804 1,658(B) 21,462
Partners' equity.......................................... 8,976 $7,576(C) 1,400
----------- ---------
Earnings before income taxes.............................. 44,848 50,218
Income tax expense........................................ 17,087 2,046(D) 19,133
----------- ----- ------ ---------
Net earnings............................................ $27,761 $4,252 $7,576 $31,085
----------- ----- ------ ---------
----------- ----- ------ ---------
Earnings per common and common equivalent share:
Net earnings............................................ $ 0.56 $ 0.57
----------- ---------
----------- ---------
Weighted average number of common and common equivalent
shares outstanding......................................... 49,256 5,300(E) 54,556
----------- ----- ---------
----------- ----- ---------
</TABLE>
The accompanying notes form a part of the unaudited pro forma combined
condensed statement of operations.
--------------------------
(A) Records additional depreciation expense on the addition of $37.3 million of
depreciable assets. The depreciation expense was calculated using the
straight line method based on a 34 year remaining life.
(B) Represents the interest expense on additional debt of $48.2 million relating
to the acquisition of one-third of AEW's interest in LQDP at the effective
weighted average interest rate under the Company's and LQDP's credit
facilities of 6.88% per annum.
(C) Represents the elimination of AEW's equity in earnings.
(D) Reflects income tax effect of pro forma adjustments assuming an effective
income tax rate of 38.1%.
(E) Reflects the increase in weighted average shares outstanding.
(F) In the third quarter of 1995, the Company will record $46.4 million
associated with the exercise of AEW's conversion option as a deduction
presented below net earnings in the Statement of Operations (Conversion of
Partner's Interest into Common Stock) in arriving at net earnings available
to common shareholders. This non-recurring, non-cash item is directly
attributable to the AEW Transaction and is not reflected in the pro forma
condensed statement of operations above.
15
<PAGE>
The unaudited pro forma combined condensed balance sheet of the Company
presented below includes the balance sheet as reported in the Company's
Quarterly Report on Form 10-Q for the six months ended June 30, 1995, and as
adjusted to reflect the AEW Transaction as if the transaction had occurred on
June 30, 1995.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AT ADJUSTMENTS AT
JUNE 30, ---------------- JUNE 30,
1995 DEBIT CREDIT 1995
----------- ------- ------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current assets.......................... $ 38,569 $ 38,569
Other non-current assets................ 24,983 24,983
Net property and equipment.............. 821,530 $17,027(A) 872,611
34,054(B)
----------- ------- ----------
$ 885,082 $51,081 $ 936,163
----------- ------- ----------
----------- ------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities..................... $ 75,058 $30,000(A) $ 105,058
Long term debt, excluding current
installments........................... 465,997 18,200(A) 484,197
Deferred income taxes and other......... 21,339 21,339
Partners' capital....................... 100,105 $31,173(A) 6,586
62,346(B)
Shareholders' equity (net of treasury
stock)................................. 222,583 96,400(B) 318,983
----------- ------- ------- ----------
$ 885,082 $93,519 $144,600 $ 936,163
----------- ------- ------- ----------
----------- ------- ------- ----------
</TABLE>
The accompanying notes form a part of the unaudited pro forma combined
condensed balance sheet.
--------------------------
(A) Records the purchase of one-third of AEW's interest in LQDP using proceeds
from the Company's and LQDP's credit facilities and the related elimination
of one-third of AEW's partner's capital. Approximately $30 million of the
$48.2 million purchase price was drawn on LQDP's 364-day unsecured line of
credit (which the Company intends to renew annually, subject to the consent
of the lenders) and therefore is included in current liabilities.
(B) Reflects the purchase of the assets and the related elimination of
two-thirds of AEW's partner's capital. Also, reflects the net of the $142.8
million of Common Stock issued in the AEW Transaction and the $46.4 million
which represents the non-recurring, non-cash item which will be recorded as
a deduction presented below net earnings in the Statement of Operations
(Conversion of Partner's Interest into Common Stock) in arriving at net
earnings available to common shareholders in the third quarter of 1995.
16
<PAGE>
The unaudited pro forma combined condensed statement of operations presented
below includes the statement of operations as reported in the Company's Form
10-K for the year ended December 31, 1994, and as adjusted to reflect the AEW
Transaction as if the transaction had occurred on January 1, 1994.
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED PRO FORMA ADJUSTMENTS YEAR ENDED
DECEMBER 31, ---------------------------- DECEMBER 31,
1994 DEBIT CREDIT 1994 (F)
------------ ------------- ------------- ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
Total revenues......................................... $ 362,242 $ 362,242
------------ ------------
Operating costs and expenses:
Direct and corporate................................. 213,508 213,508
Depreciation, amortization, and fixed asset
retirements......................................... 37,977 $ 1,096(A) 39,073
------------ ------------
Total operating costs.............................. 251,485 252,581
------------ ------------
Operating income................................... 110,757 109,661
------------ ------------
Other (income) expenses:
Net interest expense................................. 37,439 3,316(B) 40,755
Partners' equity..................................... 11,406 $ 9,278(C) 2,128
Net gain on property transactions.................... (79) (79)
------------ ------------
Earnings before income taxes......................... 61,991 66,857
Income tax expense................................... 24,176 1,631(D) 25,807
------------ ------ ------ ------------
Net earnings....................................... $ 37,815 $ 6,043 $ 9,278 $ 41,050
------------ ------ ------ ------------
------------ ------ ------ ------------
Earnings per common and common equivalent share:
Net earnings....................................... $ 0.78 $ 0.76
------------ ------------
------------ ------------
Weighted average number of common and common equivalent
shares outstanding.................................... 48,624 5,290(E) 53,914
------------ ------ ------------
------------ ------ ------------
</TABLE>
The accompanying notes form a part of the unaudited pro forma combined
condensed statement of operations.
--------------------------
(A) Records additional depreciation expense on the addition of $37.3 million of
depreciable assets. The depreciation expense was calculated using the
straight line method based on a 34 year remaining life.
(B) Represents the interest expense on additional debt of $48.2 million relating
to the acquisition of one-third of AEW's interest in LQDP at the effective
weighted average interest rate under the Company's and LQDP's credit
facilities of 6.88% per annum.
(C) Represents the elimination of AEW's equity in earnings.
(D) Reflects income tax effect of pro forma adjustments including an adjustment
to the effective income tax rate from 39% to 38.6% due to a difference
between aggregate recorded cost and tax basis of the acquired assets.
(E) Reflects the increase in weighted average shares outstanding.
(F) In the third quarter of 1995, the Company will record $46.4 million
associated with the exercise of AEW's conversion option as a deduction
presented below net earnings in the Statement of Operations (Conversion of
Partner's Interest into Common Stock) in arriving at net earnings available
to common shareholders. This non-recurring, non-cash item is directly
attributable to the AEW Transaction and is not reflected in the pro forma
condensed statement of operations above.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis addresses the results of operations
for the six month periods ended June 30, 1995 (the "1995 Six Months") and June
30, 1994 (the "1994 Six Months") and the years ended December 31, 1994, 1993 and
1992.
The Company's financial statements include the accounts of the Company's
wholly-owned subsidiaries and unincorporated partnerships and joint ventures in
which the Company has at least a 40% ownership interest and over which it
exercises substantial legal, financial and operational control. References to
"Managed Inns" are to those inns in which the Company owns less than a 40%
interest and which are managed by the Company under long-term management
contracts.
On June 15, 1995, AEW notified the Company that it would exercise, subject
to certain conditions, its option to convert two-thirds of its ownership
interest in LQDP into 5,299,821 shares of the Company's Common Stock. AEW also
agreed to sell the remaining one-third of its ownership interest in LQDP to the
Company for a negotiated price of $48.2 million in cash. The AEW Transaction was
consummated on July 3, 1995. Upon conversion of the partnership interest into La
Quinta Common Stock, the Company issued 5,299,821 shares of the Company's Common
Stock having a fair market value of $142.8 million based on the July 3, 1995 New
York Stock Exchange closing price. During the third quarter of 1995, the Company
will record net assets acquired at their fair market value of $96.4 million and
a non-cash, non-recurring item of $46.4 million associated with the exercise of
AEW's conversion option as a deduction presented below net earnings in the
Statement of Operations (Conversion of Partner's Interest into Common Stock) in
arriving at net earnings available to common shareholders. This non-recurring,
non-cash item is directly attributable to the AEW Transaction.
During the second quarter of 1994, the Company purchased the limited
partner's interest in one of its combined unincorporated joint ventures which
owned one inn. On July 1, 1994, the Company purchased nine inns which it managed
and which were previously held in two unincorporated joint ventures with CIGNA
Investments, Inc. (the "CIGNA partnerships"). The Company has continued to
operate these properties as La Quinta inns. Also during 1995 and 1994, La Quinta
acquired nine and six additional inns, respectively, for conversion to the La
Quinta-Registered Trademark- brand.
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 will be developed and 100% owned
by a Mexican investor group and managed by the Company under long-term
management agreements (pursuant to which the Company will receive management and
licensing fees). On December 20, 1994, the Mexican government allowed the peso
to trade freely against the U.S. dollar. As a result, the peso suffered a
significant, immediate devaluation against the U.S. dollar. This resulted in
economic conditions that have delayed commencement of construction of La Quinta
inns under the Development Accord. The construction of the first La Quinta inn
under the Development Accord is anticipated to begin when economic conditions in
Mexico stabilize.
The following chart shows certain historical operating statistics and
revenue data. References to occupancy percentages and ADR refer to Company Inns
(inns owned by the Company or by unincorporated partnerships and joint ventures
in which the Company owns at least a 40% interest). Managed Inns and the La
Quinta licensed inns are excluded from occupancy and ADR statistics for all
periods for purposes of comparability. All financial data is related to Company
Inns unless otherwise specified.
<TABLE>
<CAPTION>
COMPARATIVE OPERATING STATISTICS AND REVENUE DATA
----------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
---------------------- ----------------------------------
1995 1994 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT ADR)
<S> <C> <C> <C> <C> <C>
Inn revenue.......................................... $ 202,661 $ 166,003 $ 353,348 $ 258,529 $ 239,826
Restaurant rental and other.......................... 4,017 3,796 7,675 6,464 7,208
Management services.................................. 100 1,007 1,219 6,857 7,088
---------- ---------- ---------- ---------- ----------
Total revenue........................................ $ 206,778 $ 170,806 $ 362,242 $ 271,850 $ 254,122
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Occupancy percentage................................. 72.3% 70.0% 70.1% 65.1% 65.6%
ADR.................................................. $ 50.87 $ 46.62 $ 47.65 $ 46.36 $ 44.33
Available rooms (1).................................. 5,305 4,900 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>
18
<PAGE>
THE 1995 SIX MONTHS COMPARED TO THE 1994 SIX MONTHS
TOTAL REVENUES increased to $206,778,000 in the 1995 Six Months from
$170,806,000 in the 1994 Six Months, an increase of $35,972,000, or 21.1%. Of
the total revenues reported in the 1995 Six Months, 98.0% were revenues from
inns and 2.0% were revenues from restaurant rentals and other revenues.
INN REVENUES are derived from room rentals and other sources such as charges
to guests for long-distance telephone service, fax machine use, vending
commissions, banquet revenues and laundry services. Inn revenues improved to
$202,661,000 in the 1995 Six Months from $166,003,000 in the 1994 Six Months, an
increase of $36,658,000, or 22.1%. The improvement in inn revenues was related
to an increase in occupancy percentage and ADR along with the revenues
associated with the acquisition of nine inns in the 1995 Six Months, the CIGNA
partnerships in July 1994 and six inns in the last half of 1994. Occupancy
percentage increased to 72.3% in the 1995 Six Months from 70.0% in the 1994 Six
Months. ADR increased to $50.87 in the 1995 Six Months from $46.62 in the 1994
Six Months. Improvements in both ADR and occupancy percentage are due, in part,
to the substantial completion of the Company's image enhancement program in
mid-1994, as well as general improvements in the hotel industry. In the 1994 Six
Months, the image enhancement program had only been partially completed.
RESTAURANT RENTAL AND OTHER REVENUES include rental payments from restaurant
buildings owned by La Quinta and leased to and operated by third parties.
Restaurant rental and other revenues increased to $4,017,000 in the 1995 Six
Months from $3,796,000 in the 1994 Six Months, an increase of $221,000, or 5.8%.
The increase is primarily the result of the additional restaurant buildings
owned by the Company through the acquisition of the CIGNA partnerships.
MANAGEMENT SERVICES REVENUE is primarily related to fees earned by the
Company for services rendered in conjunction with Managed Inns. Management
services revenue decreased to $100,000 in the 1995 Six Months from $1,007,000 in
the 1994 Six Months. The decrease is due to the acquisition of the CIGNA
partnerships in July 1994, eliminating the related management fees earned by the
Company.
DIRECT EXPENSES include costs directly associated with the operation of
Company Inns. In the 1995 Six Months approximately 42.2% of direct expenses were
represented by salaries, wages and related costs. Other major categories of
direct expenses include utilities, property taxes, repairs and maintenance and
room supplies. Direct expenses increased to $103,128,000 ($26.88 per occupied
room) in the 1995 Six Months from $93,149,000 ($27.18 per occupied room) in the
1994 Six Months. The increase in direct expenses period over period is primarily
attributable to the growth in number of inns and increase in occupancy. The
improvement in direct expenses per occupied room was primarily due to
efficiencies the Company achieved in labor costs, repairs and maintenance and
utilities expense and was partially offset by rising labor costs in regions with
low unemployment, increased credit card discounts resulting from a higher
percentage of guests paying with credit cards and increased property taxes.
