ITEM 1. BUSINESS
La Quinta Inns, Inc. ("La Quinta" or the "Company") is a leader in the upper economy segment of the lodging market. Founded in 1968, the La Quinta chain's 221 inns are located in 29 states with concentrations in Texas, Florida and California. As of January 31, 1994, the Company owned interests in and operated all but one of its inns. The Company maintains a minority interest in nine inns which it manages pursuant to long-term management contracts and has one licensed inn.
La Quinta is incorporated under the laws of Texas and maintains its executive offices at Weston Centre, 112 East Pecan Street, P.O. Box 2636, San Antonio, Texas 78299-2636, telephone (210) 302-6000.
PRODUCT
La Quinta inns appeal to guests who desire high-quality rooms and convenient locations at attractive prices and whose needs do not include banquet and convention facilities, in-house restaurants, cocktail lounges or room service. As a result of the cost savings associated with the elimination of these management intensive facilities and services, the Company believes it is able to offer its guests an excellent value -- convenient locations and room quality comparable to mid-priced full service hotels at a lower price.
La Quinta inns contain an average of 130 spacious, quiet and comfortably furnished rooms with an average of 300 square feet. Each inn features a choice of rooms for non-smokers and smokers, complimentary continental breakfast, free unlimited local telephone calls, remote-control television with Showtime or The Movie Channel, telecopy services, same day laundry and dry cleaning service, 24-hour front desk and message service and free parking. La Quinta inns are generally located near interstate highways, major traffic arteries or destination areas such as airports and convention centers. Food service to La Quinta guests generally is provided by adjacent free-standing restaurants.
La Quinta's strategy is to continue its growth as a high-quality provider in the upper economy segment of the hotel industry, focusing on enhancing revenues, cash flow and profitability. Specifically, the Company's strategy centers upon:
CONTINUED FOCUS ON UPPER ECONOMY SEGMENT - The upper economy segment of the lodging industry is characterized by inns that provide for the basic needs of cost-conscious business travelers who desire high-quality rooms and convenient locations. Because the Company competes primarily in the upper economy segment, management's attention is totally focused on meeting the needs of La Quinta's target customers. The upper economy segment is one of the fastest growing segments in the lodging industry, growing over 5% annually, since 1989.
LA QUINTA MANAGEMENT OF INNS - In contrast to many of its competitors, La Quinta manages and has ownership interests in virtually all of its inns. La Quinta manages all but one of the 221 inns in the chain. At January 31, 1994, the Company owned 100% of 166 inns and 40% or more of an additional 45. As a result, the Company believes it is able to achieve a higher level of consistency in both product quality and service than its competition. In addition, La Quinta's position as one of the few primarily owner-operated chains enables La Quinta to offer new services, direct expansion, effect pricing and to make other marketing decisions on a system-wide or local basis as conditions dictate, usually without consulting third-party owners, management companies or franchisees as required of most other lodging chains. The Company's management of the inns also enables it to control costs and allocate resources effectively to provide excellent value to the consumer.
IMAGE ENHANCEMENT PROGRAM - In 1993, La Quinta has undertaken a comprehensive chainwide image enhancement program intended to give its properties a new, fresh, crisp appearance while preserving their unique character. The program features new signage displaying a new logo as well as exterior and lobby upgrades including brighter colors, more extensive lighting, additional
landscaping, enhanced guest entry and a full lobby renovation with contemporary furnishings and seating area for continental breakfast. Thirty nine properties completed the reimaging process in 1993 with program completion targeted for June 1994.
REGIONALLY FOCUSED GROWTH - La Quinta acquired eleven existing lodging facilities and converted them to the La Quinta brand in 1993 and anticipates expanding in a similar manner in 1994.
COMPETITION
Inns operated and licensed by La Quinta are in competition with other major lodging brands. Each La Quinta inn competes in its market area with numerous full service lodging brands, especially in the mid-priced range, and with numerous other hotels, motels and other lodging establishments. Chains such as Hampton Inns, Red Roof Inns, Fairfield Inns and Drury Inns are direct competitors of La Quinta. Other well-known competitors include Holiday Inns, Ramada Inns, Quality Inns, and Travelodge. There is no single competitor or group of competitors of La Quinta that is dominant in the lodging industry. Competitive factors in the industry include reasonableness of room rates, quality of accommodations, degree of service and convenience of locations.
Demand is affected by normally recurring seasonal patterns. At most La Quinta inns demand is higher in the spring and summer months (March through August) than in the balance of the year. Overall occupancy levels may also be affected by the number of new inns opened by the Company and the length of time such inns have been in operation.
The lodging industry in general, including La Quinta, may be adversely affected by national and regional economic conditions and government regulations. The demand for accommodations at a particular inn may be adversely affected by many factors including changes in travel patterns, local and regional economic conditions and the degree of competition with other inns in the area.
STRUCTURE AND OWNERSHIP
The Company is a combined entity comprised of La Quinta Inns, Inc., which owns and operates 211 inns, four subsidiaries and 16 combined unincorporated partnerships and joint ventures. The combined unincorporated partnerships and joint ventures own 45 inns operated by the Company. The Company manages 9 inns, 99% owned by CIGNA which are accounted for using the equity method in the Company's financial statements.
During 1993, the Company acquired, in separately negotiated transactions, limited partners' interests in 14 of the Company's combined unincorporated partnerships and joint ventures which owned 44 La Quinta inns. The Company purchased the ownership interests for an aggregate purchase price of $87,897,000 which included cash at closing, the assumption of $22,824,000 of existing debt attributable to certain limited partners' interests, and $29,878,000 in notes to certain sellers.
The Board of Directors of the Company authorized three-for-two stock splits effective in October 1993 and March 1994. References to the Company's common stock prior to the October split is described herein as "pre-split" and references to the Company's common stock after the March split is described herein as "post split".
On October 27, 1993, the Company entered into a definitive Partnership Acquisition Agreement (the "Merger Agreement") with La Quinta Motor Inns Limited Partnership ("the Partnership" or "LQP") and other parties, pursuant to which the Company, through wholly-owned subsidiaries, would acquire all units of the Partnership (the "Units") that it did not beneficially own at a price of $13.00 net per Unit in cash. The Merger Agreement provided for a tender offer (the "Offer") for all of the Partnership's outstanding Units at a price of $13.00 net per Unit in cash, which Offer commenced on November 1, 1993 and expired at midnight on November 30, 1993. The Offer resulted in the purchase of 2,805,190 Units (approximately 70.6% of the outstanding Units) by the Company through its wholly-owned subsidiary, LQI Acquisition Corporation. As a result of a contribution of additional units previously owned by the Company subsequent to the Offer, LQI Acquisition Corporation beneficially owned 3,257,890 Units (approximately 82% of the Units) at December 31, 1993. Pursuant to the Merger Agreement, a Special Meeting of Unitholders was then held on January 24, 1994 to approve the merger of a subsidiary of LQI Acquisition Corporation with and into the Partnership, with the Partnership as the surviving entity. As a result of this merger which was approved by the requisite vote of Unitholders on January 24, 1994, all of the Partnership's outstanding Units other than Units
owned by the Company or any direct or indirect subsidiary of the Company were converted into the right to receive $13.00 net in cash without interest.
The following table describes the composition of inns in the La Quinta chain at:
JOINT VENTURES AND PARTNERSHIPS. La Quinta historically financed its development, in part, through partnerships and joint ventures with large insurance companies or financial institutions. Under the terms of the joint venture and partnership agreements, available cash flow is generally used to pay debt and provide for capital improvements, with remaining cash flow being distributed to the partners in accordance with their respective ownership interests. In 1993 La Quinta began to purchase the interests in the unincorporated joint ventures and partnerships, acquiring 14 by the end of the year. In addition, the Company successfully completed the acquisition of LQP in January 1994. See further discussions above.
