UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Original Report: June 18, 2001
APPLE SUITES, INC.
(Exact name of registrant as specified in its charter)
Virginia 000-30491 54-1933472
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification Number)
9 North Third Street, Richmond, VA 23219
(Address of principal executive offices) (Zip Code)
(804) 643-4964
(Registrant's telephone number, including area code)
Apple Suites, Inc. hereby amends Items 2 and 7 of its Current Report on Form 8-K
dated June 18, 2001 as follows:
Item 2. Acquisition or Disposition of Assets
Apple Suites, Inc. (which is referred to below as the Company or as "we,"
"us" or "our") is filing this report pursuant to Item 2 of Form 8-K. This report
describes a property acquisition in April 2001 and a subsequent financing
transaction in June 2001 in which certain assets were mortgaged. For purposes of
the General Instructions to Form 8-K, the mortgage in June constitutes a
"disposition" of assets and (together with the earlier property acquisition)
involves a "significant amount" of assets. Certain related matters also are
reported below.
Property Acquisition
On April 26, 2001, we acquired the Buckhead/Atlanta Homewood Suites(R) by
Hilton for a base purchase price of $12.9 million. The hotel is located on a
2.0 acre site at 3566 Piedmont Road, Atlanta, Georgia 30305. The hotel is
approximately 5 miles from the center of downtown Atlanta and 15 miles from the
Hartsfield Atlanta International Airport.
The hotel opened in September 1997. It consists of a single four-story
building and contains 92 suites, which have a combined rentable area of 45,544
square feet. The following types of suites are available:
Type of Suite Number Available Square Feet/per Suite
---------------------- ---------------- ---------------------
Master Suite 78 446
Homewood Suite 6 526
Two-Bedroom Suite 8 950
The hotel offers a 40-seat breakfast/lounge area, a meeting room that
accommodates 25 to 30 people, and a business center that offers guests the use
of a personal computer, a photocopier and an electric typewriter. Recreational
facilities include an outdoor pool, a whirlpool and an exercise room. The hotel
also contains a guest convenience store and laundry. The hotel has its own
parking lot with approximately 100 spaces. The hotel provides complimentary
shuttle service within a 5 mile radius.
We believe that the hotel has been well maintained and is generally in very
good condition. Over the next 12 months, we plan to spend approximately
$350,000 on renovations or improvements. We expect that the principal
renovations and improvements will include replacing common area carpets and
flooring, renovating rooms, and replacing exterior signage.
During 2001 (through May), approximately 24.5% of the guests have stayed
for five nights or more. In general, occupancy at the hotel is not
significantly affected by seasonal variations. The following table shows
average daily occupancy rates for the hotel during the last five years:
Average Daily Occupancy Rate (calendar year)
2001
1997 1998 1999 2000 (through May)
---- ---- ---- ---- -------------
33.4% 68.8% 73.8% 75.0% 75.3%
During 2001 (through May), the average daily rate per suite has been
$115.48, and the average daily net revenue per suite has been $86.91. The
hotel's current rate structure is based on length of stay and type of suite, as
summarized below:
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Length of Stay
(number of nights) Homewood Master Two Bedroom
------------------ -------- ------ -----------
1 to 4 $149 $139 $225
5 to 13 115 105 195
14 to 29 105 95 185
30 or more 95 85 165
The hotel offers a weekend discount. This discount varies by type of suite
and generally reduces the basic rate by 20 to 33%. The weekend discount is not
available to guests who stay for five nights or more. The hotel also offers
discounts to guests who stay under certain corporate accounts. These discounts
are often negotiated with the corporate customer and vary from account to
account
The table below shows the average effective annual rental per square foot
since 1997:
2001
1997 1998 1999 2000 (annualized)
---- ---- ---- ---- ------------
$28.68 $55.62 $60.85 $66.91 $64.08
The depreciable real property component of the hotel has a currently
estimated Federal tax basis of $7,907,973 and will be depreciated using the
straight-line method over a life of 39 years (or less, as permitted by the
Internal Revenue Code). The basis of the personal property component of the
hotel will be depreciated in accordance with the modified accelerated cost
recovery system of the Internal Revenue Code.
