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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Securities registered pursuant to Section 12(b) of the Act:

        Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.    Yes /x/    No / /

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.    / /

        As of February 25, 2002, the aggregate market value of the registrants' voting and non-voting common equity held by non-affiliates was $801,793,964 based upon the closing price of $6.28 on the New York Stock Exchange composite tape on that date.

        As of February 25, 2002, La Quinta Corporation had 152,413,347 shares of common stock outstanding and La Quinta Properties, Inc. had 100,000 shares of class A common stock and 142,983,199 shares of class B common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain portions of La Quinta Corporation's definitive proxy statement for the 2002 annual meeting of stockholders, to be filed with the Securities and Exchange Commission within 120 days after the end of the year covered by this Form 10-K, are incorporated by reference in Part III of this Form 10-K.

TABLE OF CONTENTS

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About this Joint Annual Report

Summary

        This Joint Annual Report on Form 10-K, which we sometimes refer to as this Joint Annual Report, is filed by both La Quinta Corporation, a Delaware corporation ("LQ Corporation"), and its controlled subsidiary, La Quinta Properties, Inc., a Delaware corporation ("LQ Properties") that has elected to be treated as a real estate investment trust, or "REIT," for federal income tax purposes. We sometimes refer to LQ Corporation and LQ Properties in this Joint Annual Report collectively as "The La Quinta Companies." Both LQ Corporation and LQ Properties have securities which are publicly traded and listed on the New York Stock Exchange. Accordingly, this Joint Annual Report includes information, including financial statements, about LQ Properties on a consolidated basis and LQ Corporation on a consolidated basis, as well as information about The La Quinta Companies on a combined consolidated basis, which we present first in each item of this Joint Annual Report. The La Quinta Companies completed a restructuring on January 2, 2002 as more fully described in this Joint Annual Report. As a result of this restructuring, we will file future periodic reports with the Securities and Exchange Commission that disclose information about LQ Corporation, on a consolidated basis with its controlled subsidiary, LQ Properties, as well as information about LQ Properties on consolidated basis. As a result, our future periodic reports will contain two, rather than three, sets of financial statements. This is the last periodic report that will be filed by The La Quinta Companies that will contain three sets of financial statements.

        In this Joint Annual Report, unless the context otherwise requires, the term LQ Corporation includes those entities owned or controlled by LQ Corporation (but excluding LQ Properties); the term LQ Properties includes those entities owned or controlled by LQ Properties; and the terms "we," "us," "our," or "the companies" refers to LQ Corporation, LQ Properties and their respective subsidiaries, collectively. The term "our shares" means the shares of common stock, par value $0.01 per share, of LQ Corporation that are paired and traded as a unit with the shares of class B common stock, par value $0.01 per share, of LQ Properties. Prior to our restructuring, the common stock of LQ Corporation was paired and traded as a unit with the common stock of LQ Properties as "paired shares." Unless otherwise indicated in this Joint Annual Report, all information with respect to our shares refers to our shares since January 2, 2002 and to paired shares for periods before January 2, 2002.

Use of Certain Financial Terms

        In this Joint Annual Report, we use terms such as "EBITDA" and "Recurring Net Income available to common stockholders" which are not terms of financial measurement under generally accepted accounting principles, or GAAP. For a discussion of how we define these terms, please see the information under the heading "Item 6—Selected Financial and Other Data—Definitions of Non-GAAP Terms."

Forward-Looking Statements

        Certain statements in this Joint Annual Report that are not historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "anticipates," "expects," "intends," "estimates," "projects," and other similar expressions, which are predictions of or indicate future events and trends, typically identify forward-looking statements.

        We have used forward-looking statements in a number of parts of this Joint Annual Report, including, without limitation, "Items 1 and 2—Description of Our Business and Our Properties," including specifically the section captioned "Our Strategy" and "Item 7—Management's Discussion and Analysis of Financial Condition and Results for Operations." These forward-looking statements may

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include statements regarding the intent, belief or current expectations of the companies or their respective directors or officers with respect to the matters discussed in this Joint Annual Report. Our forward-looking statements are subject to a number of risks and uncertainties which could cause actual results or the timing of events to differ materially from those described in the forward- looking statements.

        We have included a discussion of some of these risks and uncertainties in this Joint Annual Report under the heading "Certain Factors You Should Consider About Our Companies, Our Businesses And Our Securities" and under the heading "Cautionary Statements Regarding Forward-Looking Statements in this Document." The risks and uncertainties described within these sections include those related to our lodging business, our investments in real estate, LQ Properties' status as a REIT, our healthcare business, our capital expenditures and requirements and our corporate structure, as well as risks and uncertainties related to our industry, the economy and global affairs. We have discussed these risks and uncertainties in detail within these sections and encourage you to read them in their entirety in order to understand the risks and uncertainties which can affect our forward-looking statements, as well as our business generally.

        Given the risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements that may be made in this Joint Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances.

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PART I

ITEMS 1 AND 2—DESCRIPTION OF OUR BUSINESS AND OUR PROPERTIES

General

        We are a leading limited service lodging company providing clean and comfortable guest rooms in convenient locations at affordable prices. We are one of the largest owner/operators of limited service hotels in the United States. We owned and operated 220 La Quinta Inns® and 72 La Quinta Inn & Suites® representing approximately 38,000 rooms in 28 states as of December 31, 2001. We strive to design hotels that attract both business and leisure travelers seeking consistently clean and comfortable rooms that are generally comparable to those of mid-price, full service hotels but at lower average room rates. We believe that by not providing full-service, management-intensive facilities and services, such as in-house restaurants, cocktail lounges, or room service, that typically carry high fixed costs and low margins, we are able to deliver a product that satisfies our customers' needs and price expectations, while also permitting us to concentrate on the variable cost structure and the high-margin nature of our limited service product.

        In addition to owning and operating our hotel properties, we began, in late 2000, to license the use of our proprietary brand names, including La Quinta®, La Quinta Inns® and La Quinta Inn & Suites® in return for royalty and other fees through license agreements with franchisees. As of December 31, 2001, our franchisees operated eight La Quinta Inns® and three La Quinta Inn & Suites® representing approximately 1,000 rooms under our brands. We have included additional information about our franchising program in this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and Our Properties—Our Franchising Program."

        We operate under the philosophy of offering well-located, convenient locations and consistently clean and comfortable guest rooms at an affordable price. We believe that our customers' perception of value is dependent on the following three components:

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Price. We are able to price our product lower than our mid-price, full service competitors because we do not incur significant fixed costs related to ancillary facilities and services that our customers may not utilize. We also are able to offer lower prices as a result of our consistent company-wide emphasis on cost controls.



•

Consistently Clean and Comfortable Rooms. We strive to deliver a consistent guest experience throughout our properties by following a chain-wide set of operating, marketing and hospitality standards. We believe that our properties are well constructed and well maintained and are attractively landscaped to enhance their appearance. To maintain the overall quality of our hotels, each hotel undergoes refurbishment and capital improvements as needed. In addition to regular operating maintenance, major capital refurbishing generally has been provided at intervals of five to seven years, based on an annual review of the condition of each hotel. Each hotel also undergoes a regular maintenance program whereby each room is deep cleaned every quarter. You can find additional information regarding our capital improvements and renovations programs, including our Gold Medal® Lite property renewal program, in this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and our Properties—Our Properties—Hotel Properties". In order to monitor our customers' perceptions of value, we conduct guest satisfaction surveys, maintain a quality assurance department and provide financial incentives to all our general managers and corporate employees tied to guest satisfaction performance.



•

Convenient Locations. Our hotels are typically located near interstate highways, major traffic arteries or major destination areas such as airports, business districts, universities, hospitals or convention centers. As a result, both business and leisure travelers have convenient access to our facilities.

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Our Strategy

        We focus on providing consistently clean and comfortable guest rooms in convenient locations at an affordable price. Our objective is to enhance stockholder value by building our brand and expanding our distribution, which we believe are key factors in increasing our EBITDA, cash flow per share and earnings per share. In order to achieve our objective, our key strategies include:

•

increase profits from our company-owned hotels;



•

grow our franchising program; and



•

invest our available capital.

        Increase Profits from our Company-Owned Hotels.    We expect to increase our EBITDA, cash flow per share and earnings per share through increases in profit contributions from company-owned hotels, primarily by improving revenue per available room, or RevPAR, and by controlling our costs. We believe that as the U.S. economy recovers, we will be able to increase RevPAR by stimulating room demand through effective advertising, promotions and Internet distribution channels. We are aggressively targeting new corporate business that can provide sales of a substantial number of room-nights. We also believe that our Gold Medal® Lite property renewal program will result in increases in our RevPAR.

        In addition to increasing revenues at company-owned hotels, we continue to focus on controlling costs while maintaining our customer service levels. We will continue to monitor and seek to control labor costs, which is our largest single operating cost component, through improved demand forecasting, operating efficiencies and labor scheduling. In addition, we will seek to control other hotel operating costs as well as corporate level expenses.

        Grow our Franchising Program.    We will continue to grow our franchising program by capitalizing on the value of our brands. We expect to increase EBITDA, cash flow per share and earnings per share through the development of our fee-based franchising program. By becoming more fee intensive, we anticipate increasing our return on assets and capitalizing on the value of our brands.

        Our franchising program is focused on developing relationships with experienced, high quality hotel owners who will develop and operate new hotels using the La Quinta Inns® or La Quinta Inn & Suites® brands or convert existing hotels to our brands. We believe that this strategy will allow us to continue to expand our brands' geographic coverage without requiring significant capital investment, resulting in increased revenues and cash flow while maintaining consistent quality across our entire chain. Approved franchise applicants are granted the right (subject to the terms of their license agreement) to operate under the La Quinta® brand name, obtain reservations through our central reservation system and use our hotel designs, operating systems and procedures. In return for this right, our franchisees pay to us an initial franchise affiliation fee and ongoing royalty, marketing and reservation fees. These ongoing fees are based on a percentage of gross room revenues at the franchise properties. Franchisees also pay fees to compensate for computer software usage, training programs and Returns Club® loyalty program participation.

        We believe that we have a strong corporate infrastructure that will support significant hotel expansion through franchising. In addition, our newly designed building prototypes, significant open territories in our system, consistency of our product and service, royalty fee rebate feature and our experience as an owner/operator, provide us with competitive advantages in the sale of our franchises.

        Invest our Available Capital.    We have identified certain methods of growth, such as our franchising program and our joint venture development efforts, that we anticipate will involve minimal capital requirements. As a result of this growth strategy, our ongoing capital requirements are generally expected to be less than our cash flow from operations. For the year ended December 31, 2001, our cash flow from operations was approximately $140,000,000. In addition, we have already generated,

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and project to generate, additional cash proceeds from the selective sales of existing company-owned hotels as well as the sales of non-strategic assets such as our healthcare facilities. During the year ended December 31, 2001, we generated cash proceeds from asset sales of approximately $663,000,000 and used the net proceeds from the sale of these assets primarily to reduce our debt. Accordingly, we anticipate having in excess of $400,000,000 from: cash on hand as of December 31, 2001, cash flow generated from operations during 2002, and cash proceeds generated by asset sales during 2002 to reinvest in our business, including, when appropriate, debt repayment and share repurchases.

        We may use our cash flow, in combination with other sources of capital, to pursue selective inn development and redevelopment and selected strategic acquisitions. Our current development strategy is focused on locating a select number of high visibility properties in key strategic locations, such as central business districts of major cities and areas near major airports and major vacation destinations. We currently intend to use joint ventures with experienced hotel developers for these projects. This approach to development, often used in full service hotel projects, should allow us to reduce the overall levels of our capital requirements and the level of development risk.

        In addition, we own several older hotels in locations that have experienced substantial growth around the hotel site. We believe that we have the opportunity to redevelop a select number of these locations with a new hotel property that will produce stronger operating results than the existing facility. We believe that the current weak lodging environment may present us with opportunities to expand our lodging operations. We will look to grow our lodging business by converting acquired hotel real estate portfolios to the La Quinta® brand.

        We also may use our cash flow, in combination with other sources of capital, to opportunistically pursue acquisitions to expand our brand offering, as well as our geographic territory. Acquisition opportunities would be evaluated on a number of factors, including the potential target's strategic fit, future profitability, financial condition, strength of operations, brand quality and geographic and product distribution. We believe that we have a strong infrastructure to accommodate growth that could come through acquisitions and other growth opportunities. This infrastructure includes effective advertising and marketing programs, an experienced operations group, a central reservations and property management system and a seasoned sales group.

Our Competitive Strengths

        We believe that we benefit from certain competitive strengths which assist us in implementing our business objectives and strategies, including:

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Significant Brand Awareness. We believe that we have achieved significant brand awareness as a result of our focus on providing high quality, well located accommodations and superior value, together with our national and local advertising initiatives. We believe that this brand awareness, as well as our reputation for price, quality and value, has earned our hotels a strong following of loyal guests. We reward our loyal returning guests through our Returns Club® program which provides guests with an expedited reservation system and check-in process as well as rewards for frequent stays. We believe that our brand identity provides us with a significant advantage over independent hotel operators and other limited service chains. Together with our operational expertise, this brand awareness enhances the performance of existing and newly constructed and acquired properties.