In March of 1990, the Company entered into the La Quinta Development Partners, L.P. ("LQDP" or the "Development Partnership") with AEW Partners, L.P. ("AEW Partners"). La Quinta Inns, Inc. is the general partner and owns a 40% ownership interest and AEW Partners is the limited partner and owns a 60% ownership interest. This partnership was established for the purpose of owning, operating, acquiring and developing inns. La Quinta originally contributed 18 inns with a deemed value of $44,000,000 (net of existing debt assumed by LQDP) and $4,000,000 in cash. AEW Partners contributed $3,000,000 and a promissory note ("the AEW Note") to the Development Partnership in the amount of $69,000,000. Under the terms of the agreement, proceeds from the AEW Note are to be used for the construction of inns or for the acquisition and conversion of existing inns into the La Quinta brand. In 1993, the AEW Partners fully paid the balance of the AEW Note. At December 31, 1993, the Development Partnership had acquired and converted 19 inns (nine during 1993). Under the terms of the Development Partnership agreement, AEW Partners currently has the ability to convert 66 2/3% of its ownership interest in the Development Partnership to 3,535,976 (post-split) shares of the Company's common stock. Such number of shares is reduced as distributions are made out of the Development Partnership to AEW Partners. The partnership units may be converted at any time prior to December 31, 1998. As of December 31, 1993, no partnership units had been converted. Shares of the Company's common stock issuable upon conversion are antidilutive at December 31, 1993.
Under the terms of a management agreement between the Company and the Development Partnership, La Quinta earns management, national advertising, chain services and license fees for the use of its name and services. La Quinta is also entitled to receive acquisition and conversion fees for its services in finding inns suitable for acquisition and in managing the conversion of such inns. La Quinta is also entitled to receive fees on project costs of inns constructed by the Development Partnership.
MANAGED INNS. In 1987, the Company formed two joint ventures with investment partnerships managed by CIGNA Investments, Inc. ("CIGNA I" and "CIGNA II"). The Company maintains a 1% ownership interest in
each of these ventures and manages the inns pursuant to long-term management contracts. As of December 31, 1993, the ventures owned nine inns and six free-standing restaurants operated by third parties.
La Quinta receives licensing, management, national advertising and chain services fees for the use of its brand name and services from management of the inns. The Company accounts for its ownership interest in these entities using the equity method.
LICENSING
The Company selectively licensed the name "La Quinta" to others for operations in the United States until February 1977, at which time La Quinta discontinued its domestic licensing program to unrelated third parties. One inn remains in operation under a franchise agreement.
During 1990, the Company entered into a licensing agreement with Desarrollos Turisticos Vanguardia S.A. de C.V. ("Desarrollos") for expansion of the La Quinta chain into Saltillo, Coahuila, Mexico. In February 1994, one inn developed under the license agreement opened for operation. Under the arrangement, the inn is owned by the licensee and managed by La Quinta under a separate management agreement. The Company is currently reviewing other potential management/licensing arrangements within Mexico and other Latin American countries.
"La Quinta -R-" and "teLQuik -R-" have been registered as service marks by La Quinta with the U.S. Patent and Trademark Office, and in Mexico, Canada and the United Kingdom.
OPERATIONS
Management of the La Quinta chain is coordinated from the Company's headquarters in San Antonio, Texas. Centralized corporate services and functions include marketing, accounting and reporting, purchasing, quality control, development, legal, reservations and training.
Inn operations are currently organized into Eastern and Western divisions with each division headed by a Divisional Vice President. Regional Managers report to the Divisional Vice Presidents and are each responsible for approximately 13 inns. Regional Managers are responsible for the service, cleanliness and profitability of the inns in their regions.
Individual inns are typically managed by resident managers who live on the premises. Managers receive inn management training which includes an emphasis on service, cleanliness, cost controls, sales and basic repair skills. Because La Quinta's professionally trained managers are substantially relieved of responsibility for food service, they are able to devote their attention to assuring friendly guest service and quality facilities, consistent with chain-wide standards. On a typical day shift, they will supervise one housekeeping supervisor, eight room attendants, two laundry workers, two general maintenance persons and three front desk service representatives.
At December 31, 1993, La Quinta employed approximately 6,100 persons, of whom approximately 88% were compensated on an hourly basis. Approximately 240 individuals were employed at corporate and 5,850 were employed in inn management and services. The Company's employees are not currently represented by labor unions. Management believes its ongoing labor relations are good.
MARKETING
La Quinta's primary media focus is on business travelers, who account for over half of La Quinta's rooms rented. The Company's core market consists of business travelers who visit a given area several times per year. For example, typical customers include salespersons covering a regional territory, government and military personnel and technicians. The profile of a typical La Quinta customer is a college educated business traveler, age 25 to 54, from a two income household who has a middle management, white collar occupation or upper level blue collar occupation. In addition, the Company's target markets include vacation travelers and retired travelers. The Company focuses on reaching its target markets by utilizing advertising, direct sales, programs which provide incentives to repeat travelers, and other marketing programs targeted at specific customer segments.
The Company advertises primarily through network and local radio, cable television networks and print advertisements which focus on value. The Company utilizes the same campaign concept throughout the country with minor modifications made to address regional differences. The Company also utilizes billboard advertisements along major highways which announce a La Quinta inn's presence in upcoming towns.
The Company markets directly to companies and other organizations through its direct sales force of 24 sales representatives and managers. This sales force calls on companies which have a significant number of individuals traveling in the regions in which La Quinta operates and which are capable of producing a high volume of room nights.
La Quinta enjoys a large amount of repeat business. Based on internal surveys conducted in 1993, management estimates the average customer spent approximately 14 nights per year in a La Quinta inn during the year ended December 31, 1993. The Company focuses a number of marketing programs on maintaining the high number of repeat visits. La Quinta promotes a "Returns Club" for repeat guests. This club provides its members with preferred status and rates when checking into a La Quinta inn and offers rewards for frequent stays. The Returns Club currently has over 140,000 members.
The Company provides a reservation system, "teLQuik" -R-, which currently accounts for reservations for approximately 50% of room occupancy. The teLQuik system allows customers to make reservations toll free or from special reservations phones placed in the lobbies of all La Quinta inns. The teLQuik system enables guests to make their next night's reservations from their previous night's La Quinta inn. In 1994, the Company completed a new reservation center which is a part of its program to improve operating results by providing state-of-the-art technology in processing reservations more efficiently. La Quinta, through its national sales managers, markets its reservation services to travel agents and corporate travel planners who may access teLQuik through the five major airline reservation systems.
ASSET MANAGEMENT
La Quinta's asset management strategy is founded on the importance of ownership of all or a significant portion of each of its inns. See "Structure and Ownership" on this Form 10-K. Management believes that Company ownership and management of La Quinta inns enables the Company to achieve more consistency in quality and service than its competitors.
Historically, the Company financed a large part of its development through partnerships and joint ventures with large insurance companies and other financial institutions, while managing the inns. However, during 1993, the Company acquired in separately negotiated transactions limited partners' interests in 14 of the Company's combined unincorporated partnerships and joint ventures that owned 44 La Quinta inns. The Company also completed the acquisition of 100% of the limited partners' interests in an additional 31 inns owned by a subsidiary of LQP in January of 1994, after acquiring 82% of LQP during 1993. Additionally, the Company acquired eleven existing inns during 1993. Currently, the Company owns 100% of 166 inns and between 40%-80% of 45 other inns. The Company manages an additional nine La Quinta inns in which it owns a 1% interest.
La Quinta's current development program focuses on the acquisition of competitor properties at discounts to replacement costs. At current prices, acquisition and conversion of existing properties is more cost effective than new construction. In 1993, La Quinta acquired and is converting a total of eleven inns, nine were purchased through the Development Partnership and two were purchased as wholly-owned, with an aggregate of 1,611 rooms, at an average cost of approximately $28,000 per room.