The following table summarizes the hotel's real estate tax information for
2000:
Tax Assessed Taxable Portion Tax Amount
Jurisdiction Value (40% of Assessment) Rate of Tax
- ------------ ----- ------------------- ---- ------
City of Atlanta, $6,035,700 $2,414,280 0.04677 $112,915.88
Fulton County
We estimate that the annual property tax on the expected improvements will
be approximately $16,400.
Hotel License Agreement
The Buckhead/Atlanta hotel is licensed by Homewood Suites(R) by Hilton
under a franchise license agreement dated as of April 26, 2001 between Apple
Suites Management, Inc. and Promus Hotels, Inc. (Apple Suites Management is one
of our wholly-owned subsidiaries and leases the hotel from us under a separate
lease agreement that is substantially similar to lease agreements for our other
hotels). Under the franchise license agreement, Apple Suites Management has the
right to operate the hotel using the "System" established for all properties
licensed by Homewood Suites(R) by Hilton. The "System" includes access to a
reservation system, to advertising methods, to a "Standards Manual," and to
other training, information, programs and policies.
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In exchange, Apple Suites Management has agreed to numerous requirements
and restrictions applicable to its operation of the hotel. Apple Suites
Management also is required to pay royalties and other fees, as described below.
Apple Suites Management will be subject to various operational requirements
pursuant to the franchise license agreement and the Manual. The Manual is
subject to change at any time at the sole discretion of Promus Hotels. (As
described below, Promus Hotels will act as the manager of the hotel under a
separate management agreement.) As a practical matter, many of the requirements
in the franchise license agreement and Manual will be the responsibility of
Promus Hotels. However, certain requirements will remain the practical
responsibility of Apple Suites Management. Furthermore, the failure of Promus
Hotels to comply with the management agreement will not, by itself, relieve
Apple Suites Management from its obligations under the franchise license
agreement. In such event, the remedies available to Apple Suites Management may
be limited to monetary damages for breach of the management agreement.
The hotel must be operated in accordance with the requirements established
by Promus Hotels. These requirements cover matters such as the types of
services and products that may be offered at the hotel, the style and type of
signage, the appearance and condition of the hotel, the use of the reservations
system for guests, adherence to a 100% Satisfaction Guarantee rule of operation,
required insurance coverage and other requirements.
Under the franchise license agreement, Apple Suites Management may use the
System only during the 20-year term of the franchise license agreement. The
franchise license agreement is subject to early termination for various reasons,
including default by Apple Suites Management or its efforts to obtain bankruptcy
protection. If the franchise license agreement is terminated for any reason,
the hotel must immediately cease to identify itself as having a license with
Homewood Suites(R) by Hilton.
Apple Suites Management must pay a monthly program fee equal to 4% of the
gross rooms revenues and a monthly royalty fee equal to 4% of the gross rooms
revenues. Gross rooms revenue is defined as all revenues derived from the sale
or rental of guest rooms (both transient and permanent) of the hotel, including
guaranteed no-show revenue and credit transactions, whether or not collected, at
the actual rates charged, less allowances for any guest room rebates and
overcharges, and will not does not include federal, state and local taxes
collected from patrons or guests. Gross room revenue also includes the proceeds
from any business interruption insurance applicable to loss of revenues due to
the non-availability of guest rooms. The 4% gross rooms revenue fee is subject
to change by Promus Hotels from time to time but will not exceed one percent of
the hotel's gross rooms revenue in any calendar year, and the cumulative
increases in the monthly royalty fee will not exceed 5% of gross rooms revenue.
Furthermore, there is no assurance that the marketing contribution from the
hotel will be used to fund advertising or marketing with respect to the hotel.
Under the franchise license agreement, Promus Hotels may require Apple
Suites Management to upgrade hotel facilities from time to time to meet current
standards, as then specified in the Manual. Apple Suites Management will be
responsible for all upgrade costs.
We, as the parent corporation that owns Apple Suites Management, have
agreed to guarantee the full and prompt payment of all sums owed under the
franchise license agreement, and the performance of all other obligations of
Apple Suites Management thereunder. Our guarantee is contained in a separate
instrument dated as of April 26, 2001.