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
increased to $9,392,000 ($1.77 per available room) in the 1995 Six Months from
$9,256,000 ($1.81 per available room, including Managed Inns) in the 1994 Six
Months, an increase of $136,000, or 1.5%. The decrease in corporate expenses on
a per available room basis is the result of the Company's efforts to control
fixed costs, while executing its growth plan in order to increase operating
profit.
DEPRECIATION, AMORTIZATION AND FIXED ASSET RETIREMENTS increased to
$20,630,000 in the 1995 Six Months from $17,772,000 in the 1994 Six Months, an
increase of $2,858,000, or 16.1%. This is due primarily to the increase in fixed
assets resulting from the acquisition of inns, including the CIGNA partnerships,
and additions from the image enhancement program. Depreciation, amortization and
fixed asset retirements also include retirements associated with the image
enhancement program and other capital improvements.
As a result of the above, OPERATING INCOME increased to $73,628,000 in the
1995 Six Months from $50,629,000 in the 1994 Six Months, an increase of
$22,999,000, or 45.4%. Additionally, operating margins were up 6.0 percentage
points, to 35.6% from 29.6%.
19
<PAGE>
INTEREST INCOME is primarily related to earnings on notes receivable and on
short-term investments of Company funds in money market instruments prior to
their use in operations or the acquisition of inns. Interest income decreased to
$579,000 in the 1995 Six Months from $1,069,000 in the 1994 Six Months, a
decrease of $490,000.
INTEREST ON LONG TERM DEBT increased to $20,383,000 in the 1995 Six Months
from $18,599,000 in the 1994 Six Months, an increase of $1,784,000, or 9.6%. The
increase is primarily attributable to the increase in the outstanding balance on
the Company's credit facilities as a result of the acquisition of the CIGNA
partnerships and 15 inns since June 1994.
PARTNERS' EQUITY IN EARNINGS AND LOSSES reflects the interest 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 increased to $8,976,000 in the 1995 Six Months from
$5,522,000 in the 1994 Six Months. The increase is attributable to improvements
in operating performance of the inns and the increase in the number of inns in
LQDP. Occupancy for the LQDP inns increased 4.8 percentage points and ADR
increased by $3.78 in the 1995 Six Months compared to the 1994 Six Months. As of
June 30, 1995, LQDP owned and operated 47 inns, compared to 37 inns at June 30,
1994.
INCOME TAXES for the 1995 Six Months were calculated using an effective
income tax rate of 38.1%, compared to an effective income tax rate of 39.0% for
the 1994 Six Months. The effective income tax rate decrease reflects the
estimated impact of the difference between aggregate recorded cost and tax basis
of acquired assets from the AEW Transaction and a reduction of estimated state
income tax expense.
For the reasons discussed above, the Company reported NET EARNINGS of
$27,761,000, or $0.56 per share, in the 1995 Six Months compared to $16,822,000,
or $0.35 per share, in the 1994 Six Months, an increase in net earnings of
$10,939,000, or 65.0%.
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 revenues and 0.3% were revenues from management services.
INN REVENUES increased to $353,348,000 in 1994 from $258,529,000 in 1993, an
increase of $94,819,000, or 36.7%. The increase in inn revenues was due
primarily to the acquisitions of La Quinta Motor Inns Limited Partnership
("LQP") and the CIGNA partnerships, an increase in ADR and occupancy percentage
and an increase in the number of available rooms. ADR increased to $47.65 in
1994 from $46.36 in 1993, an increase of $1.29, or 2.8%, while occupancy
increased 5.0 percentage points. The substantial completion of the Company's
image enhancement program contributed to the increases in ADR 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 inns, the CIGNA partnerships
during 1994 and LQP in December of 1993.
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 restaurant
buildings leased to and operated by third parties due to the acquisition of LQP.
MANAGEMENT SERVICES REVENUE decreased to $1,219,000 in 1994 from $6,857,000
in 1993. Management fees decreased due to the consolidation of LQP in December
1993 and the acquisition of the CIGNA partnerships in July 1994, eliminating the
related management fees earned by the Company.
In 1994, approximately 41.9% of DIRECT EXPENSES were represented by
salaries, wages, and related costs. Other major categories of direct expenses
include utilities, property taxes, repairs and maintenance and room supplies.
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
20
<PAGE>
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 the CIGNA partnerships caused the increase of
direct expenses in total year over year.
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 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 $13,922,000, 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, the CIGNA partnerships, five inns in 1994 and 11 inns in
the latter part of 1993, and the Company's image enhancement program.
As a result of the above, OPERATING INCOME increased to $110,757,000 in 1994
from $75,367,000 in 1993, an increase of $35,390,000, or 47.0%.
INTEREST INCOME decreased to $1,421,000 in 1994 from $5,147,000 in 1993, a
decrease of $3,726,000, or 72.4%. The decrease in interest income is primarily
attributable to a decrease in interest earned on a note receivable from AEW (the
"AEW Note") due to the collection of the entire principal balance in December
1993.
INTEREST ON LONG TERM DEBT increased to $38,860,000 in 1994 from $31,366,000
in 1993, an increase of $7,494,000, or 23.9%. The increase in interest expense
is attributable to the debt incurred to acquire LQP, the CIGNA partnerships and
certain of the limited partners' interests and debt assumed in connection with
the acquisition of LQP.
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 LQDP. As of December
31, 1994, LQDP owned and 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 title to the
property on which the Company's headquarters were located.
INCOME TAXES for 1994 were calculated using an estimated effective income
tax rate of 39%.
For the reasons discussed above, the Company reported EARNINGS BEFORE
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE of $37,815,000 in
1994 compared with $19,420,000 in 1993, an increase of $18,395,000, or 94.7%.
The Company reported EXTRAORDINARY ITEMS, NET OF INCOME TAXES of ($619,000)
in 1993. The 1993 extraordinary loss consisted of ($6,007,000), ($3,664,000) net
of income taxes, related to the early extinguishment and refinancing of certain
debt partially offset by an extraordinary gain of $4,991,000, $3,045,000 net of
income taxes, resulting from the Company's transfer of ownership to the
mortgagee of property on which the Company's headquarters were located.
The CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR INCOME TAXES of
$1,500,000, or $0.03 per share in 1993, was the result of the implementation of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes."
21
<PAGE>
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 revenues 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 ADR, an increase in the number of available rooms and the
acquisition of LQP. ADR increased to $46.36 in 1993 from $44.33 in 1992, an
increase of $2.03, or 4.6%, while occupancy declined 0.5 percentage points. As
anticipated, the Company's image enhancement program caused temporary
construction-related disruption in normal business operations and occupancies at
inns undergoing the process. Also, management's decision to discontinue a coupon
promotion used in 1992 had a positive impact on ADR, but 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 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%. In 1993, approximately 42.4% of direct expenses consisted
of salaries, wages, and related costs. 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 of
$2,696,000 to increase the allowance for certain notes receivable 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
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, were 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.
22
<PAGE>
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.
As a result of the above, OPERATING INCOME increased to $75,367,000 in 1993
from $34,575,000 in 1992, an increase of $40,792,000, or 118.0%. 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 Company's 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 LQDP. As of December
31, 1993, LQDP 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 title to
the property on which the Company's headquarters were located.
INCOME TAXES for 1993 were calculated using an estimated effective income
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 a loss of ($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), ($3,664,000) 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 on 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 amount. In addition, the Company retired its 10%
Convertible Subordinated Debentures due 2002.
The CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING FOR INCOME TAXES of
$1,500,000, or $0.03 per share, in 1993 was the result of the implementation of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes."
23
<PAGE>
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
In general, 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 six months ended
June 30, 1995 and June 30, 1994 and the years ended December 31, 1994 and 1993,
the Company funded a majority of its development program through LQDP. Most of
the Company's inns and adjacent restaurant land and buildings are 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 June 30, 1995, the Company had $6,694,000 of cash and cash equivalents,
an increase of $4,105,000 from December 31, 1994. At June 30, 1995, the Company
had $74,650,000 available on its credit facilities.
On April 21, 1995, the Company completed negotiations to amend its existing
credit facilities. The amended credit facilities provide the Company with a
$75,000,000 secured line of credit and a $141,500,000 secured term credit
facility. Borrowings under the secured line of credit will mature May 31, 1999.
Borrowings under the secured term credit facility require semi-annual principal
payments commencing May 30, 1997 through May 30, 2002. Borrowings under each of
these credit facilities bear interest at either LIBOR, the prime rate or
certificate of deposit rate, plus an applicable margin, as defined in the
related credit agreements. Currently, borrowings bear interest at either LIBOR
plus 3/4%, the prime rate, or the certificate of deposit rate plus 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 0.25% per annum on the daily average unused
portion of the credit facilities.
On April 21, 1995, the $35,000,000 unsecured line of credit among LQDP and
participating banks was amended. LQDP also completed negotiations for a
$30,000,000, 364-day unsecured line of credit with participating banks. The
unsecured line of credit and 364-day unsecured line of credit bear interest at
either LIBOR, the prime rate or certificate of deposit rate, plus LQDP's
applicable margin, as defined in the related credit agreements. As of April 21,
1995, borrowings under both unsecured lines of credit bear interest at either
LIBOR plus 5/8%, the prime rate, or the certificate of deposit rate plus 3/4%.
LQDP's applicable margin is determined quarterly based upon predetermined levels
of LQDP's indebtedness to cash flows, as defined in the related credit
agreements. The unsecured line of credit and 364-day unsecured line of credit
mature May 31, 1997 and April 19, 1996, respectively. LQDP pays a commitment fee
of 0.20% and 0.15% per annum on the daily unused portion of the unsecured line
of credit and the 364-day unsecured line of credit, respectively.
The Company financed the $48.2 million acquisition of the remaining
one-third of AEW's interest in LQDP by borrowing $30 million under LQDP's
364-day unsecured line of credit, and the balance under the Company's and LQDP's
credit facilities. The Company intends to renew the 364-day unsecured line of
credit annually, subject to the consent of the lenders. As of June 30, 1995, the
Company would have had $26,450,000 available on its existing credit facilities,
including the amount available on LQDP's credit facilities, after giving effect
to the AEW Transaction.
On January 23, 1992, with the approval of the Company's Board of Directors,
the Company entered into two interest rate swap agreements (the "Agreements")
which exchanged the Company's variable rate interest payments for the fixed rate
interest payments of a major financial institution (the "Counterparty"). The
debt ("Notional Amount") underlying the Agreements 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
24
<PAGE>
rate of 6.5% exceed the percentage of prime interest rate, the Company pays the
difference times the Notional Amount to the Counterparty, on a monthly basis.
These Agreements resulted in net payments to the Counterparty of $213,000,
$630,000, $1,040,000, $1,427,000 and $1,184,000 in the six months ended June 30,
1995 and 1994 and 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 June 30, 1995, the Notional Amounts of debt remaining under the
Agreements are $10,657,000 and $35,400,000, which bear interest at a weighted
average variable interest rate of 6.63% and 3.93%, respectively. The VRDN rate
decreased from 4.32% at December 31, 1994 to 3.87% at June 30, 1995.
The Company is exposed to market risk associated with fluctuations in
interest rates. By entering into 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 into 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.
Net cash provided by operating activities improved to $66,566,000 in the
1995 Six Months from $41,400,000 in the 1994 Six Months, an increase of
$25,166,000, or 60.8%. The increase was the result of the improvement in inn
revenue and operating margins. 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 percentage and ADR.
Net cash used by investing activities decreased to ($55,233,000) in the 1995
Six Months from ($82,772,000) in the 1994 Six Months, a decrease of $27,539,000,
or 33.3%. The 1995 and 1994 capital expenditures include the purchase of nine
inns and six inns, respectively. The 1994 capital expenditures also include
expenditures of approximately $40,103,000 related to the Company's image
enhancement program and the purchase of the remaining units of La Quinta Motor
Inns Limited Partnership. 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, or
7.9%. The increase was related to capital expenditures related to the image
enhancement program, purchase and conversion of inns, the purchase of units of
LQP and the acquisition of the CIGNA partnerships. 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 used by financing activities was ($7,228,000) in the 1995 Six
Months compared to net cash provided by financing activities of $18,998,000 in
the 1994 Six Months. Payments on the Company's credit facilities, an increase in
dividends to shareholders and a reduction in the proceeds received on the
Company's credit facilities and long term borrowings contributed to the increase
in cash used by financing activities. 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 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.
25
<PAGE>
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 $650,000 in the aggregate. As of June
30, 1995, the Company had no advances outstanding to the unincorporated
partnerships and joint ventures.
The estimated additional cost to complete the conversion and renovation of
inns for which commitments have been made is $9,716,000 at June 30, 1995. The
Company broke ground for the new construction of one inn in June 1995 and one
inn in July 1995. The Company is committed to approximately $12,773,000 for the
completion of these inns. Funds on hand, committed and anticipated from cash
flow are sufficient to complete these projects.
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 June 30,
1995 and June 30, 1994, 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 and LQDP's credit facilities are sufficient to fund operating
expenses, debt service and other capital requirements through at least the
second quarter of 1996. The Company will evaluate from time to time the
necessity of other financing alternatives.
SEASONALITY
The lodging industry is seasonal in nature. Generally, the Company's inn
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in the revenues, profit margins and net earnings of the Company.
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.
ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The statement,
which is effective for fiscal years beginning after December 15, 1995, requires
that an entity evaluate long-lived assets and certain other identifiable
intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable.