ITEM 2.

ITEM 2. PROPERTIES
La Quinta inns appeal to guests who desire high-quality rooms and whose needs do not include banquet and convention facilities, in-house restaurants, cocktail lounges or room service. La Quinta inns contain an average of 130 rooms and provide spacious, quiet and comfortably furnished rooms with an average of 300 square feet, a choice of rooms for non-smokers and smokers, complimentary continental breakfast, free unlimited local telephone calls, remote-control television with Showtime or The Movie Channel, telecopy services, same-day laundry and dry cleaning service, 24-hour front desk and message service and free parking.
To maintain the overall quality of La Quinta's inns and to remain competitive in its service-oriented environment, each inn undergoes refurbishments and capital improvements as needed. Typically, refurbishing has been provided at intervals of between five and seven years, based on an annual review of the condition of each inn. In each of the years ended December 31, 1993, 1992 and 1991, the Company spent approximately $32,600,000 (of which $15,400,000 was spent on the image enhancement program described below), $15,500,000 and $13,800,000, respectively, on capital improvements to existing inns. As a result of these expenditures, the Company believes it has been able to maintain a chainwide quality of rooms and common areas at its properties unmatched by any other national economy hotel chain.
In 1993, the Company undertook an image enhancement program intended to give its properties a new, fresh, crisp appearance while preserving their unique character. The program features new signage displaying a new logo as well as exterior and lobby upgrades including brighter colors, additional landscaping, enhanced guest entry and a full lobby renovation with contemporary furnishings and seating area for continental breakfast. Of the chain's 221 inns, 97 began the image enhancement program during 1993, of which 39 were complete as of December 31, 1993. Twenty properties begin the reimaging process every six to eight weeks with program completion targeted for June 1994. Signs displaying the Company's new logo were in place at substantially all properties at December 31, 1993. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Commitments."
At December 31, 1993, there were 221 inns located in 29 states, with concentrations in Texas, Florida and California. The states and cities in which the inns are located are set forth in the following table:
Typically, food service for La Quinta guests is provided by adjacent, free standing restaurants. At December 31, 1993, the Company had an ownership interest in 124 restaurant buildings adjacent to its inns. These restaurants generally are leased pursuant to build-to-suit leases that require the operator to pay, in addition to minimum and percentage rentals, all expenses, including building maintenance, taxes and insurance.
The Company's inns and restaurants were substantially pledged to secure all long-term debt maturing in various years from 1994 to 2015 (See note 2 of Notes to Combined Financial Statements).
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
On October 18, 1993, the Company announced that its Board of Directors had authorized its officers to enter into negotiations with La Quinta Motor Inns Limited Partnership (the "Partnership") regarding the acquisition of all units of the Partnership which it did not currently own, at a price of up to $12 per unit. See "Structure and Ownership" on this Form 10-K. On October 18, 1993, the Board of Directors of the General Partner of the Partnership elected three independent directors (the "Special Committee"), among other things, to negotiate the sale of Units to the Company. On October 18, 1993, two separate lawsuits were filed in Delaware Court of Chancery on behalf of the Partnership's unitholders against the Company, the Partnership, La Quinta Realty Corp., a subsidiary of the Company, and general partner of the Partnership (the "General Partner") and certain directors and officers of the General Partner (collectively, the "Defendants"). The lawsuits are captioned GREENBERG V. SCHULTZ, ET AL., C.A. No. 13199 and GORIN BROTHERS, INC., V. SCHULTZ, ET. AL., C.A. No. 13200 (collectively, the "Actions"). The complaints in the Actions allege, among other things, that Defendants breached their fiduciary duties to Unitholders by offering grossly inadequate consideration to entrench themselves in control of the Partnership, by failing to solicit competing bids, and by making inadequate public disclosure regarding the transaction. The complaints additionally allege that the Company used unequal knowledge and economic power, given its affiliation with the General Partner, to the detriment of the Unitholders. The independence of the members of the Special Committee was also questioned, allegedly resulting in the lack of arm's length negotiations and the lack of any independent appraisal or evaluation. The complaints in the Actions sought, among other things, (i) a declaration that the Defendants breached their fiduciary duties to members of the alleged class, (ii) an order preliminarily and permanently enjoining consummation of the proposed transaction, (iii) the award of compensatory damages, and (iv) the award of costs and disbursements. On October 27, 1993, the parties reached a settlement in principle in these actions. The settlement is subject to certain conditions, including court approval. On March 15, 1994, the Delaware Court of Chancery entered an Order and Final Judgment ("Judgment") which approved the settlement and dismissed the cases. All persons and entities who were owners of Units of the Partnership at October 18, 1993 and their transferees and successors in interest, immediate and remote (the "Class"), are bound by the Judgment. The Company and all other defendants were discharged from any and all liability under any claims which were or could have been brought by plaintiffs or any member of the Class regarding the acquisition and merger of the Partnership. The appeal period on the Judgment will run on April 14, 1994.
In September 1993, a former officer of the Company filed suit against the Company and certain of its directors and their affiliate companies. The suit alleges breach of an employment agreement, misrepresentation, wrongful termination, self-dealing, breach of fiduciary duty, usurpation of corporate opportunity and tortious interference with contractual relations. The suit seeks compensatory damages of $2,500,000 and exemplary damages of $5,000,000. The Company believes that the claims are wholly without merit and intends to vigorously defend against this suit.
Actions for negligence or other tort claims occur routinely as an ordinary incident to the Company's business. Several lawsuits are pending against the Company which have arisen in the ordinary course of the business, but none of these proceedings involves a claim for damages (in excess of applicable excess umbrella insurance coverages) involving more than 10% of current assets of the Company. The Company does not anticipate any amounts which it may be required to pay as a result of an adverse determination of such legal
proceedings and the matters discussed above, individually or in the aggregate, or any other relief granted by reason thereof, will have a material adverse effect on the Company's financial position or results of operations.
The Company has established a paid loss program (the "Paid Loss Program") for inns owned and managed by the Company, which includes excess umbrella policies for commercial general liability insurance, automobile liability insurance, fire and extended property insurance, workers' compensation and employer's liability insurance for losses above the deductible limits, and such other insurance as is customarily obtained for similar properties and which may be required by the terms of loan or similar documents with respect to the inns. In connection with the general liability, workers' compensation and automobile coverages, all inns participate in the Paid Loss Program, under which claims and expenses are shared pro rata, with excess umbrella insurance being maintained to cover losses, claims and costs in excess of the deductible limits per matter of $500,000 for general liability, $250,000 for workers' compensation and $250,000 for automobile coverage. All pro rata expenses and premiums under the Paid Loss Program with respect to inns owned by persons other than the Company constitute direct operating expenses of said inns under the terms of the respective management agreements.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year covered by this Annual Report on Form 10-K, no matter was submitted to a vote of Registrant's security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on The New York Stock Exchange. The range of the high and low sale prices, as adjusted for the three-for-two stock split in October 1993 and the three-for-two stock split in March 1994, of the Company's Common Stock for each of the quarters during the years ended December 31, 1993 and 1992 is set forth below:
The Company paid cash dividends in both the third and fourth quarters of 1993 in the amount of $.025 per share under its quarterly dividend policy as authorized by the Board of Directors. The Company increased its cash dividend by 50 percent in conjunction with the March 1994 three-for-two stock split to an annual rate of $.10 per share on post-split common shares. For restrictions on the Company's present or future ability to pay cash dividends, see note 2 of Notes to Combined Financial Statements. The declaration and payment of dividends in the future will be determined by the Board of Directors based upon the Company's earnings, financial condition, capital requirements and such other factors as the Board of Directors may deem relevant.
As of February 28, 1994, the approximate number of holders of record of the Company's Common stock was 915.
