10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to______ Commission File Number 000-30491 APPLE SUITES, INC. (Exact name of registrant as specified in its charter) VIRGINIA 54-1933472 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 306 EAST MAIN STREET RICHMOND, VIRGINIA 23219 (Address of principal executive offices) (Zip Code) (804) 643-1761 (Registrant's telephone number, including area code) Not Applicable (Former name, former address, and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- At August 1, 2001, there were outstanding 12,666,678 shares of common stock, no par value, of the registrant. APPLE SUITES, INC. FORM 10-Q INDEX Page Number ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets -As of 3 June 30, 2001 and December 31, 2000 Consolidated Statement of Operations - 4 Three months ended June 30, 2001 and June 30, 2000 Six months ended June 30, 2001 and June 30, 2000 Consolidated Statement of Shareholders' 5 Equity - Six months ended June 30, 2001 Consolidated Statement of Cash Flows - 6 Six months ended June 30, 2001 and June 30, 2000 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis 12 of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures 17 about Market Risk PART II. OTHER INFORMATION: Item 1. Legal Proceedings (not applicable). Item 2. Changes in Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities (not applicable). Item 4. Submission of Matters to a Vote of Security Holders (not applicable). 19 Item 5. Other Information (not applicable) Item 6. Exhibits and Reports on Form 8-K 20 2 APPLE SUITES, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)

See accompanying notes to consolidated financial statements. 3 APPLE SUITES INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)

See accompanying notes to consolidated financial statements. 4 APPLE SUITES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

See accompanying notes to consolidated financial statements. 5 APPLE SUITES, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)

See accompanying notes to consolidated financial statements. 6 APPLE SUITES, INC Notes to Consolidated Financial Statements (Unaudited) June 30, 2001 (1) General Information and Summary of Significant Accounting Policies ------------------------------------------------------------------ Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements of Apple Suites, Inc, (the "Company") have been prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2001 are not necessarily indicative of the results that may be expected for the period ended December 31, 2001. These consolidated financial statements should be read in conjunction with the Company's December 31, 2000 Annual Report on Form 10-K. The REIT Modernization Act, effective January 1, 2001, permits REIT's to establish taxable businesses to conduct certain previously disallowed business activities. The Act also reduces the REIT distribution requirement from 95% to 90% of its taxable income. Effective January 1, 2001 (the effective date for the recently passed REIT Modernization Act), the Company acquired Apple Suites Management, Inc. and its subsidiaries (the "Lessee"). In 2000, the Company paid Mr. Glade M. Knight, the Company's President and Chairman, a deposit of $900,000 in exchange for all of the issued and outstanding stock of the Lessee. For financial reporting purposes, the Company recorded the $900,000 of cash plus the fair value of net liabilities of $513,520 in the Lessee as a management termination fee (total of $1,413,520) in 2001, as the Lessee's only business is its lease with the Company. Effective January 1, 2001, all intercompany transactions, including lease revenue and rental expenses, between the Company and the Lessee are eliminated in consolidation. The Company leases to the Lessee all of its hotels acquired to date. Each hotel is leased by the Company to the Lessee under a master hotel lease agreement ("Percentage Lease"). The Lessee now operates as a taxable REIT subsidiary under the same percentage lease agreements in place before the management termination transaction. Promus Hotels, Inc. ("Promus"), a wholly owned subsidiary of Hilton Hotels Corporation ("Hilton") manages the Company's hotels under the terms of a management agreement. The Company did not have any items of comprehensive income requiring separate reporting and disclosure for the periods presented. Financial Accounting Standards Board Statement No. 138, "Accounting for Derivative Instruments and Hedging Activities" (Statement 138) became effective January 1, 2001. The Company currently does not have any derivatives subject to this Statement. 