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Hotel Management Agreement
The Buckhead/Atlanta hotel is subject to a management agreement having an
effective date of April 26, 2001, as amended on May 10, 2001. The management
agreement is between Apple Suites Management, Inc., which leases the hotel from
us, and Promus Hotels, Inc., which licenses the hotel to operate as a part of
the Homewood Suites(R) by Hilton franchise.
The management agreement requires Promus Hotels to operate the hotel in
conformity with the hotel franchise license agreement described above. Promus
Hotels will be responsible for directing the day-to-day activities of the hotel
and establishing policies and procedures relating to the management and
operation of the hotel.
As part of its responsibilities for directing the day-to-day activities of
the hotel, Promus Hotels will hire, supervise and determine the compensation and
terms of employment of all hotel personnel. Promus Hotels also will determine
the terms for admittance, room rates and all use of hotel rooms. Promus Hotels
will select and purchase all operating equipment and supplies for the hotel.
Promus Hotels will be responsible for (a) advertising and promoting the hotel in
coordination with the requirements of the franchise license agreement described
above; and (b) obtaining and maintaining any permits and licenses required to
operate the hotel.
Each year, Promus Hotels will submit a proposed operating budget for the
hotel to Apple Suites Management for its approval. Each budget will include a
business plan describing the business objectives and strategies for the hotel
for the period covered by the budget. In addition, Promus Hotels will submit a
recommended capital budget to Apple Suites Management for its approval. The
capital budget will apply to furnishings, equipment and ordinary hotel capital
replacements needed to operate the hotel in accordance with the hotel franchise
license agreement. Since it is impossible to know the expenditures for capital
replacements in advance, the management agreement provides that 5% of adjusted
gross revenues for each year will be placed in a reserve fund for capital
improvements.
In exchange for performing the services described above, Promus Hotels will
receive a management fee, payable monthly. The management fee will (a) equal 2%
of adjusted gross revenues with respect to each fiscal month during the first
year of the management agreement, (b) 3% of adjusted gross revenues with respect
to each fiscal month during the second year; and (c) 4% of adjusted gross income
with respect to each fiscal month during the remainder of the term of the
management agreement.
Adjusted gross revenues are defined generally as all revenues derived from
the hotel, as reduced by (a) refunds; (b) sales and other similar taxes; (c)
proceeds from the sale or other disposition of the hotel, furnishings and other
capital assets; (d) fire and extended coverage insurance proceeds; (e) credits
or refunds made to customers; (f) condemnation awards; (g) proceeds of
financing or refinancing of the hotel; (h) interest on bank accounts; and (i)
gratuities or service charges added to a customer's bill.
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The management agreement has a five-year term. However, Apple Suites
Management may terminate the management agreement after its first anniversary.
If it does so, Promus Hotels will be entitled to an early termination fee. The
termination fee is equal to (a) $350,000 if the termination occurs for any
reason at the option of Apple Suites Management or because the hotel is sold
during the first year of the management agreement, (b) $350,000 if the
termination occurs during the second year, (c) $250,000 if termination occurs
during the third year; (d) $100,000 if termination occurs during the fourth
year; and (e) $25,000 if termination occurs thereafter.
Beginning in the first full calendar year of operations, Apple Suites
Management may terminate the management agreement if Promus Hotels fails to
achieve, in any two consecutive calendar years, a gross operating profit which
is at least equal to 85% of the annual budgeted gross operating profit. Promus
Hotels can avoid termination by making a cash payment to Apple Suites Management
that equals the difference between the gross operating profits achieved and 85%
of the budgeted gross operating profits for the second such year. Generally,
gross operating profit is defined as the amount by which adjusted gross revenues
exceed operating costs.
Summary of Financing
On June 1, 2001, we obtained long-term financing in the amount of
$10,700,000 from First Union National Bank. We expect to use the proceeds from
this financing for general corporate purposes.
The borrower for the financing is Apple Suites SPE III, Inc., which we
formed as a new wholly-owned subsidiary. In connection with the financing, and
at the request of the lender, our new subsidiary is a "special purpose entity."