ITEM 6.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's financial statements include the accounts of the Company's wholly-owned subsidiaries and unincorporated partnerships and joint ventures in which the Company has at least a 40% interest and over which it exercises substantial legal, financial and operational control. Investments in other entities in which the Company has less than a 40% ownership interest and over which the Company has the ability to exercise significant influence, but does not have control, are accounted for using the equity method.
During 1993, the Company acquired, in separately negotiated transactions, limited partners' interests in 14 of the Company's combined unincorporated partnerships and joint ventures which owned 44 inns. The Company purchased the ownership interests for an aggregate purchase price of $87,897,000 which included cash at closing, the assumption of $22,824,000 of existing debt attributable to certain limited partners' interests, and $29,878,000 in notes to certain sellers.
As a result of the following transactions, the operations of LQP for the month of December 1993 were included in the combined financial statements of the Company. On October 27, 1993, the Company entered into a definitive Partnership Acquisition Agreement (the "Merger Agreement") with LQP and other parties, pursuant to which the Company, through wholly-owned subsidiaries, would acquire all units of the Partnership (the "Units") that it did not beneficially own at a price of $13.00 net per Unit in cash. The Merger Agreement provided for a tender offer (the "Offer") for all of the Partnership's outstanding Units at a price of $13.00 net per Unit in cash, which Offer commenced on November 1, 1993 and expired at midnight on November 30, 1993. The Offer resulted in the purchase of 2,805,190 Units (approximately 70.6% of the outstanding Units) by the Company through its wholly-owned subsidiary, LQI Acquisition Corporation. As a result of a contribution of additional units previously owned by the Company subsequent to the Offer, LQI Acquisition Corporation beneficially owned 3,257,890 Units (approximately 82% of the Units) at December 31, 1993. Pursuant to the Merger Agreement, a Special Meeting of Unitholders was then held on January 24, 1994 to approve the merger of a subsidiary of LQI Acquisition Corporation with and into the Partnership, with the Partnership as the surviving entity. As a result of this merger which was approved by the requisite vote of Unitholders on January 24, 1994, all of the Partnership's outstanding Units other than Units owned by the Company or any direct or indirect subsidiary of the Company were converted into the right to receive $13.00 net in cash without interest.
In 1993, the Company completed the acquisition of eleven inns and began renovating and converting them to the La Quinta brand. Of these inns, nine were purchased through the Development Partnership and two were purchased as wholly-owned properties. Although these inns remained open for business during conversion construction, hotel operations are disrupted during the typical three-to-four month construction period. Conversion of these inns will be completed during the first quarter of 1994.
References to "Company Inns" are to inns owned by the Company or by unincorporated partnerships and joint ventures in which the Company owns at least a 40% interest. References to "Managed Inns" are to those inns in which the Company owns less than a 40% interest and which are managed by the Company under long-term management contracts. "Managed Inns" include nine inns held in two joint ventures with CIGNA Investments, Inc. ("CIGNA") for the year ended December 31, 1993 and the 31 inns of the LQP through November 30, 1993. "Managed Inns" were accounted for using the equity method.
The following chart shows certain historical operating statistics and revenue data. References to the percentages of occupancy and the average daily rate refer to Company Inns. Managed Inns and the La Quinta licensed inn are excluded from occupancy and average daily rate statistics for all periods for purposes of comparability. All financial data is related to Company Inns unless otherwise specified.
During 1991, the Company implemented certain changes in its operations and organization which resulted in charges of $7,952,000. Such charges included severance costs resulting from a reduction in work force and the termination of four executive officers of the Company, charges related to the write-down of computer equipment and other assets and costs associated with the Company's cost reduction study. During 1992, the Company made additional changes in operations and organization based on a comprehensive review of the Company by its senior management team and recognized charges of approximately $39,751,000. These charges included a provision for the write-down of partnership investments, land, severance and other employee- related costs and other charges which affected corporate expenses and partners' equity in earnings and losses, as more fully described below.
YEAR ENDED DECEMBER 31, 1993 COMPARED TO YEAR ENDED DECEMBER 31, 1992
TOTAL REVENUES increased to $271,850,000 in 1993 from $254,122,000 in 1992, an increase of $17,728,000 or 7.0%. Of the total revenues reported in 1993, 95.1% were revenues from inns, 2.4% were revenues from restaurant rentals and other revenue and 2.5% were revenues from management services.
INN REVENUES are derived from room rentals and other sources such as charges to guests for long-distance telephone calls, fax machine use and laundry services. Inn revenues increased to $258,529,000 in 1993 from $239,826,000 in 1992, an increase of $18,703,000 or 7.8%. The increase in inn revenues was due primarily to an increase in average room rate, an increase in the number of available rooms and the acquisition of LQP. The average room rate increased to $46.36 in 1993 from $44.33 in 1992, an increase of $2.03 or 4.6%, while occupancy declined .5 percentage points. As anticipated, the Company's image enhancement program caused temporary construction related disruption in normal business operations and occupancies at properties which underwent the process. Newly acquired inns remain open during conversion construction which also disrupts the hotel operations during the typical three-to-four month construction period. Also, management's decision to discontinue a coupon promotion used in 1992 had a positive impact on room rate and had the effect of reducing occupancy in 1993. Available rooms for 1993 were 8,226,000 as compared to 7,916,000 for 1992, an increase of 310,000 available rooms, or 3.9%. The increase in the number of available rooms was due to the acquisitions of 11 inns during the year ended December 31, 1993 and the acquisition of LQP in December of 1993. The acquisition of LQP in December 1993 added $2,758,000 to inn revenues.
RESTAURANT RENTAL AND OTHER REVENUES includes rental payments from restaurants owned by the Company and leased to and operated by third parties. Restaurant rental and other revenues also include the Company's interest in the earnings (accounted for using the equity method) of two CIGNA joint ventures through the year ended December 31, 1993 and LQP, up to December 1, 1993, and miscellaneous other revenues, such as third party rental revenue from an office building which also housed the Company's corporate offices through May 1993. Restaurant rental and other decreased to $6,464,000 in 1993 from $7,208,000 in 1992, a decrease of $744,000 or 10.3%, primarily due to a reduction in earnings related to investments accounted for on the equity method.
MANAGEMENT SERVICES REVENUE is primarily related to fees earned by the Company for services rendered in conjunction with Managed Inns. Management service revenue decreased to $6,857,000 in 1993 from $7,088,000
in 1992, a decrease of $231,000 or 3.3%. Management fees decreased due to there being two less franchisees and the consolidation of LQP in December 1993 eliminating the related management fees charged by the Company to LQP for that month.
DIRECT EXPENSES include costs directly associated with the operation of Company Inns. In 1993, approximately 42% of direct expenses were represented by salaries, wages, and related costs. Other major categories of direct expenses include utilities, repairs and maintenance, property taxes, advertising and room supplies.
Direct expenses increased to $148,915,000 ($27.79 per occupied room) in 1993 compared to $135,790,000 ($26.17 per occupied room) in 1992, an increase of $13,125,000 or 9.7%. As a percentage of total revenues, direct expenses increased to 54.8% in 1993 from 53.4% in 1992. The increase in direct expense resulted primarily from the Company's implementation of a complimentary continental breakfast at all La Quinta inns during the first quarter of 1993, (which amounted to $1.08 per occupied room). Newly acquired inns typically incur more direct expenses as a percentage of revenue during the first twelve months of operations compared to the inns which have been operating as a La Quinta for more than a twelve month period. The Company acquired 11 inns during 1993 and did not acquire or convert any inns in the 1992 period. Direct expenses incurred by LQP in December 1993 were $2,048,000.