7 (2) Investment in Hotels -------------------- At June 30, 2001, the Company owned 17 hotels. Investment in hotels consisted of the following: June 30, December 31, 2001 2000 ---- ---- Land $ 29,842,407 $18,374,917 Building 137,756,475 101,314,421 Furniture and equipment 9,408,018 8,373,509 ------------ ------------ $177,006,900 $128,062,847 Less accumulated depreciation (5,633,285) (3,486,590) ----------- ------------ $171,373,615 124,576,257 ------------ ------------ Using proceeds from the sale of common shares and executing two short-term notes totaling $16,500,000, the Company acquired 4 hotels for an aggregate purchase price of $47,550,000 during 2001. These acquisitions brought the total number of hotels to 17 and total suites to 1,922. The hotels are located in Atlanta, Georgia; St. Louis, Missouri; Portland, Oregon; and Herndon, Virginia. These hotels will be leased by the Lessee and managed by Promus in substantially the same manner as the other 13 Homewood Suites(R) hotels owned at March 31, 2001. (3) Notes Payable ------------- On June 1, 2001, the Company placed $10.7 million of secured debt. The loan bears interest at a fixed interest rate of 8.15% per annum with a maturity date of June 2011. The loan is payable in monthly installments, including principal and interest, and is secured by one hotel. At June 30, 2001, the outstanding balance was $10,689,020. In connection with the purchase of 2 hotels, notes were executed by the Company payable to the order of Hilton in the amount of $16,500,000. The notes are secured by our two hotels in Missouri and Oregon and bears a fixed interest rate of 8.5% per annum. Interest payments are due monthly. The notes mature December 28, 2001. As of January 1, 2001, the Company's outstanding note payable to Hilton, secured by our property in Boulder, Colorado, totaled $7,780,500 and bore a fixed interest rate of 8.5%. During January and February 2001, the Company paid Hilton the outstanding balance on the note from net equity proceeds. (4) Shareholders' Equity -------------------- On April 17, 2001, the Company closed its "best-efforts" offering of shares. The Company received gross proceeds of $40,003,301 and $15,161,377 from the sale of 4,000,330 and 1,516,138 shares, respectively, including shares sold through the reinvestment of distributions for the six month periods ended June 30, 2001 and 2000, respectively. The total gross proceeds raised for the "best efforts" offering were $125,000,000. The net proceeds of the offering, after deducting selling commissions and other offering costs for the six month periods ended June 30, 2001 and 2000 were $35,933,303 and $13,294,035, respectively. 8 (5) Commitments and Related Parties ------------------------------- Prior to January 1, 2001, the Lessee operated as a separate entity and the Company received rental income from the Lessee which incurred rent expense under the Percentage Leases. Percentage rent is calculated by multiplying fixed percentages by the total revenues with reference to specified threshold amounts. Both the base rent and the revenue thresholds used in computing percentage rents are subject to annual adjustments based on changes in the Consumer Price Index ("CPI"). The Lessee now operates as a taxable REIT subsidiary under the same percentage lease agreements in place before the management termination transaction. The Company is obligated to pay the costs of real estate and personal property taxes, property insurance, maintenance of underground utilities and structural elements of the hotels. The Company is committed under management agreements to fund up to 5% of gross revenues for capital expenditures to include periodic replacement or refurbishment of furniture, fixtures, and equipment. At June 30, 2001 and 2000, $1,694,119 and $653,149, respectively, were held by Promus for these capital improvement reserves. In addition, in accordance with the franchise agreements, at June 30, 2001 and 2000, $75,971 and $544,469, respectively, were held for the Property Improvement Plan with a financial institution and treated as restricted cash. There are license agreements with Promus to operate the hotels as Homewood Suites(R) by Hilton properties. These agreements remain unchanged as a result of the Company's acquisition of the Lessee. These agreements have terms of 20 years and expire in 2019 through 2021. These agreements require, among other things, payment of monthly franchise fees equal to 4% of suite revenue. License and franchise agreements contain specific standards for, and restrictions and limitations on, the operation and maintenance of the hotels which are established by Promus to maintain uniformity in the system for Homewood Suites(R) by Hilton. Such standards generally regulate the appearance of the hotel, quality and type of goods and services offered, signage, and protection of marks. Compliance with such standards may from time to time require significant expenditures for capital improvements which will be borne by the Company. In addition, the agreements provide that Promus will manage the daily operations of the hotels and provide advertising and promotion to include access to the reservation system for Homewood Suites(R) by Hilton. Promus charges 4% of suite revenue for advertising and promotion fees. For the hotels acquired prior to 2001, Promus charges 4% of total revenue for management fees. For the 4 hotels acquired in 2001, Promus charges a base management fee of 2% of total revenue for 2 of the hotels. For the other 2 hotels, Promus charges 2% in the first year which increases to 3% in the second year and to 4% in the third year and thereafter. The Company has contracted with Apple Suites Realty Group, Inc. ("ASRG") to acquire and dispose of real estate assets for the Company. In accordance with