•

National and Local Advertising Initiatives. We promote and operate our own central reservation system, teLQuik®, as well as a toll-free number, 1-800-531-5900, to accept room reservations. During 2001, we handled approximately 3.2 million calls through our central reservation system, of which approximately half resulted in room reservations. In addition, we currently employ 48 national sales representatives and 15 regional sales representatives. Our sales representatives

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conduct sales programs to develop and cultivate guests from potential and existing corporate clients.

•

Operational Expertise and Experienced Management Team. Our management has substantial experience in the lodging industry. On average, senior management has approximately 25 years of experience in lodging and lodging-related industries and is supported by operational and administrative vice presidents with an average of 10 years of experience. Each company-owned property is operated as an individual profit center by an on-site general manager who oversees all day-to-day guest relations and other operating activities and implements rate, occupancy and cost containment strategies. We believe this decentralized accountability reduces operating costs while creating incentives to maximize RevPAR, guest satisfaction and operating margins by adapting room rates to prevailing market conditions at our individual hotels.



•

Financial Resources. We have substantial financial resources to invest in our business. With cash on hand and cash flow from operations and proceeds from asset sales, we anticipate having in excess of $400,000,000 to invest in our business during 2002. We could use our capital to reinvest in existing hotels, develop and/or acquire other lodging real estate assets and/or brands, reduce debt or buy back our stock.

Our Restructuring

        On December 20, 2001, our stockholders approved certain proposals which permitted LQ Corporation and LQ Properties to restructure the existing organization of the two companies by merging a newly formed, wholly owned subsidiary of LQ Corporation, with and into LQ Properties, with LQ Properties surviving the merger and becoming a subsidiary controlled by LQ Corporation while continuing its status as a REIT. Pursuant to the restructuring, which we consummated on January 2, 2002, each outstanding share of common stock of LQ Properties held by our stockholders was converted into one share of a new class B common stock of LQ Properties and each outstanding share of common stock of LQP Acquisition Corp. (all of which were held by LQ Corporation) were converted into one share of a new class A common stock of LQ Properties. Following the restructuring, each share of common stock of LQ Corporation, that previously had been paired with the common stock of LQ Properties, became paired and traded as a single unit with the new class B common stock. The outstanding common stock of LQ Corporation was unaffected by the restructuring other than a reduction in par value from $0.10 to $0.01 and the change of the pairing arrangement as described above. We proposed the restructuring in response to federal tax legislation adopted over the past several years which made it difficult for us to maintain our former status as a "grandfathered" paired share REIT while pursuing our objective to improve, expand, and diversify our lodging real estate assets and lodging business as a whole.

        In connection with the restructuring, our stockholders approved the terms of LQ Properties' class B common stock which provide that no dividends will be paid on LQ Properties' class B common stock prior to 2005. Until 2005, dividends may be paid on LQ Properties' class A common stock, including dividends necessary to maintain LQ Properties' status as a REIT. Commencing in 2005, the holders of class B common stock, may receive, on a quarterly basis, a dividend of $0.10 per share per annum although this dividend payment is not mandatory. In addition, the Class B common stock will, in certain circumstances, be redeemable for nominal consideration by LQ Properties.

        We believe that the restructuring was the best alternative for us to grow our lodging real estate portfolio, management operations and brand franchising in light of this federal tax legislation. In addition, we believe that our restructuring will allow both LQ Properties and LQ Corporation to make efficient use of their substantial net operating loss carryforwards, or "NOLs." We believe additional benefits of our restructuring include our ability to deduct preferred dividends for income tax purposes and to retain capital for other corporate uses such as deleveraging, investment, acquisitions and potential share

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repurchases. Our restructuring should also enable us to be less dependent upon capital markets by allowing us to retain more of our cash flow.

        Over the last two years, we have undergone significant financial and strategic changes. In January 2000, we began a strategy of selling non-lodging real estate assets in order to focus on our lodging business. As a result of that change in strategy, we replaced substantially all of our senior management with executives who have, on average, approximately 25 years of experience in lodging and lodging-related industries. Over the last two years, our management has improved the operations of our lodging assets, including the reduction of costs and the introduction of our franchising program. During this period, we also sold approximately $1.6 billion of our non-lodging assets, applying the proceeds from these sales to reduce our outstanding indebtedness, thereby strengthening our balance sheet. With the sale of a majority of our non-lodging assets completed, we changed our name from Meditrust to La Quinta in June 2001 to reflect the emphasis on our lodging operations. In January 2002, we restructured our tax and legal corporate structure primarily to address the challenges imposed by federal tax legislation on our previous "grandfathered" paired share REIT structure. We believe that these changes were necessary in order to reposition our business to permit growth of our lodging cash flow and expansion of the La Quinta® brand.

Recent Developments in the Lodging Industry

        In 2001, the U.S. lodging industry experienced a substantial downturn as a result of a slowing national economy and the impact of the terrorist attacks on the U.S. on September 11, 2001. Business and leisure travel slowed considerably as companies reduced corporate travel and leisure travelers cancelled or delayed trips. As a result, after a strong year in 2000, in 2001, the U.S. lodging industry posted its largest decline in RevPAR in almost ten years. Based on data provided by Smith Travel Research, a leading lodging consulting firm, RevPAR in the U.S. lodging industry for 2002 is expected to decline by approximately 7% compared to RevPAR for 2001.

        Our operating performance was likewise affected by the slowing national economy and the September 11, 2001 terrorist attacks and their aftermath. We believe that airport and urban locations were impacted the most, while highway locations were affected the least. While our operating results were negatively affected in 2001, we believe that they were not as severely impacted as many of our full-service competitors. We believe this is due to several factors, including:

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first, a slowing economy caused travelers to re-examine their lodging needs and trade down from full-service hotels to limited service lodging providers like us.



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second, many travelers chose to travel by car rather than by airplane which benefited our hotels which are typically located in "drive-to" markets.



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third, we cater to a business segment that includes traveling sales persons, who typically travel in good and bad economic times.

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Key Lodging Statistics

        The following table summarizes our key lodging statistics for the past five years:

(a)

Available room-nights in thousands.

(b)

Represents average daily rate.

(c)

Represents revenue per available room.

(d)

EBITDA is defined as income from continuing operations plus interest, income taxes, depreciation and amortization; adjusted for loss or gain on sale of assets, other income, and impairment provisions, provision for loss on equity securities and certain other expenses. See reconciliation to GAAP net income in this Joint Annual Report under the heading "Item 6—Selected Financial and Other Data—Other Unaudited Supplemental Information not Required by GAAP."

(e)

Financial results for 1998 and prior periods include lodging results operations of La Quinta Inns, Inc. prior to its merger on July 17, 1998 with Meditrust Corporation.

(f)

Includes operating statistics for hotels operated by us at any time in the respective year and does not include franchise operating statistics.

(g)

Corporate capital expenditures are included in net change in other assets and liabilities on the statements of cash flows.

Our Properties

        Hotel Properties.    Our typical, company-owned La Quinta Inn® and La Quinta Inn & Suites® contain, on average, approximately 130 guest rooms averaging 300 square feet in size. Substantially all of our guest rooms and most of our company-owned hotels include the following amenities:

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Room Amenities. Our room amenities include 25-inch remote control televisions with expanded free television channel choices, movies-on-demand, interactive video games, in-room coffee makers, hairdryers, irons and ironing boards and data port telephones for computer connections. In addition to standard rooms, La Quinta Inn & Suites® offer King Plus Extra rooms and deluxe two-room suites with microwaves and refrigerators.



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Hotel Amenities. Our hotel amenities include complimentary continental breakfast, free unlimited local telephone calls, a swimming pool, same-day laundry and dry cleaning, fax services, 24-hour front desk message service and free parking. In addition, at La Quinta Inn & Suites® we provide additional services including a fitness center, expanded continental breakfast and a courtyard with gazebo and spa.

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        Our guests typically have convenient access to food service at nearby freestanding restaurants, which include many national chains. We have an ownership interest in 109 buildings that are adjacent to our hotel properties, which we generally lease to third party restaurant operators.

        We believe that all of our hotel properties are well constructed, well maintained and are attractively landscaped to enhance their appearance. To maintain the overall quality of our hotels, each hotel undergoes refurbishment and capital improvements as needed. In addition to regular operating maintenance, major capital refurbishing has generally been provided at intervals of five to seven years, based on an annual review of the condition of each hotel. Each hotel also undergoes a regular maintenance program whereby each room is deep cleaned every quarter. During 2001, we spent approximately $50,000,000 in capital improvements and renovations to our existing hotels. We have invested approximately $240,376,000 in capital maintenance and renovation improvements to our existing hotels during the last five years.

        In addition to these periodic capital expenditures, in 2001, we commenced Gold Medal® Lite, our property renewal program. This program consists of refurbishments and enhancements to both the interior décor and exterior appearance of 200 of our company-owned La Quinta Inn® properties. Gold Medal® Lite follows our earlier $200,000,000 Gold Medal® redevelopment program of the mid-1990's in which guest rooms in 240 of our company-owned properties were completely refurbished. Gold Medal® Lite will update our guest rooms with a more modern, residential feel including new carpet, wall coverings, furniture, bedspreads and drapes. We believe this program will reinforce our position as a consistent provider of clean, comfortable facilities. In 2001, 78 company-owned properties were updated under the Gold Medal® Lite program. We expect to update the remaining 122 company-owned properties in this program in 2002 and to complete the program in early 2003 for a total program cost of approximately $90,000,000.

        To safeguard our reputation for consistency and quality, we anticipate that, from time to time, we will sell certain hotels that no longer meet the standards of the La Quinta® brand. For example, during 2001, we sold six of our hotels and other related facilities for gross proceeds of approximately $13,878,000. After conducting an extensive review of our lodging portfolio, we have identified 19 additional hotels that we have classified as held for sale.

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        The following table sets forth certain information as of December 31, 2001 regarding our lodging properties. Generally, each of our lodging properties is owned by LQ Properties and leased by LQ Properties to a subsidiary of LQ Corporation pursuant to long-term lease agreements. We have included information about these lease agreements in this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and Our Properties—La Quinta Properties, Inc.—Leases."

(a)

Our hotels had an average occupancy of 62.2% for the year ended December 31, 2001. Generally, average occupancy rates are determined by dividing the number of days or occupied rooms in each period by the average number of available rooms during such period.

(b)

The total amount of annual base rent paid to third parties related to lodging facilities in these states for the year ended December 31, 2001 was $839,000.

        Healthcare Related Properties.    As of December 31, 2001, LQ Properties had investments in 72 healthcare facilities including 66 assisted living facilities, three medical office buildings and three long-term care facilities. All of our healthcare real estate activities are conducted by LQ Properties. Accordingly, you can find more information regarding our healthcare real estate activities in this Joint Annual Report under the headings "Items 1 and 2—Description of Our Business and Our Properties—Our Other Businesses" and "La Quinta Properties, Inc.—Healthcare Related Real Estate."

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Our Operations

        We coordinate our hotel operations from our corporate headquarters in Irving, Texas. Centralized corporate services include marketing, sales, finance, information systems, construction and design, purchasing, legal, risk management, human resources and training. Accounting, treasury, tax and reservations functions are centralized in our service centers located in San Antonio, Texas.

        We have organized our hotel operations into 15 regions with each region headed by a regional vice president located within the respective market. Each regional vice president is responsible, on average, for supervising operations of 20 hotels. The regional vice presidents report to our senior management and are responsible for the service, cleanliness and profitability of the hotels in their respective regions.

        Each company-owned hotel is operated as an individual profit center, with an on-site general manager who oversees all day-to-day operations. Our general managers focus their attention on assuring friendly guest service, maintaining comfortable and clean guest rooms and achieving profitable operations. Their responsibilities also include recruiting, training and supervising the hotel's staff. A typical hotel has approximately 25 employees, including the general manager, housekeepers, laundry attendants, maintenance staff, front desk guest service representatives and a night auditor.

        Our general managers receive a five-week training program that emphasizes operations, hospitality, rate management, legal issues, interviewing, employee relations, training and budgeting prior to assuming responsibility at a hotel. We also utilize assistant managers to support the general mangers at certain properties, which provides a pool of experienced candidates to fill open general manager positions, as needed.

        We use target-driven operational budgets prepared by our general managers that are implemented after review with our senior management. Our room rates are continually reviewed by the hotel general managers, regional vice presidents and senior management so that they can be appropriately adapted to prevailing market conditions at each hotel. Each general manager can earn financial incentives based upon achieving favorable results in comparison to revenue and profit budgets and upon achieving targeted goals in guest satisfaction surveys for their respective property. We believe this incentive program increases our general managers' focus on operating efficient, well-maintained and profitable hotels.

        Our guest satisfaction is monitored through a number of initiatives. Guest satisfaction surveys, conducted by an independent market research company, provide customer feedback on each of our hotels. In addition, we operate a quality assurance department, staffed by former hotel managers, who inspect hotels for adherence to quality standards and who train hotel staff on methods to improve product quality. Regional vice presidents also inspect hotels to monitor quality standards. Financial incentives are set to reward improvements in our guest satisfaction levels. All of our general managers and corporate employees have a portion of their respective bonus plans tied to improvements in our guest satisfaction performance.

Sales & Marketing

        In general, based on data we compiled from our guest profiles, our guests are evenly divided between the following groups:

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Leisure Guests. These guests are typically vacationing families and senior citizens who are en route by car to another destination or attending a nearby special event or attraction. Leisure demand is highest on Friday and Saturday nights.



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Business Travelers. These guests typically visit a given area several times a year and include salespeople and technicians covering a specific territory as well as government and military personnel. Business demand is highest on Monday through Thursday nights.