CORPORATE EXPENSES include the costs of general management, office rent, training and field supervision of inn managers and other marketing and administrative expenses. The major components of corporate expenses are salaries, wages and related expenses and information systems. Corporate expenses decreased to $19,450,000 ($1.96 per available room, including Managed Inns) in 1993 from $21,055,000 ($2.16 per available room before non-recurring charges, including Managed Inns) in 1992 before non-recurring charges, a decrease of $1,605,000 or 7.6%. As a percent of total revenues, corporate expenses decreased to 7.2% in 1993 from 8.3% in 1992 before non-recurring charges. The 1992 corporate expenses included a non-recurring charge to increase the allowance for certain notes receivable, based upon estimates of the value of the real estate held as collateral for such notes and evaluations of the financial condition of certain borrowers, and a provision related to the settlement of certain litigation.
The PROVISION FOR WRITE-DOWN OF PARTNERSHIP INVESTMENTS, LAND AND OTHER in 1992 includes charges related to the write-down of certain joint venture interests, land previously held for future development, computer equipment and other assets, as more fully described in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year Ended December 31, 1992 Compared to Year Ended December 31, 1991."
SEVERANCE AND OTHER EMPLOYEE RELATED COSTS in 1992 consisted of costs related to the severance of certain executive officers and other employees, executive search fees and relocation costs for new officers.
PERFORMANCE STOCK OPTION relates to the costs of stock options which became exercisable when the average price of the Company's stock reached $30 per share (pre-split) for twenty consecutive days. Performance stock option expense and certain other options were accelerated as a result of this condition being met. See note 5 to the Combined Financial Statements.
DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS decreased to $23,711,000 in 1993 from $24,477,000 in 1992, a decrease of $766,000 or 3.1%. The decrease in depreciation, amortization and asset retirements was due to assets which became fully depreciated during 1993 and the write-off of computer equipment and signage in the prior year. Replacement and installation of new computer equipment and signs was substantially completed in the latter part of 1993.
OPERATING INCOME increased to $75,367,000 in 1993 from $34,575,000 in 1992, an increase of $40,792,000. Operating income before a non-recurring, non-cash charge of approximately $4,407,000 to recognize compensation expense related to the vesting of performance stock options, increased to $79,774,000 in 1993 from $73,112,000 in 1992 before write-downs, severance and employee related costs and other non-recurring charges, an increase of $6,662,000 or 9.1%.
INTEREST INCOME primarily represents earnings on the note receivable from AEW Partners (the "AEW Note") and on the short-term investment of Company funds in money market instruments prior to their use in operations or acquiring inns. Interest income decreased to $5,147,000 in 1993 from $6,041,000 in 1992, a decrease of $894,000 or 14.8%. The decrease in interest income is primarily attributable to principal reductions on the AEW Note of $16,700,000 and $19,300,000 in September and December 1993 respectively, and the
corresponding reduction in interest earned thereon. As of December 31, 1993 the AEW Note had been fully collected.
INTEREST ON LONG-TERM DEBT decreased to $31,366,000 in 1993 from $33,087,000 in 1992, a decrease of $1,721,000 or 5.2%. The decrease in interest expense is attributable to the early extinguishment of approximately $117,000,000 of certain high interest rate debt with proceeds from the 9 1/4% Senior Subordinated Notes due 2003 and bank financing which more than offset interest on borrowings to purchase limited partners' interests. In addition, certain Industrial Revenue Bond issues were refinanced to obtain more favorable interest rates.
PARTNERS' EQUITY IN EARNINGS AND LOSSES reflects the interests of partners in the earnings and losses of the combined joint ventures and partnerships which are owned at least 40% and controlled by the Company. Partners' equity in earnings and losses decreased to $12,965,000 in 1993 from $15,081,000 in 1992, a decrease of $2,116,000 or 14.0%. The decrease in partners' equity in earnings and losses is attributable to the acquisition of limited partners' interests in 14 combined unincorporated partnerships and joint ventures partially offset by increases in the earnings of the Development Partnership. As of December 31, 1993, the Development Partnership operated 37 inns compared to 28 inns as of December 31, 1992.
NET GAIN (LOSS) ON PROPERTY AND INVESTMENT TRANSACTIONS decreased to a loss of ($4,347,000) in 1993 from a gain of $282,000 in 1992. The loss in 1993 includes a $4,900,000 loss related to the Company's conveyance to the mortgagee of the title on the property in which the Company's headquarters were located.
INCOME TAXES for 1993 were calculated using an estimated effective tax rate of 39%.
For the reasons discussed above, the Company reported EARNINGS (LOSS) BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE OF $19,420,000 in 1993 compared with ($7,796,000) in 1992, an increase of $27,216,000.
The Company reported EXTRAORDINARY ITEMS, NET OF INCOME TAXES of ($619,000) in 1993 compared with ($958,000) in 1992. The 1993 extraordinary loss consisted of ($6,007,000), ($3,664,0000) net of income taxes, related to the early extinguishment and refinancing of certain debt partially offset by an extraordinary gain of $4,991,000, $3,045,000 net of income taxes, resulting from the Company's transfer of ownership to the mortgagee of property in which the Company's headquarters were located.
The cumulative effect of a change in accounting for income taxes of $1,500,000 or $.05 per share in 1993 was the result of the implementation of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes."
For the reasons discussed above, the Company reported NET EARNINGS of $20,301,000 in 1993 compared with a net loss of ($8,754,000) in 1992, an increase of $29,055,000.
YEAR ENDED DECEMBER 31, 1992 COMPARED TO YEAR ENDED DECEMBER 31, 1991
TOTAL REVENUES increased to $254,122,000 in 1992 from $240,888,000 in 1991, an increase of $13,234,000 or 5.5%. Of the total revenues reported in 1992, 94.4% were revenues from inns, 2.8% were revenues from restaurant rentals and other revenue and 2.8% were revenues from management services.
INN REVENUES increased to $239,826,000 in 1992 from $227,096,000 in 1991, an increase of $12,730,000 or 5.6%. The increase in inn revenues was due primarily to an increase in average room rate, an increase in the number of available rooms and a slight increase in the percentage of occupancy. The average room rate increased to $44.33 in 1992 from $43.11 in 1991, an increase of $1.22 or 2.8%. The increase in room rate for 1992 was primarily attributable to rate increases made in selected stronger markets in January and June. The percentage of occupancy increased to 65.6% in 1992 from 64.8% in 1991. Available rooms for 1992 were 7,916,000 as compared to 7,817,000 for 1991, an increase of 99,000 available rooms or 1.3%. The increase in the number of available rooms was due to the acquisition of two inns in the fourth quarter of 1991 and the conversion of a licensed inn to a wholly-owned inn in 1992.
RESTAURANT RENTAL AND OTHER increased slightly to $7,208,000 in 1992 from $6,910,000 in 1991. Management service revenue increased to $7,088,000 in 1992 from $6,882,000 in 1991, an increase of $206,000 or 3.0%.
In 1992, approximately 44% of DIRECT EXPENSES were represented by salaries, wages and related costs. Direct expenses were $135,790,000 ($26.17 per occupied room) in 1992 compared to $135,443,000 ($26.75 per
occupied room) in 1991, an increase of $347,000 or 0.3%. As a percentage of total revenues, direct expenses decreased to 53.4% in 1992 from 56.2% in 1991. The increase in total direct expenses was primarily due to increases in property taxes, insurance and employee health care claims expenses. However, the increase was partially offset by decreases in workers' compensation insurance resulting from new safety programs implemented by the Company, supplies and advertising expenses.
CORPORATE EXPENSES increased to $21,055,000 ($2.16 per available room, including Managed Inns) in 1992 before $2,906,000 of non-recurring charges from $19,683,000 ($2.04 per available room, including Managed Inns) in 1991, an increase of $1,372,000 or 7.0%. As a percent of total revenues, corporate expenses before non-recurring charges increased to 8.3% in 1992 from 8.2% in 1991. The 1992 non-recurring charge was primarily attributable to an increase of $2,696,000 in the allowance for certain notes receivable, related to inns sold by the company prior to 1985, based on estimates of the value of the real estate held as collateral for such notes and evaluations of the financial condition of certain borrowers. The increase in corporate expense was partially related to a provision for settlement of certain litigation.