the contract, ASRG is to be paid a fee of 2% of the purchase price of any acquisitions or sale price of any dispositions of real estate investments, subject to certain conditions. For the six months ended June 30, 2001 and 2000, ASRG paid $696,000 and $607,480, respectively under this agreement. The Company has contracted with Apple Suites Advisors, Inc. ("ASA") to advise and provide day to day management services to the Company. In accordance with the contract, the Company will pay ASA a fee equal to .1% to .25% of total equity contributions received by the Company in addition to certain reimbursable expenses. For the six months ended June 30, 2001 and 2000, ASA earned $142,022 and $50,032, respectively, under this agreement. ASRG and ASA are 100% owned by Glade M. Knight, Chairman and President of the Company. 9 (6) Earnings Per Share ------------------ The following table sets forth the computation of basic and diluted earnings per share in accordance with FAS 128:

(7) Acquisitions ------------ The following unaudited pro forma information for the six months ended June 30, 2001 and 2000 is presented as if the acquisition of the 5 hotels occurred on January 1, 2000. The pro forma information does not purport to represent what the Company's results of operations would actually have been if such transactions, in fact, had occurred on January 1, 2000, nor does it purport to represent the results of operations for future periods. Six Six Months Months Ended Ended 6/30/01 6/30/00 ------- ------- Hotel revenues $26,346,328 $25,189,928 Net income 4,398,458 2,040,896 Net income per share-basic and diluted $.32 $.27 10 The pro forma information reflects adjustments for actual revenues and expenses of the 2 hotels acquired in 2000 and 3 hotels acquired 2001 for the respective period in 2000 prior to acquisition by the Company. Net income has been adjusted as follows: (1) depreciation has been adjusted based on the Company's basis in the hotels; (2) advisory expenses have been adjusted based on the Company's contractual arrangements; (3) interest expense has been adjusted to reflect the acquisition as of January 1, 2000; (4) common stock raised during 2000 and 2001 to purchase these hotels has been adjusted to reflect issuances as of January 1, 2000; and (5) the acquisition of the Lessee was effective January 1, 2000 and the management termination fees have been eliminated in 2001 since it will not have an on-going impact. (8) Income Taxes ------------ The taxable REIT subsidiary is subject to federal and state income taxes. The taxable REIT subsidiary incurred a loss during 2001 and as such has no income tax liability at June 30, 2001. No operating loss benefit has been recorded in the consolidated balance sheet since realization is uncertain. At June 30, 2001, the taxable REIT subsidiary has $400,000 of net operating loss carryforwards which expire in 2020. (9) Subsequent Events ----------------- The Company expects to close $7.5 million of secured debt on 1 hotel by the end of the month, however, no assurances can be given. The loan will bear interest at a fixed rate of 8.14% per annum with a maturity date of September 2011. Proceeds from the secured debt will be used to reduce the outstanding balance of the Hilton notes. 11 Management's Discussion And Analysis Of Financial Condition And Results Of Operations This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include the ability of the Company to implement its acquisition strategy and operating strategy; the Company's ability to manage planned growth; changes in economic cycles; competitors within the extended-stay hotel industry; the ability to repay or refinance debt as it becomes due; and the possibility that the acquisition of Apple Suites Management, Inc. will not have the effects anticipated by the Company. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in this quarterly report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. General ------- The REIT Modernization Act, effective January 1, 2001, permits REIT's to establish taxable businesses to conduct certain previously disallowed business activities. The Act also reduces the REIT distribution requirement from 95% to 90% of its taxable income. Effective January 1, 2001 (the effective date for the recently passed REIT Modernization Act), the Company acquired Apple Suites Management, Inc. and its subsidiaries (the "Lessee"). In 2000, the Company paid Mr. Glade M. Knight, the Company's President and Chairman, a deposit of $900,000 in exchange for all of the issued and outstanding stock of the Lessee. For financial reporting purposes, the Company recorded the $900,000 of cash plus the fair value of net liabilities of $513,520 in the Lessee as a management termination fee (total of $1,413,520) in 2001, as the Lessee's only business is its lease with the Company. Effective January 1, 2001, all intercompany transactions including lease revenue and rental expenses, between the Company and the Lessee are eliminated in consolidation. The Company has acquired 17 hotels with 1,922 suites which are managed by Promus Hotels, Inc. ("Promus"), a wholly-owned subsidiary of Hilton Hotels Corporation ("Hilton"). We, through our taxable REIT