Impairment loss meeting the recognition criteria is to be measured as the amount
by which the carrying amount for financial reporting purposes exceeds the fair
value of the asset. The Company plans to adopt this statement in 1996 and does
not expect adoption of the statement to have a material effect, if any, on the
Company's financial position or results of operations.
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.
26
<PAGE>
BUSINESS
La Quinta is the second largest owner/operator of hotels in the United
States, with 236 inns and more than 30,000 rooms. La Quinta operates primarily
in the mid-priced segment of the lodging industry, as defined by Smith Travel
Research, an independent lodging industry research firm. La Quinta achieved an
average occupancy percentage of 70.1% and an ADR of $47.65 for the year ended
December 31, 1994. Founded in 1968, the Company has inns located in 29 states,
with strategic concentrations in Texas, Florida and California. La Quinta
currently owns a 100% interest in 228 of its inns and a 50% or greater interest
in an additional seven inns. La Quinta operates all of its inns other than one
licensed inn. La Quinta's business strategy is to continue to expand its
successful core business as an owner/operator in the mid-priced segment of the
lodging industry.
The Company was founded in San Antonio, Texas in 1968. La Quinta was
originally incorporated and became a publicly traded entity in 1972 and is
incorporated under the laws of the State of Texas. The principal executive
offices are located at Weston Centre, 112 E. Pecan Street, San Antonio, Texas
78299-2636, telephone (210) 302-6000.
OWNERSHIP AND MANAGEMENT CONTROL
Unlike most major chains in the lodging industry, La Quinta owns and manages
all but one of the inns that carry its brand. The Company believes that much of
its success is attributable to this operating control, which allows the Company
to achieve a higher level of consistency in both product quality and service
than its competitors. In addition, its operating control gives La Quinta the
ability to offer new services, determine expansion strategies, set pricing and
make other marketing decisions on a system-wide or local basis as conditions
dictate, without consulting third-party owners, management companies or
franchisees as required of most other lodging chains.
BRAND IMAGE
La Quinta has taken major steps to assure uniform high quality at its inns.
In 1993 and 1994, the Company invested approximately $65 million in a
comprehensive chainwide image enhancement program designed to give all of its
inns a new, fresh appearance while preserving their unique character. The
program, which was substantially completed in mid-1994, featured new signage
displaying a distinctive new logo, along with 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 areas for continental breakfast.
As a result of its ability to provide consistently high-quality, convenient
accommodations and excellent value, the Company believes that it has established
La Quinta as a strong, well-regarded mid-priced brand. The Company believes that
its brand recognition and reputation have enhanced the performance of its
existing inns and should provide an advantage for inns added in the future.
FOCUSED GROWTH STRATEGY; OWNERSHIP OF INNS
La Quinta attributes its strong operating performance in large part to the
successful implementation of a three-part strategic plan formulated by the
Company's senior management team after their arrival at the Company in 1992.
First, management substantially restructured the Company, which historically had
financed a large part of its development through partnerships and joint ventures
with financial institutions, by purchasing its partners' interests in 19
unincorporated joint ventures and partnerships since 1993 (including the AEW
Transaction). The Company also refinanced a majority of its outstanding debt,
and instituted corporate and operating-level cost controls. Second, management
reimaged all La Quinta inns through the system-wide image enhancement program.
Third, the Company demonstrated its ability to grow the number of inns --
acquiring 11 inns in 1993, 15 inns in 1994 and nine inns in the first six months
of 1995 -- while increasing profitability.
The Company intends to focus both on INTERNAL GROWTH -- enhancing revenues,
cash flow and profitability at its current portfolio of inns, and EXTERNAL
GROWTH -- adding new inns through opportunistic acquisitions and conversions of
existing properties and selective new construction. The Company's external
growth strategy is to reinforce its presence in existing markets and expand
selectively into new markets. At current
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<PAGE>
prices, acquisition and conversion of existing properties is generally more cost
effective than new construction. The Company estimates that its current average
cost of aquiring and converting an inn to the La Quinta brand is approximately
$40,000 to $45,000 per room. The Company plans to construct new inns in those
strategic markets where acquisition and conversion of existing inns at a
discount to replacement cost is not available. The Company estimates that the
average cost to construct a new inn will be approximately $50,000 to $55,000 per
room. For the twelve months ended June 30, 1995, the Company generated $79.6
million of cash flow after required interest payments, maintenance capital
expenditures (assumed to be 5% of room revenues), dividends, taxes and partner
distributions, providing an internal source of funding to support its growth
plan.
The following table describes the composition of inns in the La Quinta chain
at June 30, 1995 and as adjusted for the AEW Transaction, and at December 31,
1992:
<TABLE>
<CAPTION>
JUNE 30, 1995 DECEMBER 31, 1992
----------------------------------------------------- -------------------------
AS ADJUSTED ACTUAL ACTUAL
------------------------- ------------------------- -------------------------
LA QUINTA LA QUINTA LA QUINTA
TOTAL EQUIVALENT TOTAL EQUIVALENT TOTAL EQUIVALENT
INNS ROOMS ROOMS (1) INNS ROOMS ROOMS (1) INNS ROOMS ROOMS (1)
---- ------ ---------- ---- ------ ---------- ---- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Owned 100%.............................. 228 29,352 29,352 181 22,927 22,927 89 11,456 11,456
Owned 40-80%............................ 7 836 467 54 7,261 3,037 80 10,218 4,919
---- ------ ---------- ---- ------ ---------- ---- ------ ----------
Total Company owned and operated........ 235 30,188 29,819 235 30,188 25,964 169 21,674 16,375
Managed inns............................ -- -- -- -- -- -- 40(2) 4,978 75
Licensed inns........................... 1 120 -- 1 120 -- 3 366 --
---- ------ ---------- ---- ------ ---------- ---- ------ ----------
236 30,308 29,819 236 30,308 25,964 212 27,018 16,450
---- ------ ---------- ---- ------ ---------- ---- ------ ----------
---- ------ ---------- ---- ------ ---------- ---- ------ ----------
<FN>
------------------------------
(1) Represents the Company's proportionate ownership interest in total rooms.
(2) Managed inns represent inns in LQP and the CIGNA partnerships, which were
subsequently acquired by the Company.
</TABLE>
FACILITIES AND SERVICES
The typical La Quinta inn contains approximately 130 spacious, quiet and
comfortably furnished guest rooms averaging 300 square feet in size. Guests at a
La Quinta inn are offered a wide range of amenities and services, including
complimentary continental breakfast, free unlimited local telephone calls,
remote-control televisions with a premium movie channel, a swimming pool,
same-day laundry and dry cleaning, fax services, 24-hour front desk and message
service, smoking/non-smoking rooms and free parking. La Quinta guests typically
have convenient access to food service at adjacent free-standing restaurants,
including national chains such as Cracker Barrel, IHOP, Denny's and Perkins. La
Quinta has an ownership interest in 126 of these adjacent restaurant buildings,
which it leases to restaurant operators.
La Quinta inns appeal to guests who desire high-quality rooms, convenient
locations and attractive prices, but who do not require banquet and convention
facilities, in-house restaurants, cocktail lounges or room service. By
eliminating the costs of these management-intensive facilities and services, La
Quinta believes it offers its customers exceptional value by providing rooms
that are comparable in quality to full-service hotels at lower prices.
To maintain the overall quality of La Quinta's inns, each inn undergoes
refurbishments and capital improvements as needed. Typically, refurbishing has
been provided at intervals of between five and seven years, based on an annual
review of the condition of each inn. In the six months ended June 30, 1995 and
1994 and each of the years ended December 31, 1994, 1993 and 1992, the Company
spent approximately $16.4 million, $55.4 million, $75.2 million, $32.6 million
and $15.5 million, respectively, on capital improvements to existing inns. The
amounts for the six months ended June 30, 1995 and 1994 and the years ended
December 31, 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
inns that is more consistent than other national mid-priced hotel chains.
28
<PAGE>
CUSTOMER BASE AND MARKETING
La Quinta's combination of consistent, high-quality accommodations and good
value is attractive to business customers, who account for more than 50% of
rooms rented. These core customers typically visit a given area several times a
year, and include salespersons covering a specific territory, government and
military personnel and technicians. The 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. The
Company also targets both vacation travelers and senior citizens. For the
convenience of these targeted customer groups, inns are generally located near
suburban office parks, major traffic arteries or destination areas such as
airports and convention centers.
La Quinta has developed a strong following among its customers; internal
customer surveys show that the average customer spends 16 nights per year in a
La Quinta inn. The Company focuses a number of its marketing programs on
maintaining a high number of repeat customers. For example, La Quinta promotes a
"Returns-Registered Trademark- Club" offering members preferred status and rates
at La Quinta inns, along with rewards for frequent stays. The Returns Club had
approximately 235,000 members as of June 30, 1995.
The Company focuses on reaching its target markets by utilizing advertising,
direct sales, repeat traveler incentive programs and other marketing programs
targeted at specific customer segments. The Company advertises primarily through
network and local radio, television networks and print advertisements which
focus on quality and value. The Company utilizes the same campaign concept
throughout the country with minor modifications made to address regional
differences. The Company also utilizes billboard advertisements along major
highways which announce a La Quinta inn's presence in upcoming towns.
The Company markets directly to companies and other organizations through
its direct sales force of 40 sales representatives and managers. This sales
force calls on companies which have a significant number of individuals
traveling in the regions in which La Quinta operates and which are capable of
producing a high volume of room nights.
The Company provides a central reservation system,
"teLQuik-Registered Trademark-," which currently accounts for advance
reservations for approximately 27% of room nights. The teLQuik system allows
customers to make reservations by dialing 1-800-531-5900 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 addition, approximately 47% of room nights reflect
advance reservations made directly with individual inns and forwarded to the
central reservation system. In total, advance reservations account for
approximately 74% of room nights. In 1994, the Company completed a new
reservation center, which is a part of its program to improve operating results
by providing state-of-the-art technology in processing reservations more
efficiently. La Quinta, through its national sales managers, markets its
reservation services to travel agents and corporate travel planners who may
access teLQuik through the five major airline reservation systems.
29
<PAGE>
THE LODGING INDUSTRY
Conditions in the lodging industry have improved significantly since the
beginning of 1992, with occupancy percentages, ADR and profitability increasing
through the end of the first quarter of 1995, the last quarter for which such
industry information is available. The lodging industry as a whole earned
pre-tax profits of approximately $5.5 billion in 1994, more than double the
level of pre-tax profitability achieved in 1993.
The key elements underlying the industry's strong operating performance are
(i) increased economic activity, which has resulted in growth in demand for
hotel rooms, coupled with (ii) growth in new room supply that has been
significantly lower than the growth in demand. Room demand growth exceeded the
rate of new room supply by 2.0%, 2.6% and 3.3% in 1992, 1993 and 1994,
respectively. However, historical industry performance may not be indicative of
future results. See "Risk Factors -- Risks of the Lodging Industry."
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL U.S. LODGING INDUSTRY DEMAND GROWTH MARGIN
<S> <C>
(% Growth in Room Demand Less % Growth in Room Supply)
1991 -2.5%
1992 2.0%
1993 2.6%
1994 3.3%
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL U.S. OCCUPANCY AND ADR
<S> <C> <C>
(% Increase/Decrease)
Occupancy ADR
1991 -2.4% 0.6%
1992 2.0% 1.4%
1993 2.6% 2.8%
1994 2.4% 3.8%
</TABLE>
Source: Smith Travel Research
30
<PAGE>
In this favorable supply/demand environment, with an excess of demand growth
over supply growth, lodging companies like La Quinta have demonstrated a
significant degree of "pricing power," which describes a hotel's ability to
increase ADR without adversely affecting occupancy percentages. For example,
industry-wide ADR grew 3.8% in 1994 versus 1993, while industry average
occupancy percentages increased 2.4% over the same period. ADR growth exceeded
the rate of inflation in 1994 by 1.2%, the first year of real rate growth after
seven years of decline. Industry-wide ADR in the first three months of 1995
increased 4.9% over the first three months of 1994, with occupancy percentages
up 1.5% over the comparable 1994 first-quarter results.
The mid-priced lodging industry segment in which La Quinta primarily
operates has also experienced favorable operating results. In both 1994 and the
first quarter of 1995, demand growth exceeded supply growth in this segment by a
wider margin than in any other lodging industry segment except luxury hotels. In
addition, REVPAR grew by 5.5% in the mid-priced segment in 1994 versus 1993.
Only the luxury segment experienced higher REVPAR growth in 1994. The mid-priced
segment continued to have strong REVPAR growth in the first quarter of 1995,
with REVPAR increasing 5.9% over the comparable period in 1994. The foregoing
industry data is based on information provided by Smith Travel Research.
OPERATIONS
Management of the La Quinta chain is coordinated from the Company's
headquarters in San Antonio, Texas. Centralized corporate services and functions
include marketing, financing, accounting and reporting, purchasing, quality
control, development, legal, reservations and training.
Inn operations are currently organized into Eastern, Western and Central
divisions with each division headed by a Divisional Vice President. Regional
Managers report to the Divisional Vice Presidents and are each responsible for
approximately 12 inns. Regional Managers are responsible for the service,
cleanliness and profitability of the inns in their regions.
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, each inn manager will supervise
one housekeeping supervisor, eight room attendants, two laundry workers, two
general maintenance persons and three front desk service representatives.
At June 30, 1995, La Quinta employed approximately 7,400 persons, of whom
approximately 90% were compensated on an hourly basis. Approximately 280
individuals were employed at corporate and 7,120 were employed as inn managers
and employees. The Company's employees are not currently represented by labor
unions. Management believes its ongoing labor relations are good.