During 1992, the Company recorded NON-RECURRING CASH AND NON-CASH CHARGES of approximately $39,751,000. Of these charges $28,383,000 are included as a provision for write-down of partnership investments, land and other; $6,936,000 related to severance and other employee related costs; and the remaining $4,432,000 affected corporate expenses and partners' equity in earnings and losses. All of these charges resulted from certain changes being made in the Company's operations and organization based on a comprehensive review by the Company's senior management team.
During 1991, the Company recognized non-recurring cash and non-cash charges of $7,952,000 resulting from certain changes made in the Company's operations and organization. Of those charges, approximately $4,097,000 were for severance related costs for former employees which resulted from a reduction in the work force of approximately 72 employees, 50 of which were employed at the Company's headquarters and the termination of four executive officers of the Company under the various provisions of their severance agreements. Of the remaining charges, approximately $2,165,000 related to the write-down of computer equipment and other assets and approximately $1,690,000 represented costs associated with the Company's study to enhance shareholder value.
DEPRECIATION, AMORTIZATION AND ASSET RETIREMENTS decreased to $24,477,000 in 1992 from $34,921,000 in 1991, a decrease of $10,444,000 or 29.9%. Approximately $9,200,000 of the decrease was due to the Company's change in the depreciable lives of the building assets from 30 years to 40 years, effective January 1, 1992.
OPERATING INCOME decreased to $34,575,000 in 1992 from $42,889,000 in 1991, a decrease of $8,314,000 or 19.4%, primarily due to certain charges recorded in 1992, as more fully described above. Operating income before non-recurring charges and the effect of a change in estimated useful lives of buildings increased to $63,914,000 in 1992 from $50,841,000 in 1991 an increase of $13,073,000 or 25.7%. The net impact of these charges and adjustments on operating income for 1992 amounted to a net charge of $29,339,000 compared with $7,952,000 for 1991. As a percentage of total revenues, operating income decreased to 13.6% in 1992 from 17.8% in 1991.
INTEREST INCOME decreased to $6,041,000 in 1992 from $8,442,000 in 1991, a decrease of $2,401,000 or 28.4% The decrease in interest income is primarily attributable to a $14,866,000 reduction in principal on the AEW Note in March 1992 and the corresponding reduction in interest earned thereon.
INTEREST ON LONG-TERM DEBT decreased to $33,087,000 in 1992 from $38,713,000 in 1991, a decrease of $5,626,000 or 14.5%. The decrease in interest expense is related to the refinancing of approximately $42,000,000 in industrial revenue bond issues in 1992 and 1991 to obtain more favorable interest rates, the decline in the prime interest rate and the reduction of the average outstanding balance on the Company's Credit Facility due to improving operating cash flow.
PARTNERS' EQUITY IN EARNINGS AND LOSSES increased to $15,081,000 in 1992 from $9,421,000 in 1991, an increase of $5,660,000 or 60.1%. The increase in partners' equity in earnings and losses is primarily attributable to a decrease in depreciation expense related to the change in building lives of properties owned by the combined partnerships and joint ventures from 30 years to 40 years and to the increase in earnings of the Development Partnership. As of December 31, 1992, the Development Partnership operated 28 inns compared to 26 inns as of December 31, 1991. Partners' equity in earnings and losses in 1992 was also impacted by a $1,214,000 adjustment to reallocate losses of a joint venture to the Company.
NET GAIN (LOSS) ON PROPERTY AND INVESTMENT TRANSACTIONS increased to $282,000 in 1992 from a loss of ($1,012,000) in 1991. The majority of the 1991 loss was the result of write-downs on four properties partially offset by gains on three land condemnations.
The Company's effective tax rate for 1992 was primarily affected by deferred tax benefits that had not been recognized related to certain charges incurred during the year.
For the reasons discussed above, the Company reported a LOSS BEFORE EXTRAORDINARY ITEMS of ($7,796,000) in 1992 compared with the earnings before extraordinary items of $1,398,000 in 1991, a decrease of $9,194,000.
The Company reported EXTRAORDINARY ITEMS, NET OF INCOME TAXES of ($958,000) in 1992 compared with ($1,269,000) in 1991. The extraordinary items reported in each period were primarily a result of the refinancing of three industrial revenue bond issues totaling $12,910,000 in principal in 1992 and nine industrial revenue bond issues totaling $28,950,000 in principal in 1991. Extraordinary items in 1992 also relate to the early extinguishment of the Company's 10% Convertible Subordinated Debentures due 2002.
For the reasons discussed above, the Company reported a NET LOSS of ($8,754,000) in 1992 compared with net earnings of $129,000 in 1991, a decrease of $8,883,000.
CAPITAL RESOURCES AND LIQUIDITY
The Company has historically financed its development program through partnerships with financial institutions, a public debt offering and borrowings under the Company's Credit Facilities. During the years ended December 31, 1993 and 1992, the Company funded a majority of its development program through the Development Partnership. The Company's inns and adjacent restaurant land and buildings are substantially pledged to secure long-term debt of the Company. Distributions of cash, if any, from the Company's joint ventures and partnerships are made from cash available after payment of operating expenses, debt service, capital expenditures and acquisition and development of new inns.
At December 31, 1993, the Company had $23,848,000 of cash and cash equivalents, an increase of $10,987,000 from December 31, 1992. The increase was due to the collection of $19,300,000 on AEW Partners' obligation to the Development Partnership in December 1993. In July 1993, the Company completed negotiations on a new $40,000,000 Secured Line of Credit and $30,000,000 Secured Term Credit Facility. On December 22, 1993, the Company completed negotiations on an additional $30,000,000 Secured Line of Credit which bore interest at the prime rate plus 1/2%. The additional Line of Credit matured upon the closing of the amendment to the $40,000,000 Secured Line of Credit and $30,000,000 Secured Term Credit Facility more fully discussed below. At December 31, 1993 the Company had approximately $31,380,000 available on its credit facility.
In January 1994, the Company completed negotiations to amend the $40,000,000 Secured Line of Credit and increase the Secured Term Credit Facility from $30,000,000 to $145,000,000. Borrowings under the $40,000,000 secured line of credit, which will expire May 30, 1997 will be made at varying interest rates of LIBOR plus 1 3/4%, the prime rate, or certificate of deposit rate plus 1 7/8%. Borrowings under the $145,000,000 Secured Term Credit Facility, which will expire May 31, 2000, will be made through October 31, 1994 and will bear interest at varying interest rates of LIBOR plus 2%, the prime rate plus 1/4%, or certificate of deposit rate plus 2 1/8%. Amounts borrowed under the Secured Term Credit Facility will require semi-annual principal payments commencing November 30, 1994 through May 31, 2000. In February 1994, the Company used the Secured Term Credit Facility to retire $65,742,000 of 11.25% mortgage debt assumed through the acquisition of LQP, which would have matured in November 1994. As of February 28, 1994, the Company had $27,125,000 available on its credit facility.
At December 31, 1993, the AEW Note to the Development Partnership had been fully collected. The Company anticipates that substantially all of its development activity in 1994 will occur through the Development Partnership by using the Partnership's available cash and cash from operations and that no distributions of cash will be made to partners.
Net cash provided by operating activities increased to $77,364,000 in 1993 from $60,543,000 in 1992, an increase of $16,821,000 or 27.8%. The increase was due to increased inn revenues and an increase in accounts payable and accrued expenses due to the timing of payment. Net cash provided by operating activities increased to $60,543,000 in 1992 from $54,056,000 in 1991, an increase of $6,487,000 or 12.0%. The majority of the increase was due to an increase in inn revenues as a result of increased occupancy and average room rates.