subsidiary, hold the franchise and market reservation agreement for each of the hotels, which are operated as Homewood Suites(R) by Hilton. We, through our taxable REIT subsidiary, engage a third- party manager, Promus, to operate the hotels. The Company is externally advised and has contracted with Apple Suites Advisors, Inc. ("ASA") to manage its day- to-day operations and make investment decisions. The Company has contracted with Apple Suites Realty Group, Inc. ("ASRG") to provide brokerage and acquisition services in connection with its hotel acquisitions. ASA, and ASRG are all owned by Mr. Glade Knight, the Company's Chairman. (See Note 5 to the unaudited consolidated financial statements of the Company for further 12 information on related-party transactions). Results of Operations --------------------- As discussed earlier, the Company purchased Apple Suites Management, Inc. on January 1, 2001. The sole business of the Lessee was with the Company. Therefore, for purposes of a meaningful comparison, we have compared revenue and hotel operating expenses for the six and three months ended June 30, 2001 with those of the Lessee for the six and three months ended June 30, 2000. Revenues -------- In 2001, operations of the hotels are included in the Company's consolidated operations. Prior to January 1, 2001, the operations of the hotels were included in the Lessee's operations. Total revenues consist primarily of suite revenue. During the six months ended June 30, 2001, the Company had suite and other revenues of $20,919,569 and $1,019,711, respectively. For the same period in 2000, the Lessee had suite and other revenues of $16,162,186 and $891,551, respectively. During the three months ended June 30, 2001, the Company had suite and other revenues of $10,857,055 and $524,519, respectively. The Lessee had suite and other revenues of $8,479,831 and $470,735, respectively, for the same period in 2000. The increases are primarily due to a full quarter of operations in 2001 of the two 2000 hotel acquisitions and the operations of the 4 hotels acquired in 2001 since their acquisition dates. In 2000, the Company's lease revenue was derived from the Percentage Leases covering the hotels in operations with the Lessee. The lease revenue earned by the Company and the rent expense incurred by the Lessee are eliminated in consolidation in 2001. For the six months ended June 30, 2001 and 2000 average occupancy rate was 76% and 78%, average daily rate ("ADR") was $101 and $91, and revenue per available room ("REVPAR") was $76 and $71, respectively. For the three months ended June 30, 2001 and 2000 average occupancy rate was 76% and 79%, ADR was $100 and $92, and REVPAR was $76 and $72, respectively. The decrease in average occupancy is primarily due to the increases in daily rental rates to maximize revenues in 2001. The increases in ADR and REVPAR are due to a combination of significant increases in daily rental rates, and the full two quarters effect of the 2000 hotel acquisitions and the 2001 hotel acquisitions since their acquisition dates which had higher ADRs. The Company's interest income consists of $308,440 and $101,161 earned from the investments of its cash and cash reserves for the six months ended June 30, 2001 and 2000, respectively. The Company's interest income consists of $214,401 and $68,429 for the three months ended June 30, 2001 and 2000, respectively. The increases are due to the investment of the offering proceeds pending acquisition closings in 2001. In 2000, interest income of $45,528 and $30,253 for the six and three months ended June 30, 2000, respectively, was earned from the promissory notes with the Lessee for franchise and hotel supplies. The interest income to the Company and the interest expense to the Lessee relating to the franchise, hotel supplies and working capital notes are eliminated in consolidation in 2001. Comparable Hotel Results ------------------------ The Company's comparable hotels consist of 11 Homewood Suites(R) by Hilton, containing 1,218 suites that the Company has owned since January 1, 2000. For the six months ended June 30, 2001, the hotels had a 5% increase in REVPAR and a 7% increase in ADR over the same period in 2000. Average occupancy for the first two quarters of 2001 for these hotels decreased 1% from the first 13 two quarters of 2000. For the three months ended June 30, 2001, the hotels had a 2% increase in REVPAR and a 5% increase in ADR over the same period in 2000. Average occupancy for the second quarter of 2001 for these hotels decreased 2% from the second quarter of 2000.These fluctuations are due to the factors described above. Expenses -------- Interest expense was $2,419,026 and $3,059,738 for the six months ended June 30, 2001 and 2000, respectively. For the second quarter of 2001 and 2000, interest expense was $1,248,728 and $1,606,628, respectively. Interest in 2000 related to short-term notes payable to Hilton at an interest rate of 8.5% and amortization of deferred financing costs. Interest in 2001 represented interest on short-term notes with Hilton, $60.7 million in secured debt (see Notes Payable below), and amortization of deferred financing cost. Interest expense has decreased due to a