31
<PAGE>
PROPERTIES
At June 30, 1995, there were 236 inns located in 29 states with
concentrations in Texas, Florida and California. The states and cities in which
the inns are located are set forth in the following table:
ALABAMA
Birmingham
Huntsville (2)
Mobile
Montgomery
Tuscaloosa
ARIZONA
Phoenix (3)
Tucson (2)
ARKANSAS
Little Rock (5)
CALIFORNIA
Bakersfield
Costa Mesa
Fresno
Irvine
La Palma
Redding
Sacramento (2)
San Bernardino
San Diego (3)
San Francisco
Stockton
Ventura
COLORADO
Colorado Springs
Denver (7)
FLORIDA
Coral Springs
Daytona Beach
Deerfield Beach
Ft. Myers
Gainesville
Jacksonville (3)
Miami
Orlando (3)
Pensacola
Tallahassee (2)
Tampa (5)
GEORGIA
Atlanta (7)
Augusta
Columbus
Savannah (2)
ILLINOIS
Champaign
Chicago Metro Area (5)
Moline
INDIANA
Indianapolis (2)
Merrillville
KANSAS
Lenexa
Wichita
KENTUCKY
Lexington
LOUISIANA
Baton Rouge
Bossier City
Kenner
Lafayette
Monroe
New Orleans (5)
Slidell
Sulphur
MICHIGAN
Kalamazoo
MISSISSIPPI
Jackson (2)
MISSOURI
St. Louis
NEBRASKA
Omaha
NEVADA
Las Vegas (2)
Reno
NEW MEXICO
Albuquerque (3)
Farmington
Las Cruces
Santa Fe
NORTH CAROLINA
Charlotte (2)
OHIO
Columbus
OKLAHOMA
Oklahoma City (3)
Tulsa (3)
PENNSYLVANIA
Pittsburgh
SOUTH CAROLINA
Anderson
Charleston
Columbia
Greenville
TENNESSEE
Chattanooga
Kingsport
Knoxville (2)
Memphis (3)
Nashville (3)
TEXAS
Abilene
Amarillo (2)
Arlington
Austin (5)
Beaumont
Bedford
Brownsville
Clute
College Station
Corpus Christi (2)
Dallas Metro Area (12)
Del Rio
Denton
Eagle Pass
El Paso (3)
Fort Stockton
Fort Worth (2)
Galveston
Georgetown
Harlingen
Houston Metro Area (17)
Killeen
Laredo
Longview
Lubbock (2)
Lufkin
TEXAS (CONTINUED)
Midland
Nacogdoches
Odessa
Round Rock
San Angelo
San Antonio (11)
San Marcos
Temple
Texarkana
Tyler
Victoria
Waco
Wichita Falls
UTAH
Layton
Salt Lake City
VIRGINIA
Bristol
Hampton
Richmond
Virginia Beach
WASHINGTON
Seattle (2)
Tacoma
WYOMING
Casper
Cheyenne
Rock Springs
LICENSED
LA QUINTA INNS
TEXAS
McAllen
OTHER
OWNED INNS
(operated under other brands)
GEORGIA
Columbus
TEXAS
El Paso
La Marque
San Antonio
32
<PAGE>
Typically, food service for La Quinta guests is provided by adjacent, free
standing restaurants. At June 30, 1995, the Company had an ownership interest in
126 restaurant buildings adjacent to its inns. These 126 restaurant buildings
are owned by the Company or its partnerships and joint ventures, which own the
related inn. These restaurant buildings 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. The Company's ownership interests in such restaurant buildings are as
follows, after giving effect to the AEW Transaction:
<TABLE>
<CAPTION>
RESTAURANT BUILDINGS
-----------------------
<S> <C>
Owned 100%..................................................... 121
Owned 50-67%................................................... 5
---
126
---
---
</TABLE>
Most of the Company's inns and restaurants are pledged to secure long term
debt maturing in various years from 1995 to 2015. (See note 2 of Notes to
Combined Financial Statements.)
COMPETITION
Each La Quinta inn competes in its market area with numerous full service
lodging brands, especially in the mid-priced segment, and with numerous other
hotels, motels and other lodging establishments. Chains such as Hampton Inns,
Courtyard by Marriott, Fairfield Inns and Drury Inns are direct competitors of
La Quinta. Other well-known competitors include Holiday Inns, Ramada Inns, Red
Roof Inns and Comfort Inns. There is no single competitor or group of
competitors of La Quinta that is dominant in the lodging industry. Competitive
factors in the industry include reasonableness of room rates, quality of
accommodations, degree of service and convenience of locations.
The lodging industry in general, including La Quinta, may be adversely
affected by national and regional economic conditions and government
regulations. The demand for accommodations at a particular inn may be adversely
affected by many factors including changes in travel patterns, local and
regional economic conditions and the degree of competition with other lodging
establishments in the area. See "Risk Factors -- Risks of the Lodging Industry"
and "-- Competition."
LICENSING
The Company selectively licensed the name "La Quinta-Registered Trademark-"
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 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 will be developed and 100% owned
by a Mexican investor group and managed by the Company under long-term
management agreements (pursuant to which the Company will receive management and
licensing fees). On December 20, 1994, the Mexican government allowed the peso
to trade freely against the U.S. dollar. As a result, the peso suffered a
significant, immediate devaluation against the U.S. dollar. This resulted in
economic conditions that have delayed commencement of construction of La Quinta
inns under the Development Accord. The construction of the first La Quinta inn
under the Development Accord is anticipated to begin when economic conditions in
Mexico stabilize.
"La Quinta-Registered Trademark-," "teLQuik-Registered Trademark-" and
"Returns-Registered Trademark- Club" have been registered as service marks by La
Quinta with the U.S. Patent and Trademark Office and variously in Mexico,
Canada, the United Kingdom and the Netherland Antilles.
EMPLOYMENT AND OTHER GOVERNMENT REGULATION
The lodging industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation and sale of
food and beverage (such as health and liquor license laws) and building and
zoning requirements. Also, the Company is subject to laws governing its
relationship with employees, including minimum wage requirements, overtime,
working conditions and work permit requirements. An increase in the minimum wage
rate, employee benefit costs or other costs associated with employees, could
adversely affect the Company. Both at the federal and state level from time to
time, there are proposals under consideration to increase the minimum wage.
Under the Americans with Disabilities
33
<PAGE>
Act of 1990 (the "ADA"), all public accommodations are required to meet certain
federal requirements related to access and use by disabled persons. Although the
Company has taken actions to comply with the ADA, no assurance can be given that
a material ADA claim will not be asserted against the Company. These and other
initiatives could adversely affect the Company as well as the lodging industry
in general.
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. In addition, certain environmental laws and
common law principles could be used to impose liability for release of
asbestos-containing materials ("ACMs") into the air, and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs. Environmental laws also may impose
restrictions on the manner in which property may be used or business may be
operated, and these restrictions may require expenditures. In connection with
the ownership or operation of hotels and adjacent restaurant land and buildings,
the Company may be potentially liable for any such costs or liabilities.
Although the Company is currently not aware of any material environmental claims
pending or threatened against it, no assurance can be given that a material
environmental claim will not be asserted against the Company. The cost of
defending against claims of liability or of remediating a contaminated property
could have a material adverse affect on the results of operations of the
Company.
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, entitled WALTER J. BIEGLER V. LA QUINTA MOTOR
INNS, INC., ET AL., is pending in the U.S. District Court for the Western
District of Texas, San Antonio Division. 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. As yet, 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 similiar
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.
34
<PAGE>
MANAGEMENT
The following chart lists the Company's current directors and executive
officers.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH THE COMPANY
--------------------------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Gary L. Mead....................................... 47 President, Chief Executive Officer and Director
Michael A. Depatie................................. 38 Senior Vice President -- Finance
William C. Hammett, Jr............................. 48 Senior Vice President -- Accounting and Administration
Thomas W. Higgins.................................. 48 Senior Vice President -- Operations
Stephen B. Hickey.................................. 50 Senior Vice President -- Marketing
Steven T. Schultz.................................. 48 Senior Vice President -- Development
John F. Schmutz.................................... 48 Vice President -- General Counsel and Secretary
Dr. William H. Cunningham.......................... 51 Director
Donald J. McNamara................................. 42 Director
Peter Sterling..................................... 53 Director
Thomas M. Taylor................................... 52 Director
</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 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 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 of the Company 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 System from August
1973 to September 1988.
THOMAS W. HIGGINS has been Senior Vice President -- Operations of the
Company since September 1992. He served as Vice President -- Human Resources of
the Company from June 1992 to September 1992. He served as Vice President --
Human Resources of Motel 6 G.P., Inc. from May 1988 to June 1992. He served as
Director of Training Employment of General Mills from October 1986 to May 1988.
STEPHEN B. HICKEY has been Senior Vice President -- Marketing of the Company
since June 1995. He served as Senior Vice President -- Marketing of T.G.I.
Friday's, Inc. from September 1989 to June 1995. He served as Vice President --
Corporate Marketing of Wendy's International from October 1988 to August 1989.
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.
DR. WILLIAM H. CUNNINGHAM has been a Director since 1985. He has been
Chancellor of The University of Texas System since September 1992, and prior
thereto, the President of The University of Texas at Austin since September
1985. He served as the Dean of the College of Business Administration and
Graduate School of Business of The University of Texas at Austin from 1983 to
August 1985 and a Professor of
35
<PAGE>
Marketing, the University of Texas at Austin, since 1979. He is a director of
Freeport McMoRan Inc., Jefferson-Pilot Corporation, LBJ Foundation Board and
John Hancock Advisors (formerly Trans American Fund Management Group).
DONALD J. MCNAMARA has been a Director since 1991. He has served as the
Chairman of The Hampstead Group (a real estate investment firm) since September
1987. He is a director of Forum Retirement Partners, L.P.; a director of FelCor
Suite Hotels, Inc.; and Chairman of the Board of Harvey Hotel Holdings, Inc.
PETER STERLING has been a Director since 1991. He has served as the Vice
President and Chief Financial Officer of Sid R. Bass, Inc. and Lee M. Bass, Inc.
(diversified investment firms) since September 1, 1983.
THOMAS M. TAYLOR has been a Director since 1991. He has served as Chairman
of the Board of the Company since March 1994 and President of Thomas M. Taylor &
Co. (an investment consulting firm) since May 1985. He is also President of
TMT-FW (a diversified investment firm). He is a director of TPI Enterprises,
Inc. and John Wiley & Sons, Inc.
None of the directors or executive officers of the Company has a family
relationship with any of the other directors or executive officers.
36
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
On June 15, 1995, the Selling Shareholder notified the Company that it would
exercise, subject to certain conditions, its option to convert two-thirds of its
ownership interest in LQDP into 5,299,821 shares of Common Stock pursuant to the
La Quinta Development Partners, L.P. Amended and Restated Agreement of Limited
Partnership dated March 21, 1990, as amended (the "LQDP Partnership Agreement").
The AEW Transaction was consummated on July 3, 1995. In addition to the shares
issued upon conversion, the Selling Shareholder will sell in the Offering 20,250
shares of Common Stock that it currently owns, assuming that the U.S.
Underwriters' over-allotment option is exercised in full. See "Prospectus
Summary -- The Selling Shareholder." After the completion of the Offering,
assuming the exercise of the over-allotment option in full, the Selling
Shareholder will not own any shares of Common Stock.
Under the LQDP Partnership Agreement, the Selling Shareholder was granted
the right to appoint a director of the Company, which right will terminate after
the completion of the Offering. An officer of the general partner of the Selling
Shareholder, who had been appointed a director of the Company pursuant to this
right, resigned as a director of the Company on June 13, 1995.
The table below sets forth certain information regarding beneficial
ownership of the Company's Common Stock by (i) the Selling Shareholder, as of
July 3, 1995 and (ii) each person known to the Company to be a beneficial owner
of more than 5% of the Common Stock (other than the Selling Shareholder), as of
May 31, 1995. All percentages set forth below have been adjusted for the
issuance of the Common Stock to the Selling Shareholder in the AEW Transaction.
<TABLE>
<CAPTION>
AT MAY 31, 1995(1)
--------------------------------------------------------------------------
SHARES TO BE
SHARES BENEFICIALLY OWNED SOLD IN THE SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING OFFERING AFTER THE OFFERING
---------------------------- -------------- ----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT
------------------------------------------ --------------- ----------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
AEW Partners, L.P......................... 5,320,071(2) 10.18% 5,320,071 (2) -- (2) -- %
225 Franklin Street
Boston, Massachusetts 02110
Thomas M. Taylor & Co..................... 2,322,979 4.44 -- 2,322,979 4.44
Trust for the benefit of Mr. Taylor's 3,375 * -- 3,375 *
son......................................
Thomas M. Taylor.......................... 60,750 (3) * -- 60,750 (3) *
Sid R. Bass, Inc.......................... 2,765,305 5.29 -- 2,765,305 5.29
Lee M. Bass, Inc.......................... 2,765,305 5.29 -- 2,765,305 5.29
The Bass Management Trust................. 2,861,392 (4) 5.48 -- 2,861,392 (4) 5.48
The Airlie Group, L.P..................... 2,025,000 3.87 -- 2,025,000 3.87
Annie R. Bass Grandson's Trust for Lee M.
Bass..................................... 536,287 1.03 -- 536,287 1.03
Annie R. Bass Grandson's Trust for Sid R.