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        Our national advertising campaigns emphasize the consistency and value associated with our hotels. We market through national and local cable and network television, newspapers, other print media and our own website. In addition, we utilize billboard advertisements located along interstate highways near many of our hotels. We employ a 48-member direct sales force. The direct sales force calls on companies that have a significant number of individuals traveling in the regions in which we operate and who have need for a high volume of room-nights. The direct sales force also seeks to increase room sales through the inclusion of our hotels in approved or preferred lodging lists of corporate travel managers and travel agencies who operate on a national basis. In addition, we also employ 15 regional sales representatives at selected hotels, typically located in corporate business parks. Our regional sales representatives conduct sales programs to develop local corporate contacts and encourage local companies to utilize our hotels.

        We offer a number of marketing programs aimed at creating customer loyalty and developing a strong following among our customers. We promote our Returns Club® frequent guest program, which provides its members with an expedited reservation and check-in process as well as rewards for frequent stays. This program improves the administrative efficiency of the reservation agents and front desk staff by providing a personal profile of each member. This profile includes information such as mailing address, room type preference, and preferred method of payment. As of December 31, 2001, we had approximately 820,000 Returns Club® members. These Returns Club® members accounted for approximately 22% of all room-nights sold in 2001. In addition, we form and continue to seek alliances with national travel and consumer organizations, such as AAA and AARP, and offer special rates or promotions to such organizations' customers.

        We promote and operate our own central reservation system, teLQuik®, as well as a toll-free number, 1-800-531-5900, to accept reservations. During 2001, we handled approximately 3.2 million calls through our central reservation system, of which approximately half resulted in room reservations. Our reservation system provides reservation agents with information about hotel locations, available rooms and prices, in order to assist customers in reserving rooms. Our agents are trained in telephone sales and cross-selling techniques. Through our computer network, we continually update the number of rooms sold at a hotel property, permitting the sale of all available rooms through either the individual hotel or the reservation centers. We market our reservation services to travel agents and corporate travel planners who may access teLQuik® through four global distribution systems (airline reservation systems). We also have specialized reservation agents for large group sales, motor coach sales and special service bookings. We estimate that approximately 30% of room sales are to customers who have made a reservation through our central reservation system. An additional 30% of room sales are to customers who have made a reservation directly with the hotel. The remaining 40% of room sales are to customers who arrive at a property without reservations or who make reservations through the Internet.

        We book room reservations on the Internet at our website, www.laquinta.com. This website provides information regarding our hotel locations, services and amenities. The information on our website is not part of or incorporated by reference in this Joint Annual Report. In 2002, we expect to improve upon the www.laquinta.com site to enhance our website's booking capabilities. In addition, we distribute our lodging product via travel websites such as Travelocity, Expedia and Hotwire and we sell room inventory through Priceline.com and other Internet distributors.

Our Franchising Program

        In late 2000, we initiated a program to license the use of our brands through franchising. Our franchising activities include both the franchising of new hotel properties, as well as the reflagging of existing hotel properties that meet our quality specifications. We evaluate franchise applicants on the basis of, among other factors:

•

their previous hotel operating expertise;



•

the strength of their financial resources; and

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•

credit history.

        A prospective franchisee is required to pay us a refundable application fee of $5,000 when an application is made for a La Quinta franchise. Upon execution of a license agreement, approved franchise applicants generally pay us an affiliation fee ranging from $40,000 to $45,000, toward which the $5,000 application fee can be used as a credit. Approved franchise applicants are granted the right (subject to the terms of their license agreement) to operate under the La Quinta® brand name, obtain reservations through our central reservation system and use our hotel designs, operating systems and procedures.

        Generally, a franchisee is required to pay a royalty fee of 4.0% of gross room revenues (as defined in the license agreement) during the first two years of operating under the La Quinta® brand and 4.5% of gross room revenues for all periods thereafter. A franchisee can receive a rebate of 0.5% of gross room revenues if, in any calendar year, the franchise hotel achieves superior results in guest satisfaction as measured by an independent guest survey conducted by a market research firm. In addition to the royalty fees, a franchisee generally pays, as a percentage of gross room revenues, a marketing fund fee of 2.5% for national advertising and a reservation fee of 2.0% to support the cost of reservation services provided to the hotels. Franchisees also pay fees to compensate for computer software usage, training programs and Returns Club® loyalty program participation.

        Before a franchise hotel opens, we inspect the hotel to confirm that our quality specifications have been met. Once a franchise hotel opens, we provide continued sales support, assistance and visitation by our franchise operations directors. We currently employ two franchise service directors, who are former general managers of our hotels, to assist franchisees with pre-opening and ongoing business issues. We also employ eight franchise sales personnel located throughout the U.S. who market our franchise program to qualified applicants.

        We do not presently have a formal company-funded financial assistance program for franchisees. However, we may, at our discretion, offer franchisees financing upon varying terms, depending upon a number of factors. These factors include: the amount of the financing; the number of hotels involved; location; the number of rooms involved; market conditions; and other factors that may warrant financial assistance.

        A typical franchise hotel consists of approximately 85 rooms. Each franchise hotel must adhere to the same rigorous quality standards of construction and maintenance as a company-owned hotel. Each franchise hotel is inspected by a franchise service director to assure that the franchise hotel adheres to our quality standards. We have the ability to terminate the license agreement for failure to meet our quality standards as well as for a franchisee's failure to fulfill other contractual obligations. As of December 31, 2001, 11 franchise hotels were operating under the La Quinta® brand and 29 additional hotels had executed license agreements. Our goal is to have 80 franchise hotels open by the end of 2002 and to open approximately 50 additional franchise hotels each year thereafter.

Our Information Systems

        Our information systems support our operations, reservations, marketing and sales, financial reporting and management reporting functions. During 2001, we substantially improved our information systems capabilities. These improvements include:

•

enhanced capabilities for installing systems and supporting franchisees;



•

increased correlation in room inventory and rate consistency between property management systems;



•

introduction of new electronic distribution channels;



•

more timely management reporting for improved operational decision making;

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•

enhancements to our Internet site, www.laquinta.com;



•

improvements to our sales systems for tracking leads and procuring corporate business; and



•

improved payroll and scheduling reports to control labor costs.

        Our system stability also has improved with the outsourcing of the hosting, maintenance and support to a leading third party provider, Perot Systems. We plan to continue to invest in our information systems to enhance our ability to monitor and maximize revenues and profitability.

Our Competition

        The hotel industry is highly competitive. Our hotels compete in our market areas with numerous limited service lodging brands, especially in the mid-priced segment, and with numerous major national lodging chains, regional brands and independently owned hotels. We believe that the primary competitive factors determining success in our industry are:

•

price;



•

location; and



•

quality.

        Our current direct competitors include national chains which operate in the mid-scale without food and beverage segment, such as Hampton Inns, Fairfield Inns, and Comfort Inns. In certain locations, our hotels also compete with mid-scale properties with food and beverage services, such as Ramada Inns, Holiday Inns and Hilton Garden Inns. No single competitor or group of our competitors is dominant in the lodging industry. However, some of our competitors have a larger network of locations and greater resources than we do.

Our Employees

        As of December 31, 2001, we employed approximately 7,000 employees, including approximately 6,300 hourly employees. Of these employees, approximately 220 were employed at our corporate headquarters in Irving, Texas and approximately 270 were employed at our support centers in San Antonio, Texas, of whom 190 work at our reservation center. Our employees are not currently represented by labor unions and we have never experienced an organized work stoppage. We believe that ongoing labor relations with our employees are good.

Our Trademarks

        La Quinta Inns®, La Quinta Inn & Suites®, Returns Club®, teLQuik®, Gold Medal® and our other associated proprietary trademarks are our registered trademarks. All of our material trademarks are registered with the United States Patent and Trademark Office. In addition, we have registered certain of our trademarks with the appropriate governmental agencies in certain foreign jurisdictions. We consider all of these trademarks and the associated name recognition to be important to our business. We monitor the use of similar names and takes appropriate action when possible infringements occur.

Seasonality

        The lodging industry is seasonal in nature. The periods during which our lodging properties experience higher hotel revenue activities vary from property to property depending principally upon location. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarter. We expect this seasonality will cause quarterly fluctuations in revenue, profit margins and net earnings.

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Our Other Businesses

        As of December 31, 2001, we owned or provided financing for 72 geographically dispersed healthcare facilities operated by eight different third party operators. All of our healthcare operations, including the healthcare real estate financing activities, are conducted by LQ Properties. Consistent with our previously announced intention to focus on the lodging industry, our healthcare operations and healthcare assets are decreasing as a result of our continued success in selling these assets to other healthcare real estate investors or to the operators of the facilities. We intend to continue selling our healthcare assets and redeploy the capital generated to deleverage or expand our lodging operations. As of December 31, 2001, 11 employees maintained the operations of the healthcare business. These employees are responsible for monitoring the existing healthcare related real estate portfolio as well as negotiating the sale (or early repayment) of our existing healthcare portfolio assets. The net book values of healthcare related leases and mortgages over the last five years were as follows:

(a)

Includes adjustment for impairment of real estate assets and impairment of mortgage loans of $88,369,000, $177,162,000, $116,011,000 and $66,909,000 as of December 31, 2001, 2000, 1999 and 1998, respectively.

        As of December 31, 2001, LQ Properties held approximately $153,006,000 of healthcare assets as lessor through sale/leaseback transactions. Substantially all of LQ Properties' sale/leaseback transactions are leased under triple net leases which are accounted for as operating leases and generally require that the third party pay for all maintenance, repairs, insurance and taxes on the property. LQ Properties has historically earned fixed monthly rents, although in some circumstances, it has earned periodic additional rents. Generally, multiple leases with one operator are cross-collateralized and contain cross-default provisions tied to each of the operator's other leases with us. You can find more information regarding our healthcare leases in this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and Our Properties—La Quinta Properties, Inc.—Leases."

        As of December 31, 2001, LQ Properties held approximately $82,853,000 in permanent mortgage loan financing. Permanent mortgage financing provided by LQ Properties has historically consisted of either construction or development loans made to a third party operator to construct a new healthcare facility which were converted to permanent mortgage loans or permanent mortgage loan financing put in place at the time a third party operator bought or refinanced an existing healthcare facility. These permanent mortgage loans are secured by first mortgage liens on the underlying real estate and personal property of the mortgagor.

        As of December 31, 2001, we also operated TeleMatrix, a provider of telephones, software and equipment for the lodging and telecommunications industry. Although this business generated positive operating cash flow and functions relatively autonomously, it does not represent a significant portion of our assets, revenues, operating cash flow or expenses.

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La Quinta Properties, Inc.

General

        LQ Properties is a self-administered REIT which operates under the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and is incorporated in the State of Delaware. LQ Properties' principal executive offices are located at 909 Hidden Ridge, Suite 600, Irving, TX 75038 and its telephone number is (214) 492-6600. As of December 31, 2001, LQ Properties had investments in 360 facilities consisting of 288 hotels and 72 healthcare facilities.

        In January 2000, we announced a plan of reorganization, referred to as our Five Point Plan, which provided for, among other things:

•

an orderly disposition of a significant portion of our healthcare assets; and



•

our intention to focus on enhancing the long-term growth potential of our lodging division.

        As a result of that strategy, LQ Properties had a net decrease in gross real estate investments of $852,089,000 during the year ended December 31, 2001 principally due to the sale of certain healthcare assets to operators of healthcare real estate assets, sales of land and the repayment of principal on permanent mortgage loans and development loans. You can find additional information and a further discussion of our Five Point Plan in this Joint Annual Report under the heading "Item 6—Selected Financial and Other Data—Overview—Focus on Lodging Industry."

        For a discussion of certain factors that could impact the financial condition, results of operations and/or business of LQ Properties or the successful implementation of our Five Point Plan and each of its respective component parts, you are encouraged to read the section of this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and Our Properties—Certain Factors You Should Consider About Our Companies, Our Businesses And Our Securities."

        A more detailed discussion of our businesses is set forth in this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and Our Properties."

Lodging Related Real Estate

        As of December 31, 2001, LQ Properties had investments in 288 hotels including 218 La Quinta Inns® and 70 La Quinta Inn & Suites® hotels. These hotels, located in 28 states, represent an aggregate of 37,368 rooms in service, and are leased by LQ Properties (or the respective property owning subsidiary) to a subsidiary of LQ Corporation. Additionally, as of December 31, 2001, subsidiaries of LQ Corporation held investments in four lodging facilities. You can find additional information about our lodging business and lodging related real estate in this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and Our Properties."

Healthcare Related Real Estate

        As of December 31, 2001, LQ Properties had investments in 72 healthcare facilities including 66 assisted living facilities, three medical office buildings, and three long-term care (skilled nursing) facilities. Third party operators leased 64 of LQ Properties' healthcare facilities and eight facilities constituted investments through the provision of permanent mortgage loan financing. LQ Properties' healthcare properties are located in 19 states and are operated by eight different operators.

        Assisted Living Facilities.    Our assisted living facilities provide a combination of housing, supportive services, personalized assistance and healthcare designed to respond to individual needs for daily living activities. Support services are generally available 24 hours a day to meet scheduled and unscheduled needs.