lower outstanding debt balance and decreasing interest rates in 2001 compared to 2000. Depreciation expense for the first six months increased to $2,146,695 in 2001 from $1,219,246 in 2000. For the second quarter of 2001 and 2000 depreciation expense was $1,147,185 and $670,045, respectively. The increase is directly attributable to the acquisition of hotels in 2000 and 2001 and the capital improvements made during 2000 and 2001. Taxes, insurance, and other expenses for the first six months were $885,774 or 4% of the Company's suite revenue in 2001 and $1,404,441 or 9% of the Lessee's suite revenue in 2000. For the second quarter of 2001 these expenses were $502,482 or 5% of the Company's suite revenue. These expenses were $712,866 or 8% of the Lessee's suite revenue for the same period in 2000. The decrease is due to the Company's efforts to reduce tax assessments. As a result, the expenses were lower than anticipated. General and administrative expenses for the first six months were $507,507 or 2% of the Company's suite revenue in 2001 and $510,236 or 3% of the Lessee's suite revenue in 2000. For the second quarter of 2001, these expenses were $191,101 or 2% of the Company's suite revenue. For the same period in 2000 these expenses were $255,500 or 3% of the Lessee's suite revenue. These expenses represent the administrative expenses of the Company as distinquished from the hotel operations. Hotel operating expenses totaled $12,354,856 and $6,230,834 for the six and three months ended June 30, 2001, respectively. For the six and three months ended June 30, 2000, hotel operating expenses incurred by the Lessee, excluding rent expense and interest expense for the franchise, hotel supplies and working capital promissory notes, totaled $9,781,848 and $5,143,331, respectively. The increases are primarily due to a full two quarters of operations in 2001 of the two 2000 hotel acquisitions and the 4 hotels acquired in 2001 since their acquisition dates. The rent and interest expense are excluded from 2000 since the expenses are eliminated in consolidation in 2001. Promus manages the day-to-day operations of the hotels. Promus charges fees of 4% of total revenue for these functions for the hotels acquired prior to 2001. For the 4 hotels acquired in 2001, Promus charges a base management fee of 2% of total revenue for 2 of the hotels. For the other 2 hotels, Promus charges 2% in the first year which increases to 3% in the second year and to 4% in the third year and thereafter. Promus also charges a fee of 4% of suite revenue for franchise licenses to operate as a Homewood Suites(R) by Hilton and to participate in its reservation system. Total expenses for these services were $2,488,922 and $1,970,316 for the six months ended June 30, 2001 and 2000, respectively. For the second quarter of 2001 and 2000 these expenses were $1,272,860 and $1,032,962. These expenses are included in the hotel operating expenses above. 14 Liquidity and Capital Resources ------------------------------- On April 17, 2001, the Company closed its "best-efforts" offering of shares. The Company received gross proceeds of $40,003,301 and $15,161,377 from the sale of 4,000,330 and 1,516,138 shares, including shares sold through the reinvestment of distributions for the six month periods ended June 30, 2001 and 2000, respectively. The total gross proceeds raised for the "best efforts" offering were $125,000,000. The net proceeds of the offering, after deducting selling commissions and other offering costs for the six month periods ended June 30, 2001 and 2000 were $35,933,303 and $13,294,035, respectively. Notes payable ------------- On June 1, 2001, the Company placed $10.7 million of secured debt. The loan bears interest at a fixed interest rate of 8.15% per annum with a maturity date of June 2011. The loan is payable in monthly installments, including principal and interest, and is secured by one hotel. At June 30, 2001, the outstanding balance was $10,689,020. In connection with the purchase of 2 hotels, notes were executed by the Company payable to the order of Hilton in the amount of $16,500,000. The notes are secured by our two hotels in Missouri and Oregon and bears a fixed interest rate of 8.5% per annum. Interest payments are due monthly. The notes mature December 2001. The Company plans to pay the principal amounts of the notes by obtaining secured financings on the hotels. The Company is currently holding discussions with lenders to obtain financing. As of January 1, 2001, the Company's outstanding note payable to Hilton, secured by our property in Boulder, Colorado, totaled $7,780,500 and bore a fixed interest rate of 8.5%. During January and February 2001, the Company paid Hilton the outstanding balance on the note from net equity proceeds. Cash and cash equivalents ------------------------- Cash and cash equivalents totaled $11,042,239 at June 30, 2001. Capital requirements -------------------- The Company has an ongoing capital commitment to fund its capital improvements. The Company through the Lessee is required under the management agreements with Promus to make available to the Lessee for the repair, replacement, or refurbishing of furniture, fixtures, and equipment