Bass..................................... 536,287 1.03 -- 536,287 1.03
Douglas K. and Anne Marie Bratton......... 5,375 * -- 5,375 *
Douglas K. Bratton IRA.................... 1,687 * -- 1,687 *
Miles Ellis Bratton 1991 Trust............ 1,687 * -- 1,687 *
Bratton Family Foundation................. 10,000 * -- 10,000 *
Thomas W. Briggs.......................... 16,875(5) * -- 16,875(5) *
Geoffrey P. Raynor........................ 12,740(5) * -- 12,740(5) *
Michael N. Christodolou................... 10,125(5) * -- 10,125(5) *
W. Forrest Tempel......................... 3,375(5) * -- 3,375(5) *
Donald J. McNamara, III Trust............. 1,012(5) * -- 1,012(5) *
Donald J. McNamara........................ 414,112(5) * -- 414,112(5) *
William P. Hallman, Jr.................... 168,750(6) * -- 168,750(6) *
Peter Sterling Trusts..................... 8,437 * -- 8,437 *
Peter Sterling............................ 286,874 * -- 286,874 *
--------------- ----------- --------------- -----------
(as a Group) 14,817,729(7) 28.25 -- 14,817,729 (7) 28.25
c/o W. Robert Cotham
2600 First City Bank Tower
Fort Worth, Texas 76102
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
AT MAY 31, 1995(1)
--------------------------------------------------------------------------
SHARES TO BE
SHARES BENEFICIALLY OWNED SOLD IN THE SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING OFFERING AFTER THE OFFERING
---------------------------- -------------- ----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT NUMBER NUMBER PERCENT
------------------------------------------ --------------- ----------- -------------- --------------- -----------
GeoCapital Corporation.................... 3,603,329(8) 6.89 -- 3,603,329 (8) 6.89
<S> <C> <C> <C> <C> <C>
767 Fifth Avenue -- 45th Floor
New York, New York 10153
Gary L. Mead.............................. 2,902,500 (9) 5.28 -- 2,902,500 (9) 5.28
112 East Pecan Street
San Antonio, Texas 78205
FMR Corp.................................. 3,626,415 10) 6.94 -- 3,626,415 10) 6.94
82 Devonshire Street
Boston, Massachusetts 02109
Putnam Investments, Inc................... 2,923,632 11) 5.59 -- 2,923,632 11) 5.59
One Post Office Square
Boston, Massachusetts 02109
First Interstate Bancorp.................. 2,755,554 12) 5.27 -- 2,755,554 12) 5.27
633 West Fifth Street
Los Angeles, California 90071
<FN>
--------------------------
* Less than one percent (1%).
(1) AEW's beneficial ownership is reported as of July 3, 1995.
(2) 5,299,821 of the shares shown as beneficially owned by AEW were issued in
the AEW Transaction upon the conversion of two-thirds of its interest in
LQDP. Number of shares sold in the Offering and number of shares
beneficially owned after the Offering assume the exercise in full of the
U.S. Underwriters' over-allotment option. In the event that the U.S.
Underwriters' over-allotment option is not exercised, after the Offering
AEW will own 470,071 shares of Common Stock, or less than 1%.
(3) Mr. Taylor beneficially owns 60,750 shares which he presently has the right
to acquire under the Company's 1984 Stock Option Plan. In addition, Mr.
Taylor may be deemed to beneficially own the shares beneficially owned by
Thomas M. Taylor & Co., The Airlie Group, L.P. and an irrevocable trust for
the benefit of Mr. Taylor's son. See footnote (5) under "Security Ownership
of Management."
(4) Perry R. Bass, solely in his capacities as sole trustee and as one of two
trustors, has sole voting and dispositive power with respect to the
2,861,392 shares owned by The Bass Management Trust.
(5) The information reflected for such groups or beneficial owners is based on
statements and reports filed with the Securities and Exchange Commission
and furnished to the Company by such persons, and information supplied
pursuant to the Registration Rights Agreement dated, March 9, 1993, between
the Company and certain of the above persons. No independent investigation
concerning the accuracy thereof has been made by the Company.
(6) A March 26, 1993 Schedule 13D amendment provided to the Company reflects
that William P. Hallman, Jr., because of his position as the trustee, also
has "sole voting power" and "sole dispositive power" with respect to the
following trusts: (i) Annie R. Bass Grandson's Trust for Sid R. Bass with
respect to 536,287 shares, (ii) Annie R. Bass Grandson's Trust for Lee M.
Bass with respect to 536,287 shares, (iii) Donald J. McNamara, III Trust
with respect to 1,012 shares and (iv) Peter Sterling Trusts with respect to
8,437 shares.
(7) Thomas M. Taylor, Sid R. Bass, Lee M. Bass and other investors, including
the persons named above, have filed a Schedule 13D Statement, amended
through March 26, 1993, with the Securities and Exchange Commission. The
persons making the Schedule 13D filing have stated that neither the fact of
such filing nor anything contained therein shall be deemed admission by
them that a "group" exists within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934.
(8) A February 9, 1995 Schedule 13G, combined with a March 1995 Form 4 provided
to the Company by GeoCapital Corporation ("GeoCapital") reflects that
GeoCapital is an investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, which has no voting power with respect to
the shares, but which has "sole dispositive power" with respect to
3,603,329 shares.
(9) A December 1994 Form 5 provided to the Company reflects that Mr. Mead has
"sole voting power" and "sole dispositive power" with respect to (i)
202,500 shares which he beneficially owns, (ii) 2,193,750 shares which he
presently has the right to acquire pursuant to a non-qualified stock option
agreement dated March 3, 1992 and (iii) 506,250 shares which he presently
has the right to acquire pursuant to a non-qualified stock option agreement
dated March 11, 1994.
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
(10) A February 13, 1995 Schedule 13G provided to the Company reflects that FMR
Corp. ("FMR"), a company controlled by Edward C. Johnson 3d, Chairman of
FMR Corp., and various Johnson family members, beneficially owns 3,626,415
shares of common stock. Fidelity Management & Research Company
("Fidelity"), a wholly-owned subsidiary of FMR and an investment adviser
registered under Section 203 of the Investment Advisers Act of 1940, is the
beneficial owner of 2,624,906 shares as a result of acting as investment
adviser to several investment companies registered under Section 8 of the
Investment Company Act of 1940, and as a result of acting as sub-advisor to
Fidelity American Special Situations Trust ("FASST"). FMR through its
control of Fidelity has no voting power with respect to the shares, but has
"sole dispositive power" with respect to 2,596,856 shares. FMR through its
control of Fidelity and FASST has sole power to vote and to dispose of
28,050 shares held by FASST. Fidelity International Limited ("FIL") is the
beneficial owner of 33,350 shares, which includes 28,050 shares of Common
Stock held by FASST. FIL has sole power to vote and dispose of 5,300 of
these shares. Fidelity Management Trust Company, a wholly-owned subsidiary
of FMR and a bank as defined in Section 3(a)(6) of the Securities Exchange
Act of 1934, is the beneficial owner of 996,209 shares and has "sole voting
power" with respect to 914,972 and no power to vote or to direct the voting
of 81,237 shares.
(11) A January 30, 1995 Schedule 13G provided to the Company reflects that
Putnam Investments, Inc., a wholly-owned subsidiary of Marsh & McLennan
Companies, Inc., and an investment adviser registered under Section 203 of
the Investment Advisers Act of 1940, is the beneficial owner of and has
shared dispositive power with respect to 2,923,632 shares as a result of
wholly owning two registered investment advisers: Putnam Investment Manage-
ment, Inc. ("Putnam Management") and The Putnam Advisory Company, Inc.,
("Putnam Advisory") and as a result has "shared voting power" with respect
to 197,275 shares. Putnam Management is the beneficial owner of 2,590,975
shares and has shared dispositive power but no voting power with respect to
the shares. Putnam Advisory is the beneficial owner of 332,657 shares, has
shared dispositive power with respect to 332,657 shares and has "shared
voting power" with respect to 197,275 shares.
(12) A February 10, 1995 Schedule 13G provided to the Company reflects that
First Interstate Bancorp is a Parent Holding Company in accordance with
Rule 13d-1(b)(ii)(G) of the Securities Exchange Act of 1934, with
beneficial ownership of 2,755,554 shares and has (i) "sole voting power"
with respect to 1,530,068 shares, (ii) "sole dispositive power" with
respect to 2,416,200 shares and (iii) "shared dispositive power" with
respect to 339,354 shares.
</TABLE>
The information reflected for such groups or beneficial owners is based on
statements and reports filed with the Securities and Exchange Commission and
furnished to the Company by such groups. No independent investigation concerning
the accuracy thereof has been made by the Company.
39
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
Based upon information received upon requests from the persons concerned,
each current director, the Company's five most highly compensated executive
officers, and all directors and executive officers of the Company as a group
owned beneficially as of May 31, 1995, the number and percentage of outstanding
shares of Common Stock of the Company indicated in the following table. All
percentages set forth below have been adjusted for the issuance of Common Stock
to the Selling Shareholder in the AEW Transaction.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAMES OF INDIVIDUAL OWNED
OR IDENTITY OF GROUP AS OF MAY 31, 1995 PERCENT OF CLASS
------------------------------------------------------------- ------------------------ -----------------
<S> <C> <C>
DIRECTORS:
William H. Cunningham...................................... 40,500(1) * %
Donald J. McNamara......................................... 414,112(2) *
Gary L. Mead............................................... 2,902,500(3) 5.28
Peter Sterling............................................. 286,874(4) *
Thomas M. Taylor........................................... 4,412,104(5) 8.43
OTHER NAMED EXECUTIVE OFFICERS:
Michael A. Depatie......................................... 249,847(6) *
William C. Hammett, Jr..................................... 240,887(7) *
Steven T. Schultz.......................................... 235,472(8) *
Thomas W. Higgins.......................................... 179,504(9) *
All directors and executive officers as a group............ 8,961,800(10) 15.98
<FN>
------------------------
* Less than one percent (1%)
(1) The shares shown as beneficially owned by Dr. Cunningham represent 40,500
shares which he presently has the right to acquire under the Company's 1984
Stock Option Plan.
(2) The shares shown as beneficially owned by Mr. McNamara include 60,750
shares which he presently has the right to acquire under the Company's 1984
Stock Option Plan.
(3) The shares shown as beneficially owned by Mr. Mead include (i) 2,193,750
shares which he presently has the right to acquire pursuant to a
non-qualified stock option agreement dated March 3, 1992 and (ii) 506,250
shares which he presently has the right to acquire pursuant to a
non-qualified stock option agreement dated March 11, 1994.
(4) The shares shown as beneficially owned by Mr. Sterling include 60,750
shares which he presently has the right to acquire under the Company's 1984
Stock Option Plan.
(5) The shares shown as beneficially owned by Mr. Taylor (i) include 2,322,979
shares that Mr. Taylor may be deemed to own beneficially because of his
position as the President, sole director and principal shareholder of
Thomas M. Taylor & Co., (ii) 2,025,000 shares that Mr. Taylor may be deemed
to own beneficially because of his position as President and principal
shareholder of Thomas M. Taylor & Co., which is one of two general partners
of EBD L.P., which is the sole general partner of the Airlie Group L.P.,
(iii) 3,375 shares owned by an irrevocable trust for the benefit of his son
and (iv) 60,750 shares which he presently has the right to acquire under
the Company's 1984 Stock Option Plan. Mr. Taylor's mother, Annette B.
Taylor, serves as trustee of the aforesaid trust for Mr. Taylor's son. Mr.
Taylor disclaims beneficial ownership of the shares owned by such trust.
(6) The shares shown as beneficially owned by Mr. Depatie, Senior Vice
President -- Finance of the Company, include (i) 13,500 shares held by a
trust for which he is sole trustee and beneficiary, (ii) 875 shares that
Mr. Depatie may be deemed to own beneficially because of his position as
general partner in two partnerships and (iii) 235,472 shares which he has
the right to acquire under the Company's 1984 Stock Option Plan.
(7) The shares shown beneficially owned by Mr. Hammett, Senior Vice President
-- Accounting & Administration of the Company, include (i) 2,445 shares
owned beneficially by Mr. Hammett, (ii) 2,970
</TABLE>
40
<PAGE>
<TABLE>
<S> <C>
shares held by his wife and (iii) 235,472 shares which he has the right to
acquire under the Company's 1984 Stock Option Plan. Mr. Hammett disclaims
beneficial ownership of the 2,970 shares held by his wife.
(8) The shares shown beneficially owned by Mr. Schultz, Senior Vice President
-- Development of the Company reflect 235,472 shares which he has the right
to acquire under the Company's 1984 Stock Option Plan.
(9) The shares shown beneficially owned by Mr. Higgins, Senior Vice President
-- Operations reflect 179,504 shares which he has the right to acquire
under the Company's 1984 Stock Option Plan.
(10) The holdings shown for all directors and executive officers as a group
include 3,808,670 shares which the directors and executive officers have
the right to acquire under the Company's 1984 Stock Option Plan and Mr.
Mead's Non-Qualified Stock Option Agreement. Shares acquirable pursuant to
stock options, which are exercisable within sixty days after May 31, 1995,
are shown as being beneficially owned by members of such group in the above
table and have been considered to be outstanding for purposes of
calculating the percentage ownership of all directors and executive
officers as a group.
</TABLE>
All directors and executive officers as a group beneficially own a total of
5,153,130 shares (9.86%) of the Company's outstanding Common Stock excluding the
3,808,670 shares referred to in note (10) above which certain directors and
executive officers have the right to acquire under the Company's stock option
plans.
Except as reflected in the notes to the preceding table, each person owns
directly the number of shares indicated in the table and has the sole power to
vote and dispose of such shares.