Net cash used by investing activities increased to $145,027,000 in 1993 from $15,166,000 in 1992, an increase of $129,861,000. The increase was related to the acquisition of LQP, the acquisition of partners' interest in 14 unincorporated joint ventures and partnerships, the acquisition of eleven inns and capital expenditures related to the Company's image enhancement program. Net cash used by investing activities decreased to $15,166,000 in 1992 from $35,083,000 in 1991, a decrease of $19,917,000 or 56.8%. This decrease resulted from no inns being acquired during 1992 compared to three inns and a partner's interest in an additional five inns in 1991.
Net cash provided by financing activities was $78,650,000 in 1993 compared to net cash used by financing activities of ($40,471,000) in 1992. The increase in cash provided by financing activities was the result of the issuance of the 9 1/4% Senior Subordinated Notes due 2003, the collection of the AEW Note and the decrease in distributions to partners partially offset payments on long-term debt. Net cash used by financing activities increased to $40,471,000 in 1992 from $24,428,000 in 1991, an increase of $16,043,000 or 65.7%. This increase was primarily impacted by a reduction of the Company's average outstanding balance on the Credit Facility.
COMMITMENTS
In accordance with the unincorporated partnership or joint venture agreements executed by the Company, La Quinta is committed to advance funds necessary to cover operating expenses of a joint venture. In addition, four other unincorporated partnerships and joint ventures executed promissory notes in which the Company guaranteed to fund amounts not to exceed $4,985,000 in the aggregate.
The estimated additional cost to complete the conversion and renovation of inns for which commitments have been made is $36,455,000 at December 31, 1993, of which includes amounts for the Company's image enhancement program that were in process or under contract. Funds on hand, committed and anticipated from cash flow are sufficient to complete these projects.
The Company has undertaken a comprehensive chainwide image enhancement program intended to give its properties a new, fresh, crisp appearance while preserving their unique character. The program features new signage displaying a new logo as well as exterior and lobby upgrades including brighter colors, more extensive lighting, additional landscaping, enhanced guest entry and full lobby renovation with contemporary furnishings and seating area for continental breakfast. In the first quarter of 1993, the Company began its property and image enhancement program on the La Quinta inns it manages or owns. The Company anticipates that $36,379,000 will be needed to complete the project, including $27,493,000 related to work which was in process or under contract at December 31, 1993. The Company intends to fund its image enhancement program through funds generated from operations and available on its Credit Facility. The Company does not anticipate the funding of this program will have an adverse effect on its ability to fund its operations.
Under the terms of a Partnership agreement between the Company and AEW Partners, the Company maintains a reserve for renovating, remodeling and conversion of the inns in the Development Partnership based on 5% of gross room revenue of the Partnership which includes certain amounts required by loan agreements. At December 31, 1993 and 1992 the Company had $3,833,000 and $3,920,000, respectively, of restricted cash which is classified as investments.
In accordance with the requirements of an escrow agreement related to a pool of mortgage notes executed by the Company and a third party lender, the Company is required to make annual deposits into an escrow account for the purpose of establishing a reserve for the replacement of furnishings, fixtures and equipment used on or incorporated into the mortgaged properties. The Company shall be relieved of its obligation to make such annual deposits for any year in which the escrow account has an aggregate balance of $2,431,000. At December 31, 1993 and 1992, the Company had reserved $2,431,000 and $5,754,000, respectively.
In 1993, the Company entered into a ten year operating lease for its corporate headquarters in San Antonio. In addition, the Company entered into a ten year lease in December 1993 to house the Company's reservation facilities.
Funds on hand, anticipated from future cash flows and available on the Company's Credit Facility are sufficient to fund operating expenses, debt service and other capital requirements through at least the end of 1994. The Company will evaluate from time to time the necessity of other financing alternatives.
SEASONALITY
Demand, and thus room occupancy, is affected by normally recurring seasonal patterns and, in most La Quinta inns, is higher in the spring and summer months (March through August) than in the balance of the year.
INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". This Statement requires the use of the asset and liability method of accounting for deferred income taxes and was implemented in 1993. The impact of the Statement's implementation has been disclosed in note 4 of Notes to Combined Financial Statements.
INFLATION
The rate of inflation as measured by changes in the average consumer price index has not had a material effect on the revenues or net earnings (loss) of the Company in the three most recent years.
ITEM 8.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) DIRECTORS OF REGISTRANT
There is incorporated in this Item 10 by reference that portion of the Company's definitive Proxy Statement, dated on or about April 15, 1994, which Registrant intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Election of Directors," and "Meetings and Committees of the Board of Directors."
(B) EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information is set forth below concerning the executive officers of the Company, each of whom has been elected to serve until the regular annual meeting of the Board of Directors following the next Annual Meeting of Shareholders and until his/her successor is duly elected and qualified.
Gary L. Mead 46 President and Chief Executive Officer and Director Michael A. Depatie 37 Sr. Vice President - Finance, Chief Financing Officer William C. Hammett, Jr. 47 Sr. Vice President - Accounting & Administration Thomas W. Higgins 46 Sr. Vice President - Operations R. John Kaegi 45 Sr. Vice President - Marketing Steven T. Schultz 47 Sr. Vice President - Development John F. Schmutz 46 Vice President - General Counsel and Secretary
Gary L. Mead has been Director, President and Chief Executive Officer of the Company since March 1992. He served as Executive Vice President - Finance of Motel 6 G.P., Inc., the managing general partner of Motel 6, L.P., from October 1987 to January 1991.
Michael A. Depatie has been Senior Vice President - Finance, Chief Financing Officer of the Company since July 1992. He served as Senior Vice President, Summerfield Hotel from May 1989 to July 1992. He served as Managing General Partner of PacWest Capital Partners from April 1988 to April 1989. He served as Vice President - Finance of The Residence Inn Company from July 1984 to July 1986 and Senior Vice President - Finance from July 1986 to March 1988.
William C. Hammett, Jr. has been Senior Vice President - Accounting and Administration since June 1992. He served as Executive Vice President - Finance of Motel 6 G.P., Inc., from February 1991 to June 1992. He served as Vice President-Controller of Motel 6 G.P., Inc. from September 1988 to February 1991. He served as Controller of Spartan Food Systems from August 1973 to September 1988.
Thomas W. Higgins has been Senior Vice President - Operations of the Company since September 1992. He served as Vice President - Human Resources of the Company from June 1992 to September 1992. He served as Vice President - Human Resources of Motel 6 G.P., Inc. from May 1988 to June 1992. He served as Director of Training/Employment of General Mills from October 1986 to May 1988.
R. John Kaegi has been Senior Vice President - Marketing of the Company since July 1992. He served as Senior Vice President - Marketing and Strategic Planning of KinderCare Learning Centers, Inc. from December 1989 to July 1992. He served as Vice President - Marketing of KinderCare Learning Centers, Inc. from July 1987 to December 1989. He served as Director Field Marketing of Holiday Inns, Inc. from November 1985 to July 1987.
Steven T. Schultz has been Senior Vice President - Development of the Company since June 1992. He served as Senior Vice President - Development of Embassy Suites from October 1986 to June 1992.
John F. Schmutz has been Vice President - General Counsel and Secretary of the Company since June 1992. He served as Vice President - General Counsel of Sbarro, Inc. from May 1991 to June 1992. He served as Vice President - Legal of Hardee's Food Systems, Inc. from April 1983 to May 1991.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
There are incorporated in this Item 11 by reference those portions of the Company's definitive Proxy Statement, dated on or about April 15, 1994, which Registrant intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Executive Compensation," "Compensation Pursuant to Plans," "Other Compensation," "Compensation of Directors," and "Termination of Employment and Change of Control Arrangements."