an amount up to 5% of gross revenue provided that such amount may be used for capital expenditures made by the Company with respect to the hotels. The Company expects that this amount will be adequate to fund the required repair, replacement, and refurbishments and to maintain its hotels in a competitive condition. At June 30, 2001, $1,694,119 was held by Hilton for these capital improvement reserves. In addition, in accordance with the franchise agreements $75,971 was held for Property Improvement Plans with a financial institution and treated as restricted cash. The Company capitalized improvements of $1,344,382 for the first six months of 2001. The Company has one hotel undergoing renovations at June 30, 2001. The Company plans to spend approximately $1 million in 2001. It is anticipated that the equity funds will be used to make principal 15 payments on the notes incurred in conjunction with the 2001 acquisitions. The Company will seek to obtain additional financing to meet its objectives. Approximately 41% of the 2001 common stock dividend distribution, or $1,741,764, was reinvested in additional common shares. In general, the Company's liquidity and capital resources are believed to be more than adequate to meet its cash requirements during 2001, given current and anticipated financing arrangements. Acquisitions ------------ Using proceeds from the sale of common shares and executing two short-term notes totaling $16,500,000, the Company acquired 4 hotels for an aggregate purchase price of $47,550,000 during 2001. These acquisitions brought the total number of hotels to 17 and total suites to 1,922. The hotels are located in Atlanta, Georgia; St. Louis, Missouri; Portland, Oregon; and Herndon, Virginia. These hotels will be leased by the Lessee and managed by Promus in substantially the same manner as the other 13 Homewood Suites(R) hotels owned at March 31, 2001. Inflation --------- Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the operator's ability to raise room rates. Seasonality ----------- The hotel industry historically has been seasonal in nature, reflecting higher occupancy rates primarily during the first three quarters of the year. Seasonal variations in occupancy at the Company's hotels may cause quarterly fluctuations in the Company's revenues, particularly during the fourth quarter. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, the Company expects to utilize cash on hand to make distributions. Recent Accounting Pronouncements -------------------------------- On January 1, 2001, Financial Accounting Standards Board Statement No. 138, "Accounting for Derivative Instruments and Hedging Activities" became effective. The Company currently does not have any financial instruments subject to this statement. 16 Item 3. Quantitative And Qualitative Disclosures About Market Risk In connection with the acquisition of 2 hotels, the Company incurred $16,500,000 of short-term borrowings at a fixed interest rate of 8.15%. In addition, the Company secured 1 hotel with $10.7 million of secured debt with a fixed interest rate of 8.15%. Since these borrowings are at a fixed rate of interest, changes in market rate will not have a direct impact on the Company's results of operations. There have been no other material changes since December 31, 2000. See the information provided in the Company's Annual Report on Form 10-K under Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations. 17 Part II, Item 2. Changes in Securities and Use of Proceeds The following table set forth information concerning the Offering and the use of proceeds from the Offering as of June 30, 2001:

18 Item 4. Submission of Matters to a Vote of Security Holders. On May 16, 2001, the Company held an Annual Meeting of Shareholders for the purpose of electing two directors to the Company's Board of Directors. The two nominees to the Company's Board of Directors were Bruce H. Matson and Robert M. Wiley. Each nominee was a current director of the Company and was nominated for an additional three-year term on the Board of Directors. The election of directors was uncontested and both nominees were elected. The total number of votes represented at the Annual Meeting of Shareholders was 10,255,481. The voting results are summarized below: Votes For: 10,249,596 Votes Withheld: 5,885 ---------- ----- 19 Part II, Item 6. Exhibits and Reports on Form 8-K (a) Exhibits -- None (b) Reports on Form 8-K The following table lists the reports on Form 8-K filed by the Company during the quarter ended June 30, 2001, the items reported and the financial statements included in such filings. Type and Date of Reports Items Reported Financials Statements Filed Form 8-K dated 2,7(c) None April 26, 2001 and filed June 18, 2001 Form 8-K/A dated 2,7(c) None June 18, 2001 and filed June 28, 2001 20 SIGNATURES ---------- Pursuant to the requirements 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. Apple Suites, Inc. ------------------ (Registrant) DATE: 8-14-01 BY: /s/ Glade M. Knight ---------- ------------------------------------- Glade M. Knight President BY:/s/ Stanley J. Olander ------------------------------------- Stanley J. Olander Secretary and Treasurer 21

APPLE SUITES INC 10-Q