CERTAIN U.S. TAX CONSEQUENCES TO NON-U.S. SHAREHOLDERS
The following is a general discussion of certain U.S. federal tax
consequences of the ownership and disposition of a share of Common Stock by a
non-U.S. holder. For purposes of this discussion, a non-U.S. holder is a person
or entity that, for U.S. federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership, or a non-resident
fiduciary of a foreign estate or trust. This discussion does not consider any
specific facts or circumstances that may apply to a particular non-U.S. holder
and does not address state, local or non-U.S. tax considerations. Furthermore,
the following discussion is based on current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), the regulations promulgated thereunder
and public administrative and judicial interpretations of the Code and
regulations as of the date hereof, all of which are subject to change, which
changes could be applied retroactively.
Each prospective investor is urged to consult its own tax adviser with
respect to the U.S. federal, state and local tax consequences of owning and
disposing of a share of Common Stock, as well as any tax consequences arising
under the laws of any other taxing jurisdiction.
U.S. INCOME AND ESTATE TAX CONSEQUENCES
DIVIDENDS. A dividend that is not effectively connected with the conduct of
a trade or business in the United States by a non-U.S. holder of shares of
Common Stock (or, if a tax treaty applies, not attributable to a United States
permanent establishment maintained by such non-U.S. holder) will be subject to
U.S. withholding tax at a 30% or lower treaty rate. A dividend that is
effectively connected with the conduct of a trade or business in the United
States by the non-U.S. holder of shares of Common Stock and, if a tax treaty
applies, is attributable to a U.S. permanent establishment maintained by such
non-U.S. holder, will be exempt from the withholding tax described above (if
certain certification and disclosure requirements are met) and will be subject
instead (i) to the U.S. federal income tax on net income that applies to U.S.
persons and (ii) with respect to corporate holders under certain circumstances,
to the branch profits tax equal to 30% (or lower treaty rate) of its
"effectively connected earnings and profits" within the meaning of the Code for
the taxable year, as adjusted for certain items.
Under current U.S. Treasury regulations, dividends paid to an address
outside the United States are presumed to be paid to a resident of such country
for purposes of the withholding discussed above (unless
41
<PAGE>
the payor has knowledge to the contrary), and, under the current interpretation
of U.S. Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. However, under proposed U.S. Treasury regulations, which have
not yet been put into effect, to claim the benefits of a tax treaty, a non-U.S.
holder of Common Stock would be required to file certain forms accompanied by a
statement from a competent authority of the treaty country.
GAIN ON DISPOSITION OF COMMON STOCK. A non-U.S. holder generally will not
be subject to U.S. federal income tax on any gain recognized on a disposition of
shares of Common Stock unless (i) subject to the exception discussed below, the
Company is or has been a "United States real property holding corporation" (a
"USRPHC") within the meaning of Section 897 (c)(2) of the Code at any time
within the shorter of the five-year period preceding such disposition or such
holding period (the "Required Holding Period"), (ii) the gain is effectively
connected with the conduct of a trade or business within the United States of
the non-U.S. holder and, if a tax treaty applies, attributable to a permanent
establishment maintained by the non-U.S. holder, (iii) the non-U.S. holder is an
individual who holds the share as a capital asset and is present in the United
States for 183 days or more in the taxable year of the disposition and either
(a) such individual has a "tax home" (as defined for U.S. federal income tax
purposes) in the United States or (b) the gain is attributable to an office or
other fixed place of business maintained in the United States by such individual
or (iv) the non-U.S. holder is subject to a tax pursuant to the Code provisions
applicable to certain U.S. expatriates.
If an individual non-U.S. holder falls under clauses (ii) or (iv) above, he
or she will be taxed on his or her net gain derived from the sale under regular
U.S. federal income tax rates. If the individual non-U.S. holder falls under
clause (iii) above, he or she will be subject to a flat 30% tax on the gain
derived from the sale which may be offset by U.S. capital losses
(notwithstanding the fact that he or she is not considered a resident of the
United States). If a non-U.S. holder that is a foreign corporation falls under
clause (ii) above, it will be taxed on its gain under regular graduated U.S.
federal income tax rates and, in addition, will under certain circumstances be
subject to the branch profits tax equal to 30% of its "effectively connected
earnings and profits" within the meaning of the Code for the taxable year, as
adjusted for certain items, unless it qualifies for a lower rate under an
applicable income tax treaty.
A corporation is generally a USRPHC if the fair market value of its United
States real property interests equal or exceeds 50% of the sum of the fair
market value of its worldwide real property interests plus its other assets used
or held for use in a trade or business. The Company believes that it is
currently a USRPHC; however, a non-U.S. holder would generally not be subject to
tax, or withholding in respect of such tax, on gain from a sale or other
disposition of Common Stock by reason of the Company's USRPHC status if the
Common Stock is regularly traded on an established securities market ("regularly
traded") during the calendar year in which such sale or disposition occurs
provided that such holder does not own, actually or constructively, Common Stock
with a fair market value in excess of 5% of the fair market value of all Common
Stock outstanding at any time during the Required Holding Period. While not free
from doubt, the Company believes that the Common Stock will be treated as
regularly traded.
If the Company is or has been a USRPHC within the Required Holding Period,
and if a non-U.S. holder owns in excess of 5% of the fair market value of Common
Stock (as described in the preceding paragraph), such non-U.S. holder of Common
Stock will be subject to U.S. federal income tax at regular graduated rates
under certain rules ("FIRPTA tax") on gain recognized on a sale or other
disposition of such Common Stock. In addition, if the Company is or has been a
USRPHC within the Required Holding Period and if the Common Stock were not
treated as regularly traded, a non-U.S. holder (without regard to its ownership
percentage) is subject to withholding in respect of FIRPTA tax at a rate of 10%
of the amount realized on sale or other disposition of Common Stock in USRPHCs
and will be further subject to FIRPTA tax in excess of the amounts withheld. Any
amount withheld pursuant to such withholding tax will be creditable against such
non-U.S. holder's U.S. federal income tax liability. Non-U.S. holders are urged
to consult their tax advisors concerning the potential applicability of these
provisions.
42
<PAGE>
FEDERAL ESTATE TAX. Shares of Common Stock owned or treated as owned by an
individual non-U.S. holder at the time of his or her death will be includible in
his or her estate for U.S. estate tax purposes unless an applicable estate tax
treaty provides otherwise.
BACKUP WITHHOLDING AND INFORMATION REPORTING
DIVIDENDS. The Company must report annually to the Internal Revenue Service
and to each non-U.S. holder the amount of dividends paid to and the tax
withheld, if any, with respect to such holder. These information reporting
requirements apply regardless of whether withholding was reduced by an
applicable tax treaty. Copies of these information returns may also be available
under the provisions of a specific treaty or agreement with the tax authorities
in the country in which the non-U.S. holder resides. Dividends that are subject
to U.S. withholding tax at the 30% statutory rate or at a reduced tax treaty
rate and dividends that are effectively connected with the conduct of a trade or
business in the United States (if certain certification and disclosure
requirements are met) are exempt from backup withholding of U.S. federal income
tax. Backup withholding will therefore generally not apply to dividends paid on
shares of Common Stock to a non-U.S. holder at an address outside the United
States.
DISPOSITION OF COMMON STOCK. Information reporting and backup withholding
imposed at a rate of 31% will apply to the proceeds of a disposition of Common
Stock paid to or though a U.S. office of a broker unless the disposing holder
certifies its non-U.S. status or otherwise establishes an exemption. Generally,
U.S. information reporting and backup withholding will not apply to a payment of
disposition proceeds if the payment is made outside the United States through a
non-U.S. office of a non-U.S. broker. However, U.S. information reporting
requirements (but not backup withholding) will apply to a payment of disposition
proceeds outside the United States if (A) the payment is made through an office
outside the United States of a broker that is either (i) a U.S. person, (ii) a
foreign person which derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States or (iii) a
"controlled foreign corporation" for U.S. federal income tax purposes and (B)
the broker fails to maintain documentary evidence that the holder is a non-U.S.
holder and that certain conditions are met, or that the holder otherwise is
entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to U.S. Internal
Revenue Service.
43
<PAGE>
UNDERWRITING
Under the terms and subject to conditions contained in the U.S. Underwriting
Agreement dated the date hereof, each of the underwriters of the United States
and Canadian offering of Common Stock named below (the "U.S. Underwriters"), for
whom Smith Barney Inc., Alex. Brown & Sons Incorporated and Montgomery
Securities are acting as representatives (the "Representatives"), has severally
agreed to purchase, and the Selling Shareholder has agreed to sell to each U.S.
Underwriter, shares of Common Stock which equal the number of shares set forth
opposite the name of such U.S. Underwriter below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
------------------------------------------- -----------
<S> <C>
Smith Barney Inc........................... 961,700
Alex. Brown & Sons Incorporated............ 961,650
Montgomery Securities...................... 961,650
William Blair & Company.................... 40,000
J.C. Bradford & Co. ....................... 40,000
The Chicago Corporation.................... 40,000
Crowell, Weedon & Co. ..................... 20,000
Dean Witter Reynolds Inc. ................. 65,000
A. G. Edwards & Sons, Inc. ................ 65,000
Furman Selz Incorporated................... 40,000
Goldman, Sachs & Co. ...................... 65,000
Jefferies & Company, Inc. ................. 20,000
Ladenburg, Thalmann & Co. Inc. ............ 40,000
Legg Mason Wood Walker, Incorporated....... 40,000
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
------------------------------------------- -----------
<S> <C>
McDonald & Company Securities, Inc. ....... 40,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.............................. 65,000
The Ohio Company........................... 20,000
PaineWebber Incorporated................... 65,000
Piper Jaffray Inc. ........................ 40,000
Principal Financial Securities, Inc. ...... 40,000
Raymond James & Associates, Inc. .......... 40,000
The Robinson-Humphrey Company, Inc. ....... 40,000
Salomon Brothers Inc ...................... 65,000
Schroder Wertheim & Co. Incorporated....... 65,000
Southwest Securities, Inc. ................ 20,000
Van Kasper & Company....................... 20,000
-----------
Total.................................. 3,880,000
-----------
-----------
</TABLE>
Under the terms and subject to the conditions contained in the International
Underwriting Agreement dated the date hereof, each of the managers of the
concurrent international offering of Common Stock named below (the "Managers"
and, together with the U.S. Underwriters, the "Underwriters"), for whom Smith
Barney Inc., Alex. Brown & Sons Incorporated and Montgomery Securities are
acting as lead managers (the "Lead Managers"), has severally agreed to purchase,
and the Selling Shareholder has agreed to sell to each Manager, shares of Common
Stock which equal the number of shares set forth opposite the name of such
Manager below:
<TABLE>
<CAPTION>
NUMBER
MANAGERS OF SHARES
----------------------------------------------------------------------------------- -----------
<S> <C>
Smith Barney Inc. ................................................................. 279,000
Alex. Brown & Sons Incorporated ................................................... 278,000
Montgomery Securities ............................................................. 278,000
Caisse des Depots et Consignations ................................................ 45,000
Panmure Gordon & Co Ltd. .......................................................... 45,000
VEREINS-UND WESTBANK
Aktiengesellschaft ................................................................ 45,000
-----------
Total............................................................................ 970,000
-----------
-----------
</TABLE>
The U.S. Underwriting Agreement and the International Underwriting Agreement
provide that the obligations of the several U.S. Underwriters and the several
Managers, respectively, to pay for and accept delivery of the shares subject to
approval of certain legal matters by counsel and to certain other conditions.
The U.S. Underwriters and the Managers are obligated to take and pay for all
shares of Common Stock offered hereby (other than those covered by the
over-allotment option described below) if any such shares are taken.
The U.S. Underwriters and the Managers (collectively, the "Underwriters")
initially propose to offer part of the shares of Common Stock directly to the
public at the public offering price set forth on the cover page of this
Prospectus and part to certain dealers at a price that represents a concession
not in excess of $0.66 per share below the public offering price. The U.S.
Underwriters and the Managers may allow, and
44
<PAGE>
such dealers may reallow, a concession not in excess of $0.10 per share to the
other U.S. Underwriters or Managers, respectively, or to certain other dealers.
After the initial public offering, the public offering price and such
concessions may be changed by the U.S. Underwriters and the Managers.
The Selling Shareholder has granted to the U.S. Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to an
aggregate of 470,071 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus less underwriting discounts
and commissions. The U.S. Underwriters may exercise such option to purchase
additional shares solely for the purpose of covering over-allotments, if any,
incurred in connection with the sale of the shares offered hereby. To the extent
such option is exercised, each U.S. Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares as the number of shares set forth opposite such U.S.
Underwriter's name in the "U.S. Underwriters" table above bears to the total
number of shares in such table.
The Company, the Selling Shareholder and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
The Selling Shareholder, the Company and certain of its officers and
directors have agreed, subject to certain exceptions, that, for a period of 90
days from the date of this Prospectus, they will not, without the prior written
consent of Smith Barney Inc., offer, sell, contract to sell or otherwise dispose
of any Common Stock or any securities convertible into, or exercisable or
exchangeable for, Common Stock.
The U.S. Underwriters and the Managers have entered into an Agreement
between U.S. Underwriters and Managers pursuant to which each U.S. Underwriter
has agreed that, as part of the distribution of the 3,880,000 shares offered in
the United States and Canadian offering (i) it is not purchasing any such shares
for the account of anyone other than a U.S. or Canadian Person and (ii) it has
not offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any, of such shares or distribute any prospectus relating to the
United States and Canadian offering outside the United States or Canada or to
anyone other than a U.S. or Canadian Person. In addition, each Manager has
agreed that as part of the distribution of the 970,000 shares offered in the
international offering: (i) it is not purchasing any such shares for the account
of any U.S. or Canadian Person and (ii) it has not offered or sold, and will not
offer, sell, resell or deliver, directly or indirectly, any of such shares or
distribute any prospectus relating to the international offering in the United
States or Canada or to any U.S. or Canadian Person. Each Manager has also agreed
that it will offer to sell shares only in compliance with all relevant
requirements of any applicable laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between U.S. Underwriters
and Managers, including: (i) certain purchases and sales between the U.S.