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        Long-Term Care (Skilled Nursing) Facilities.    Our long-term care facilities offer restorative, rehabilitative and custodial nursing care for patients not requiring the more extensive and sophisticated treatment available at acute care hospitals. Our facilities are designed to provide custodial care and to supplement hospital care and many have transfer agreements with one or more acute care hospitals.

        Medical Office Buildings.    Our medical office building facilities contain corporate headquarters for certain healthcare companies as well as individual physicians, physician groups and other healthcare provider offices for the treatment of patients. The types of services provided in our medical office buildings may include clinics, examination facilities, outpatient therapy and the provision of other medical services in a non-hospital setting.

        The following table includes information as of December 31, 2001 regarding our healthcare properties:

(a)

Generally, average occupancy rates are determined by dividing the number of days or occupied rooms in each period by the average number of licensed bed days during such period. Based upon information provided by

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the operators of our healthcare facilities, the average occupancy of LQ Properties' portfolio of operating healthcare facilities for the year ended December 31, 2001, was as follows: 91% for long-term care facilities and 77% for assisted living facilities.

(b)

Represents purchase price or mortgage amount as of December 31, 2001 for operating facilities.

(c)

The annual base rent/interest payments under the healthcare leases or mortgages are generally projected to be approximately 8% of the purchase price or mortgage amount, in accordance with the terms of the respective agreements. Base rent excludes additional and percentage rent and interest. Additional and percentage rent, interest and other fees earned by the facilities listed above for the year ended December 31, 2001 were an aggregate of $2,292,000. Additional and percentage rent and interest are calculated based upon a percentage of a facility's revenues over an agreed upon base amount or an automatic annual escalation. Amounts listed in the table above represent contractual base rent or interest.

(d)

Includes a permanent mortgage loan of $25,634,000.

(e)

The gross investment and annual base rent is included in the Oklahoma assisted living facility under an umbrella sale/leaseback.

(f)

Includes permanent mortgage loans of $9,800,000.

(g)

The mortgage amount and interest payment includes the Massachusetts medical office building under an umbrella mortgage.

(h)

Permanent mortgage loans.

Leases

        LQ Properties leases its real estate assets.    As a REIT, LQ Properties is not permitted to operate or manage the businesses conducted on its real estate assets. Instead, LQ Properties leases its lodging related real estate to a subsidiary of LQ Corporation and leases its healthcare related real estate to third parties. Each of these leasing activities are described in more detail below.

        Leased Hotel Properties.    Generally, each of the hotel properties, including the land, related easements and rights, buildings, improvements, furniture, fixtures and equipment, that is owned by LQ Properties is leased to a subsidiary of LQ Corporation pursuant to long-term lease agreements. We refer to these hotel properties as the leased hotel properties.

        The lease agreements have fixed terms of five years. LQ Properties' gross real estate investment in the leased hotel properties aggregates approximately $2,671,304,000 as of December 31, 2001. The base rents range from 3.5% to 15.5% per annum of LQ Properties' equity investment in the leased hotel properties. The lease agreements between LQ Properties and LQ Corporation include quarterly base or minimum rents plus contingent or percentage rents based on quarterly gross revenue thresholds for each of the leased hotel properties. Rent in the aggregate for the year ended December 31, 2001 was $275,359,000, of which $163,633,000 remained outstanding and payable to LQ Properties by LQ Corporation as of December 31, 2001.

        LQ Corporation is required to pay rent and all operating expenses of the leased hotel properties while LQ Properties assumes costs attributable to real estate taxes and insurance. LQ Corporation is required to provide for all repairs, replacements and alterations to the leased hotel properties that are not considered capital additions or material structural work, as defined in the lease agreements. LQ Properties provides for all capital additions and material structural work. LQ Corporation has operated at a substantial loss due in part to the lease payments required to be made under the lease agreements. Due to the unexpected, but long-term, shortfall in the operating revenues generated by the leased hotel properties as compared to what was originally contemplated when the terms of the lease agreements were originally established, it is highly likely that LQ Properties and LQ Corporation will modify substantially all of the lease agreements for the leased hotel properties which would result in a reduction in revenue for LQ Properties and reduced expenses for LQ Corporation.

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        Leased Healthcare Properties.    We do not operate any of the businesses conducted on LQ Properties' healthcare related real estate. Instead, all of LQ Properties' healthcare related real estate is leased to third parties. Generally, each of the healthcare facilities, including the land, related easements and rights, buildings, improvements and fixtures, that are owned by LQ Properties are leased pursuant to a long-term triple net lease. The leased healthcare properties usually do not include major movable equipment.

        The healthcare facility leases generally have a fixed term of approximately 10 years and contain multiple renewal options. Some healthcare facility leases are subject to earlier termination upon the occurrence of certain events as described in the lease.

        LQ Properties' leased healthcare properties before impairment aggregated approximately $217,204,000 as of December 31, 2001. The base rents range from approximately 8% to 12% per annum of LQ Properties' equity investment in the leased healthcare properties. The base rents for the renewal periods are generally fixed rents for the initial renewal periods and market rates for later renewal periods. All leases provide for either an automatic fixed annual rent escalation or additional variable rents in addition to the base rent, based on revenues exceeding specified base amounts.

        Each lease is a triple net lease requiring the lessee to pay rent and all additional charges incurred in the operation of the leased healthcare property. The lessees are required to repair, maintain, and in certain circumstances rebuild the leased healthcare properties as well as pay insurance and taxes on the facility.

        The obligations under the leases are generally guaranteed by the parent corporation of the lessee, if any, or affiliates or individual principals of the lessee. Some obligations are further backed by letters of credit and cash collateral from various financial institutions which may cover up to six months of lease payments and which remain in effect until the expiration of a fixed time period or the fulfillment of certain performance criteria. Generally, multiple leases with one operator are cross-collateralized and contain cross-default positions tied to each of the operator's other leases with LQ Properties.

        LQ Properties also obtains other credit enhancement devices similar to those it may obtain with respect to mortgage loans as described below.

        With respect to two of the leased healthcare properties, LQ Properties leases the land pursuant to ground leases and subleases the land to the operator of the leased healthcare property. Such subleases contain terms substantially similar to those found in the healthcare facility leases.

Other Healthcare Investments

        LQ Properties' healthcare portfolio includes secured loans which are structured to provide LQ Properties with interest income, additional interest based upon the revenue growth of the operating facility or a fixed rate increase, principal amortization and commitment fees. All of the approximately $107,024,000 in mortgage loans at face value before impairment as of December 31, 2001 are first mortgage loans. LQ Properties is no longer actively engaged in making new mortgage loans on healthcare properties.

        The interest rates on LQ Properties' existing investments in mortgage loans for operating facilities range from approximately LIBOR plus 1% per annum to 10% per annum on the outstanding balances. The yield to LQ Properties on mortgage loans depends upon a number of factors, including:

•

the stated interest rate;



•

the average principal amount outstanding during the term of the loan;



•

the amount of the commitment fee charged at the inception of the loan;



•

the interest rate adjustments; and

17

•

the additional interest earned.

        The mortgage loans for operating facilities made through December 31, 2001 generally have 10-year terms with up to 20 to 30-year amortization schedules that provide for a balloon payment of the outstanding principal balance at the end of the tenth year. Some of the mortgages include an interest adjustment in the fifth year which generally provides for interest to be charged at the greater of the current interest rate or 300 to 400 basis points over the five-year United States Treasury securities' yield at the time of adjustment.

        LQ Properties requires a variety of additional forms of security and collateral beyond that which is provided by the lien of the mortgage, including one or more of the following items:

•

a guaranty of the complete payment and performance of all obligations associated with each mortgage loan from the borrower's parent corporation, if any, other affiliates of the borrower and/or one or more of the individual principals controlling such borrower;



•

a collateral assignment from the borrower of the leases and the rents relating to the mortgaged property;



•

a collateral assignment from the borrower of all permits, licenses, approvals and contracts relating to the operation of the mortgaged property;



•

a pledge of all, or substantially all, of the equity interest held in the borrower;



•

cash collateral for a negotiated dollar amount typically equal to three months to one year's principal and interest on the loan, (which cash collateral typically remains in effect until the later to occur of (i) three years after the closing of the mortgage loan or (ii) the achievement by the facility of an agreed-upon cash flow debt coverage ratio for three consecutive fiscal quarters and, in the event that the agreed-upon financial covenants are not maintained throughout the loan term, the borrower is often required to reinstate the cash collateral);



•

an agreement by any affiliate of the borrower or operator of the facility to subordinate all payments due to it from the borrower to all payments due to LQ Properties under the mortgage loan; and



•

a security interest in all of the borrower's personal property, including, in some instances, the borrower's accounts receivable. In addition, the mortgage loans are generally cross-defaulted and cross-collateralized with any other mortgage loans, leases or other agreements between the borrower or any affiliate of the borrower and LQ Properties.

Income Tax Matters

        LQ Properties currently intends to continue to manage its investments, including the sale or disposition of property or other investments, and to operate (including through its business relationships with LQ Corporation) in a manner consistent with the requirements of the Code and the regulations thereunder in order to qualify as a REIT. As long as LQ Properties complies with the Code and its regulations regarding REIT qualification, LQ Properties will generally not be taxed, under the federal income tax laws, on that portion of its REIT taxable income that it distributes to its stockholders. LQ Properties utilizes taxable REIT subsidiaries to conduct the operations of TeleMatrix and to hold certain assets which LQ Properties could not hold directly. LQ Properties has accrued and paid federal and state income taxes on the earnings of such subsidiaries.

        In order to continue to qualify as a REIT, among other factors, LQ Properties must have distributed, in general, at least 90% of its 2001 REIT taxable income (excluding net capital gain) as dividends eligible for the dividends paid deduction available to REITs. Distributions to preferred stockholders during 2001 satisfied this requirement. As of December 31, 2001, LQ Properties had NOLs of approximately $125,000,000 that could be used to reduce LQ Properties' REIT taxable income and distribution requirements in future years. Going forward, LQ Properties intends to utilize its available NOLs in a

18

tax-efficient manner. For LQ Properties, this may include using its available NOLs to offset amounts that would otherwise be required to be distributed to LQ Corporation. Such amounts could be retained within LQ Properties to fund acquisitions, reduce debt, or for other corporate purposes.

Environmental Matters

        Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in its property. These laws often impose liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. The costs of investigation, removal or remediation of hazardous substances may be substantial. Additionally, the presence of hazardous or toxic substances, or the failure to properly remediate these substances, may adversely affect the owner's ability to sell or rent or to borrow using this property as collateral. People who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of a release of substances at a disposal treatment facility, whether or not the facility is owned or operated by that person. Certain environmental laws impose liability for release of asbestos containing materials, or "ACMs," into the air and third-parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, management and development of real properties, we may be considered an owner or operator or as having arranged for the disposal or treatment of hazardous or toxic substances and, therefore, be potentially liable for removal or remediation costs, as well as certain other related costs, including governmental fines and injuries to persons and property.

        We have retained independent environmental consultants in the past to conduct or update Phase I environmental assessments (which generally do not involve invasive techniques such as soil or ground water sampling) and asbestos surveys with respect to certain of our properties. These environmental assessments have not revealed any environmental conditions that we believe will have a material adverse effect on our business, assets or results of operations. Where appropriate, on a property-by-property basis, these consultants also have conducted additional testing, including sampling for asbestos, for soil contamination where underground storage tanks are or where located, and for contamination of underground water. However, even though these environmental assessments have been conducted, there is still the risk that the environmental assessments and updates did not identify all potential environmental liabilities because either a prior owner created a material environmental condition that is not known to us or the independent consultants preparing the assessments did not discover it. Further, new environmental liabilities may have developed since the environmental assessments were conducted. We are aware that certain of our hotel properties' are adjacent to gasoline stations that may put these properties at risk for soil and groundwater contamination from these neighboring properties. In addition, one of our hotel properties is located near a "Superfund Site" as designated by the EPA. Finally, our lodging properties are cleaned and maintained using various chemicals and cleaning agents, some of which may be environmentally sensitive or hazardous. We generally maintain these chemicals and cleaning agents in appropriate containers to protect against environmental hazards.

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La Quinta Corporation

General

        LQ Corporation is a Delaware corporation, which currently operates the business conducted on LQ Properties' lodging related real estate. LQ Corporation's principal executive offices are located at 909 Hidden Ridge, Suite 600, Irving, TX, 75038 and its telephone number is (214) 492-6600.

        As of December 31, 2001, LQ Corporation, through its subsidiaries, leased 288 properties from LQ Properties, managed a total of 292 hotels and LQ Corporation's franchisees operated 11 hotels. LQ Corporation's activities are conducted primarily on real estate either leased or subleased from LQ Properties. Additionally, subsidiaries of LQ Corporation held investments in four lodging facilities as of December 31, 2001. LQ Corporation does not operate any businesses conducted on, or related to, LQ Properties' healthcare related real estate. LQ Corporation neither leases real estate from, nor manages real estate on behalf of, any third party with the exception of one hotel facility and certain land parcels. You can find more information and a further discussion about our lodging business in this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and Our Properties."

        For a discussion of certain factors that could impact the financial condition, results of operations and/or business of LQ Corporation, you are encouraged to read the section of this Joint Annual Report entitled "Certain Factors You Should Consider About Our Companies, Our Businesses And Our Securities."

        A more detailed discussion of our businesses is set forth in this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and Our Properties."