To qualify as a special purpose entity, our new subsidiary has organizational
documents that impose certain requirements during the term of the financing.
In particular, the subsidiary must maintain its separate legal identity and
must limit its activities to dealing with the property that secures the
financing. The secured property includes the real and personal property that
constitutes the Homewood Suites(R) by Hilton extended-stay hotel in Boulder,
Colorado. We transferred this hotel to our new subsidiary in connection with
the financing.
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Promissory Note
The financing is evidenced by a promissory note dated June 1, 2001 in the
principal amount of $10,700,000. The note provides for the following:
. a stated annual interest rate of 8.15%
. a maturity date of June 1, 2011
. the payment of principal and interest in consecutive monthly
installments of $83,650.38
. a balloon payment of approximately $8,878,400 at maturity
. the full payment of principal and all other amounts at maturity
. the acceleration, at the option of the lender, of all amounts due under
the note if any required monthly payment is not made within seven days
of its due date or if there is any other event of default
. a late charge of 5% on any payment that is not made within seven days
of its due date
. an increase of 4% in the applicable interest rate upon any default
. a restriction on voluntary prepayment, which is not permitted without
penalty until the final two months of the note
Additional payments or penalties would apply in other circumstances, such
as acceleration of the promissory note during the first two years, based upon an
event of default. If acceleration occurs in the first year, the sum of the
additional payments would equal at least 5% of the remaining debt under the
note.
The promissory note also contains substantial limitations on release and
substitution of collateral. The hotel that serves as collateral under the
promissory note cannot be released from its mortgage during the first two years
of the note. After two years, our borrowing subsidiary could obtain such a
release by providing the lender with substitute collateral in the form of
direct, non-callable obligations of the United States. These substitute
obligations must be structured to pay a series of amounts that match, as closely
as possible, the remainder of the installments required under the promissory
note.
Security Documents
As indicated above, the financing is secured by a mortgage and other
encumbrances on the hotel owned by our new subsidiary. The other encumbrances
include a security interest in the related personal property and various
assignments of leases, rents, profits, contracts and permits, all in favor of
the lender. These encumbrances are created by multiple agreements and
instruments, which will be referred to as "security documents" for simplicity.
The security documents impose a number of requirements on our borrowing
subsidiary, as the owner of the hotel, including obligations to maintain
adequate insurance. The security documents prohibit any further encumbrances
and any further assignments of leases, rents, profits, contracts or permits with
respect to the hotel.
-7-
Upon any default that occurs under the promissory note or a security
document, various remedies are available to the lender. Those remedies include,
for example (a) declaring the entire principal balance under the promissory
note, together with all accrued and unpaid interest, to be due and payable
immediately; (b) taking possession of the collateral, including the hotel; and
(c) collecting rents from the hotel, or foreclosing on it, to satisfy unpaid
amounts under the promissory note. Our borrowing subsidiary, as the maker of
the promissory note, would be required to pay any costs that may be incurred by
the lender in exercising such remedies.
Indemnity And Guaranty Agreement
The Company is required to indemnify the lender against defaults under the
promissory note executed by its borrowing subsidiary and to guaranty the
collection of all amounts due under the note. The Company has agreed to these
requirements in a separate Indemnity and Guaranty Agreement.
Other Agreements
Before our transfer of the hotel in Boulder, Colorado to our borrowing
subsidiary, the hotel was subject to separate license, management and lease
agreements. The transfer did not have any effect on the franchise license
agreement and the hotel continues to operate as part of the Homewood Suites(R)
by Hilton franchise. The management agreement was not modified in connection
with the transfer, but our borrowing subsidiary did enter into a consent and
agreement of manager for the benefit of the lender. Our borrowing subsidiary
also leased the hotel to Apple Suites Management, Inc. (one of our wholly-owned
subsidiaries). Other than the identity of the hotel owner, the new lease
agreement is substantially identical to the previous lease agreement.
Item 7. Financial Statements and Exhibits
c. Exhibits.
4.1 Promissory Note dated June 1, 2001 in the principal amount of $10,700,000
made payable by Apple Suites SPE III, Inc. to First Union National Bank,
with respect to the Homewood Suites(R) by Hilton hotel in Boulder,
Colorado.