Underwriters and the Managers, (ii) certain offers, sales, resales, deliveries
or distributions to or through investment advisors or other persons exercising
investment discretion, (iii) purchases, offers or sales by a U.S. Underwriter
who is also acting as Manager or by a Manager who is also acting as a U.S.
Underwriter and (iv) other transactions specifically approved by the
Representatives and the Lead Managers. As used herein, "U.S. or Canadian Person"
means any resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States or Canadian income taxation regardless of the source of its income
(other than the foreign branch of any U.S. or Canadian Person), and includes any
United States or Canadian branch of a person other than a U.S. or Canadian
Person.
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada in
which such offer is made.
Each Manager has represented and agreed that: (i) it has not offered or sold
and during the period of six months from the date hereof will not offer or sell
any shares to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
45
<PAGE>
Offers of Securities Regulations 1995 (the "Regulations"); (ii) it has complied
and will comply with all applicable provisions of the Financial Services Act
1986 and the Regulations with respect to anything done by it in relation to the
shares in, from or otherwise involving the United Kingdom; and (iii) it has only
issued or passed on and will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the offer of the shares
if that person is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1995 or is a person to
whom such document may otherwise lawfully be issued or passed on.
No registration, filing or other action has been or will be made or taken in
any jurisdiction by the Company, the Selling Shareholder or the Managers that
would permit an offering to the general public of the shares offered hereby in
any jurisdiction other than the United States.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the offering price set forth on the cover page hereof.
Pursuant to the Agreement Between U.S. Underwriters and Managers, sales may
be made between the U.S. Underwriters and the Managers of such number of shares
as may be mutually agreed. The price of any shares so sold shall be the public
offering price as then in effect for shares being sold by the U.S. Underwriters
and the Managers, less all or any part of the selling concession, unless
otherwise determined by mutual agreement. To the extent that there are sales
between the U.S. Underwriters and the Managers pursuant to the Agreement between
U.S. Underwriters and Managers, the number of shares initially available for
sale by the U.S. Underwriters and by the Managers may be more or less than the
number of shares appearing on the front cover of this Prospectus.
LEGAL MATTERS
Certain legal matters with respect to the shares of Common Stock offered
hereby will be passed upon for the Company by John F. Schmutz, Vice President --
General Counsel of the Company and Latham & Watkins, Los Angeles, California and
for the Underwriters by Davis Polk & Wardwell, New York, New York.
EXPERTS
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 included or incorporated by reference herein and elsewhere in
the Registration Statement (as defined under "Available Information"), have been
included or incorporated by reference herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere and incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP refers to the adoption of Statement of Financial
Accounting Standards No. 109 in 1993.
With respect to the unaudited interim financial information for the
three-month periods ended March 31, 1995 and 1994 and the three-month and
six-month periods ended June 30, 1995 and 1994, included or incorporated by
reference herein, KPMG Peat Marwick LLP has reported that they applied limited
procedures in accordance with professional standards for a review of such
information. However, their separate reports included in the Company's Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1995 and June 30, 1995,
and included or incorporated by reference herein, state that they did not audit
and they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their reports on such information should
be restricted in light of the limited nature of the review procedures applied.
The accountants are not subject to the liability provisions of Section 11 of the
Securities Act of 1933 for their reports on the unaudited interim financial
information because those reports are not a "report" or a "part" of the
registration statement prepared or certified by the accountants within the
meaning of Sections 7 and 11 of the Securities Act of 1933.
46
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement (together with all amendments, the
"Registration Statement") on Form S-3 under the Securities Act of 1933, as
amended ("Securities Act") with respect to the Common Stock offered hereby. This
Prospectus, filed as a part of that Registration Statement, does not contain all
the information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. In addition, certain documents filed by the Company with the
Commission have been incorporated herein by reference. See "Incorporation of
Certain Information by Reference." For further information regarding La Quinta
and the Common Stock offered hereby, reference is made to the Registration
Statement, including the exhibits and schedules thereto and the documents
incorporated herein by reference. The Company is subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and
at the regional offices of the Commission at Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and at 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such materials can
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common
Stock of the Company is listed on the New York Stock Exchange. Reports, proxy
statements and other information concerning the Company can also be inspected
and copied at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Company's Annual Report on Form 10-K (Commission file No. 1-7790) for
the fiscal year ended December 31, 1994 (filed with the Commission on March 15,
1995), the Company's Quarterly Report on Form 10-Q for the three month period
ended March 31, 1995 (filed with the Commission on May 15, 1995), the Company's
Current Report on Form 8-K (filed with the Commission on June 16, 1995) and the
Company's Quarterly Report on Form 10-Q for the six month period ended June 30,
1995 (filed with the Commission on July 26, 1995), are hereby incorporated by
reference.
In addition to the foregoing, the description of the Common Stock offered
hereby, appearing on page 20 of the Prospectus, dated February 13, 1979, under
the caption "Common Stock" included in the Registration Statement on Form S-7
under the Securities Act, which was incorporated in the Registration Statement
of the Company on Form 8-A under the Exchange Act, dated March 13, 1979, is
hereby incorporated by reference.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act, after the date of this Prospectus and prior to the
termination of the offering of the securities offered by this Prospectus, shall
be deemed to be incorporated by reference in this Prospectus and be a part
hereof from the date of filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference in this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained in this Prospectus, or in
any other subsequently filed document that also is or is deemed to be
incorporated by reference, modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified,
to constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person to whom a
copy of this Prospectus has been delivered, upon written or oral request of any
such person, a copy of any or all of the documents incorporated by reference
herein, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference into the information that this Prospectus
incorporates. Written or oral requests for such copies should be directed to: La
Quinta Inns, Inc., 112 East Pecan Street, San Antonio, Texas 78205, Attention:
Investor Relations, telephone (210) 302-6000.
47
<PAGE>
LA QUINTA INNS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
AUDITED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................................................... F-2
Combined Balance Sheets as of December 31, 1994 and 1993................................................... F-3
Combined Statements of Operations for the years ended December 31, 1994, 1993 and 1992..................... F-4
Combined Statements of Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992........... F-5
Combined Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992..................... F-6
Notes to Combined Financial Statements..................................................................... F-8
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Independent Accountants' Review Report..................................................................... F-26
Combined Condensed Balance Sheets as of June 30, 1995 and December 31, 1994................................ F-27
Combined Condensed Statements of Operations for the six months ended June 30, 1995 and 1994................ F-28
Combined Condensed Statements of Cash Flows for the six months ended June 30, 1995 and 1994................ F-29
Notes to Combined Condensed Financial Statements........................................................... F-30
</TABLE>
F-1
<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
F-2
<PAGE>
LA QUINTA INNS, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1994 1993
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
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.
F-3
<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.
F-4
<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.
F-5
<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.
F-6
<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 mortgagee (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.
F-7
<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
10-20
Leasehold and land improvements......................... 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.
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
F-8
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
F-9
<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 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.
F-10
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) LONG-TERM DEBT (CONTINUED)
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.
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.
F-11
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) LONG-TERM DEBT (CONTINUED)
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.
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.
F-12
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(3) UNINCORPORATED VENTURES AND PARTNERSHIPS (CONTINUED)
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>
<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>
F-13
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(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>
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>
F-14
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(4) INCOME TAXES (CONTINUED)
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>
F-15
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(4) INCOME TAXES (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.
F-16
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(5) SHAREHOLDERS' EQUITY (CONTINUED)
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 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>
NUMBER OF OPTION PRICE RANGE TOTAL OPTION
SHARES PER SHARE PRICE
---------- -------------------- ---------------
<S> <C> <C> <C>
(IN THOUSANDS)
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
F-17
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(5) SHAREHOLDERS' EQUITY (CONTINUED)
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.
(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>
F-18
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(6) PENSION PLAN AND OTHER (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.
F-19
<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.
F-20
<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
F-21
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(10) CONTINGENCIES (CONTINUED)
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.
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.
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.
F-22
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(11) QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
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).
F-23
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS (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
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
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 Investments, Inc. 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.
F-24
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(14) ACQUISITION OF PARTNERS' INTERESTS (CONTINUED)
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
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.
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1993 1992
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
(UNAUDITED)
<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>
F-25
<PAGE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors
La Quinta Inns, Inc.:
We have reviewed the combined condensed balance sheet of La Quinta Inns,
Inc. as of June 30, 1995, and the related combined condensed statements of
operations and cash flows for the six-month periods ended June 30, 1995 and
1994. These combined condensed financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the combined condensed financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the combined balance sheet of La Quinta Inns, Inc. as of December 31,
1994 and the related combined statements of operations, shareholders' equity,
and cash flows for the year then ended (not presented herein); and in our report
dated January 23, 1995, we expressed an unqualified opinion on those combined
financial statements. In our opinion, the information set forth in the
accompanying combined condensed balance sheet as of December 31, 1994, is fairly
stated, in all material respects, in relation to the combined balance sheet from
which it has been derived.
KPMG PEAT MARWICK LLP
San Antonio, Texas
July 20, 1995
F-26
<PAGE>
LA QUINTA INNS, INC.
COMBINED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
---------- ------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents......................................................................... $ 6,694 $ 2,589
Receivables (net of allowance of $222 and $441):
Trade........................................................................................... 12,510 10,185
Other........................................................................................... 2,527 2,363
Supplies.......................................................................................... 6,753 7,474
Prepaid expenses.................................................................................. 2,862 1,202
Deferred income taxes............................................................................. 7,223 7,223
---------- ------------
Total current assets.......................................................................... 38,569 31,036
---------- ------------
Notes receivable, excluding current installments (net of allowance of $2,549 and $3,351)............ 6,206 7,320
---------- ------------
Investments......................................................................................... 2,637 2,647
---------- ------------
Properties held for sale, at estimated net realizable value......................................... 2,664 2,664
---------- ------------
Land held for future development, at cost........................................................... 2,716 1,324
---------- ------------
Property and equipment, at cost, substantially all pledged:
Buildings......................................................................................... 799,415 767,665
Furniture, fixtures and equipment................................................................. 130,139 124,336
Land and leasehold improvements................................................................... 162,115 150,311
---------- ------------
Total property and equipment.................................................................. 1,091,669 1,042,312
Less accumulated depreciation and amortization.................................................... 270,139 252,372
---------- ------------
Net property and equipment.................................................................... 821,530 789,940
---------- ------------
Deferred charges and other assets, at cost less applicable amortization............................. 10,760 10,850
---------- ------------
Total assets.................................................................................. $ 885,082 $ 845,781
---------- ------------
---------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long term debt (note 3)................................................... $ 15,242 $ 39,976
Accounts payable:
Trade........................................................................................... 12,737 10,292
Other........................................................................................... 3,387 6,386
Income taxes.................................................................................... 9,178 3,641
Accrued expenses:
Payroll and employee benefits................................................................... 21,259 21,238
Interest........................................................................................ 3,045 3,023
Property taxes.................................................................................. 8,986 8,387
Other........................................................................................... 1,224 1,125
---------- ------------
Total current liabilities..................................................................... 75,058 94,068
---------- ------------
Long term debt, excluding current installments (note 3)............................................. 465,997 448,258
---------- ------------
Deferred income taxes, pension and other............................................................ 21,339 22,125
---------- ------------
Partners' capital................................................................................... 100,105 92,099
---------- ------------
Shareholders' equity:
Common stock ($.10 par value; 100,000,000 shares authorized, 49,358,612 and 48,758,528 shares
issued).......................................................................................... 4,936 4,876
Additional paid-in capital........................................................................ 76,744 68,759
Retained earnings................................................................................. 159,826 134,409
Minimum pension liability......................................................................... (1,474) (1,474)
---------- ------------
240,032 206,570
Less treasury stock, at cost (2,365,321 and 2,361,366 shares)..................................... 17,449 17,339
---------- ------------
Total shareholders' equity.................................................................... 222,583 189,231
---------- ------------
Total liabilities and shareholders' equity.................................................... $ 885,082 $ 845,781
---------- ------------
---------- ------------
</TABLE>
See accompanying notes to combined condensed financial statements.
F-27
<PAGE>
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
------------------------
1995 1994
----------- -----------
<S> <C> <C>
Revenues:
Inn................................................................................... $ 202,661 $ 166,003
Restaurant rental and other........................................................... 4,017 3,796
Management services................................................................... 100 1,007
----------- -----------
Total revenues...................................................................... 206,778 170,806
----------- -----------
Operating costs and expenses:
Direct................................................................................ 103,128 93,149
Corporate............................................................................. 9,392 9,256
Depreciation, amortization and fixed asset retirements................................ 20,630 17,772
----------- -----------
Total operating costs and expenses.................................................. 133,150 120,177
----------- -----------
Operating income.................................................................... 73,628 50,629
----------- -----------
Other (income) expense:
Interest income....................................................................... (579) (1,069)
Interest on long term debt............................................................ 20,383 18,599
Partners' equity in earnings and losses............................................... 8,976 5,522
----------- -----------
Earnings before income taxes........................................................ 44,848 27,577
Income taxes............................................................................ 17,087 10,755
----------- -----------
Net earnings........................................................................ $ 27,761 $ 16,822
----------- -----------
----------- -----------
Net earnings per common and common equivalent share................................. $ .56 $ .35
----------- -----------
----------- -----------
Weighted average number of common and common equivalent shares outstanding (note 2)..... 49,256 48,415
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to combined condensed financial statements.