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are incorporated in this Item 12 by reference those portions of the Company's definitive Proxy Statement, dated on or about April 15, 1994, which Registrant intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the captions "Principal Shareholders" and "Security Ownership of Management".
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is incorporated in this Item 13 by reference that portion of the Company's definitive Proxy Statement, dated on or about April 15, 1994, which Registrant intends to file not later than 120 days after the end of the fiscal year covered by this Form 10-K, appearing under the caption "Certain Relationships and Related Transactions."
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements
The Combined Financial Statements of the Company appearing in Item 8 are as follows:
Combined Balance Sheets at December 31, 1993 and 1992 Combined Statements of Operations for the years ended December 31, 1993, 1992 and 1991 Combined Statements of Shareholders' Equity for the years ended December 31, 1993, 1992 and 1991 Combined Statements of Cash Flows for the years ended December 31, 1993, 1992 and 1991 Notes to Combined Financial Statements Independent Auditors' Report on financial statements and schedules
(2) Financial Statement Schedules
Schedule V - Property, Plant and Equipment - For the years ended December 31, 1993, 1992 and 1991. Schedule VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment - For the years ended December 31, 1993, 1992 and 1991. Schedule X - Supplemental Income Statement Information-For the years ended December 31, 1993, 1992 and 1991.
All other schedules for which provision is made in the applicable regulation to the Securities and Exchange Commission are not required under the related instructions or are inapplicable and have been omitted.
(3) The following exhibits are filed as a part of this Report:
(3)(a) Restated Articles of Incorporation of La Quinta Inns, Inc., as amended on May 21, 1993. (8)
(3)(b) Amended and Restated By-Laws of La Quinta Inns, Inc. (1)
(10)(a) La Quinta Inns, Inc. 1978 Non-Qualified Stock Option Plan, as amended. (2)
(10)(b) La Quinta Inns, Inc. 1984 Stock Option Plan. (3)
(10)(c) Amendment No. 1 to La Quinta Inns, Inc. 1984 Stock Option Plan. (4)
(10)(d) Amendment No. 2 to La Quinta Inns, Inc. 1984 Stock Option Plan. (5)
(10)(e) Amended and Restated La Quinta Inns, Inc. 1984 Stock Option Plan, as of November 21, 1991. (1)
(10)(f) La Quinta Development Partners, L.P. Amended and Restated Agreement of Limited Partnership, dated March 21, 1990, by and between Registrant and AEW Partners, L.P. (6)
(10)(g) La Quinta Development Partners, L.P. Contribution Agreement, dated March 21, 1990, by and between Registrant and AEW Partners, L.P. (6)
(10)(h) Management and Development Agreement by and between Registrant and La Quinta Development Partners, L.P., dated March 21, 1990. (6)
(10)(i) Supplemental Executive Retirement Plan and Trust Agreement of Registrant, dated April 20, 1990, by and between Registrant and Frost National Bank. (7)
(10)(j) La Quinta Inns, Inc. Deferred Compensation Plan, effective June 1, 1987. (7)
(10)(k) Form of Bonus Agreement dated February 22, 1991, by and between Registrant and each of Messrs. Sam Barshop, David B. Daviss, Alan L. Tallis and Francis P. Bissaillon. (7)
(10)(l) Form of Indemnification Agreement, made and entered into as of November 15, 1990 and thereafter (with respect to persons who became directors of Registrant after such dates), by and between Registrant and each of its directors. (7)
(10)(m) Form of Indemnification Agreement, made and entered into as of November 15, 1990 and thereafter (with respect to persons who became directors of Registrant after such dates), by and between Registrant and each of its officers. (7)
(10)(n) Registration Rights Agreement, dated as of July 31, 1991 by and between Registrant and Sam Barshop and his wife, Ann Barshop. (1)
(10)(o) Employment Agreement, dated as of October 1, 1991, by and between Registrant and Sam Barshop. (1)
(10)(p) Employment Agreement, dated as of March 3, 1992, by and between Registrant and Gary L. Mead. (1)
(10)(q) Non-Qualified Stock Option Agreement, dated as of March 3, 1992, between Registrant and Gary L. Mead. (1)
(10)(r) Registration Rights Agreement, dated as of March 3, 1992, between Gary L. Mead. (1)
(10)(s) Second Amended and Restated Master Convenant Agreement dated June 15, 1993. (8)
(10)(t) $126,795,786.64 Credit Agreement dated June 15, 1993. (8)
(10)(u) Indenture dated May 15, 1993 Re: $120,000,000 9 1/4% Senior Subordinated Notes due 1003. (8)
(10)(v) Partnership Acquisition Agreement dated October 27, 1993, among the Partnership, the General Partner, La Quinta, LQI Acquisition Corporation and LQI Merger Corporation. (9)
(10)(w) $241,844,955.21 Amended and Restated Credit Agreement Among La Quinta Inns, Inc. Certain lenders and NationsBank of Texas, N.A. as Administrative Lender dated January 25, 1994 filed herewith.
(10)(x) Third Amended and Restated Master Covenant Agreement dated as of January 25, 1994 filed herewith.
(11) Statement regarding computation of per share earnings filed herewith.
(22) Subsidiaries of La Quinta Inns, Inc. as of March 3, 1994 filed herewith.
(23) Registrant's definitive Proxy Statement, dated on or about April 15, 1994, to be filed by Registrant within 120 days after the end of the fiscal year covered by this Form 10-K.
(24) Consent by KPMG Peat Marwick dated March 23, 1994 to incorporation by reference of their reports dated January 31, 1994, except as to the first paragraph of note 5, which is as of February 9, 1994, in various Registration Statements filed herewith.
(25) Powers of Attorney filed herewith.
(b) Reports on Form 8-K. Registrant filed two Current Reports on Form 8-K, dated November 3, 1993 and December 15, 1993 with the Securities and Exchange Commission. The Report dated November 3, 1993 was filed under Items 5 and 7 describing the Merger Agreement between La Quinta Inns, Inc. and La Quinta Motor Inns Limited Partnership ("the Partnership"). The report dated December 15, 1993 was filed under Items 2 and 7 describing the acquisition of the Partnership, the Partnership's December 31, 1992 Consolidated Financial Statements and pro forma information for the year ended December 31, 1992 and the nine month period ended September 30, 1993.
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(1) Previously filed as an exhibit to the Registrant's Registration Statement on Form 10-K for the year ended December 31, 1991 and incorporated herein by reference.
(2) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No. 2-65645) and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Registration Statement on Form 10-K for the year ended May 31, 1984 and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Registration Statement on Form S-8 (No. 2-97266) and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Registration Statement and incorporated herein by reference.
(6) Previously filed as an exhibit to the Registrant's Registration Statement for the Transition Period Report on Form 10-K for the seven months ended December 31, 1989 and incorporated herein by reference.
(7) Previously filed as an exhibit to the Registrant's Registration Statement on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference.
(8) Previously filed as an exhibit to Registrant's Registration Statement on Form 10-Q for the period ended June 30, 1993.
(9) Previously filed to the Registrant's Schedule 14D-1 filed November 1, 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LA QUINTA INNS, INC. (Registrant)
By:----------------------------------- William C. Hammett, Jr. Senior Vice President Chief Accounting Officer
By:----------------------------------- Michael A. Depatie Senior Vice President Chief Financing Officer Date:
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities and on the date indicated.
Signature Title
Gary L. Mead President and Chief Executive Officer, Director
William C. Hammett, Jr. Sr. Vice President - Accounting and Administration
Thomas M. Taylor Chairman of the Board
Michael A. Depatie Sr. Vice President - Finance
Joseph F. Azrack Director
Philip M. Barshop Director
William H. Cunningham Director
Barry K. Fingerhut Director
George Kozmetsky Director
Donald J. McNamara Director
Peter Sterling Director