Income Tax Matters

        LQ Corporation pays ordinary corporate income taxes on its taxable income. Any income, net of taxes, will be available for retention in LQ Corporation's business or for distribution to stockholders as dividends. Any dividends distributed by LQ Corporation will be subject to tax at ordinary rates and generally will be eligible for the dividends received deduction for corporate stockholders to the extent of LQ Corporation's current or accumulated earnings and profits. However, there is no tax provision which requires LQ Corporation to distribute any of its after-tax earnings and LQ Corporation does not expect to pay cash dividends in the foreseeable future. Currently, LQ Corporation is not paying any federal income taxes due to the operating losses being generated. As of December 31, 2001, LQ Corporation had NOLs of approximately $215,000,000 that can be used to reduce future taxable income from operations or taxable distributions from LQ Properties.

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Certain Factors You Should Consider About Our Companies,
Our Businesses And Our Securities

        Presented below are certain factors that we believe are material to our stockholders. You should be aware that there are various risks, including those described below, which in the future and, in some cases, already do, materially affect us and our business, financial condition and results of operations. You should carefully consider these factors. This section includes or refers to certain forward-looking statements. You should read the explanation of the qualifications and limitations on such forward-looking statements in this Joint Annual Report under the headings "Items 1 and 2—Description of Our Business and Our Properties—Cautionary Statements Regarding Forward-Looking Statements In This Document."

Risks Associated with our Lodging Business

Our strategic focus on lodging related properties exposes our stockholders to risks common in this industry that may adversely affect an investment in our securities, including a number of risks that could have an adverse effect on our lodging related business.

        Our economic performance, and consequently the value of our publicly traded securities, are subject to the risk that if our properties do not generate revenues to meet our operating expenses, including debt service and capital expenditures, our cash flow will be adversely affected. The following factors, common in the lodging industry, may adversely affect the revenues generated by our hotel properties, including:

•

changes in the national, regional and local general economic climate;



•

weather conditions;



•

competition from comparable hotels, many of which have greater marketing and financial resources than our hotel-operating business;



•

the desirability of particular locations;



•

the quality, philosophy and performance of the lodging facility managers and supervisors;



•

changes in product preferences;



•

decreases in the demand for our lodging facilities as a result of technological developments;



•

availability of qualified labor;



•

changes in room rates and increases in operating costs due to inflation and other factors;



•

capability of management information systems;



•

the need for capital to reinvest in order to periodically repair and upgrade our lodging facilities;



•

sudden changes in travel patterns caused by factors such as terrorist attacks;



•

increases in travel expenses that reduce business and leisure travel;



•

increases in infrastructure expenses such as real estate tax and utilities; and



•

fluctuating and seasonal demands of business travelers and tourism and the relationship, generally, between supply of and demand for hotel rooms (an oversupply of hotel properties or a reduction in demand for hotel rooms).

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We may continue to experience reduced demand for our hotel rooms as a result of the September 11, 2001 terrorist attacks and their aftermath, which may result in reduced revenue and decreased financial performance in the future.

        The terrorist attacks have negatively impacted general economic, market and political conditions. The terrorist attacks, compounded with the slowing national economy, have resulted in substantially reduced demand for lodging for both business and leisure travelers across all lodging segments. This has resulted in reduced revenue and decreased financial performance for fiscal year 2001. While we currently cannot project the continuing impact of these events on us, we do expect that if lodging demand remains reduced, we may experience additional declines in RevPAR and EBITDA in the future. Additionally, these declines could affect our ability to comply with certain financial covenants under our credit facility.

We must successfully compete for franchisees or our franchising program will not develop into a meaningful component of our lodging business.

        The lodging business is a heavily franchised industry. While the La Quinta® brand has been in existence since 1968, we just introduced the franchising of the La Quinta® brand in the fall of 2000. Some of our competitors may have substantially greater marketing and financial resources than we do. Some of our competitors may have greater brand distribution than we do. Some of our competitors may offer greater financial incentives, including financing and royalty rebates, than we do. We must still compete successfully against these other lodging components in order to successfully grow our franchising program and develop it into a long-term meaningful component of our lodging business.

Our franchising program depends upon third party owners/operators who may not fulfill their franchising obligations, including failing to make timely payments to us and failing to maintain quality control over the use of the La Quinta® brand.

        Our growth strategy includes, among other things, expansion of the La Quinta® brand through franchising. The success of our franchise program is dependent upon the manner in which our franchisees adhere to their respective franchise agreements and operating standards, which include:

•

timely payment of royalties and fees;



•

ongoing capital expenditures and maintenance; and



•

proper usage of the La Quinta® brand and related trademarks.

        In addition, while we have contractual controls over each franchisee, we do not have control over the day-to-day use by franchisees of our La Quinta® brand. As a result, third party franchisees may not appropriately use and protect our La Quinta® brand which may decrease its value or expose it to legal challenges.

Our strategy of developing and redeveloping lodging properties may not generate the economic returns we expect.

        Our strategy includes current and future development and redevelopment activities. These activities are subject to risks because, among other reasons:

•

we may be unable to proceed with the development and redevelopment of properties because we cannot obtain financing upon terms that are favorable to us;



•

we might not find appropriate, strategically located properties;



•

our redevelopment efforts may not produce desired operating results;



•

developed properties may not meet stipulated minimum returns;



•

land costs may be higher than anticipated; and

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•

we may be unable to obtain, or may be delayed in obtaining, required building permits and authorizations, which could result in increased costs and could cause us to abandon projects altogether.

        In addition, we may from time to time experience shortages of materials or qualified trades people or volatile increases in the cost of certain construction materials or labor, resulting in longer than normal construction and remodeling periods, loss of revenue and increased costs. We will rely heavily on local contractors, who may be inadequately capitalized or understaffed. The inability or failure of one or more local contractors to perform may result in construction or remodeling delays, increased costs and loss of revenue which could adversely affect our business, financial condition and results of operations.

We may utilize joint venture partnerships, which we may have limited control over, for hotel acquisitions and/or development.

        We may acquire and/or develop hotel properties through joint ventures with third parties. Joint venturers often share control over the operation of the joint venture assets. Actions by a co-venturer could subject such assets to additional risks, including:

•

our co-venturers in an investment might have economic or business interests or goals that are inconsistent with our interests or goals;



•

our co-venturers may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives; and



•

our co-venturers could go bankrupt, leaving us liable for their share of joint venture liabilities.

        Although we generally will seek to maintain sufficient control of any joint venture to permit our objectives to be achieved, we might not be able to take action without the approval of our joint venture partners. Also, our joint venture partners could take actions binding on the joint venture without our consent.

We may be unsuccessful in identifying and completing acquisition opportunities which would limit our ability to grow over the long-term.

        Part of our growth strategy includes the potential acquisition of other lodging hotels and/or brands. We may compete with other lodging and leisure companies for potential hotel and/or brand acquisition opportunities. Some of these competitors may have substantially greater financial resources than we do and may be able to pay more to acquire properties than we are able to pay. These entities may be able to accept more risk than we choose to manage, including risks of a company's creditworthiness, brand identification or geographic location. Competition may generally reduce the number of acquisition opportunities that we believe are suitable. In addition, competition for properties may increase the cost of acquiring properties and/or brands.

        Part of our growth strategy includes the potential acquisition of other lodging hotels and/or brands. Such new acquisitions may fail to perform as expected or we may be unable to make acquisitions on favorable terms. Additionally, we may underestimate the costs necessary to bring an acquired property up to standards established for its intended market position or the costs to integrate an acquired property or brand with our existing operations.

We may be unsuccessful in increasing our cash flow from our company-owned hotels.

        We may not be successful in our strategy of increasing cash flow though increased profit contributions from our company-owned hotels due to the following factors:

•

we may be unsuccessful in controlling costs;



•

demand may not increase for our hotel rooms;

23

•

we may not be successful in targeting new corporate and leisure business; and



•

our marketing efforts may not result in increasing our RevPAR.

We operate in a very competitive market which may limit our operating margins, diminish our market share and reduce our earnings.

        Our hotels generally operate in markets that contain numerous competitors, including a wide range of lodging facilities offering full-service, limited-service and all-suite lodging options to the public. The continued success of our hotels will be substantially dependent upon our ability to compete in such areas as affordable and competitive room rates, quality of accommodations, name recognition, service level and convenience of locations. Additionally, an increasing supply of hotel rooms in our market segment, and recent consolidations in the lodging industry generally, have resulted in the creation of several large, multi-branded hotel chains with diversified operations that may adversely impact our business, financial condition and results of operations. We cannot assure you that demographic, geographic or other changes in markets will not adversely affect the convenience or desirability of the locations of our hotels. Furthermore, we cannot assure you that competing hotels will not provide greater competition for guests than currently exists in the markets in which our hotels operate or that new hotels will not enter such markets.

Our lodging related properties are geographically concentrated which exposes our business to the effects of geographically oriented events and occurrences.

        Our hotels are concentrated in the western and southern regions of the United States. As a result, our lodging properties are particularly sensitive to adverse economic and competitive conditions and trends in those regions and such conditions could adversely affect our business, financial condition and results of operations. The concentration of lodging properties in one region may expose us to risks of adverse economic developments, or adverse climate or weather conditions which are greater than if our portfolio were more geographically diverse.

Our lodging related business and operations are subject to extensive employment and other governmental regulation.

        Our lodging business is subject to extensive federal, state and local regulation, including building and zoning requirements, all of which can prevent, delay, make uneconomical or significantly increase the cost of developing additional lodging facilities. In addition, our lodging business and hotel operators are subject to laws governing their relationship with employees, including minimum wage and overtime payment requirements, rules pertaining to working conditions, work permit requirements and discrimination and other claims. An increase in the minimum wage rate, employee benefit costs or other costs associated with employees could adversely affect our business, financial condition and results of operations.

Risks Related to La Quinta Generally

We are exposed to litigation that could result in a substantial adverse affect on our business and financial results.

        There could be a substantial adverse affect on our business and financial results if we are not successful in defending or reaching a settlement with respect to the litigation currently pending against us. Although we are pursuing settlements with terms favorable to us and/or aggressively defending the material lawsuits that have been filed against us, we may not be successful in these efforts. If the ultimate outcome of litigation against us is not resolved in our favor, we could be exposed to considerable financial liabilities, significant portions of which may not be recoverable from our insurance providers.

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Our failure to obtain and maintain proper insurance on our properties could have a material adverse effect on us.

        We are responsible for insuring our properties, including our lodging related properties, as well as for obtaining the appropriate insurance coverage to reasonably protect our interests in the regular course of business. Additionally, each of our leases and mortgage loans typically specifies that comprehensive insurance be maintained on each of our properties, including liability, fire and extended coverage. Leases and loan documents for new investments typically contain similar provisions. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods, that may be uninsurable or not economically insurable. We will use our discretion in determining amounts, coverage limits and deductibility provisions of insurance, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. The events of September 11, 2001 have made it difficult to obtain certain types of insurance and are causing the cost of insurance to increase. We may not be able to obtain or renew insurance policies, or, if we are able to obtain or renew our coverage, it may be at a significantly higher cost than our historic experience. As a result, we may be forced to carry insurance coverage that, in the event of a substantial loss, would not be sufficient to pay the full current market value or current replacement cost of our lost investment and also may result in certain losses being totally uninsured. Inflation, changes in building codes, zoning or other land use ordinances, environmental considerations, lender imposed restrictions and other factors also might make it infeasible for us to use insurance proceeds to replace the property after it has been damaged or destroyed. Under such circumstances, the insurance proceeds, if any, that we receive might not be adequate to restore our economic position with respect to such property.

        In addition, insurance coverage for our properties and for casualty losses do not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings, that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

        Finally, property and casualty insurance has become more expensive and difficult to procure recently. As it becomes more expensive or difficult to procure, we will need to make decisions as to the types and amounts of coverage to obtain, including determining whether partially self-insuring is an economically feasible alternative.

We depend on our key personnel.

        We depend on the efforts of our executive officers and other key personnel. While we believe that we could find replacements for these key personnel, the loss of their services could have a significant adverse effect on our operations.

Changes in market conditions could adversely affect the market price of our securities.

        As with other publicly traded equity securities, the value of our publicly traded securities depends on various market conditions which may change from time to time. Among the market conditions that may affect the value of our paired common stock are the following:

•

the extent of investor interest in us;



•

the attractiveness of our equity securities in comparison to other equity securities, including securities issued by other real estate-based or lodging related companies;



•

our financial performance; and



•

general stock and bond market conditions.

25

        The market value of our publicly traded securities is based primarily upon the market's perception of our growth potential, including current and potential future earnings, the value of our assets, including real estate and the La Quinta® brand, and, if applicable, any dividend that may be paid on LQ Properties class B common stock in the future. Consequently, our paired common stock may trade at prices that are higher or lower than their net asset value per share. Additionally, if our future earnings are less than expected, it is likely that the market price of our paired common stock will diminish.

Provisions of our charters and bylaws could inhibit changes in control that could be beneficial to our stockholders.

        Certain provisions of our charters and bylaws may delay or prevent a change in control or other transaction that could provide our stockholders with a premium over the then-prevailing market price of their paired shares or which might otherwise be in their best interests. In addition to staggered Boards of Directors, our charters generally prohibit ownership, directly, indirectly or beneficially, by any single stockholder of more than 9.9% of our equity stock. We refer to this limitation as the "ownership limit." Our Boards of Directors may waive or modify the ownership limit with respect to one or more persons if they are satisfied that ownership in excess of this limit would not jeopardize LQ Properties' status as a REIT for federal income tax purposes. Shares owned in violation of the ownership limit will be treated as "excess stock" and will be subject to loss of rights to distributions and voting and other penalties. The ownership limit may also have the effect of inhibiting or impeding a change in control. These restrictions on transferability and ownership also will not apply if our Boards of Directors determine that it is no longer in the best interests of LQ Properties to attempt to qualify, or to continue to qualify, as a REIT.