F-28
<PAGE>
LA QUINTA INNS, INC.
COMBINED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings........................................................................ $ 27,761 $ 16,822
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of property and equipment and fixed asset
retirements...................................................................... 20,630 17,772
Partners' equity in earnings and losses........................................... 8,976 5,522
Changes in operating assets and liabilities:
Receivables..................................................................... (2,832) (4,957)
Income taxes.................................................................... 9,648 5,985
Supplies and prepaid expenses................................................... (1,457) (1,368)
Accounts payable and accrued expenses........................................... 2,123 1,425
Deferred charges and other assets............................................... 266 424
Deferred credits and other...................................................... 1,451 (225)
------------ ------------
Net cash provided by operating activities..................................... 66,566 41,400
------------ ------------
Cash flows from investing activities:
Capital expenditures other than acquisitions.................................... (16,417) (55,435)
Proceeds from property transactions.............................................
Purchase and conversion of inns................................................. (40,292) (20,989)
Purchase of partners' equity interests.......................................... -- (9,622)
Decrease in notes receivable and other investments.............................. 1,476 3,274
------------ ------------
Net cash used by investing activities......................................... (55,233) (82,772)
------------ ------------
Cash flows from financing activities:
Proceeds from lines of credit and long-term borrowings.......................... 187,260 266,352
Principal payments on lines of credit and long-term borrowings.................. (195,001) (245,025)
Capital distributions to partners............................................... (967) (429)
Dividends to shareholders....................................................... (2,344) (1,533)
Purchases of treasury stock..................................................... (102) (1,736)
Net proceeds from stock transactions............................................ 3,926 1,369
------------ ------------
Net cash (used) provided by financing activities.............................. (7,228) 18,998
------------ ------------
Increase (decrease) in cash and cash equivalents...................................... 4,105 (22,374)
Cash and cash equivalents at beginning of period...................................... 2,589 23,848
------------ ------------
Cash and cash equivalents at end of period............................................ $ 6,694 $ 1,474
------------ ------------
------------ ------------
Supplemental disclosure of cash flow information:
Interest paid......................................................................... $ 20,749 $ 19,307
------------ ------------
------------ ------------
Income tax paid....................................................................... $ 6,582 $ 1,120
------------ ------------
------------ ------------
Income tax refunds.................................................................... $ (51) $ (12)
------------ ------------
------------ ------------
Supplemental schedule of non-cash investing and financing activities:
Tax benefit from stock options exercised.............................................. $ 4,111 $ 1,768
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to combined condensed financial statements.
F-29
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited combined condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, which are necessary for a fair presentation of financial
position and results of operations have been made. The combined condensed
financial statements should be read in conjunction with the combined financial
statements and notes thereto included in the December 31, 1994 Annual Report on
Form 10-K.
(2) EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE
The Board of Directors authorized three-for-two stock splits effective in
March 1994 and October 1994. Earnings per share, the weighted average number of
shares outstanding, shareholders' equity and the following information have been
adjusted to give effect to each of these distributions. Primary and fully
diluted earnings per share are not materially different.
The weighted average number of common and common equivalent shares used in
the computation of earnings per share are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Weighted average common shares issued....................................... 49,194,094 48,167,046
Effect of treasury stock.................................................... (2,363,153) (2,178,161)
Dilutive effect of stock options............................................ 2,424,772 2,426,108
------------ ------------
Weighted average number of common and common equivalent shares............ 49,255,713 48,414,993
------------ ------------
------------ ------------
</TABLE>
(3) LONG-TERM DEBT
On April 21, 1995, the Company completed negotiations to amend its existing
credit facilities. The amended credit facilities provide the Company with a
$75,000,000 Secured Line of Credit and a $141,500,000 Secured Term Credit
Facility. Borrowings under the Secured Line of Credit will mature May 31, 1999.
Borrowings under the Secured Term Credit Facility require semi-annual principal
payments commencing May 30, 1997 through May 30, 2002. Borrowings under each of
these credit facilities bear interest at either LIBOR, the prime rate or
certificate of deposit rate, plus an applicable margin, as defined in the
related credit agreements. Currently, borrowings bear interest at either LIBOR
plus 3/4%, the prime rate or the certificate of deposit rate plus 7/8%. The
applicable margin is determined quarterly based upon predetermined levels of
indebtedness to cash flows as defined in the related credit agreements.
On April 21, 1995, the $35,000,000 Unsecured Line of Credit among La Quinta
Development Partners, L.P. ("LQDP") and participating banks was amended. LQDP
also completed negotiations for a $30,000,000, 364-day Unsecured Line of Credit
with participating banks. The Unsecured Line of Credit and 364-day Unsecured
Line of Credit bear interest at either LIBOR, the prime rate or certificate of
deposit rate, plus LQDP's applicable margin, as defined in the related credit
agreements. As of June 30, 1995, borrowings under both Unsecured Lines of Credit
bear interest at either LIBOR plus 5/8%, the prime rate or the certificate of
deposit rate plus 3/4%. LQDP's applicable margin is determined quarterly based
upon predetermined levels of LQDP's indebtedness to cash flows, as defined in
the related credit agreements. The Unsecured Line of Credit and 364-day
Unsecured Line of Credit mature May 31, 1997 and April 20, 1996, respectively.
Both the Unsecured Line of Credit and the 364-day Unsecured Line of Credit will
remain in existence following the AEW Partners, L.P. ("AEW") Transaction
discussed in note 5.
F-30
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) LONG-TERM DEBT (CONTINUED)
At June 30, 1995, the Company had $74,650,000 available on its existing
credit facilities including the Unsecured Line of Credit in LQDP. This amount
was reduced to $26,450,000 on July 3, 1995 following the drawings to finance the
AEW Transaction discussed in note 5.
(4) CONTINGENCIES
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
intends to vigorously defend itself against this suit.
The Company is also party to various lawsuits and claims generally
incidental to its business. The ultimate disposition of these and the above
discussed matter are not expected to have a material adverse effect on the
Company's financial position or results of operations.
(5) SUBSEQUENT EVENT -- ACQUISITION OF PARTNER'S INTEREST
On June 15, 1995, AEW notified the Company that it would exercise its
option, subject to certain conditions, to convert two-thirds of its ownership
interest in LQDP into 5,299,821 shares of the Company's Common Stock and also
agreed to sell its remaining ownership interest in LQDP to the Company for a
negotiated price of $48.2 million in cash (collectively, the "AEW Transaction").
Under the terms of the LQDP Partnership Agreement, AEW paid $3,000,000 in 1990
for an option, subject to certain vesting and other conditions, to convert
two-thirds of its ownership interest in LQDP into a specified number of shares
(adjusted for stock splits, cash dividends and distributions from LQDP to AEW)
of the Company's Common Stock. The AEW Transaction was consummated on July 3,
1995. The Company financed the cash portion of the AEW Transaction through
borrowings under its and LQDP's bank credit facilities.
Upon conversion of the partnership interest into La Quinta Common Stock, the
Company issued 5,299,821 shares of Common Stock having a fair market value of
$142.8 million based on the July 3, 1995 New York Stock Exchange closing price.
During the third quarter of 1995, the Company will record net assets acquired at
their fair market value of $96.4 million and a non-cash, non-recurring item of
$46.4 million as a deduction presented below net earnings in the Statement of
Operations (Conversion of Partner's Interest into Common Stock) in arriving at
net earnings available to common shareholders. This non-recurring, non-cash item
is directly attributable to the AEW Transaction.
The sale to La Quinta of AEW's remaining one-third interest in LQDP will be
accounted for as an acquisition of a minority interest and purchase accounting
will be applied.
As permitted under the Partnership Agreement, AEW has requested that the
Common Stock be registered with the Securities and Exchange Commission for sale
in an underwritten secondary public offering. Pursuant to this request, the
Company has filed a registration statement with the Securities and Exchange
Commission with respect to such sale.
The following unaudited pro forma information reflects the combined results
of operations of the Company as if the AEW Transaction had occurred on January
1, 1995 and January 1, 1994. The pro forma information gives effect to certain
adjustments, including additional depreciation expense on property and equipment
based on their fair values, increased interest expense on additional debt
incurred, elimination of AEW's Partners' equity in earnings and losses and the
related income tax effect of those adjustments. The pro forma information does
not reflect the non-cash, non-recurring item described above.
F-31
<PAGE>
LA QUINTA INNS, INC.
NOTES TO COMBINED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(5) SUBSEQUENT EVENT -- ACQUISITION OF PARTNER'S INTEREST (CONTINUED)
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 DECEMBER 31, 1994
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Total revenues.......................................... $ 206,778 $ 362,242
-------- --------
-------- --------
Net earnings............................................ $ 31,085 $ 41,050
-------- --------
-------- --------
Earnings per share...................................... $ .57 $ .76
-------- --------
-------- --------
</TABLE>
F-32
<PAGE>
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY THE U.S. UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 10
Use of Proceeds................................ 10
Capitalization................................. 11
Price Range of Common Stock and Dividends...... 12
Selected Financial Data........................ 13
Pro Forma Financial Data....................... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 27
Management..................................... 35
Principal and Selling Shareholders............. 37
Security Ownership of Management............... 40
Certain U.S. Tax Consequences to
Non-U.S. Shareholders......................... 41
Underwriting................................... 44
Legal Matters.................................. 46
Experts........................................ 46
Available Information.......................... 47
Incorporation of Certain Information by
Reference..................................... 47
Index to Financial Statements.................. F-1
</TABLE>
[LOGO]
4,850,000 Shares
La Quinta Inns, Inc.
Common Stock
---------
PROSPECTUS
JULY 31, 1995
---------
Smith Barney Inc.
Alex. Brown & Sons
Incorporated
Montgomery Securities
---------------------------------
---------------------------------
---------------------------------
---------------------------------
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR BY THE MANAGERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 10
Use of Proceeds................................ 10
Capitalization................................. 11
Price Range of Common Stock and Dividends...... 12
Selected Financial Data........................ 13
Pro Forma Financial Data....................... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business....................................... 27
Management..................................... 35
Principal and Selling Shareholders............. 37
Security Ownership of Management............... 40
Certain U.S. Tax Consequences to
Non-U.S. Shareholders......................... 41
Underwriting................................... 44
Legal Matters.................................. 46
Experts........................................ 46
Available Information.......................... 47
Incorporation of Certain Information by
Reference..................................... 47
Index to Financial Statements.................. F-1
</TABLE>
[LOGO]
4,850,000 Shares
La Quinta Inns, Inc.
Common Stock
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PROSPECTUS
JULY 31, 1995
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Smith Barney Inc.
Alex. Brown & Sons
International
Montgomery Securities
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<PAGE>
APPENDIX
In accordance with Item 232.304 of Regulation S-T, the following is a
description of images appearing on the inside front cover page of the
Prospectus, which material is omitted from this "EDGAR" filing in reliance
on such Item.
Three panel, full page gate-fold depicting the following: the first full page
panel depicts a map of the continental United States in which certain states
are shaded to indicate states where La Quinta Inns, Inc. operates (i) 1-9 inns
(dark shading) and (ii) 10 or more inns (light shading). Also contains a legend
explaining the shading. A photograph of a La Quinta inn sign is also included
on this page. Stabilization legend included on this page.
The second and third full page panels, which are contiguous, contain 5
photographs of the following (clockwise from the top right): (i) interior of
a La Quinta inn room and a guest, (ii) front exterior view of a La Quinta
inn, (iii) interior of a lobby in a La Quinta inn and two guests, (iv) two
front desk assistants at a La Quinta inn, and (v) interior view of the eating
area of a La Quinta inn and five guests. The photographs surround the text
that is included in the prospectus on page 2 above the stabilization legend
in the Edgarized version.
<PAGE>
In accordance with Item 232.304 of Regulation S-T, the following is a
description of graphics material appearing on page 31 of the Prospectus,
which material is omitted from this "EDGAR" filing in reliance on such
Item. The graphics material depicts three bar charts. The first bar chart
is entitled "Total U.S. Lodging Industry Demand Growth Margin (% Growth
in Room Demand Less % Growth in Room Supply)" and reflects the following
percentages shown on the vertical axis for the following years shown on
the horizontal axis: -2.5% in 1991, 2.0% in 1992, 2.6% in 1993 and 3.3%
in 1994. The second bar chart is entitled "Total U.S. Occupancy
Percentage (% Increase/Decrease)" and reflects the following percentages
shown on the vertical axis for the following years shown on the
horizontal axis: -2.4% in 1991, 2.0% in 1992, 2.6% in 1993 and 2.4% in 1994.
The third bar chart is entitled "Total U.S. ADR (% Increase)" and reflects
the following percentages shown on the vertical axis for the following years
shown on the horizontal axis: 0.6% in 1991, 1.4% in 1992, 2.8% in 1993 and
3.8% in 1994. The source of the data in these three bar charts in Smith
Travel Research.
<PAGE>
In accordance with Item 232.304 of Regulation S-T, the following is a
description of images appearing on the inside back cover of the Prospectus,
which material is omitted from this "EDGAR" filing in reliance on such Item.
Contains 3 photographs of the following (clockwise from the top right): (i) a
fountain of a lion's head, (ii) exterior view of a swimming pool and
surrounding area, and (iii) a four-story bell tower connected to a La Quinta
inn displaying La Quinta signage.