4.2 Indemnity and Guaranty Agreement dated as of June 1, 2001 by Apple Suites,
Inc. as Indemnitor in favor of First Union National Bank as Lender, in
connection with a $10,700,000 loan to Apple Suites SPE III, Inc. as
Borrower with respect to the Homewood Suites(R) by Hilton hotel in Boulder,
Colorado.
4.3 Deed of Trust and Security Agreement dated as of June 1, 2001, from Apple
Suites SPE III, Inc. as Grantor to The Public Trustee of the County of
Boulder, Colorado as Trustee for the benefit of First Union National Bank
as Beneficiary, with respect to the Homewood Suites(R) by Hilton hotel in
Boulder, Colorado.
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4.4 Security Agreement dated as of June 1, 2001 by Apple Suites SPE III, Inc.
as Debtor in favor of First Union National Bank as Lender with respect to
the Homewood Suites(R) by Hilton hotel in Boulder, Colorado.
4.5 Assignment of Contracts and Permits dated as of June 1, 2001 from Apple
Suites SPE III, Inc. as Assignor to First Union National Bank as Assignee
with respect to the Homewood Suites(R) by Hilton hotel in Boulder,
Colorado.
4.6 Assignment of Leases, Rents and Profits dated as of June 1, 2001 by Apple
Suites SPE III, Inc. as Assignor in favor of First Union National Bank as
Assignee with respect to the Homewood Suites(R) by Hilton hotel in Boulder,
Colorado.
4.7 Percentage Lease Subordination and Attornment Agreement dated as of June 1,
2001 between First Union National Bank as Lender and Apple Suites
Management, Inc. as Lessee with respect to the Homewood Suites(R) by Hilton
hotel in Boulder, Colorado.
4.8 Consent and Agreement of Manager dated as of June 1, 2001 by Apple Suites
SPE III, Inc. as Borrower in favor of First Union National Bank as Lender
with respect to the Homewood Suites(R) by Hilton hotel in Boulder,
Colorado.
4.9 Environmental Indemnity Agreement dated as of June 1, 2001 by Apple Suites
SPE III, Inc. and Apple Suites, Inc., as Indemnitors, in favor of First
Union National Bank, as Lender, with respect to the Homewood Suites(R) by
Hilton hotel in Boulder, Colorado.
4.10 Receipt and Closing Certificate dated June 1, 2001 by Apple Suites SPE
III, Inc. as Borrower and Apple Suites, Inc. as Guarantor in favor of First
Union National Bank, as Lender, with respect to the Homewood Suites(R) by
Hilton hotel in Boulder, Colorado.
10.1 Apple Suites SPE III, Inc. Articles of Incorporation.
10.2 Apple Suites SPE III, Inc. Bylaws.
10.3 Management Agreement dated as of April 26, 2001 between Apple Suites
Management, Inc. and Promus Hotels, Inc. with respect to the
Buckhead/Atlanta Homewood Suites(R) by Hilton hotel.
10.4 Amendment to Management Agreement dated as of May 10, 2001 between Apple
Suites Management, Inc. and Promus Hotels, Inc. with respect to the
Buckhead/Atlanta Homewood Suites(R) by Hilton hotel.
10.5 Franchise License Agreement dated as of April 26, 2001 between Promus
Hotels, Inc. and Apple Suites Management, Inc. with respect to the
Buckhead/Atlanta Homewood Suites(R) by Hilton hotel.
10.6 Guarantee of Franchise License Agreement by Apple Suites, Inc. dated April
26, 2001 in connection with the Buckhead/Atlanta Homewood Suites(R) by
Hilton hotel.
10.7 Hotel Lease Agreement dated as of April 26, 2001 between Apple Suites, Inc.
as lessor and Apple Suites Management, Inc. as lessee with respect to the
Buckhead/Atlanta Homewood Suites(R) by Hilton hotel.
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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 hereunto duly authorized.
Apple Suites, Inc.
By: /s/ Glade M. Knight
-----------------------
Glade M. Knight, President
June 28, 2001
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