Risks Related to Our Debt

Our substantial leverage and the associated risks could result in adverse consequences for us.

We are dependent on external sources of capital and have substantial amounts of debt.

        We may have to rely on third party sources of capital in order to repay our debt, fund capital expenditures and otherwise pursue our strategic objectives. These external sources of capital may or may not be available on favorable terms or at all. Our access to third party sources of capital depends upon a number of factors, including general market conditions, the market's perception of our growth potential and risk characteristics of our underlying business operations, our current and potential future earnings and cash flow and the market price of our securities. Moreover, additional equity offerings may result in the substantial dilution of our stockholders' interests and additional debt financing may further leverage us. In the event we are unable to access third party sources of capital on terms favorable to us, we may be delayed in implementing capital improvements or in pursuing our growth strategy which could reduce our revenue or operating income.

        As of December 31, 2001, we had approximately $1 billion of debt. This amount of debt could have important consequences for our investors and for us, some of which include:

•

our ability to obtain additional financing may be impaired, both currently and in the future;



•

a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on this indebtedness, thereby reducing the funds available for other purposes;



•

our cash flow may be insufficient to meet required payments of principal, interest or future dividends;



•

we may be substantially more leveraged than our competitors, putting us at a competitive disadvantage; and

26

•

our flexibility to adjust to market conditions is limited, leaving us vulnerable in a downturn in general economic conditions or in our business.

Our credit facility contains certain financial covenants that we may not meet and, if violated, could limit our ability to continue to borrow under our credit facility and, under certain circumstances, could accelerate the amount due under our credit facility.

        We depend upon a credit agreement with lenders for a portion of our operating funds. This credit agreement subjects us to financial covenants, including restrictions on our ability to engage in certain activities. Several factors, including the recent economic downturn and terrorist attacks, have had an adverse affect on the lodging business. As a result, there is a risk that we may not meet one or more of these financial covenants. Furthermore, we may be unable to amend our credit facility to provide for covenants that we will be able to meet in the currently challenging environment. If we violate or fail to comply with any of the financial or other covenants in our credit agreement, there may be a material adverse effect on us. Most notably, we may be unable to borrow additional funds under our credit agreement and, further, our outstanding debt under our credit agreement could become immediately due.

We have continued to sell our healthcare assets and a lack of continued success in these sales efforts may impair our ability to service or refinance our debt obligations.

        Since the announcement of our Five Point Plan, we have relied, and will continue to rely, significantly on the sale of healthcare assets to repay our indebtedness. The sale of significant portions of healthcare assets is subject to a number of risks including:

•

the ability to identify satisfactory potential buyers;



•

the availability of financing to potential buyers;



•

the satisfactory completion of regulatory approvals; and



•

other factors which are outside of our control.

        During the past several years, participants in the healthcare real estate industry have endured capital markets that have offered limited access to traditional financing vehicles. Regulatory changes, uncertainty in the industry and other factors have contributed to this reduction in available capital financing sources. Continuing limitations in the amount and type of capital which is available to the healthcare real estate industry may reduce the number of qualified buyers, impact the timing of asset sales or reduce the purchase prices at which prospective buyers are willing to acquire healthcare related real estate. In the event we are unable to continue to successfully sell healthcare assets on a timely basis and at prices which are acceptable to us, our ability to satisfactorily service or refinance our debt obligations could be impaired.

Rising interest rates would increase our interest costs and reduce our earnings.

        We currently have, and may incur more, indebtedness that bears interest at variable rates. Accordingly, if interest rates increase, so will our interest costs, which would adversely affect our earnings, cash flow and our ability to service debt.

Risks Associated With Our Investment in Real Estate

Real estate investments are subject to numerous risks.

        Because we own and lease hotels, we are subject to the risks that generally relate to investments in real property. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, as

27

well as the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including:

•

changes in national economic conditions;



•

changes in local economic conditions and neighborhood characteristics;



•

changes in interest rates;



•

changes in the availability, cost and terms of mortgage funds;



•

the impact of present or future environmental legislation and compliance with environmental laws;



•

the ongoing need for capital improvements, particularly in older structures;



•

changes in other operating expenses;



•

increases in the real property taxes that we pay;



•

adverse changes in governmental rules and fiscal policies;



•

adverse changes in zoning laws;



•

civil unrest;



•

acts of God, including earthquakes and other natural disasters (which may result in uninsured losses); and



•

other factors, such as terrorist attacks, that are beyond our control.

Compliance or failure to comply with the Americans with Disabilities Act of 1990 and other similar laws could result in substantial costs to us which will increase our operating or capital expenses and reduce our earnings.

        The Americans with Disabilities Act generally requires that public buildings, including office buildings and hotels, be made accessible to disabled persons. Noncompliance could result in the imposition of fines by the federal government or the award of damages to private litigants. If, pursuant to this Act, we are required to make substantial alterations and capital expenditures in one or more of our properties, including the removal of access barriers, it could adversely affect our financial condition and results of operations.

        We may also incur significant costs complying with other regulations. Our properties are subject to various federal, state and local regulatory requirements, such as state and local fire and life safety requirements. If we fail to comply with these requirements, we could incur fines or private damage awards. However, we do not know whether existing requirements will change or whether compliance with future requirements will include significant unanticipated expenditures that will affect our cash flow and results from operations.

Potential liability for environmental contamination could result in substantial costs or restrictions on the use of our properties which could decrease our revenue, increase our operating costs or increase our capital expenditures.

        Environmental problems are possible and can be costly. It could be discovered that some of our properties are not in compliance with applicable environmental laws. Additionally, under federal, state and local environmental laws, ordinances and regulations, we may be required to investigate and clean up the effects of releases of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or responsibility, simply because of our current or past ownership or operation of those particular real estate properties. If unidentified environmental problems arise, we may

28

have to make substantial payments which could adversely affect our business, financial condition and results of operations because:

•

as owner or operator, we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination;



•

the law typically imposes clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination;



•

even if more than one person may be responsible for the contamination, each person who shares legal liability under the environmental laws may be held responsible for all of the clean-up costs; and



•

governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.

        These costs could be substantial and in extreme cases could exceed the value of the contaminated property. The presence of hazardous or toxic substances or petroleum products or the failure to properly remediate contamination may materially and adversely affect our ability to borrow against, sell or rent an affected property. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination.

        Environmental laws also govern the presence, maintenance and removal of asbestos. Such laws require that owners or operators of buildings containing asbestos:

•

properly manage and maintain the asbestos;



•

notify and train those who may come into contact with asbestos; and



•

undertake special precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a building.

        Such laws may impose fines and penalties on building owners or operators who fail to comply with these requirements and may allow third parties to seek recovery from owners or operators for personal injury associated with exposure to asbestos fibers.

We are subject to real property taxes which are subject to significant changes by taxing authorities which could increase operating expenses.

        Our properties are subject to real property taxes. The real property taxes may increase or decrease as property tax rates change and as the values of properties are assessed and reassessed by taxing authorities. Increases in property taxes may adversely affect our financial condition and results of operations.

The illiquidity of real estate as an investment limits our ability to sell properties quickly in response to market conditions.

        Real estate investments are relatively illiquid and, therefore, cannot be purchased or sold rapidly in response to changes in economic or other conditions. Buyers may not be identified quickly or such buyers may not be able to secure suitable financing to consummate a transaction. Furthermore, sales of certain appreciated property could generate material adverse tax consequences, which may affect our ability to sell properties in response to market conditions and adversely affect returns to stockholders.

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Risks Associated with LQ Properties and its Status as a REIT

Failure of LQ Properties to qualify as a REIT would cause it to be taxed as a corporation, which would expose us to serious tax consequences and could substantially reduce any funds available for payment of dividends to holders of class B common stock.

        If LQ Properties fails to qualify as a REIT for federal income tax purposes, it will be taxed as a corporation. We believe that LQ Properties is organized and qualified as a REIT and intend to operate it in a manner that will allow it to continue to qualify as a REIT. However, we cannot assure you that LQ Properties is qualified as such, or that it will remain qualified as such in the future because qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only limited judicial and administrative interpretations, and involves the determination of facts and circumstances not entirely within our control. The complexity of the Code provisions governing REITs is greater in the case of a REIT that owns hotels and leases them to a corporation of which it is a subsidiary. In addition, future legislation, new regulations, administrative interpretations or court decisions may significantly change the tax laws or the application of the tax laws with respect to qualification as a REIT for federal income tax purposes or the federal income tax consequences of such qualification.

        If LQ Properties fails to qualify as a REIT, we could face serious tax consequences that could substantially reduce, or possibly eliminate, the funds available for, among other things, the payment of dividends to holders of class B common stock for each of the years involved because LQ Properties:

•

would not be allowed a deduction for any dividends paid to stockholders in computing its taxable income and would be subject to federal income tax at regular corporate rates;



•

could be subject to the federal alternative minimum tax and possibly increased state and local taxes; and



•

unless entitled to relief under statutory provisions, could not elect to be subject to tax as a REIT for four taxable years following the year during which it was disqualified.

        In addition, if LQ Properties fails to qualify as a REIT, it will no longer be required to pay dividends for REIT qualification purposes, and if dividends were paid they would be subject to tax as ordinary income to the extent of current and accumulated earnings and profits. As a result of all of these factors, the failure of LQ Properties to qualify as a REIT could result in significant adverse tax consequences and could adversely affect the value of our securities.

LQ Properties is subject to some taxes even if it qualifies as a REIT.

        Even if LQ Properties qualifies as a REIT, it is subject to some federal, state and local taxes on its income and property. For example, LQ Properties pays taxes on certain undistributed income and is subject to a 100% tax on net income derived from "prohibited transactions." LQ Properties may also be taxed on all or a portion of the gain recognized from the sale of assets acquired from La Quinta Inns, Inc. as a result of the July 1998 merger of La Quinta Inns, Inc. with and into LQ Properties. LQ Properties' is also subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by LQ Properties with respect to any calendar year are less then the sum of:

•

85% of LQ Properties' ordinary income for that year;



•

95% of LQ Properties' capital net income for that year; and



•

100% of LQ Properties' undistributed income from prior year.

        Additionally, LQ Properties' income derived from properties located in some states is subject to local taxes.

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LQ Properties may need to borrow money in the future to meet its minimum distribution requirements and to continue to qualify as a REIT.

        LQ Properties' ability to make distributions to stockholders could be adversely affected by increased debt service obligations if it needs to borrow money in the future in order to maintain its REIT qualification. For example, differences in timing between when LQ Properties receives income and when it has to pay expenses could require LQ Properties to borrow money to meet the minimum distribution requirements applicable to REITs. The incurrence of large expenses also could cause LQ Properties to need to borrow money to meet this requirement. LQ Properties might need to borrow money for these purposes even if we believe that market conditions are not favorable for such borrowings and, therefore, we may borrow money on unfavorable terms.

Risks Associated with our Healthcare Related Business

Our ownership of healthcare related properties exposes our investors to risks common in that industry that may adversely affect an investment in our securities including a number of operating risks that could have an adverse effect on our healthcare related properties.

        In addition to lodging, our other business involves the financing and leasing of healthcare related properties. The results of operations of our healthcare related properties are subject to many factors common in the healthcare industry, including:

•

competition for tenants;



•

changes in the financial condition of third party operators of our healthcare facilities;



•

extensive federal, state and local regulations of the healthcare industry and potential increases in such government regulation of healthcare;



•

changes in the availability and cost of insurance coverage;



•

increases in operating costs due to inflation and other factors;



•

the availability of qualified labor;



•

changes in interest rates;



•

the ultimate outcome of certain litigation filed against us;



•

our ability to sell off investments within a timeframe and at prices that are reasonable; and



•

adverse effects of general and local economic conditions.

        The foregoing factors could adversely affect the ability of our third party healthcare facilities operators to generate revenues and make payments, which in turn, could materially adversely affect our business, financial condition and results of operations.

We have no control over increased government regulation in the healthcare industry.

        The healthcare industry is subject to changing political, economic, regulatory and demographic influences that may affect the operations of healthcare facilities and providers. During the past several years, the healthcare industry has been subject to changes in government regulation of many aspects of the industry (for example, reimbursement rates and certain capital expenditures). Some elected officials have announced that they intend to examine certain aspects of the United States healthcare system, including proposals which may further increase governmental involvement in healthcare. For example, the President and Congress have in the past and may in the future, propose healthcare reforms which could impose additional regulations on us and our operators or limit the amounts that operators may charge for services. Our healthcare facility operators are, and will continue to be, subject to varying

31

degrees of regulation and licensing by health or social service agencies and other regulatory authorities in the various states and localities in which they operate or in which they will operate.

One of our healthcare facility operators has filed for bankruptcy.

        CareMatrix Corporation, an operator of three of our healthcare facilities, filed for bankruptcy protection under Chapter 11 in November 2000. We continue to monitor CareMatrix and have not come to a definitive agreement with them. We have initiated various actions to protect our interests under our leases and mortgages, including the draw down and renegotiation of certain escrow accounts and agreements. While the earnings capacity of certain facilities has been reduced and the reductions may extend to future periods, we believe that we have recorded appropriate impairment provisions based on our assessment of current circumstances. However, if circumstances change resulting in foreclosure or lease termination, there can be no assurance that our investments in these healthcare facilities would not be written down below current carrying value based upon estimates of fair value at such time.

Failure to comply with fraud and abuse laws and governmental program integrity regulations may have a material adverse effect on us.

        In the event that any of our borrowers or lessees were to be found in violation of laws regarding fraud, abuse or self-referral, that borrower's or lessee's license or certification to participate in government reimbursement programs could be jeopardized. Additionally, the borrower or lessee could be subject to civil and criminal fines and penalties. Either of these occurrences could have a material adverse affect on us by adversely affecting the borrower's or lessee's ability to make debt or lease payments to us.

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It is difficult to be continuously up-to-date with current information regarding third party operators of our healthcare properties.

        Our healthcare portfolio comprises approximately 11.9% of our total real estate investments before impairments. Approximately 8.8% of our total real estate investments (approximately 74.1% of the healthcare portfolio before impairment) are operated by companies in the assisted living sector of the healthcare industry.

        We monitor credit risk for our healthcare portfolio by evaluating a combination of publicly available financial information, information provided by the operators themselves and information otherwise available to us. The financial condition and ability of these healthcare operators to meet their rental and other obligations will, among other things, have an impact on our revenues, net income or loss and our ability to obtain financing. The operations of the skilled nursing companies have been negatively impacted by changes in Medicare reimbursement rates, increases in labor costs, increases in their leverage and various other factors. In addition, any failure by these operators to effectively conduct their operations could have a material adverse effect on their business reputation or on their ability to enlist and maintain patients in their facilities.

        Operators of assisted living and skilled nursing facilities are experiencing longer fill-up periods and are being affected by concerns regarding the potential of overbuilding, increased regulation and the use of certain accounting practices. Accordingly, many of the operators have announced earnings shortfalls and have experienced a significant decline in their stock prices. These factors have had detrimental impact on the liquidity of some assisted living operators which has slowed or halted their growth plans and may have a negative effect on their operating cash flows.

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Cautionary Statements Regarding
Forward-Looking Statements In This Document

        Certain matters discussed in this Joint Annual Report may constitute "forward-looking statements" within the meaning of the Private Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements and are including this statement for purposes of complying with these safe harbor provisions. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Although we believe the forward-looking statements are based on reasonable assumptions, we can give no assurance that their expectations will be attained. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements as a result of various uncertainties and other factors, including, without limitation:

•

our ability to successfully grow our lodging business;



•

the availability of capital for acquisitions and for renovations and the conditions of the capital markets in general;



•

competition within the lodging industry and the healthcare industry;



•

competition in franchising the La Quinta® brand;



•

the cyclicality of the real estate business, the lodging business and the healthcare business;



•

the continued effects of the events of September 11, 2001 on our business;



•

general real estate and economic conditions;



•

our ability to comply with the financial covenants contained in our credit facility;



•

decreases in consumer confidence, which may result in less consumer spending and lower demand for our lodging business;



•

decreases in business spending and increased transportation costs, which may result in lower demand for our lodging business;



•

interruptions in transportation systems which may result in reduced business and leisure travel;



•

a general economic recession, which may adversely affect our business and markets and our ability to obtain cost-effective equity and/or debt financing;



•

interest rates;



•

our ability to continue to successfully sell healthcare assets;



•

the ultimate outcome of litigation filed against us;



•

the enactment of legislation impacting us or LQ Properties' status as a REIT and the continuing ability of LQ Properties to qualify as a REIT;



•

the further implementation of regulations governing payments to, as well as the financial conditions of, operators of our healthcare related assets, including the filing for protection under the US Bankruptcy Code by any operators of our healthcare assets and the impact of the protection offered under the US Bankruptcy Code for those operators who have already filed for such protection; and



•

other risks described from time to time in our annual, quarterly and current reports filed with the SEC, including without limitation, those risks identified in this Joint Annual Report under the heading "Items 1 and 2—Description of Our Business and our Properties—Certain Factors You Should Consider About Our Companies, Our Businesses And Our Securities."

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        Given the risks and uncertainties, you are cautioned not to place undue reliance on the forward-looking statements that may be made in this Joint Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances.

ITEM 3. LEGAL PROCEEDINGS

        On December 7, 2000, a legal action was filed in the United States District Court for the District of Colorado, entitled Eric Potteiger v. La Quinta Inns, Inc. and The Meditrust Companies (Civ. Action No. 00-D-2456). On December 7, 2000, a legal action was filed in the District Court, Denver County, State of Colorado, entitled Amy Bronn and Mike Bronn v. La Quinta Inns, Inc. and The Meditrust Companies (Cause No. 00CV9364) (remanded to Colorado State Court in February, 2002). On March 29, 2001, a legal action was filed in the United States District Court for the District of Colorado, entitled Dawn Grawe v. La Quinta Inns, Inc. and The Meditrust Companies (Civ. Action No.-0552). We are named as defendants in each of the complaints. Plaintiffs in each of these suits seek to recover compensatory and punitive damages from us for injuries which they allegedly sustained in October 2000 as a result of carbon monoxide exposure which they experienced while guests at a La Quinta Inn & Suites. We have insurance coverage that may be available to cover some or all of the potential losses resulting from such incidents although losses characterized as punitive or similar damages may not be covered by customary insurance coverage such as ours. We believe that La Quinta Inns, Inc. has meritorious defenses to these lawsuits, as well as claims against non-parties to these lawsuits that may satisfy all or part of any potential liability that may be found against La Quinta Inns, Inc. We intend to vigorously contest and defend these cases.

        On June 27, 2001, a complaint was filed in the United States District Court for the District of Massachusetts, entitled Steadfast Insurance Co. v. Meditrust Corp., et al., Civ Action No. 01-CV-1115-MEL. On November 30, 2001 that complaint was amended, and the amended complaint was entitled Steadfast Insurance Co. v. La Quinta Properties, Inc., Civ Action No. 01-CV-1115-MEL. The amended complaint was filed by plaintiff under seal. LQ Properties accepted service of the amended complaint on December 19, 2001. The plaintiff, which claims to be the subrogee or assignee of the claims of various entities, alleges purported causes of action including breach of contract, negligence, violation of 15 USC § 771, violation of Mass. Gen. L. c. 110 § 410, negligent misrepresentation, and violation of Mass. Gen. L. c. 93A, § 11, arising out of an alleged misrepresentation in the offering memorandum for Meditrust Corporation's 7.114% Exercisable Put Option Securities. The amended complaint seeks approximately $15 million plus other potential damages. We believe that LQ Properties has meritorious defenses to the lawsuit, as well as claims against non-parties to the lawsuit that may satisfy all or part of any potential liability that may be found against LQ Properties. We intend to vigorously contest and defend this case.

        On January 4, 2002, a legal action was filed in the United States District Court for the Central District of California, entitled KSL Desert Resorts, Inc. v. La Quinta Corporation, et al., (No. CV-02-007 RT (SGLx)). LQ Corporation is named as defendant in the complaint. The plaintiff, which uses the name "La Quinta Resort & Club," claims that we have infringed its federal trademark, have falsely designated the origin of our goods and services, are diluting plaintiff's trademark, have committed California statutory and common law trademark infringement, and have engaged in common law and statutory unfair competition. The plaintiff seeks an injunction to prevent us, our agents, servants, employees, and our attorneys from using the mark "La Quinta" in Palm Springs, in the Coachella Valley, or throughout the United States. The plaintiff also seeks to cancel our federal trademark registrations that include the phrase "La Quinta" and to require destruction of any items under our control, which include the phrase "La Quinta." The action remains in the pre-trial stage. We intend to vigorously contest and defend this case.

        We are party to a number of other claims and lawsuits arising out of the normal course of business. Certain of these claims involve healthcare facilities owned, or formerly owned, by LQ Properties that are

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leased to and operated by third party operators. Although we require our third party operators to maintain insurance coverage, this insurance coverage may not be adequate to fully protect us. We have been notified that one of the companies providing such insurance coverage, Reliance Insurance Company, was ordered into liquidation on October 3, 2001. Although we cannot predict what effect this liquidation will have on pending claims, we do not consider our ultimate liability with respect to any of these claims or lawsuits, as well as any other claims and lawsuits arising in the normal course of our business, to be material in relation to our consolidated financial condition or operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        We had special meetings of our stockholders on December 20, 2001 to consider a number of proposals related to our restructuring and proposed equity incentive and employee stock purchase plans the results of which are summarized below:

LQ Corporation

        On December 20, 2001, a special meeting of the stockholders of LQ Corporation was held. At this special meeting, LQ Corporation's stockholders (i) approved our proposed restructuring pursuant to the Agreement and Plan of Merger, dated as of October 17, 2001, among LQ Corporation, LQP Acquisition Corp. and LQ Properties; (ii) approved the proposed amendment and restatement of the LQ Corporation Amended and Restated Certificate of Incorporation; (iii) approved the La Quinta Corporation 2002 Stock Option and Incentive Plan; and (iv) approved the La Quinta Corporation Employee Stock Purchase Plan. The following table sets forth, with respect to each matter voted upon, the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as applicable:

LQ Properties

        On December 20, 2001, a special meeting of the stockholders of LQ Properties was held. At the special meeting, LQ Properties' stockholders (i) approved our proposed restructuring pursuant to the Agreement and Plan of Merger, dated as of October 17, 2001, among LQ Corporation, LQP Acquisition Corp. and LQ Properties; (ii) approved the La Quinta Corporation 2002 Stock Option and Incentive Plan; and (iii) approved the La Quinta Corporation Employee Stock Purchase Plan.

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        The following table sets forth, with respect to each matter voted upon, the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as applicable:

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ITEM 4A. OUR EXECUTIVE OFFICERS

        We have provided information about our executive officers in this Item 4A of this Joint Annual Report. We also encourage you to refer to LQ Corporation's proxy statement for its 2002 annual meeting of stockholders which will be filed with the Securities and Exchange Commission by April 30, 2002.

LQ Corporation

        The following information relative to LQ Corporation's executive officers is given as of February 25, 2002:

        Clive D. Bode has been Chairman of the Board of LQ Corporation since October 1999. Mr. Bode has been a special advisor to certain members of the Bass family of Fort Worth, Texas for the past 10 years. Mr. Bode is also a Director of Kelly, Hart & Hallman, a Fort Worth based law firm.

        Francis W. Cash has been President and Chief Executive Officer of LQ Corporation since April 2000. Mr. Cash was also the Treasurer of LQ Corporation from April 2000 until June 2000, at which time David L. Rea was appointed Treasurer. Mr. Cash was the Chairman of the Board, Chief Executive Officer, President and a Director of Mariner Healthcare Group, Inc. from September 1999 until March 2000. From July 1995 to August 1999, Mr. Cash served as President and Chief Executive Officer of Red Roof Inns, Inc. He also served as Chairman of the Board of Red Roof Inns from June 1996 to August 1999. Prior to his service at Red Roof Inns, Mr. Cash served as President and Chief Operating Officer of NovaCare, Inc. from October 1992 to June 1995. Prior to that, Mr. Cash served in a number of senior executive positions for 18 years at Marriott Corporation, most recently as President, Marriott Service Group.

        David L. Rea has been Executive Vice President and Chief Financial Officer of LQ Corporation since June 2000. Mr. Rea was also the Treasurer of LQ Corporation from June 2000 to January 2002. Most recently, Mr. Rea served as CFO of the start-up e-commerce company, SingleSourceIT.com. Prior to that, he was with Red Roof Inns, Inc. from 1996 through 1999 where he served in various roles, including Executive Vice President, CFO and Treasurer. From 1995 through 1996, he served as Vice President of Finance at DeBartolo Realty Corporation and held various investment management related positions with T. Rowe Price Associates from 1986 through 1995.

        Stephen T. Parker has served as Executive Vice President of Sales and Marketing of LQ Corporation since June 2001. From May 2000 to June 2001 he served as Senior Vice President of Sales and Marketing of LQ Corporation. From August 1999 to May 2000, he was a hospitality/marketing consultant in Phoenix, Arizona. From March 1997 until August 1999, Mr. Parker served as Senior Vice President, Sales and Marketing for Red Roof Inns, Inc. He served as Vice President, Marketing for North America for Choice Hotels International, Inc. from October 1986 until March 1997.

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        Alan L. Tallis has been Executive Vice President-Chief Development Officer of LQ Corporation since July 2000. He previously served in various executive positions with LQ Corporation from 1980 to 1992. Prior to returning to LQ Corporation in 2000, Mr. Tallis served as Executive Vice President-Development and General Counsel of Red Roof Inns, Inc. and Managing Director of Tallis & Associates.

        Sandra K. Michel has been Senior Vice President and General Counsel of LQ Corporation since December 2001 and Secretary of LQ Corporation since January 2002. Ms. Michel also serves as Senior Vice President, General Counsel and Secretary of LQ Properties. Prior to joining the companies, Ms. Michel served as General Counsel and Secretary of Sunterra Corporation from June 2000 through April 2001 and Deputy General Counsel and Assistant Secretary from August 1999 through June 2000. Prior to that, Ms. Michel served as Senior Counsel to W.R. Grace & Co. from December 1991 to August 1999 assuming the role of Assistant Secretary in September 1998. Ms. Michel was an attorney in private practice with nationally recognized firms for 11 years prior to joining W.R. Grace & Co.

        Wayne B. Goldberg has been Senior Vice President of Operations of LQ Corporation since October 2001 and, prior to that, was Group Vice President of Operations since July 2000. Prior to joining LQ Corporation, Mr. Goldberg was Chief Operating Officer for Bridge Street Accommodations. Prior to Bridge Street, Mr. Goldberg spent over 20 years at Red Roof Inns, Inc. Mr. Goldberg served in various roles at Red Roof Inns, including: Group Vice President, District Vice President, Regional Manager, Area Manager and General Manager.

        A. John Novak has served as Senior Vice President and Chief Information Officer of LQ Corporation since January 2001. Prior to joining LQ Corporation, Mr. Novak was Senior Vice President and Chief Information Officer for Resort Condominiums International (RCI), a division of Cendant Corporation, beginning in April 1999. He served as Vice President of Lodging Property Systems for Marriott International from 1996 to 1999. Mr. Novak also served as Vice President of Resorts and Sales Systems for Walt Disney World Company from 1990 until 1996.

        Brent A. Spaeth has been Senior Vice President of Human Resources and Administration of LQ Corporation since October 2001 and, prior to that, was Group Vice President of Operations since August 2000. Mr. Spaeth has been with LQ Corporation since February of 1989. He has served in various roles including Regional Vice President of the Inn & Suites in the Western Regions and Divisional Vice President for the Central Division. He formerly held various regional operations positions with the Drury and Holiday Inn corporations.

LQ Properties

        The following information relative to LQ Properties' executive officers is given as of February 25, 2002:

        Clive D. Bode has been Chairman of the Board of LQ Properties since October 1999. Mr. Bode has been a special advisor to certain members of the Bass Family of Fort Worth, Texas for the past 11 years. Mr. Bode is also a Director of Kelly, Hart & Hallman, a Fort Worth based law firm.

        Francis W. Cash has been President and Chief Executive Officer of LQ Properties since April 2000. Mr. Cash was the Chairman of the Board, Chief Executive Officer, President and a Director of Mariner Healthcare Group, Inc. from September 1999 until March 2000. From July 1995 to August 1999, Mr. Cash

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served as President and Chief Executive Officer of Red Roof Inns, Inc. He also served as Chairman of the Board of Red Roof Inns from June 1996 to August 1999. Prior to his service at Red Roof Inns, Mr. Cash served as President and Chief Operating Officer of NovaCare, Inc. from October 1992 to June 1995. Prior to that, Mr. Cash served in a number of senior executive positions for 18 years at Marriott Corporation, most recently as President, Marriott Service Group.

        David L. Rea has been Executive Vice President and Chief Financial Officer of LQ Properties since December 2000. Mr. Rea was also the Treasurer of LQ Properties from December 2000 to January 2002. Most recently, Mr. Rea served as CFO of the start-up e-commerce company, SingleSourceIT.com. Prior to that, he was with Red Roof Inns, Inc. from 1996 through 1999 where he served in various roles, including Executive Vice President, CFO and Treasurer. From 1995 through 1996, he served as Vice President of Finance at DeBartolo Realty Corporation and held various investment management related positions with T. Rowe Price Associates from 1986 through 1995.

        Michael F. Bushee has been Chief Operating Officer of LQ Properties, Inc. since September 1994. He was Senior Vice President of Operations of LQ Properties from November 1993 through August 1994, Vice President from December 1989 through October 1993, Director of Development from January 1988 to December 1989 and has been associated with LQ Properties since April 1987. Mr. Bushee was previously associated with The Stop & Shop Companies, Inc. a retailer of food products and general merchandise, for three years and Wolf & Company, P.C., independent accountants, for four years.

        Sandra K. Michel has been Senior Vice President and General Counsel of LQ Properties since December 2001 and Secretary of LQ Properties since January 2002. Ms. Michel also serves as Senior Vice President, General Counsel and Secretary of LQ Corporation. Prior to joining the companies, Ms. Michel served as General Counsel and Secretary of Sunterra Corporation from June 2000 through April 2001 and Deputy General Counsel and Assistant Secretary from August 1999 through June 2000. Prior to that, Ms. Michel served as Senior Counsel to W.R. Grace & Co. from December 1991 to August 1999 assuming the role of Assistant Secretary in September 1998. Ms. Michel was an attorney in private practice with nationally recognized firms for 11 years prior to joining W.R. Grace & Co.

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PART II

ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our Common Stock

        Market Information.    Our shares trade on the New York Stock Exchange under the symbol "LQI." The following table sets forth, for the periods shown, the high and low sales prices for our paired shares (our publicly traded paired common stock prior to our restructuring) as reported on the New York Stock Exchange Composite Tape:

        LQ Properties' class A common stock is currently held by LQ Corporation and has never been publicly traded.

        Holders of Record.    There were approximately 10,965 holders of record of our shares as of February 25, 2002. Included in the number of stockholders of record are shares held in "nominee" or "street" name. As of February 25, 2002, LQ Corporation was the only holder of LQ Properties' class A common stock.

        Dividends.    In order to qualify for the beneficial tax treatment accorded to REITs, LQ Properties is generally required each year to distribute to its preferred and common stockholders at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and by excluding any net capital gain. LQ Properties did not make any distributions on its common stock during the fiscal year ended December 31, 2001 as preferred dividends exceeded REIT taxable income. In connection with the restructuring, LQ Properties' stockholders approved the terms of LQ Properties' class B common stock which provide that no dividends will be paid on LQ Properties' class B common stock prior to 2005. Until 2005, dividends may be paid on LQ Properties' class A common stock, including dividends necessary to maintain LQ Properties' status as a REIT. Commencing in 2005, the holders of class B common stock, may receive, on a quarterly basis, a dividend of $0.10 per share per annum although this dividend payment is not mandatory. Prior to 2005, we expect that if LQ Properties pays dividends on its common stock, including dividends required to maintain its REIT status, these dividends will be paid to LQ Corporation, the sole holder of the class A common stock following our restructuring. In addition, we do not anticipate paying cash dividends on LQ Corporation's common stock in the foreseeable future.

Our Series A Preferred Stock

        Market Information.    On June 10, 1998, LQ Properties issued 7,000,000 depositary shares (the "Series A Depositary Shares"). Each Series A Depositary Share represents one-tenth of a share of 9% Series A Cumulative Redeemable Preferred Stock with a par value of $0.10 per share ("Series A Preferred Stock"). LQ Properties' Series A Depository Shares trade on the New York Stock Exchange under the symbol "LQI_P." The following table sets forth, for the periods shown, the high and low sales prices for the Series A Depository Shares:

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        Holders of Record.    There were approximately 224 holders of record of LQ Properties' Series A Depositary Shares as of February 25, 2002. Included in the number of holders of record are Series A Depositary Shares held in "nominee" or "street" name.

        Dividends.    For the year ended December 31, 2001, LQ Properties designated the following cash distributions to holders of its Series A Depositary Shares as non-taxable returns of capital:

        For the year ended December 31, 2000, LQ Properties designated the following cash distributions to holders of its Series A Depositary Shares as non-taxable returns of capital:

ITEM 6. SELECTED FINANCIAL AND OTHER DATA

Overview

        Background.    In November 1997, Meditrust, a Massachusetts business trust and predecessor to LQ Properties, merged with Santa Anita Realty Enterprises, Inc., with Santa Anita Realty Enterprises, Inc. continuing as the surviving corporation. Concurrently, Meditrust Acquisition Company merged with Santa Anita Operating Company, with Santa Anita Operating Company continuing as the surviving corporation. We refer to these two mergers as the Santa Anita merger. Upon completion of the Santa Anita merger, Santa Anita Realty Enterprises, Inc. changed its corporate name to "Meditrust Corporation" and Santa Anita Operating Company changed its corporate name to "Meditrust Operating Company." The common stock of Meditrust Operating Company was paired together with the common stock of Meditrust Corporation, so that the two entities, known collectively as The Meditrust Companies, traded together on the New York Stock Exchange as one unit. During early 1998 and after completion of the Santa Anita Merger, The Meditrust Companies, which focused primarily on the health care industry, began pursuing a strategy of diversification into additional new businesses which culminated in mergers with La Quinta Inns, Inc., a lodging company, and Cobblestone Holdings, Inc., a golf course company.

        Changes in the Law Diminished the Benefits of the Paired Share Structure.    The Meditrust Companies, as a result of the Santa Anita merger, acquired the benefits of a unique organizational structure known as a "grandfathered" paired share REIT. Federal tax legislation adopted in July 1998 limited benefits attributable to future use of the "grandfathered" paired share structure. In addition, during the summer of 1998 and thereafter, the debt and equity markets available to REITs generally, and healthcare and lodging REITs specifically, deteriorated, thus limiting our companies' access to cost

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efficient capital. As a result, during the latter part of 1998 and throughout 1999 our companies implemented a comprehensive restructuring plan, known as the "1998 Plan," designed to strengthen our companies' financial position and clarify our investment and operating strategy. Pursuant to the 1998 Plan:

•

we sold over $1.4 billion in assets (including the Cobblestone Golf Group and the Santa Anita Racetrack),



•

and over $820 million of healthcare properties, and



•

repaid over $625 million in debt and fully settled our forward equity investment transaction with certain affiliates of Merrill Lynch & Co.

        Focus on Lodging Industry.    During 2000, we implemented a five-point plan of reorganization, referred to as the Five Point Plan intended to further strengthen our position and focus on the lodging division. Consistent with certain components of the Five Point Plan which called for, among other things, an orderly disposition of a significant portion of healthcare assets and substantial reduction in debt, we have completed healthcare asset sales and received mortgage repayments totaling approximately $1.6 billion between January 1, 2000 and December 31, 2001 and applied substantially all of the proceeds toward reduction of our total indebtedness of $2.6 billion as of December 31, 1999 to $1.0 billion as of December 31, 2001.

        On June 20, 2001, we changed our name to La Quinta to reflect our focus on the lodging industry. Meditrust Corporation was renamed La Quinta Properties, Inc. and Meditrust Operating Company was renamed La Quinta Corporation. Our common stock continued to trade together on the New York Stock Exchange as one unit under the ticker symbol "LQI".

        On December 20, 2001, our stockholders approved certain proposals which permitted LQ Corporation and LQ Properties to restructure the existing organization of the two companies by merging, LQP Acquisition Corp., a newly formed, wholly owned subsidiary of LQ Corporation, with and into LQ Properties, with LQ Properties surviving the merger and becoming a subsidiary controlled by LQ Corporation while continuing its status as a REIT. Pursuant to the restructuring, which we consummated on January 2, 2002, each outstanding share of common stock of LQ Properties held by our stockholders was converted into one share of a new class B common stock of LQ Properties and each outstanding share of common stock of LQP Acquisition Corp. (all of which were held by LQ Corporation) were converted into one share of a new class A common stock of LQ Properties. Following the restructuring, each share of common stock of LQ Corporation, that previously had been paired with the common stock of LQ Properties, become paired and traded as a single unit with the new class B common stock. The outstanding common stock of LQ Corporation was unaffected by the restructuring other than a reduction in par value from $0.10 to $0.01 and the change of the pairing arrangement as described above.

Definitions of Non-GAAP Terms

        "EBITDA" means income or loss from continuing operations plus interest, income taxes, depreciation and amortization; adjusted for loss or gain on sale of assets, other income, impairment provisions, provision for loss on equity securities and other nonrecurring expenses. "Recurring Net Income available to common stockholders" means net income available to common stockholders plus the cumulative effect of changes in accounting principles, extraordinary gains or losses, gains or losses on the sales of assets and other nonrecurring expenses. Neither EBITDA nor Recurring Net Income available to common stockholders are intended to represent cash flow or any other measure of performance in accordance with generally accepted accounting principles, known as GAAP. EBITDA and Recurring Net Income available to common stockholders are used because our management believes that certain investors find these terms to be useful tools for measuring our performance. We have provided a reconciliation of net income (loss) per common share calculated in accordance with

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GAAP to EBITDA and Recurring Net Income available to common stockholders in this Joint Annual Report under the heading "Item 6—Selected Financial and Other Data—Other Unaudited Supplemental Information not Required by GAAP."

Financial Information

        The following tables set forth, among other information, selected financial information for The La Quinta Companies, LQ Properties and LQ Corporation. Combined LQ Properties and LQ Corporation financial information has been presented as the La Quinta Companies with all significant intercompany and inter-entity balances and transactions eliminated in combination. Likewise, the separate consolidated financial information for LQ Properties and LQ Corporation include the accounts of the respective company and its majority owned partnerships after elimination of all significant intercompany accounts and transactions. Financial information related to results of operation for Cobblestone Golf Group and Santa Anita Racetrack have been reflected as discontinued operations. This information is based on and should be read in conjunction with the information set forth under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and the notes thereto appearing elsewhere in this Joint Annual Report.

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THE LA QUINTA COMPANIES

Selected Financial Information

(a)

Certain reclassifications have been made to the 2000 and 1999 presentation to conform to the presentation of the financial position and results of operations as of and for the year ended December 31, 2001.

(b)

Financial results for 1998 include lodging segment results for the period from the date of the La Quinta Merger July 17, through December 31. Financial results for 1997 do not include results from the lodging segment.

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THE LA QUINTA COMPANIES

Selected Financial Information, (Continued)